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Report and Accounts 2001

LA Fitness plc

LA Fitness plc Report and Accounts 2001

ContentsDirectors and Advisors 2

Chairman’s Statement 4

Chief Executive’s Review 6

Directors’ Report 10

Report on Corporate Governance 12

Report of the Board on Directors’ Remuneration 14

Statement of Directors’ Responsibilities 17

Auditors’ Report to the Members of LA Fitness plc 18

Consolidated Profit and Loss Account 19

Consolidated Balance Sheet 20

Company Balance Sheet 21

Consolidated Statement of Total Recognised Gains and Losses 22

Reconciliation of Movements in Shareholders’ Funds 22

Consolidated Cash Flow Statement 23

Notes to the Accounts 24

Notice of Annual General Meeting 42

Financial TimetableEx-dividend date 24 October 2001

Record date 26 October 2001

Annual General Meeting 27 November 2001

Final dividend 30 November 2001

Interim Results to 31 January 2002 March 2002

Turnover up 88% to £28.4 million

(2000: £15.2 million)

EBITDA* up 84% to £8.1 million

(2000: £4.4 million)

Operating profit* up 90% to £6.0 million

(2000: £3.2 million)

Pre-tax profits* up 74% to £5.6 million

(2000: £3.2 million)

Basic earnings per share* up 60% to 13.0p

(2000: 8.1p)

Final dividend of 0.67p (2000: 0.33p)

13 clubs opened during year

Membership up 79% to 88,630 (2000: 49,620)

Trading since year end has continued to be strong

* pre-exceptional item

Financial Highlights

LA Fitness plc


Page 2

Directors and Advisors

Directors

Peter Alan JacobsNon-Executive Chairman •

Frederick Oliver TurokChief Executive

David TurnerCorporate Development Director

Richard Taylor ACA

Finance Director

Jeremy Guy TaylorOperations Director

Michael Peter Mills FCCA

Non-Executive Director •

David John CohenNon-Executive Director s•

• Members of the Audit and

Remuneration Committees

Secretary

Graham Taylor ACCA

Registered office

101 Commercial Road

London E1 1RD

Registered Number

3224406

Auditors

KPMG Audit PlcChartered Accountants

Registered Auditor

Norfolk House, Silbury Boulevard

Central Milton Keynes

Buckinghamshire MK9 2HA

Stockbroker

Old Mutual Securities Limited2 Lambeth Hill, London EC4V 4GG

Financial Adviser

Hawkpoint Partners Limited4 Great St Helens, London EC3A 6HA

Solicitors

Berwin LeightonAdelaide House

London Bridge, London EC4R 9HA

David Wineman & Co.Craven House

121 Kingsway, London WC2 6BN

Finers Stephens Innocent179 Great Portland Street

London W1N 6LS

Registrars

Computershare Services PLCPO Box 82, The Pavilions

Bridgwater Road, Bristol BS99 7NH

Bankers

Barclays Bank Plc54 Lombard Street, London EC3V 9EX

Peter Jacobs

Peter is a mechanical engineering graduate from Glasgow

University. He served as Chief Executive of BUPA between

1991 and 1998, having previously been Chief Executive

Officer of British Sugar from 1986 and of Berisford

International plc from 1989. Peter was also the non-executive

chairman of Hillsdown Holdings plc and Healthcall Limited.

He is currently a non-executive director of Allied Domecq plc

and Bank Leumi (UK) Limited.

Fred Turok

Fred has overall responsibility for the management of the

Group. After an early career as a physical education teacher,

Fred joined David Lloyd Leisure plc at its club in Heston,

Middlesex in 1985. In 1990 he left to set up Westminster

Leisure, a partnership with his wife and Jeremy Taylor,

LA Fitness’ Operations Director, which acquired Westminster

health club and launched Body & Soul, the former name of

the LA Fitness club in Kingston. In 1994 he began working

with David Turner, LA Fitness’ Corporate Development

Director. He joined the Board as one of the Founders

in 1996.

David Turner

David has responsibility for new projects, site selection,

acquisition and development as well as scheduling and

delivering capital projects. Having trained as a surveyor,

David opened his first club, City Squash, in 1979 which was

one of the first squash clubs to provide extensive health

and fitness club facilities. While opening and operating three

further clubs, he specialised in the location of projects, the

negotiation, design and building of facilities and the creation

and monitoring of management and operational systems.

In addition, he acted as a consultant to a number of

organisations, including Blue Circle Industries plc and the

Port of London Authority, the forerunner of the London

Docklands Development Corporation. In 1994 he joined

forces with Fred Turok. He joined the Board as one of the

Founders in 1996.

Richard Taylor

Richard qualified as a chartered accountant in 1984, while

with Newman & Partners. In 1985, he joined World of Leather

plc serving as its Finance Director and Company Secretary

and in 1995 he was appointed as Joint Managing Director.

Following UNO plc’s acquisition of World of Leather plc in

1997, Richard served as UNO plc’s Corporate Affairs Director

until September 1998. In 1999 he served as Operations

Director of Owners Provident plc before joining the LA Fitness

Board in September 1999.

Jeremy Taylor

Jeremy has responsibility for the day to day running of the

Group’s clubs and oversees its sales activities, which includes

membership retention and staff recruitment and training.

Like Fred Turok, Jeremy also joined David Lloyd Leisure plc in

1985, progressing to the role of manager at the Surrey Tennis

& Country Club before setting up Westminster Leisure with

Fred and Susan Turok in 1990. He also joined the Board as

one of the Founders in 1996.

Michael Mills

Michael qualified as a certified accountant in 1974 and has

held a number of positions in the brewing and pub retailing

sector, including financial accountant at Carlsberg Brewery

Limited and regional financial controller and, latterly, head

of strategic planning at Chef and Brewer Limited. He was a

co-founder of The Slug & Lettuce Group plc and served as

its Finance Director until September 1995. He is the finance

director of Jodsal Limited, a venture capital backed pub

management company.

David Cohen

David is the senior independent non-executive Director. He is

senior corporate broking advisor to SG Securities (London)

Limited (“SG”). Prior to this he was head of SG’s corporate

broking department which he established in 1993 on joining

SG from Robert Fleming Securities, where he was head of

corporate broking. He began his career at Simon & Coates,

a firm of stockbrokers, becoming a senior partner specialising

in corporate finance. Following Chase Manhattan’s acquisition

of Simon & Coates, David was appointed head of new

business development, later becoming head of European

investment banking. He has extensive corporate finance

experience including serving as corporate broking adviser

to David Lloyd Leisure plc until it was taken over by

Whitbread plc in 1995.

