Summary of LIFE TIME FITNESS INC

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion may contain forward-looking statements regarding us and our business, prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that advise interested parties of the risks and factors that may affect our business.
The interim consolidated financial statements filed on this Form 10-Q and the discussions contained herein should be read in conjunction with the annual consolidated financial statements and notes included in the latest Form 10-K, as filed with the SEC, which includes audited consolidated financial statements for the three fiscal years ended December 31, 2008. Overview
We operate large, multi-use sports, fitness and family recreation centers. As of October 30, 2009, we operated 84 centers primarily in residential locations across 19 states under the LIFE TIME FITNESS and LIFE TIME ATHLETIC brands. We compare the results of our centers based on how long the centers have been open at the most recent measurement period. We include a center for comparable center revenue purposes beginning on the first day of the thirteenth full calendar month of the center's operation, prior to which time we refer to the center as a new center. We include an acquired center for comparable center revenue purposes beginning on the first day of the thirteenth full calendar month after we assumed the center's operations. We consider a center to be a mature center beginning on the first day of the 37th full calendar month of the center's operations.
As we grow our presence in existing markets by opening or leasing new centers, we expect to attract some memberships away from our other existing centers already in those markets, reducing revenue and initially lowering the memberships of those existing centers. 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 comparable center revenue may be lower in future periods than in the past. Of the three new centers we opened in 2009, two are in existing markets. We do not expect that operating costs of our planned new centers will be significantly higher than centers opened in the past, and we also do not expect that the planned increase in the number of centers will have a material adverse effect on the overall financial condition or results of operations of existing centers. Another result of opening new centers or leasing centers, is that our center operating margins may be lower than they have been historically. We expect both the addition of pre-opening expenses and the lower revenue volumes characteristic of newly-opened centers, as well as the occupancy costs associated with leased centers to affect our center operating margins at these centers and on a consolidated basis.

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In the future, we also may experience increased member attrition, lower average dues, lower in-center revenue per membership as well as higher membership acquisition costs which may result in lower total revenue and operating profit in affected centers and on a consolidated basis. Our categories of new centers and existing centers do not include the center owned by Bloomingdale, LLC because it is accounted for as an investment in an unconsolidated affiliate and is not consolidated in our financial statements.
We measure performance using such key operating statistics as member satisfaction ratings, return on investment, average revenue per membership, including membership dues and enrollment fees, average in-center revenue per membership and center operating expenses, with an emphasis on payroll and occupancy costs, as a percentage of sales and comparable center revenue growth. We use center revenue and EBITDA margins to evaluate overall performance and profitability on an individual center basis. In addition, we focus on several membership statistics on a center-level and system-wide basis. These metrics include change in center membership levels and growth of system-wide memberships, percentage center membership to target capacity, center membership usage, center membership mix among individual, couple and family memberships and center attrition rates. During 2008, our trailing twelve month attrition rate increased from 34.2% to 42.3%, driven primarily by the slowing economy and inactive members leaving earlier than in the past. During the first nine months of 2009, our trailing twelve month attrition rate has decreased from 42.3% to 40.6%.
We have three primary sources of revenue.
• First, our largest source of revenue is membership dues (67.1% of total revenue for the nine months ended September 30, 2009) and enrollment fees (3.1% of total revenue for the nine months ended September 30, 2009) paid by our members. We recognize revenue from monthly membership dues in the month to which they pertain. We recognize revenue from enrollment fees over the expected average life of the membership, which we estimate to be 30 months for 2009 and the fourth quarter of 2008, 33 months for the second and third quarters of 2008 and 36 months for the first quarter of 2008 and prior periods.

• Second, we generate revenue within a center, which we refer to as in-center revenue, or in-center businesses (28.2% of total revenue for the nine months ended September 30, 2009), including fees for personal training, registered dieticians, group fitness training and other member activities, sales of products at our LifeCafe, sales of products and services offered at our LifeSpa, tennis programs and renting space in certain of our centers.

