| LIFE TIME FITNESS INC Item 1A Risk Factors |
| If we are unable to identify and acquire suitable sites for new sports and athletic, professional fitness, family recreation and resort/spa centers, our revenue growth rate and profits may be negatively impacted |
| To successfully expand our business, we must identify and acquire sites that meet the site selection criteria we have established |
| In addition to finding sites with the right demographic and other measures we employ in our selection process, we also need to evaluate the penetration of our competitors in the market |
| We face significant competition for sites that meet our criteria, and as a result we may lose those sites, our competitors could copy our format or we could be forced to pay significantly higher prices for those sites |
| If we are unable to identify and acquire sites for new centers, our revenue growth rate and profits may be negatively impacted |
| Additionally, if our analysis of the suitability of a site is incorrect, we may not be able to recover our capital investment in developing and building the new center |
| For example, in 2002 we recorded an asset impairment charge of dlra7dtta0 million related to our executive facility, which is located in downtown Minneapolis, Minnesota, and a restaurant that we separately operate in the same building |
| We may be unable to attract and retain members, which could have a negative effect on our business |
| The success of our business depends on our ability to attract and retain members, and we cannot assure you that we will be successful in our marketing efforts or that the membership levels at our centers will not materially decline, especially at those centers that have been in operation for an extended period of time |
| All of our members can cancel their membership at any time upon providing advance notice |
| In addition, we experience attrition and must continually attract new members in order to maintain our membership levels |
| There are numerous factors that could lead to a decline in membership levels or that could prevent us from increasing membership at newer centers where membership is generally not yet at a targeted capacity, including market maturity or saturation, a decline in our ability to deliver quality service at a competitive price, direct and indirect competition in the areas where our centers are located, a decline in the public’s interest in health and fitness, changes in discretionary spending trends and general economic conditions |
| In addition, we may decide to close a center and attempt to move members of that center to a different center or we may temporarily relocate members if a center is closed for remodeling or due to hurricane, fire, earthquake or other casualty |
| In order to meet our objectives, it is important that we open new centers on schedule |
| A significant amount of time and expenditure of capital is required to develop and construct new centers |
| If we are significantly delayed in opening new centers, our competitors may be able to open new clubs in the same market before we open our centers |
| This change in the competitive landscape could negatively impact our pre-opening sales of memberships and increase our investment costs |
| In addition, delays in opening new centers could hurt our ability to meet our growth objectives |
| Our ability to open new centers on schedule depends on a number of factors, many of which are beyond our control |
| These factors include: • obtaining acceptable financing for construction of new sites; • obtaining entitlements, permits and licenses necessary to complete construction of the new center on schedule; • recruiting, training and retaining qualified management and other personnel; • securing access to labor and materials necessary to develop and construct our centers; • delays due to material shortages, labor issues, weather conditions or other acts of god, discovery of contaminants, accidents, deaths or injunctions; and • general economic conditions |
| 13 _________________________________________________________________ [69]Table of Contents The opening of new centers in existing locations may negatively impact our same-center revenue increases and our operating margins |
| During 2006, we plan to open eight centers, one of which opened in January and one of which opened in February |
| Three of the remaining six openings in 2006 are in existing markets |
| With respect to existing markets, it has been our experience that opening new centers may attract some memberships away from other centers already operated by us in those markets and diminish their revenues |
| In addition, as a result of new center openings in existing markets, and because older centers will represent an increasing proportion of our center base over time, our same-center revenue increases may be lower in future periods than in the past |
| Another result of opening new centers is that our center operating margins may be lower than they have been historically while the centers build membership base |
| We expect both the addition of pre-opening expenses and the lower revenue volumes characteristic of newly-opened centers to affect our center operating margins at these new centers |
| We also expect certain operating costs, particularly those related to occupancy, to be higher than in the past in some newly-entered geographic regions |
| As a result of the impact of these rising costs, our total center contribution and operating margins may be lower in future periods than they have been in the past |
| Our continued growth could place strains on our management, employees, information systems and internal controls which may adversely impact our business and the value of your investment |
| Over the past several years, we have experienced significant growth in our business activities and operations, including an increase in the number of our centers |
| Our past expansion has placed, and any future expansion will place, significant demands on our administrative, operational, financial and other resources |
| Any failure to manage growth effectively could seriously harm our business |