Biographical details of the Board of Directors are set out below:

I am pleased to present the Group’s results for theyear ended 31 July 2001 during which we have madeexcellent progress and continue to produce recordprofits. Whilst being mindful of the current economicuncertainties and prepared to modify our expansionplans if required, we remain firmly on track toachieve our roll-out target of 70 clubs throughout the United Kingdom by 31 July 2003.

Results

Turnover for the year to 31 July 2001 grew by 88% to£28.4m (2000: £15.2m). Earnings before interest, taxand depreciation (EBITDA) increased by 84% to £8.1m(before exceptional items) from £4.4m and operatingprofits before exceptional items increased by 90% to £6.0m (2000: £3.2m). Profits before tax andexceptional items rose by 74% to £5.6m (2000:£3.2m). Profits before tax and after exceptional items rose by 64% to £5.3m (2000: £3.2m).

Pre-exceptional earnings per share increased by 60%to 13.0p (2000: 8.1p). Basic earnings per share roseby 52% to 12.3p (2000: 8.1p). The exceptional chargeof £0.3m relates to the probable losses arising as aresult of the Group’s insurers, Independent InsuranceGroup PLC, being placed into liquidation in June 2001.

At 31 July 2001, the Group operated 37 clubs, havingopened 13 during the year against our pre-rights issueexpectations of 8 clubs. The performance of these newclubs, both during the pre-opening sales period andafter opening was above expectations. The clubsopened during the previous financial year are alltrading strongly and have also exceeded expectations.The number of members at operating clubs rose by79% to 88,630 from 49,620 as at 31 July 2000.

The acceleration of club openings during the year was funded in part through a 1 for 9 rights issue inOctober 2000 raising £10.2m (net of expenses), with the balance from bank borrowings.

Dividend

The Board recommends a final dividend of 0.67p perordinary share (2000: 0.33p) payable on 30 November2001 to shareholders on the register on 26 October2001. The dividend reflects the Board’s belief that as afast growing company, the majority of retained profitsshould be applied to expansion opportunities leadingto further growth in profitability and shareholder value.

Current expansion plans

Since the year end 2 clubs have opened and a further10 are under construction. We are confident of beingable to open 17 clubs (including 1 in Spain) in thisfinancial year, subject to current trading conditionscontinuing, which will take our total to 54 by 31 July 2002.

LA Fitness plc


Page 4

Chairman’s Statement

…the performance of

new clubs, both during

the pre-opening sales

period, and after

opening was above

expectations…

The property development department continues to be strengthened so that we can capitalise on theextensive site opportunities available in order to meetour medium term target of having 70 clubs open inthe United Kingdom by 31 July 2003.

At the year end the Group had a gearing level of 50%.New bank facilities of £40m have been put in placesince the year end which, together with the operationalcash flows of the business and the funds anticipatedto be generated by future sale and leasebacktransactions, will provide the funding required todeliver our medium term club number target.

Staff

I would like to take this opportunity to thank all LA Fitness staff and my Board colleagues for theircontinuing hard work, commitment and enthusiasmwhich has contributed to our success to date and will be the platform for future success.

Current Trading and Prospects

Trading since the year end has continued to be strong.I am pleased to report that the company is notexperiencing any trading pressures resulting from thecurrent economic downturn. In September, like for likemembership sales were ahead 17% against last year.

While we cannot quantify any possible future adverseimpact from recent world events, the Board stronglybelieves that our model of affordable fitness clubswhich are conveniently located appeals to the lifestyleambitions of the broad spectrum of people whoregard fitness as a necessity, rather than adispensable luxury. This has been confirmed by ourexperience in recent weeks both in terms of newmember gains and retention rates and club usage. I consider that this model will prove to be the mostrobust if the UK suffers from the recessionarypressures. I therefore look forward with confidence to reporting further progress at the half year end.

Peter Jacobs

Chairman11 October 2001

Trading since

the year end has

continued to be

strong. Like for like

membership sales

in September 2001

were ahead 17%.

Page 5

LA Fitness plc


Page 6

Chief Executive’s Review

In reviewing the performance of the Group for the year ended 31 July 2001, I am delighted toreport that we continue to growrapidly and have delivered recordturnover and profits. The demandfor quality health and fitnessfacilities that are both convenientlylocated and affordably priced, withan emphasis on customer service,remains very strong. Consequentlyour model, which includes aswimming pool, remains a highlydesirable product enabling us toexploit this growing market.

The record results we have achieved this year havecome from both organic growth at existing clubs andthe opening of 13 new clubs, exceeding ourexpectations in both areas.

Results

Turnover for the year to 31 July 2001 grew by 88% to £28.4m (2000: £15.2m). Like for like comparisonshave been calculated for the 15 clubs openthroughout this year and the previous year. Therefore,to be included within this calculation, a club has to be opened for at least 2 years. Given our success inattracting higher membership levels within the first 12months of opening, the majority of clubs have reachedcapacity prior to inclusion within this statistic. It istherefore particularly pleasing to report a like-for-likesales increase of 8.3% for the year.

We continue to work hard on seeking and exploitingopportunities for driving ancillary income, such asprivate training, merchandising and advertising. Forthe year ended 31 July 2001, income arising fromsources other than membership subscriptions andjoining fees grew to 13.2% from 11.5% last year.Measured on a like-for-like basis, ancillary income has increased by over 15%.

The gross margin for the year was 31.4% compared to 32.5% last year. This fall, which was in line withexpectations, reflects the 22 clubs (150% increase)that have opened over the last 2 years and have yetto reach maturity. Central administration costs of

£2.9m (2000: £1.8m) reflect our investment in staff at all levels to support the growing needs of theenlarging business. At 10.3% of turnover (2000:11.7%), this cost continues to be reduced and furtherreductions are expected in future years’ results.

EBITDA increased by 84% to £8.1m (beforeexceptional items) from £4.4m and operating profitsbefore exceptional items increased by 90% to £6.0m(2000: £3.2m). The operating margins thereforeincreased to 21.1% (2000: 20.8%).