• Third, we have expanded the LIFE TIME FITNESS brand into other wellness-related offerings that generate revenue, which we refer to as other revenue, or corporate businesses (1.6% of total revenue for the nine months ended September 30, 2009), including our media, wellness and athletic events businesses. Our primary media offering is our magazine, Experience Life. Other revenue also includes two restaurants in the Minneapolis market and rental income from our Highland Park, Minnesota office building.

Center operations expenses consist primarily of salary, commissions, payroll taxes, benefits, rent, real estate taxes and other occupancy costs, utilities, repairs and maintenance, supplies, administrative support and communications to operate our centers. Advertising and marketing expenses consist of our marketing department costs and media and advertising costs to support center membership levels, in-center businesses and our corporate businesses. General and administrative expenses include costs relating to our centralized support functions, such as accounting, information systems, procurement, real estate and development and member relations. Our other operating expenses include the costs associated with our media, athletic events and nutritional product businesses, two restaurants and other corporate expenses, as well as gains or losses on our dispositions of assets. Our total operating expenses may vary from period to period depending on the number of new centers opened during that period, the number of centers engaged in presale activities and the performance of our in-center businesses.
Our primary capital expenditures relate to the construction of new centers and updating and maintaining our existing centers. The land acquisition, construction and equipment costs for a current model center can vary considerably based on variability in land cost and the cost of construction labor, as well as whether or not a tennis area is included or whether or not we expand the gymnasium or add other facilities. We perform maintenance and make improvements on our centers and equipment throughout each year. We conduct a more thorough remodeling project at each center approximately every four to six years.

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Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the U.S., or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from those estimates. In recording transactions and balances resulting from business operations, we use estimates based on the best information available. We use estimates for such items as depreciable lives, volatility factors, expected lives and rate of return in determining fair value of option grants, probability of achieving performance targets, tax provisions and provisions for uncollectible receivables. We also use estimates for calculating the amortization period for deferred enrollment fee revenue and associated direct costs, which are based on the historical average expected life of center memberships. We revise the recorded estimates when better information is available, facts change or we can determine actual amounts. These revisions can affect operating results. Our critical accounting policies and use of estimates are discussed in and should be read in conjunction with the annual consolidated financial statements and notes included in the latest Form 10-K, as filed with the SEC, which includes audited consolidated financial statements for our three fiscal years ended December 31, 2008.

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Results of Operations
The following table sets forth our statement of operations data as a percentage
of total revenue and also sets forth other financial and operating data:

                                                   For the Three Months                     For the Nine Months
                                                    Ended September 30,                     Ended September 30,
                                                 2009                2008                2009                2008
Revenue
Center revenue
Membership dues                                      67.6 %              66.0 %              67.1 %              65.5 %
Enrollment fees                                       3.1                 3.5                 3.1                 3.4
In-center revenue                                    27.6                28.2                28.2                29.1

Total center revenue                                 98.3                97.7                98.4                98.0
Other revenue                                         1.7                 2.3                 1.6                 2.0

Total revenue                                       100.0               100.0               100.0               100.0

Operating expenses
Center operations                                    59.5                58.4                60.5                58.6
Advertising and marketing                             2.7                 3.7                 3.2                 4.1
General and administrative                            4.5                 4.8                 5.2                 5.3
Other operating                                       3.7                 2.5                 2.8                 2.4
Depreciation and amortization                        10.9                 9.4                10.8                 9.1

Total operating expenses                             81.3                78.8                82.5                79.5

Income from operations                               18.7                21.2                17.5                20.5

Other income (expense)
Interest expense, net                                (3.6 )              (3.6 )              (3.7 )              (3.7 )
Equity in earnings of affiliate                       0.1                 0.2                 0.2                 0.2

Total other income (expense)                         (3.5 )              (3.4 )              (3.5 )              (3.5 )

Income before income taxes                           15.2                17.8                14.0                17.0
Provision for income taxes                            5.6                 6.9                 5.5                 6.8

