Life Time Fitness, Inc.

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Life Time Fitness, Inc.

6442 City West Parkway
Eden Prairie, Minnesota 55344
U.S.A.
Telephone: (952) 947-000
Fax: (952) 947-9137
Web site: http://www.lifetimefitness.com

Public Company:
Incorporated: 1990 as FCA, Ltd.
Employees: 7,700
Sales: $256.9 million (2003)
Stock Exchanges: New York
Ticker Symbol: LTM
NAIC: 713940 Fitness and Recreational Sports Centers

Life Time Fitness, Inc., operates more than 35 large-format sports, athletic, fitness, and family recreation centers. The publicly traded company is based in Eden Prairie, Minnesota, a state that is home to 14 Life Time centers. Illinois, with seven centers, is the next largest area of operation for the chain, followed by Michigan with five, Arizona, Texas, and Virginia with two, and single locations in Indiana and Ohio. Life Time takes a big box approach to health clubs, using a model center that exceeds 100,000 square feet in size and has a target capacity of 11,500 memberships. About one-third of the units conform to this model, and another dozen are also large-format centers. Because of their size, the resort-style centers are able to offer a wide variety of sports, fitness, and family recreation programs and services at rates below the industry average. Life Time offers swimming pools with water slides, racquet ball courts, basketball courts, climbing walls, and large numbers of weight training stations and cardiovascular equipment. The centers also provide free child care and children's activities, including small gyms, playground equipment, televisions, and even computer labs offering both entertainment and educational games. Moreover, Life Time offers dining and full-service spas. Life Time is also attempting to leverage its brand name, publishing a magazine, Experience Life, and developing a line of apparel, nutritional, and other products.

Founder Emigrates to America in 1978

Life Time's founder, Bahram Akradi, grew up in Tehran, Iran. In 1978, when he was 17 years old—and a year before Iranian militants stormed the U.S. embassy, took 54 hostages, and severed ties between the two countries—Akradi emigrated to the United States, joining his brother who had settled in Colorado Springs, Colorado. He began studying electrical engineering at the University of Colorado, working in restaurants to pay his bills. As a college senior, he found work at a unit of a local health club chain, Nautilus Swim & Fitness, starting out cleaning the pool and club but soon taking on increasing responsibilities. He began selling memberships two days a week, but because he was so goal-oriented, setting daily targets that he insisted upon meeting, by the time he graduated from college he was the chain's top salesman. He decided to continue working for Nautilus Swim rather than pursue a career in engineering and in 1983 was sent to Minneapolis-St. Paul to launch the chain's first facility outside of Colorado. It was an immediate success and within a month, Akradi became a partner in the company. He directed site selection, development, and sales and operation as the company added three locations in 1984. Under his direction, the chain became the first to become a 24-hour-a-day operation, provide free child care, offer almost-hourly aerobics classes, and hire larger teams of trainers to assist customers. In 1984, the year the chain changed its name to U.S. Swim and Fitness Clubs, its success—eight clubs generating $33 million in annual sales—attracted the attention of Bally's, the largest chain of health clubs in the United States, and in 1986 Bally's bought the company. Akradi elected to stay on with Bally's, signing a five-year contract.

After three years with Bally's, Akradi quit to start his own health club business. In addition to providing the kind of customer service he introduced at U.S. Swim & Fitness, his idea was to build clubs large enough to accommodate the variety of choices that would appeal to an entire family. "I had worked in clubs," he told the Minneapolis Star Tribune in a 2003 profile, "They were dingy, smelly places. They were like torture chambers. And they forced you into contracts. It wasn't built from a customer perspective." Unable to open a health club in the Minneapolis market because of a non-compete clause in the contract he signed with Bally's, Akradi attempted to open a large club in San Francisco. According to his research, Minneapolis had a health club for every 70,000 residents while San Francisco had one for every 470,000 residents, making the community a logical place to open a facility. However, he was unable to raise the necessary financing, and finally he moved back to Minnesota when the non-compete provision expired.

First Center Opens in 1992

In October 1990, Akradi formed FCA Ltd. In addition to liquidating all of his personal assets, he lined up a group of shareholders, the largest of which were Minneapolis businessman Wheelock Whitney and Sunfish Lake businessman John Driscoll. Akradi retained a 35 percent interest. In July 1992, he opened the first Life Time Fitness center, roughly 30,000 square feet in size, in Brooklyn, Minnesota, on a site that had not been kind to health clubs: three earlier attempts to establish a club at this location had failed. Akradi established a goal of selling 2,700 memberships in the first year, and as had been the case when he sold memberships during college, he was determined to meet the challenge. At the end of the year, the Brooklyn club sold 2,702 members, was well established, and would go on to become one of the most profitable units in the Life Time chain.

Late in 1994, Life Time, focusing on the suburbs of Minneapolis-St. Paul, opened its second club, located in Egan, Minnesota, which contributed partially to the $4 million in revenues the company posted for the year. The third club, in Woodbury, Minnesota, opened in the fall of 1995, and the chain made plans to establish another four units in Roseville, Minnetonka, Eden Prairie, and Coon Rapids. Some parties were interested in investing in the chain, but at this point, according to Akradi, Life Time did not have use for the money until its could line up more deals for club openings.