The strategy of the business is to operate fromleasehold units. In this highly capital intensive growthbusiness, we prefer not to retain freehold propertieson our balance sheet as shareholders’ interests arebest served by using our cash resources to open new clubs. However, opportunities exist and havebeen taken to purchase freehold sites, which aresubsequently fitted out to be sold and leased back. Our decision to purchase freehold sites (7 acquiredduring the financial year) has increased the number ofsite opportunities available to us as well as providingthe opportunity to realise additional funds when theproperty is sold, thereby reducing the net capital cost ofthe club and contributing to the funding of our roll-out.

The freehold of our Bury club was sold during the year, realising additional funds of £0.9m whichcontributed towards the fit out of the club. We anticipatesimilar surpluses on our freehold portfolio, which wewould expect to hold on average for less than 1 year.

The net bank interest and similar charges for the yearto 31 July 2001 amounted to £0.4m (2000: net interestreceivable £0.1m), of which approximately £0.2m isdirectly attributable to the cost of holding freeholdsprior to their sale and leaseback. Current accountingstandards permit the capitalisation of this interest up to the clubs’ opening. However, we adopt aconservative accounting policy and do not capitaliseany interest, either on club developments or on theholding cost of freeholds.

Profits before tax and before the exceptional chargerelating to the liquidation of Independent InsuranceGroup PLC rose by 74% to £5.6m (2000: £3.2m). Thefailure of Independent necessitated the Group havingto put in place alternative insurance cover for periodsalready committed.

The taxation charge for the year as a percentage ofprofits is 7% (2000: 13%). The low tax charge resultsfrom the availability of accelerated capital allowancesand the utilisation of tax losses brought forward. The Company will be introducing FRS 19 (DeferredTaxation) in respect of the financial statements for the year ending 31 July 2002. The introduction of thisFinancial Reporting Standard will result in a fulltaxation charge in future years after providing in fullfor deferred taxation. The cash amount of tax payablewill remain unaffected.

Operations

We have made substantial progress during the lastyear, with membership numbers across the Groupcontinuing to grow rapidly. At 31 July 2001, the Grouphad 88,630 members at the 37 clubs open, whichcompares to 49,620 at 31 July 2000. This representsan increase of 39,010 members in the last 12 months.This growth in member numbers, which comes fromboth the existing portfolio and new club openings,demonstrates our ability to capitalise on the hugedemand for our model, largely as a consequence of the continuing change in consumer habits andlifestyle. Our commitment to customer service hasseen an encouraging improvement in retention rates,now at 68% across the Group, an increase from 65%as at 31 July 2000. Furthermore, approximately 70% ofnew members at existing clubs join as a direct resultof a member’s recommendation.

During the period, 13 new clubs were opened takingour total to 37. The pre-opening membership sales atthe clubs opened this year exceeded our expectations.A number of these clubs opened with over 2,000members (70% of anticipated capacity) comfortablyexceeding our typical breakeven number of 1,450.

At 31 July 2001, the Group had 88,630

members at the 37 clubs open, which

compares to 49,620 at 31 July 2000.

Reflecting our policy of maintaining affordable monthlymembership rates across the Group, the averageheadline rate is currently £38 per month. 90% of newmembers commit to an annual membership. Payment,which is typically by direct debit over the period ofmembership and is recognised as such, gives a securerevenue stream for the first twelve months. Joiningfees account for 4% of turnover (2000: 6%). The amounts charged for joining are continually flexed dependent upon the particular club and its level of maturity.

Opportunities exist to increase membership capacity at many clubs by exploiting the periods during theweek when the clubs are not fully utilised. One suchinitiative was the introduction of a new membershipcategory. LA Prime time was trialled in January 2001offering bespoke classes at off-peak usage times forthe over 55 age group. It is generally recognised thatthis age group offers substantial growth potential forthe industry. This proved very successful and has nowbeen extended to many of the clubs within the group.As the group expands, a greater number of membershave the opportunity to use city centre clubs close to their place of work and residential clubs close towhere they live. LA Wide membership, which allowsusage at all clubs at any time, is now being offered at £55 per month, a premium rate to normalmembership. This category of membership is proving very popular and we currently have over 5,000 LA Wide members.

Further opportunities exist to grow additional revenuestreams from members and non-members. A numberof initiatives commenced over the last year, anexample of which is the introduction of 4 wellnessservice centres (3 of which are in partnership withBUPA) as part of our existing clubs. Encouraged by the success of these units, a number of new wellnesscentres are being rolled out.

The LA Fitness brand continues to grow in stature viathe creation of strategic partnerships, brand alliances,branded product sales in addition to the roll-out ofquality clubs throughout the United Kingdom. TheBoard believes that this further strengthening of thebrand is fundamental to the continuing creation ofcorporate opportunities.

Staff

A challenge to the business has been to recruit andthen train staff to the highest standards throughoutthe organisation, but in particular at club manager andabove. We pride ourselves on the quality of trainingthat we deliver, evidenced by the high retention rateof senior staff members. It is also gratifying to witnessthe number of senior managers that have grown from within the organisation. This has resulted in asubstantial development of the management team viathe creation of a senior management executive board.These senior managers all have meaningful numbersof share options to motivate and reward loyalty in the medium term. As we continue to grow, it is ourintention to continue to motivate key personnel withour share option scheme.

LA Fitness model

The model for a LA Fitness club is a full service 12,000– 20,000 square feet health and fitness club. Locationsare selected on the basis that 80% of members aregenerally attracted from a location of not more than 5 minutes from the front door. The facilities of a typicalclub include a fully fitted gymnasium, cardio-theatre,two studios, café bar, beauty or wellness centre,solarium, spa and swimming pool. Clubs located inresidential areas will also have, amongst other things, a crèche and car park. The services offered at all clubsinclude private training, wellness, beauty and alternativetherapies, merchandise, snacks and beverages.

LA Fitness plc


Page 8

Chief Executive’s Review continued

Roll-out

The pipeline in place to deliver future LA Fitness clubshas increased as a result of the improving covenant ofthe Company and the changing face of the retail highstreet. Therefore, the availability of sites for our modelis substantial and growing. The property team wasstrengthened during the year enabling us to open 13clubs. The enhanced property team has the experienceand expertise necessary to give us every confidence ofhitting our two year club opening target. Since theyear end, 2 clubs have opened with a further 10under construction.