Net income                                            9.6 %              10.9 %               8.5 %              10.2 %


Other financial and operating data:
Comparable center revenue
growth-13 month (1)                                  (5.4 %)              3.9 %              (4.2 %)              3.8 %
Comparable center revenue
growth-37 month (1)                                  (8.7 %)             (1.9 %)             (8.5 %)             (1.9 %)
Average revenue per membership                $       358         $       358         $     1,063         $     1,082
Average in-center revenue per membership      $       100         $       104         $       305         $       321
EBITDA (in thousands)                         $    63,726         $    61,179         $   179,867         $   171,502
EBITDA margin                                        29.7 %              30.8 %              28.4 %              29.8 %
Capital expenditures (in thousands)           $    25,128         $   124,974         $   116,853         $   360,551
Centers open at end of period                          84                  77                  84                  77
Number of memberships at end of period            590,716             557,164             590,716             557,164
Total center square footage at end of
period (2)                                      8,445,689           7,645,989           8,445,689           7,645,989

(1) Membership dues, enrollment fees and in-center revenue for a center are included in comparable center revenue growth - 13 month beginning on the first day of the thirteenth full calendar month of the center's operation and are included in comparable center revenue growth - 37 month beginning on the first day of the thirty-seventh full calendar month of the center's operation, at which time it is considered a mature center.

(2) The square footage presented in this table reflects fitness square footage which is the best metric for the efficiencies of a facility. In a few of our centers, we sublease space to third parties who operate our pro shop, salon or climbing wall or to hospitals or chiropractors that use the space to provide physical therapy. The square footage figures include those subleased areas. The square footage figures exclude areas used for tennis courts and outdoor swimming pools. These figures are approximations.

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Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
Total revenue. Total revenue increased $15.5 million, or 7.8%, to $214.3 million for the three months ended September 30, 2009 from $198.8 million for the three months ended September 30, 2008.
Total center revenue grew $16.4 million, or 8.4%, to $210.6 million for the three months ended September 30, 2009 from $194.2 million for the three months ended September 30, 2008. Of the $16.4 million increase in total center revenue,
• 83.0% was from membership dues, which increased $13.6 million, or 10.4%, due to increased memberships at new centers. Our number of memberships increased 6.0% to 590,716 at September 30, 2009 from 557,164 at September 30, 2008.

• 18.2% was from in-center revenue, which increased $3.0 million primarily as a result of increased sales of our LifeCafe products and services and personal training. Average in-center revenue per membership decreased from $104 for the three months ended September 30, 2008 to $100 for the three months ended September 30, 2009. We began to see slower in-center revenue growth in the second half of 2008 through the current period in 2009 due to the slower economy.

• (1.2%) was from enrollment fees, which are deferred until a center opens and recognized on a straight-line basis over our estimated average life of a membership. Since the fourth quarter of 2008, the estimated average life of a membership has been 30 months. For the second and third quarters of 2008, it was 33 months, and for the first quarter of 2008 and prior, it was 36 months. Enrollment fees decreased by $0.2 million for the three months ended September 30, 2009 to $6.6 million. In 2008 and 2009, we lowered our enrollment fees to stimulate new membership demand.