| To be successful, we will need to continue to implement management information systems and improve our operating, administrative, financial and accounting systems and controls |
| We will also need to train new employees and maintain close coordination among our executive, accounting, finance, marketing, sales and operations functions |
| These processes are time-consuming and expensive, will increase management responsibilities and will divert management attention |
| Our debt levels may limit our flexibility in obtaining additional financing and in pursuing other business opportunities |
| As of December 31, 2005, we had total consolidated indebtedness of dlra273dtta3 million, consisting principally of obligations under term notes that are secured by certain of our properties, borrowings under our revolving credit facility that are secured by certain personal property, mortgage notes that are secured by certain of our centers and obligations under capital leases |
| Our level of indebtedness could have important consequences to us, including the following: • our ability to obtain additional financing, if necessary, for capital expenditures, working capital, acquisitions or other purposes may be impaired or such financing may not be available on favorable terms; • we will need a substantial portion of our cash flow to pay the principal of, and interest on, our indebtedness, including indebtedness that we may incur in the future; • payments on our indebtedness will reduce the funds that would otherwise be available for our operations and future business opportunities; • a substantial decrease in our cash flows from operations could make it difficult for us to meet our debt service requirements and force us to modify our operations; • we may be more highly leveraged than our competitors, which may place us at a competitive disadvantage; • our debt level may make us more vulnerable and less flexible than our competitors to a downturn in our business or the economy in general; and • some of our debt has a variable rate of interest, which increases our vulnerability to interest rate fluctuations |
| 14 _________________________________________________________________ [70]Table of Contents In addition to the amount of indebtedness outstanding as of December 31, 2005, we have access to an additional dlra81dtta0 million under our credit facilities |
| We also have the ability to incur new debt, subject to limitations under our existing credit facilities and in our debt financing agreements |
| Furthermore, we have 13 centers financed by Teachers Insurance and Annuity Association of America that are subject to cross-default and cross-collateral provisions, which would allow the lender to foreclose on each of these 13 centers if there is an event of default related to one or more of these centers |
| If we incur additional debt, the risks associated with our leverage, including our ability to service our debt, could intensify |
| Because of the capital-intensive nature of our business, we may have to incur additional indebtedness or issue new equity securities and, if we are not able to obtain additional capital, our ability to operate or expand our business may be impaired and our operating results could be adversely affected |
| Our business requires significant levels of capital to finance the development of additional sites for new centers and the construction of our centers |
| If cash from available sources is insufficient, or if cash is used for unanticipated needs, we may require additional capital sooner than anticipated |
| In the event that we are required or choose to raise additional funds, we may be unable to do so on favorable terms or at all |
| Furthermore, the cost of debt financing could significantly increase, making it cost-prohibitive to borrow, which could force us to issue new equity securities |
| If we issue new equity securities, existing shareholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock |
| If we cannot raise funds on acceptable terms, we may not be able to take advantage of future opportunities or respond to competitive pressures |
| Any inability to raise additional capital when required could have an adverse effect on our business plans and operating results |
| The health club industry is highly competitive and our competitors may have greater name recognition than we have |
| We compete with other health and fitness centers, physical fitness and recreational facilities established by local non-profit organizations, governments, hospitals, and businesses, local salons, cafes and businesses offering similar ancillary services, and to a lesser extent, amenity and condominium clubs and similar non-profit organizations, exercise studios, racquet, tennis and other athletic clubs, country clubs and the home fitness equipment industry |
| Competitors, which may have greater name recognition than we have, may compete with us to attract members in our markets |
| Non-profit and government organizations in our markets may be able to obtain land and construct centers at a lower cost than us and may be able to collect membership fees without paying taxes, thereby allowing them to lower their prices |
| This competition may limit our ability to increase membership fees, retain members, attract new members and retain qualified personnel |
| Competitors could copy our business model and erode our market share, brand recognition and profitability |
| We employ a business model that could allow competitors to duplicate our successes |
| We cannot assure you that our competitors will not attempt to copy our business model and that this will not erode our market share and brand recognition and impair our growth rate and profitability |
| In response to any such competitors, we may be required to decrease our membership fees, which may reduce our operating margins and profitability |
| We have significant operations concentrated in certain geographic areas, and any disruption in the operations of our centers in any of these areas could harm our operating results |
| We currently operate multiple centers in several metropolitan areas, including 17 in the Minneapolis/ St |