Funding

At the year end, the Group had £16.0m of bankoverdrafts and loans, which together with financelease obligations resulted in a gearing level of 50%. A substantial element of the total borrowings reflect the£10.6m cost of freehold properties acquired during theyear, prior to improvements. Since the year end, thefreehold of the Finchley club has been sold and leasedback for a consideration of £3m against an originalpurchase price of £2m prior to fit-out. Furthermore,new bank facilities of £40m have been put in place to provide the funding required to deliver our mediumterm club number target of 70 clubs in the UK.

Spain

Construction has commenced on our first club inBarcelona, Spain. The club is expected to open earlyin 2002, and membership sales are exceeding ourexpectations, having already signed up over 1,000annual members.

Conditional contracts have been exchanged for a clubin Madrid. A number of other site opportunities arecurrently in solicitors’ hands.

The Board believes that Spain offers very exciting and substantial opportunities to roll-out the LA Fitnessmodel and it expects returns on investment fromSpain to match those currently being achieved in theUnited Kingdom. The management team for Spain hasvery quickly established the operational, financial andreporting controls necessary for our expansion.

Current Trading and Prospects

Since the year end the business has continued togrow in line with our expectations and I am pleasedto report that during the last two months we have notexperienced any effects of the economic downturn.

We continue to monitor the key performanceindicators of the business, and indeed have putadditional measures in place, so that should tradingconditions change, we will be in position to reactquickly and decisively.

The Board believes that the LA Fitness model can berolled-out into a chain of well in excess of 100 clubsin the UK and that there are substantial growthopportunities in Europe. There are a considerablenumber of sites available to match the LA Fitnessmodel and unquestionably the demand for health andfitness membership hugely exceeds supply. LA Fitness,with its strong brand, commitment to service andexcellent value offering is in a strong position to take advantage of this demand and will continue todevelop as a significant force in the United Kingdomhealth and fitness market.

Fred Turok

Chief Executive11 October 2001

Page 9

LA Fitness plc


Page 10

The Directors present their annual report and the audited financial statementsfor the year ended 31 July 2001.

Principal activities and review of business

The principal activity of the Group during the year was that of ownership andoperation of health and fitness clubs and related activities.

A review of the Group’s business is contained in the Chairman’s Statement andthe Chief Executive’s review on pages 4 to 9.

Results

The profit after taxation for the year amounted to £4,898,000 (2000: £2,791,000).After providing for dividends, the retained profit for the year was £4,489,000(2000: £2,696,000).

Dividends

The Directors recommend that a final dividend of 0.67p per ordinary share (2000: 0.33p) is paid on 30 November 2001 to shareholders on the register atclose of business on 26 October 2001. An interim dividend of 0.33p per ordinaryshare (2000: nil) was paid in May 2001 to ordinary shareholders and thereforethe total dividend for the year payable to ordinary shareholders amounts to1.00p (2000: 0.33p).

Directors and directors’ interests

The Directors of the Company during the year together with their interests in theshare capital of the Company, including connected party interests as at 31 July2001, were as follows:

31 July 2001 31 July 2000

Ordinary shares of 5p each Ordinary shares of 5p each

Beneficial Non-beneficial Beneficial Non-beneficial

P Jacobs 335,115 - 333,333 -

F Turok 6,749,839 - 6,713,936 343,469

D Turner 2,514,377 1,678,489 2,501,006 1,671,618

J Taylor 864,196 - 859,599 -

R Taylor 20,107 - 20,000 -

D Cohen 335,116 - 333,333 -

M Mills 124,161 - 123,500 -

Directors’ Report

Since 31 July 2001, the non-beneficial interest of Mr D Turner has been reduced by 125,000 ordinaryshares to 1,553,489. There has been no other changesin the Directors’ interests between 31 July 2001 andthe date of this report.

The Directors’ other interests in contracts with theCompany during the year are referred to in note 30to the financial statements. Mr J Taylor and Mr M Millswho retire by rotation, offer themselves for re-electionat the forthcoming Annual General Meeting.

Substantial shareholdings

As at 5 October 2001, the Company had been notifiedof the following substantial interests:

Number of Percentage

ordinary shares of issued

of 5p each share capital

F Turok (Director) 6,749,839 16.5%

M & G Investment Management Limited 5,283,894 12.9%

3i Group plc 4,906,556 12.0%

D Turner (Director) 4,067,866 10.0%

Employees

The Board recognises that the performance of theGroup is enhanced when employees are kept informedabout the operational and financial progress of thebusiness. Regular meetings are held with employeesat all levels of seniority to discuss the key issues as well as the publication of a monthly employeenewsletter. A Director and senior manager mentoringprogramme was introduced in August 2000.

All employees receive equal opportunities for careeradvancement, including training and other forms ofeducation as appropriate. People with disabilities are,wherever possible, given the same opportunities for employment, training, career development andpromotion taking into account their individual abilities and qualifications. Employees who becomedisabled during their working life will be retained inemployment wherever possible and given help withrehabilitation and training.

The Group encourages the involvement of employeesin its success through membership of the share option scheme.

Creditor payment policy

The Group supports the prompt Payment Code of the CBI. It is the Group’s policy to pay amounts due to all its suppliers in accordance with the terms ofpayment agreed with each supplier at the time of the transaction.

At the year end, the Group’s trade creditorsrepresented approximately 40 days (2000: 37 days),and the Company’s trade creditors representedapproximately 41 days (2000: 37 days).

Auditors

A resolution for the re-appointment of KPMG Audit Plcas auditors of the Company is to be proposed at theforthcoming Annual General Meeting.

By order of the Board

Graham Taylor

Company Secretary101 Commercial Road, London, E1 1RD

11 October 2001

LA Fitness plc


Page 12

Report on Corporate Governance

LA Fitness is committed to maintaining highstandards of corporate governance in line with theCombined Code issued by the UK Listing Authority in June 1998 which sets out the Principles of Good Governance and Code of Best Practice.

Review of Corporate Governance Principles

The Board sets out its review of how the principles of Corporate Governance contained in the Report of the Committee on Corporate Governance have been applied.

Board of Directors

The Board currently comprises four executive andthree independent non-executive Directors. EachDirector submits for re-election at least every threeyears. Directors who are appointed during the year are subject to re-appointment by the Shareholders at the next Annual General Meeting. There is a cleardelineation of responsibility between the Chairmanand Chief Executive and other executive Directors.Biographical details of the Directors are given on page 3.