Other revenue decreased $0.9 million, or 18.8%, to $3.7 million for the three months ended September 30, 2009, which was primarily due to lower media sales. Center operations expenses. Center operations expenses totaled $127.5 million, or 60.5% of total center revenue (or 59.5% of total revenue), for the three months ended September 30, 2009, compared to $116.3 million, or 59.9% of total center revenue (or 58.4% of total revenue), for the three months ended September 30, 2008. This $11.2 million increase primarily consisted of an increase of $6.1 million in occupancy-related costs, including utilities, real estate taxes and rent on leased centers, $1.7 million in additional payroll-related costs to support increased memberships at new centers and increases in membership acquisition costs and an increase in expenses to support in-center products and services. Center rent expense totaled $9.9 million for the three months ended September 30, 2009 and $6.5 million for the three months ended September 30, 2008. This $3.4 million increase is primarily a result of the six sale-leaseback transactions that we entered into during the second half of 2008.
Advertising and marketing expenses. Advertising and marketing expenses were $5.8 million, or 2.7% of total revenue, for the three months ended September 30, 2009 compared to $7.3 million, or 3.7% of total revenue, for the three months ended September 30, 2008.These expenses decreased primarily due to less presale activity and more targeted and more market-specific marketing campaigns. General and administrative expenses. General and administrative expenses were $9.7 million, or 4.5% of total revenue, for the three months ended September 30, 2009 compared to $9.5 million, or 4.8% of total revenue, for the three months ended September 30, 2008. This $0.2 million increase was primarily due to increased costs to support the growth in memberships and the number of centers. These expenses decreased as a percentage of revenue primarily due to increased efficiencies and productivity improvements.
Other operating expenses. Other operating expenses were $8.0 million for the three months ended September 30, 2009 compared to $4.9 million for the three months ended September 30, 2008. This increase is primarily a result of construction-related expenses, costs associated with the expansion of our corporate wellness businesses and losses on the disposition of assets. Depreciation and amortization. Depreciation and amortization was $23.4 million for the three months ended September 30, 2009 compared to $18.7 million for the three months ended September 30, 2008. This $4.7 million increase was due primarily to depreciation on our new centers opened in 2008 and the first three quarters of 2009 and the remodels of acquired clubs completed in 2008.

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Interest expense, net. Interest expense, net of interest income, was $7.7 million for the three months ended September 30, 2009 compared to $7.2 million for the three months ended September 30, 2008. This $0.5 million increase was primarily the result of decreased capitalized interest on construction projects.
Provision for income taxes. The provision for income taxes was $12.0 million for the three months ended September 30, 2009 compared to $13.7 million for the three months ended September 30, 2008. This $1.7 million decrease was due to a decrease in income before income taxes of $2.6 million and a lower effective income tax rate in the third quarter of 2009. The effective income tax rate for the three months ended September 30, 2009 was 36.8% compared to 38.8% for the three months ended September 30, 2008.
Net income. As a result of the factors described above, net income was $20.6 million, or 9.6% of total revenue, for the three months ended September 30, 2009 compared to $21.6 million, or 10.9% of total revenue, for the three months ended September 30, 2008.
Nine Months ended September 30, 2009 Compared to Nine Months ended September 30, 2008
Total revenue. Total revenue increased $57.6 million, or 10.0%, to $633.3 million for the nine months ended September 30, 2009 from $575.7 million for the nine months ended September 30, 2008.
Total center revenue grew $59.0 million, or 10.5%, to $623.4 million for the nine months ended September 30, 2009 from $564.4 million for the nine months ended September 30, 2008. Of the $59.0 million increase in total center revenue,
• 81.5% was from membership dues, which increased $48.1 million, or 12.8%, due to increased memberships at new centers. Our number of memberships increased 6.0% to 590,716 at September 30, 2009 from 557,164 at September 30, 2008.

• 19.1% was from in-center revenue, which increased $11.3 million primarily as a result of increased sales of our LifeCafe products and services and personal training. Average in-center revenue per membership decreased from $321 for the nine months ended September 30, 2008 to $305 for the nine months ended September 30, 2009. We began to see slower in-center revenue growth in the second half of 2008 through the current period in 2009 due to the slower economy.

• (0.6%) was from enrollment fees, which are deferred until a center opens and recognized on a straight-line basis over our estimated average life of a membership. Since the fourth quarter of 2008, the estimated average life of a membership has been 30 months. For the second and third quarters of 2008, it was 33 months, and for the first quarter of 2008 and prior, it was 36 months. Enrollment fees decreased by $0.4 million for the nine months ended September 30, 2009 to $19.6 million. In 2008 and 2009, we lowered our enrollment fees to stimulate new membership demand.