In the summer of 1996, Life Time completed an initial round of venture capital financing, receiving $6.5 million from Minneapolis-based Norwest Equity Partners. The chain began building its first "big box" centers, 94,000 square feet in size, roughly the size of two football fields, to realize Akradi's dream of offering recreational centers for the entire family at a value price point. To further this concept, Life Time also began turning to municipalities to create public-private partnerships in building new centers. In 1996, Life Time forged such a relationship, the first of its kind in the United States, with the city of Plymouth, Minnesota, in conjunction with the local school district. With a contribution of land from the city which the company leased, Life Time built a 110,000-square-foot pool and fitness center, including an eight-lane competition pool, diving pool, indoor and outdoor leisure pools, two basketball courts, two gyms, an aerobics room, racquetball courts, and 160 pieces of cardiovascular equipment and 120 resistance-training machines. The facility was owned and operated by Life Time, but area residents were given a discount on memberships and the ability to use facilities on a daily-pass basis; the club also paid local property taxes. This public-private model would be used to open other Life Time clubs in Champlin and Savage, Minnesota, and Akradi hoped to put the idea to good effect elsewhere in the country. Aside from the money saved on real estate, these partnerships forged stronger ties with a community, resulting in increased membership rates.

In 1998, FCA Ltd. changed its name to Life Time Fitness, Inc. to help build the brand. It also completed its second round of venture capital financing, receiving $20 million. Norwest provided $18 million and Piper Jaffray Investors and a group of investors contributed the other $2 million. By the end of 1998, Life Time consisted of nine centers and with an infusion of cash from investors planned to open another six units in the next year. A major reason for investor enthusiasm over Life Time involved positive demographics. In 1990, the number of health club members in America totaled ten million, and over the course of the next decade that figure would triple to 30.5 million people. During the same period, however, only 1,200 health clubs were added, totaling 15,125 in 1999. In addition to growing demand, Life Time was staking out valuable territory, appealing to families and people who were not fitness buffs but just looking to improve their health. In the past, health clubs appealed to customers who were in shape, a situation that intimidated a large number of potential customers. The Life Time concept was more inviting and convenient, especially for parents with children.

One area that needed addressing at Life Time was its Member Management System (MMS), the information technology systems that was used to register, authorize, and track the usage of the facilities by Life Time members. Because the system was often down, many members simply bypassed it. The result was nonpayment of dues and a number of lapsed accounts that were recorded as paid. Moreover, Life Time had to foot the bill for consultants to step in to fix even the smallest glitch. To rectify the situation, a chief information officer was hired, Brent Zempel, who lacked technical expertise but knew the health and fitness industry and was a strong manager. He assembled an IT team and after dismissing available off-the-shelf MMS systems, developed a customized system based on Java. The architecture went live in August 2000, and because the Life Time clubs were all linked, members were now able to use any Life Time facility. The company continued to work out bugs as MMS was refined and became a major part of the company's expansion plans.

Chicago Entry in 2000

In 2000, Life Time began using its current model center, 105,000 square feet in size. Also during this year, the company conducted its largest round of equity financing, taking in $45 million, the financing managed by U.S. Bancorp Piper Jaffray and once again led by Norwest Equity Partners. New York-based Patricof & Co. Ventures Inc. also participated. At this stage, Norwest owned about 35 percent of Life Time, Arkadi and other employees around 20 percent, and Patricof 15 percent. Another major step taken in 2000 was Life Time's entry into the Chicago market. By the end of the year, the chain was operating 21 clubs and revenues totaled $92.9 million.

Company Perspectives:

Our cornerstones are exercise, nutrition and education so you can achieve a balanced and fulfilled life.

More than just expanding its geographic reach, Life Time began looking beyond the operation of health clubs to becoming a true health-and-fitness brand. The chain began adding amenities found in spas, as well as moving into such areas as apparel, food lines, and nutritional supplements. Life Time created a new position of chief operating officer and hired Bruce Fabel to fill the post. Fabel had worked in retail development for Calvin Klein, Nike, and Warner Brothers Studio Stores and was well experienced in branding strategies. A major factor in attaining the company's brand extensions involved Life Time's MMS, which could be used to inform members about the company's new programs, products, and services to help squeeze greater revenue out of the existing membership base. In addition, Life Time began thinking about spinning off its MMS unit as a consulting firm that would customize MMS for other companies. In this way, Life Time's IT unit would actually generate revenue rather than exist as a mere expense on the balance sheet. In 2002, about 5 percent of Life Time's revenues came from the sale of ancillary products, but that number would begin to increase significantly. Life Time also took steps to transform its in-house magazine, Experience Life, into a nationally distributed, bi-monthly glossy publication. In 2003, Experience Life became available at most Barnes and Noble, Borders, and B. Dalton locations around the country. Subscriptions to the magazine were also available. Contrary to the approach of some magazines that catered to the "perfect body" idea or peddled get-fit-quick fixes, Experience Life took a broader approach, appealing to the kind of audience its fitness centers targeted: people with a number of commitments, including family, career, and personal development.

In 2002, Life Time moved into the Southwest for the first time, opening a club in Tempe, Arizona. The Southwest was an appealing market for the company, which planned to open more centers in Phoenix and several in the Houston and Dallas areas. Revenues for the year increased to $192.4 million. That amount would grow to $256.9 million in 2003, and the company would record net income of $13.6 million. Life Time's efforts to grow its other income streams were also bearing fruit. Restaurants, nutritional supplements, personal training fees, and other sources of income generated $25.1 million in 2001, $38.2 million in 2002, and $54.2 million in 2003. The ability to show that the company had multiple ways to generate sales was also important to the company's next step: going public.

With Credit Suisse First Boston and Merrill Lynch serving as co-managers and Piper Jaffray acting as an underwriter, Life Time completed its initial public offering of stock in June 2004, raising $183 million. According to the company, the main reason for going public was to establish a market for its stock, which would allow equity partners like Norwest to realize a profit on their investment. Some of the money was also earmarked for opening new centers. The chain was 35 units strong by July 2004, with four centers in Texas scheduled to open in winter 2004 and others in the development stage. The prospects for Life Time were clearly trending upward, and there was no apparent end in sight to the company's ability to sustain its pattern of strong and steady growth.