There are ten regular Board meetings each year andother ad hoc meetings are held as required to directoverall Group strategy and operations. Board meetingsfollow a formal agenda covering matters specificallyreserved for decision by the Board, but all Boardmembers are free to raise other issues at the Board.All Board papers are sent to Directors in sufficienttime before Board meetings. These cover key areas of the Group’s affairs including overall Group strategy,acquisition and divestment policy, approval ofbudgets, major capital expenditure programmes and significant transactions and financing issues. The Board has delegated responsibilities to standing committees, which it has established as described below.

There is an agreed procedure for Directors to takeindependent professional advice at the company’sexpense without reference to other Board Members.The Company Secretary is responsible for ensuringthat Board procedures are followed and all Directors

have access to the Company Secretary. Every Directorreceives appropriate training relevant to the business.

Audit Committee

The Audit Committee is chaired by Michael Mills andcurrently comprises all of the non-executive Directors.The executive Directors are invited to attend at therequest of the Committee as necessary for theCommittee to conduct its business. The Company’sauditors attend all meetings and have direct access to its Chairman. It meets at least twice a year andreviews the Group’s financial and accounting policies,interim and final results and Annual Report prior to their submission to the Board together withmanagement reports on accounting and internalcontrol matters. The Committee will review theappointment and Terms of Reference of the externalauditors, their management letter and considers anyother matters raised by the auditors. It also monitorsthe effectiveness of the internal audit function.

Remuneration Committee

The Remuneration Committee comprises all of thenon-executive Directors under the chairmanship ofPeter Jacobs. It determines the terms and conditionsof employment of the executive Directors. Furtherdetails are set out on pages 14 to 16.

Nominations Committee

As the Board of Directors of the Company is small,and the Company is still developing, there is noseparate nominations committee. All nominations to the Board are considered by all of the Directors.

Relations with Shareholders

The Company undertakes a formal programme ofinstitutional presentations on the announcement of its full year and interim results and copies of thepresentations are available to individual shareholderson request. The Company encourages communicationwith private shareholders and notice of the AGM isgiven at least 20 working days before the meeting,

at which separate resolutions are proposed on each substantially separate issue. The Chairman of the Audit Committee and the Chairman of theRemuneration Committee will attend the forthcoming Annual General Meeting.

The Group uses its website (www.lafitness.co.uk) toprovide, among other things, corporate informationthat is of value to Shareholders.

Internal Control

The Board has established an on-going process foridentifying, evaluating and managing the significantrisks faced by the Group. The process is regularlyreviewed by the Board.

The Board has overall responsibility for the Group’ssystem of internal control. However, such a system isdesigned to manage, rather than eliminate the risk offailure to achieve business objectives, and can onlyprovide reasonable and not absolute assuranceagainst material misstatement. The Directors haveestablished an organisational structure with clearoperating procedures, lines of responsibility anddelegated authority to discharge their responsibility. In particular, there are clear procedures for:

• monitoring of business risks on an ongoing basiswith key risks identified and reported to the AuditCommittee and to the Board;

• capital investment, with detailed appraisals, togetherwith clearly defined authorisation levels and postinvestment review;

• financial reporting, within a comprehensive financialplanning and accounting framework based on abudgeting and reporting function, with budgets andresults reviewed at a senior level in the Company toprovide timely and regular monitoring of financialperformance; and

• internal audit of adherence to operationalprocedures, financial controls and reporting.

There are also clear procedures for monitoring thesystem of internal control. This process involves:

• reports from relevant senior executives concerningthe operation of those elements of the system forwhich they are responsible; and

• reports from the internal audit function concerningcompliance with the Group’s internal controlprocedures.

The Board has reviewed the effectiveness of theinternal control framework for the period covered bythese financial statements and up to the date ofapproval of the Annual Report and Accounts throughthe monitoring process described above and nomaterial weakness have been identified.

Going Concern

The financial statements have been prepared on thegoing concern basis since the Directors are satisfiedthat the Group has adequate resources to continue in operational existence for the foreseeable future.

Compliance Statement

In the opinion of the Directors, the Company fullycomplied throughout the year ended 31 July 2001with the provisions of Section 1 of the Combined Code on Corporate Governance issued by the Financial Services Authority.

LA Fitness plc


Page 14

Report of the Board on Directors’ Remuneration

The Remuneration Committee comprises the threenon-executive Directors under the Chairmanship ofPeter Jacobs. The Committee provides advice andrecommendations to the Board regarding theframework for the executives’ remuneration which it reviews annually and determines, on behalf of the Board, the individual remuneration packages of each executive Director.

Remuneration Policy

In forming its remuneration policy the Committee has also given full consideration to all of the mattersreferred to in Section B of the Combined Code issuedby the Financial Services Authority. The emphasis isupon attracting, retaining and motivating high calibreindividuals as executive Directors, whose remunerationis linked to the overall performance of the Group andso to the interests of the Shareholders.

The Committee has utilised these principles in derivingremuneration packages for the executive Directors. Thekey principles of which are:

• to pay a market competitive salary having regard tothe Director’s experience and the need to attract andretain the highest quality management; and

• to make contributions into an individual’s personalpension scheme; and

• to provide a range of benefits such as life assuranceand medical expenses insurance.

The value of these benefits in kind do not form part of pensionable salary and these packages arereviewed each year to ensure that they are focused on the Group’s business objectives and the creation of Shareholder value.

The performance related element of Directors’Remuneration is reflected both through the bonusscheme and the share holdings of the executiveDirectors.

In addition, the Committee also approves shareoptions awards to all employees.

Directors’ Base Salary

Salaries are reviewed annually by the Committee on 1 August. The Committee reviews salary surveys for the purpose of monitoring overall remunerationlevels against other peer group companies in theleisure sector.

Bonus Scheme

All executive Directors are entitled to the payment ofdiscretionary bonuses on achievement of targets set atthe start of each financial year.

Pension Benefits

The Company makes contributions on behalf of theexecutive Directors directly into their own personalpension plans. The contributions made by theCompany in respect of individual Directors are shownon page 15. Pension entitlement is calculated byreference to the base salary only, and with effect from 1 August 2000 is not less than 4% of salary.

Executive Share Option Schemes

The Group’s Share Option Scheme (the “Scheme”) is used as a means of motivating and retainingemployees. The Scheme was introduced in 1999 andcomprises two parts, namely the LA Fitness ApprovedExecutive Share Option Scheme (Approved Part) andthe LA Fitness Unapproved Executive Share OptionScheme (Unapproved Part). The Approved Part hasbeen approved by the Board of the Inland Revenueunder the provisions of the Income and CorporationTaxes Act 1988. The Unapproved Part has not beenapproved by the Inland Revenue and it is notintended to apply for approval in respect of it. Optionsgranted under the Scheme may generally be exercisedbetween three and ten years from the date of grantand all options granted after the Company’s flotationin October 1999 have been at market price.