| Paul market, eight in the Chicago market, six in the Detroit market, and five in the Dallas market, with continued planned expansion in these and other markets |
| As a result, any prolonged disruption in the operations of our centers in any of these markets, whether due to technical difficulties, power failures or destruction or damage to the centers as a result of a natural disaster, fire or any other reason, could harm our operating results |
| In addition, our concentration in these markets increases our exposure to adverse developments related to competition, as well as economic and demographic changes in these areas |
| 15 _________________________________________________________________ [71]Table of Contents If we cannot retain our key personnel and hire additional highly qualified personnel, we may not be able to successfully manage our operations and pursue our strategic objectives |
| We are highly dependent on the services of our senior management team and other key employees at both our corporate headquarters and our centers, and on our ability to recruit, retain and motivate key personnel |
| Competition for such personnel is intense, and the inability to attract and retain the additional qualified employees required to expand our activities, or the loss of current key employees, could materially and adversely affect us |
| If our founder and chief executive officer leaves our company for any reason, it could have a material adverse effect on us |
| Our growth and development to date have been largely dependent upon the services of Bahram Akradi, our Chairman of the Board of Directors, President, Chief Executive Officer and founder |
| Akradi ceases to be Chairman of the Board of Directors and Chief Executive Officer for any reason other than due to his death or incapacity or as a result of his removal pursuant to our articles of incorporation or bylaws, we will be in default under the loan documents for our 13 centers financed with Teachers Insurance and Annuity Association of America |
| Akradi may be able to exert disproportionate control over our company because of the significant consequence of his departure |
| We do not have any employment or non-competition agreement with Mr |
| We could be subject to claims related to health or safety risks at our centers |
| Use of our centers poses potential health or safety risks to members or guests through exertion and use of our equipment, swimming pools and other facilities and services |
| We cannot assure you that claims will not be asserted against us for injury or death suffered by someone using our facilities or services |
| In addition, the child center services we offer at our centers expose us to claims related to child care |
| Lastly, because we construct our own centers, we also face liability in connection with the construction of these centers |
| We are subject to extensive government regulation, and changes in these regulations could have a negative effect on our financial condition and results of operations |
| Various federal and state laws and regulations govern our operations, including: • general rules and regulations of the Federal Trade Commission, state and local consumer protection agencies and state statutes that prescribe certain forms and provisions of membership contracts and that govern the advertising, sale and collection of our memberships; • state and local health regulations; • federal regulation of health and nutritional products; and, • regulation of rehabilitation service providers |
| Any changes in such laws could have a material adverse effect on our financial condition and results of operations |
| We could be subject to claims related to our nutritional products |
| The nutritional products industry is currently the source of proposed federal laws and regulations, as well as numerous lawsuits |
| We advertise and offer for sale proprietary nutritional products within our centers and through our Web site |
| We cannot assure you that there will be no claims against us regarding the ingredients in, manufacture of or results of using our nutritional products |
| Furthermore, we cannot assure you that any rights we have under indemnification provisions or insurance policies will be sufficient to cover any losses that might result from such claims |
| If it becomes necessary to protect or defend our intellectual property rights or if we infringe on the intellectual property rights of others, we may become involved in costly litigation or be required to pay royalties or fees |
| We may have disputes with third parties to enforce our intellectual property rights, protect our trademarks, determine the validity and scope of the proprietary rights of others or defend ourselves from claims of infringement, invalidity or unenforceability |
| Such disputes may require us to engage in litigation |
| We may incur substantial costs 16 _________________________________________________________________ [72]Table of Contents and a diversion of resources as a result of such disputes and litigation, even if we win |
| In the event that we do not win, we may have to enter into royalty or licensing agreements, we may be prevented from using the marks within certain markets in connection with goods and services that are material to our business or we may be unable to prevent a third party from using our marks |
| We cannot assure you that we would be able to reach an agreement on reasonable terms, if at all |
| In particular, although we own an incontestable federal trademark registration for use of the LIFE TIME FITNESS® mark in the field of health and fitness centers, we are aware of entities in certain locations around the country that use LIFE TIME FITNESS or a similar mark in connection with goods and services related to health and fitness |
| Accordingly, if we open any centers in the areas in which these parties operate, we may be required to pay royalties or may be prevented from using the mark in such areas |
| Our business could be affected by acts of war or terrorism |
| Current world tensions could escalate, potentially leading to war or acts of terrorism |
| This could have unpredictable consequences on the world economy and on our business |