Other revenue decreased $1.4 million, or 12.1%, to $9.9 million for the nine months ended September 30, 2009, which was primarily due to lower media sales. Center operations expenses. Center operations expenses totaled $383.3 million, or 61.5% of total center revenue (or 60.5% of total revenue), for the nine months ended September 30, 2009 compared to $337.1 million, or 59.7% of total center revenue (or 58.6% of total revenue), for the nine months ended September 30, 2008. This $46.2 million increase primarily consisted of an increase of $20.0 million in occupancy-related costs, including utilities, real estate taxes and rent on leased centers, $11.6 million in additional payroll-related costs to support increased memberships at new centers and increases in membership acquisition costs and an increase in expenses to support in-center products and services. Center rent expense totaled $29.7 million for the nine months ended September 30, 2009 and $16.9 million for the nine months ended September 30, 2008. This $12.8 million increase is primarily a result of the six sale-leaseback transactions that we entered into during the second half of 2008.
Advertising and marketing expenses. Advertising and marketing expenses were $20.1 million, or 3.2% of total revenue, for the nine months ended September 30, 2009 compared to $23.6 million, or 4.1% of total revenue, for the nine months ended September 30, 2008. These expenses decreased primarily due less presale activity and more targeted and more market-specific marketing campaigns.

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General and administrative expenses. General and administrative expenses were $33.2 million, or 5.2% of total revenue, for the nine months ended September 30, 2009 compared to $30.7 million, or 5.3% of total revenue, for the nine months ended September 30, 2008. This $2.5 million increase was primarily due to increased costs to support the growth in memberships and the number of centers and unabsorbed real estate and development overhead. These expenses decreased as a percentage of revenue primarily due to increased efficiencies and productivity improvements.
Other operating expenses. Other operating expenses were $17.8 million for the nine months ended September 30, 2009 compared to $13.7 million for the nine months ended September 30, 2008. This increase is primarily a result of construction-related expenses, costs associated with the expansion of our corporate wellness businesses and losses on the disposition of assets. Depreciation and amortization. Depreciation and amortization was $68.1 million for the nine months ended September 30, 2009 compared to $52.5 million for the nine months ended September 30, 2008. This $15.6 million increase was due primarily to depreciation on our new centers opened in 2008 and the first three quarters of 2009 and the remodels of acquired clubs completed in 2008. Interest expense, net. Interest expense, net of interest income, was $23.0 million for the nine months ended September 30, 2009 compared to $21.3 million for the nine months ended September 30, 2008. This $1.7 million increase was primarily the result of decreased capitalized interest on construction projects.
Provision for income taxes. The provision for income taxes was $34.7 million for the nine months ended September 30, 2009 compared to $38.9 million for the nine months ended September 30, 2008. This $4.2 million decrease was primarily due to a decrease in income before income taxes of $9.0 million. The effective income tax rate for the nine months ended September 30, 2009 was 39.1% compared to 39.8% for the nine months ended September 30, 2008.
Net income. As a result of the factors described above, net income was $54.0 million, or 8.5% of total revenue, for the nine months ended September 30, 2009 compared to $58.8 million, or 10.2% of total revenue, for the nine months ended September 30, 2008.
Liquidity and Capital Resources
Liquidity
Historically, we have satisfied our liquidity needs through various debt and sale-leaseback arrangements, sales of equity and cash flow provided by operations. Principal liquidity needs have included the development of new centers, debt service requirements and expenditures necessary to maintain and update our existing centers and associated fitness equipment. We believe that we can satisfy our near-term debt service obligations and capital expenditure requirements with cash flow from operations. We believe that we can satisfy our longer-term debt service obligations and capital expenditure requirements with cash flow from operations, by the extension of the terms of or refinancing our existing debt facilities, through sale-leaseback transactions and by continuing to raise long-term debt or equity capital, although there can be no assurance that such actions can or will be completed. Our business model operates with negative working capital because we carry minimal accounts receivable due to our . . .