At 31 July 2001 options to subscribe for up to 914,870 Ordinary Shares of 5p each were held by 164 employeesunder the Scheme. These options are exercisable from dates commencing on 10 August 2002 and expiring on 29 April 2011 at prices ranging between 41.25p and 339p per share with a weighted average of 202p. Thoseoptions granted during the year were at exercise prices of 242p to 268p per share. Both the number of subsistingoptions and the exercise prices were amended for all outstanding options following the Company’s rights issue in October 2000.

Service Agreement

Each executive Director has an existing employment contract with a notice period of twelve months.

External Directorships

The executive Directors are permitted to take external non-executive directorships, to provide them with widerexperience for their own and the Company’s benefit, subject to the approval of the Committee and provided thatthe time commitment does not impact on the executive’s duties.

Non-Executive Directors

Non-executive Directors are appointed on rolling contracts subject to six month’s written notice. Each Director isappointed for a period of no more than 3 years with no automatic right of re-appointment. Non-executive Directorsdo not take part in discussions of their own remuneration. The basic fees payable to Non-executive Directors areset by the Board as a whole.

Directors’ Remuneration

Salary Year ended Year ended

and fees Bonus Benefits Pension 31 July 2001 31 July 2000

£’000 £’000 £’000 £’000 £’000 £’000

P Jacobs 30 - - - 30 26

F Turok 120 25 1 5 151 99

D Turner 83 25 1 3 112 79

R Taylor 82 25 1 7 115 67

J Taylor 76 25 1 3 105 77

M Mills 18 - - - 18 15

D Cohen 13 - - - 13 11

422 100 4 18 544 374

The fees in respect of the services provided by Mr M Mills are paid to NGI Consultancy Limited.

LA Fitness plc


Page 16

Report of the Board on Directors’ Remuneration

Directors’ Share Options

At Granted Adjustment At

Date Exercise Period Exercise 1 August during following 31 July

of grant From To price 2000 year rights issue 2001

R Taylor

Approved scheme 20.10.99 20.10.02 19.10.09 148.5p 20,000 - 204 20,204

Unapproved scheme 20.10.99 20.10.02 19.10.09 148.5p 20,002 - 204 20,206

09.11.00 09.11.03 08.11.10 266p - 26,316 - 26,316

06.04.01 06.04.04 05.04.11 242p - 31,818 - 31,818

30.04.01 30.04.04 29.04.11 268p - 68,182 - 68,182

40,002 126,316 408 166,726

No options were exercised during the year, and there have been no changes in Directors’ options since the yearend. The future exercise of options is not subject to any conditions.

The market price of the ordinary shares at 31 July 2001 was 291p. The shares traded during the year in the range212p to 321p.


Peter Jacobs

Chairman11 October 2001

Company law requires the Directors to preparefinancial statements for each financial year whichgive a true and fair view of the state of affairs of theCompany and Group and of the profit or loss for thatperiod. In preparing those financial statements, theDirectors are required to:

• select suitable accounting policies and then applythem consistently;

• make judgements and estimates that are reasonableand prudent;

• state whether applicable accounting standards havebeen followed, subject to any material departuresdisclosed and explained in the financial statements;

• prepare the financial statements on the goingconcern basis unless it is inappropriate to presumethat the Group will continue in business.

The Directors are responsible for keeping properaccounting records which disclose with reasonableaccuracy at any time the financial position of theCompany and to enable them to ensure that thefinancial statements comply with the Companies Act1985. They have general responsibility for taking suchsteps as are reasonably open to them to safeguardthe assets of the Group and to prevent and detectfraud and other irregularities.

Page 17

Statement of Directors’Responsibilities

LA Fitness plc


Page 18

Auditors’ Reportto the Members of LA Fitness plc

We have audited the financial statements of LA Fitness plc for the year ended 31 July 2001 whichcomprise of the Profit and Loss account, the BalanceSheet, the Cash Flow Statement, the ConsolidatedStatement of Total Recognised Gains and Losses andthe related notes. These financial statements havebeen prepared under the historical cost conventionand the accounting policies set out therein.

Respective responsibilities of directors and auditors

The Directors are responsible for preparing the Annual Report. As described on page 17 this includesresponsibility for preparing the financial statements in accordance with applicable United Kingdom law and accounting standards. Our responsibilities, asindependent auditors, are established in the UnitedKingdom by statute, the Auditing Practices Board, theListing Rules of the Financial Services Authority and by our profession’s ethical guidance.

We report to you our opinion as to whether thefinancial statements give a true and fair view and areproperly prepared in accordance with the CompaniesAct. We also report to you if, in our opinion, thedirectors’ report is not consistent with the financialstatements, if the Company has not kept properaccounting records, if we have not received all theinformation and explanations we require for our audit,or if information specified by law or the Listing Rulesregarding directors’ remuneration and transactions withthe Group is not disclosed.

We review whether the statement on pages 12 and 13 reflects the Company’s compliance with the sevenprovisions of the Combined Code specified for ourreview by the Financial Services Authority, and wereport if it does not. We are not required to considerwhether the Board’s statements on internal controlcover all risks and controls or form an opinion on theeffectiveness of the Group’s corporate governanceprocedures or its risk and control procedures.

We read the other information contained in the AnnualReport, including the corporate governance statement,and consider whether it is consistent with the auditedfinancial statements. We consider the implications for

our report if we become aware of any apparentmisstatements or material inconsistencies with the financial statements.

Basis of audit opinion

We conducted our audit in accordance with AuditingStandards issued by the Auditing Practices Board. An audit includes examination, on a test basis, ofevidence relevant to the amounts and disclosures in the financial statements. It also includes anassessment of the significant estimates andjudgements made by the directors in the preparationof the financial statements, and of whether theaccounting policies are appropriate to the Group’scircumstances, consistently applied and adequatelydisclosed.

We planned and performed our audit so as to obtainall the information and explanations which weconsidered necessary in order to provide us withsufficient evidence to give reasonable assurance that the financial statements are free from materialmisstatement, whether caused by fraud or otherirregularity or error. In forming our opinion we alsoevaluated the overall adequacy of the presentation of information in the financial statements.

Opinion

In our opinion the financial statements give a true andfair view of the state of affairs of the Company andthe Group as at 31 July 2001 and of the profit of theGroup for the year then ended and have been properlyprepared in accordance with the Companies Act 1985.

KPMG Audit Plc

Chartered Accountants Registered AuditorMilton Keynes

11 October 2001

Consolidated Profit and Loss Accountfor the year ended 31 July 2001

Page 19

The notes on pages 24 to 41 form part of these financial statements.

Before Exceptional

exceptional items 2001 2000

items (note 3) Total Total

Note £’000 £’000 £’000 £’000

Turnover

Continuing operations 2 28,449 - 28,449 15,170

Cost of sales (19,506) - (19,506) (10,239)

Gross profit 8,943 - 8,943 4,931

Administrative expenses (2,932) (301) (3,233) (1,775)

Operating profit

Continuing operations 6,011 (301) 5,710 3,156

Interest receivable 5 27 - 27 251

Interest payable and similar charges 6 (464) - (464) (199)

Profit on ordinary activities before taxation 4 5,574 (301) 5,273 3,208

Tax on profit on ordinary activities 8 (375) (417)

Profit on ordinary activities after taxation 4,898 2,791

Dividends paid and proposed

on equity and non-equity shares 9 (409) (159)

Additional finance credit of non-equity shares 10 - 64

(409) (95)

Retained profit for the financial year 25 4,489 2,696

Basic earnings per share 11 12.3p 8.1p

Diluted earnings per share 11 12.2p 8.1p

LA Fitness plc


Page 20

Consolidated Balance Sheetat 31 July 2001


2001 2000

Note £’000 £’000 £’000 £’000

Fixed assets

Intangible assets 12 67 27

Tangible assets 13 60,029 28,520

Investments 15 435 435

60,531 28,982

Current assets

Stocks 16 301 195

Debtors 17 2,842 1,611

Cash at bank and in hand 54 28

3,197 1,834

Creditors: amounts falling due

within one year 18 (12,830) (8,339)

Net current liabilities (9,633) (6,505)

Total assets less current liabilities 50,898 22,477


after more than one year 19 (14,290) (588)

Provisions for liabilities and charges 21 (817) (817)

Net assets 35,791 21,072

Capital and reserves

Called up share capital 22 2,043 1,838

Share premium account 23 25,855 15,830

Other reserves 24 (249) (249)

Profit and loss account 25 8,142 3,653

Equity shareholders’ funds 26 35,791 21,072

These financial statements were approved by the Board of Directors on

11 October 2001 and were signed on its behalf by:

F Turok R Taylor

Director Director

2001 2000

Note £’000 £’000 £’000 £’000

Fixed assets

Tangible assets 14 1,210 443

Investments 15 727 685

1,937 1,128

Current assets

Stocks 16 173 140

Debtors* 17 39,399 17,567

Cash at bank and in hand 2,127 175

41,699 17,882


within one year 18 (1,717) (675)

Net current assets 39,982 17,207

Total assets less current liabilities 41,919 18,335


after more than one year 19 (13,000) -

Net assets 28,919 18,335

Capital and reserves

Called up share capital 22 2,043 1,838

Share premium account 23 25,855 15,830

Profit and loss account 25 1,021 667

Equity shareholders’ funds 26 28,919 18,335

*Included in debtors is £38,889,000 (2000: £16,968,000) relating to amounts

owed by Group undertakings due after more than one year (note 17).

These financial statements were approved by the Board of Directors on

11 October 2001 and were signed on its behalf by:

F Turok R Taylor

Director Director


Company Balance Sheetat 31 July 2001

LA Fitness plc


Page 22

Consolidated Statement of TotalRecognised Gains and Lossesfor the year ended 31 July 2001

2001 2000

Notes £’000 £’000

Profit for the financial year 4,898 2,791

Prior year adjustment 27 - (480)

Total recognised gains and losses since the last annual report 4,898 2,311

Reconciliation of Movementsin Shareholders’ Fundsfor the year ended 31 July 2001

2001 2000

Notes £’000 £’000

Profit for the financial year 4,898 2,791

Dividends 9 (409) (159)

Additional finance credit of non-equity shares - 64

4,489 2,696

New share capital subscribed (net of expenses) 22 10,230 14,253

Non-equity interests retained - (64)

Net addition to shareholders’ funds 14,719 16,885

Opening shareholders’ funds 21,072 4,187

Closing shareholders’ funds 35,791 21,072


2001 2000

Notes £’000 £’000

Net cash inflow from operating activities 32 7,662 5,709

Returns on investment and servicing of finance 32 (437) 14

Taxation (476) (185)

Capital expenditure 32 (32,145) (13,929)

Dividends paid on equity shares (256) -

Net cash outflow before financing (25,652) (8,391)

Financing 32 22,706 8,745

(Decrease)/increase in cash in the year (2,946) 354

Reconciliation of net cash flow to net debt (see note 33)

(Decrease)/increase in cash in the year (2,946) 354

Cash (inflow)/outflow from movement in debt and finance leases (12,476) 5,506

Change in net debt resulting from cash flows (15,422) 5,860

New finance leases (1,546) (196)

Movement in net debt during the year (16,968) 5,664

Net debt at 1 August 2000 (856) (6,520)

Net debt at 31 July 2001 33 (17,824) (856)

Major non-cash transactions are referred to in note 34 to the financial statements.


Consolidated Cash Flow Statementfor the year ended 31 July 2001

LA Fitness plc


Page 24

Notes to the Accounts (forming part of the financial statements)

1 Accounting policies

Basis of preparation

The financial statements have been prepared in accordance with applicable accounting standards and under

the historical cost convention. The following principal accounting policies have been applied consistently in

dealing with items which are considered material in relation to the Group’s financial statements.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its

subsidiaries made up to 31 July 2001. All investments except for LA Leisure Limited and LA Westminster

Limited have been accounted for on an acquisition basis. Under this method, the results of subsidiary

undertakings acquired or disposed of in the year are included in the consolidated profit and loss account

from the date of acquisition or up to the date of disposal. LA Leisure Limited and LA Westminster Limited

have been accounted for using the merger accounting principles set out in FRS 6 (see note 24).

The Group financial statements do not include a separate profit and loss account for the holding Company

as permitted by Section 230 of the Companies Act 1985. The amount of Group profit attributable to the

members of the holding Company is shown in note 25 to the financial statements.

Turnover

Turnover comprises the value of goods and services supplied by the Group, exclusive of value added tax.

Membership subscription income is recognised evenly over the membership period. Joining fee income is

recognised when received.

Tangible fixed assets and depreciation

Tangible fixed assets are stated at cost less depreciation. Depreciation is provided at rates calculated to

write off the cost of fixed assets, less their estimated residual value, over their expected useful lives on the

following bases:

Freehold property (excluding land) 2% straight line

Leasehold land and buildings straight line over the life of the lease

Fixtures, fittings and equipment 12.5% straight line or 20% reducing balance

Motor vehicles 25% reducing balance

In accordance with FRS 11, the Directors consider the carrying value of fixed assets for impairment. Any

reductions in value arising from the impairment of fixed assets are charged to the profit and loss account

for the year.

Stocks

Stocks are stated at the lower of cost and net realisable value.

Deferred taxation

Provision is made for taxation deferred as a result of material timing differences between the incidence of

income and expenditure for taxation and accounts purposes, using the liability method, only to the extent

that, in the opinion of the Directors, there is a reasonable probability that a liability or asset will crystallise

in the near future.

Leasing and hire purchase

Assets acquired under finance leases or hire purchase contracts are capitalised as tangible fixed assets

and depreciated over the shorter of the lease term and their useful lives. Finance leases are those where

substantially all of the risks and benefits of ownership are assumed by the Group. Obligations under such

agreements are included in creditors net of the finance charge. Finance charges and interest are taken to the

profit and loss account in constant proportion to the remaining balance of the capital repayments or net

obligations outstanding.

Rentals applicable to operating leases where substantially all of the risks and benefits of ownership remain

with the lessor are charged to the profit and loss account on a straight line basis over the life of the lease.

Goodwill

The treatment of goodwill (representing the excess of the fair value of the consideration given over the fair

value of the identifiable net assets acquired) arising on business combinations in respect of acquisitions

before 1 August 1998, when FRS 10 Goodwill and intangible assets was adopted, depended on the

circumstances surrounding each individual acquisition. Goodwill was either written off directly to reserves or,

alternatively, was capitalised and amortised to nil by equal annual instalments over its estimated useful life.

When a subsequent disposal occurs any related goodwill previously written off to reserves is written back

through the profit and loss account as part of the profit or loss on disposal.

Goodwill arising on business combinations in respect of acquisitions after 1 August 1998 will be capitalised.

Positive goodwill is amortised to nil by equal annual instalments over its estimated useful life not exceeding

20 years. On the subsequent disposal or termination of a business acquired since 1 May 1998, the profit

or loss on disposal or termination is calculated after charging (crediting) the unamortised amount of any

related goodwill (negative goodwill).

Pensions

The Company makes contributions to the personal pension schemes of certain employees. Contributions are

charged to the profit and loss account as they become payable.

Pre-opening expenditure

In accordance with UITF Abstract 24, pre-opening sales and marketing costs associated with clubs under

construction are charged to the profit and loss account as incurred. Prior to 1 August 1998, these costs

were written off over 24 months and for clubs opening between 1 August 1998 and 31 July 1999, such

costs were expensed over a period of 12 months. The change in accounting policy gave rise to a prior

year adjustment of the results for the year ended 31 July 1999 and a restatement of the opening revenue

reserves as at 1 August 1998 (see note 27).

Capitalisation of interest

Interest costs associated with the capital borrowed to finance the building of new clubs is charged to the

profit and loss account as incurred.

LA Fitness plc


Page 26

2 Turnover

Turnover, which arose entirely within the United Kingdom, represents the value of goods sold and services

provided during the year, net of value added tax.

The Group carried out one class of business, being that of the ownership and operation of health and

fitness clubs and related activities.

3 Exceptional item

The exceptional charge relates to the probable losses arising as a result of the Group’s insurers, the

Independent Insurance Group PLC, being placed into liquidation in June 2001. This necessitated the Group

having to put in place alternative insurance cover for periods already committed to the Independent

Insurance Group PLC.

4 Profit on ordinary activities before taxation

Profit on ordinary activities before taxation is stated after charging/(crediting):

2001 2000

£’000 £’000

Depreciation – owned assets 1,767 833

Depreciation – leased assets 369 443

Amortisation of goodwill 2 3

Auditors’ remuneration

Audit fees* 36 33

Non audit fees paid to KPMG Audit Plc and its associates 49 42

Operating lease rentals:

Land and buildings 2,533 1,325

Equipment hire 57 67

Rent receivable (375) (153)

*Included in audit fees is £2,200 (2000: £2,000) relating to the Company. In addition to the above, KPMG

Audit Plc and its associates received £69,000 relating to services provided in connection with the Company’s

rights issue in October 2000. This amount has been charged to the share premium account (see note 23).

A further £34,000 has been paid (and included within prepayments) to KPMG Audit Plc and its associates

in relation to the ongoing discussions with HM Customs and Excise referred to in note 21.


5 Interest receivable

2001 2000

£’000 £’000

Bank interest receivable 27 251

6 Interest payable and similar charges

2001 2000

£’000 £’000

Bank loans and overdrafts 305 97

Finance charges on finance leases and hire purchase contracts 159 102

464 199

7 Directors and employees

Details of payments made to Directors during the year are set out in the report of the Board on Directors’

remuneration on pages 14 to 16 above.

2001 2000

Staff costs (including directors) £’000 £’000

Wages and salaries 9,618 4,900

Social security costs 791 382

Other pension costs 22 22

10,431 5,304

The average weekly number of persons employed by the Group (including directors) during the year,

analysed by category was made up as follows:

2001 2000

Number Number

Administration 82 48

Club activities 748 444

830 492

LA Fitness plc


Page 28

8 Taxation

2001 2000

£’000 £’000

Corporation tax at 30% (2000: 30%) 375 561

Impact of prior year adjustment (see note 27) - (144)

375 417

The tax charge for the year has benefited from the utilisation of Corporation Tax losses brought forward.

In addition, no provision has been made for deferred taxation arising from accelerated capital allowances

since the timing differences are not expected to reverse in the foreseeable future.

9 Dividends

2001 2000

£’000 £’000

Paid on preference shares – nil (2000: 19p) - 38

Interim dividend paid on ordinary shares – 0.33p (2000: nil) 135 -

Final proposed dividend on ordinary shares – 0.67p (2000: 0.33p) 274 121

409 159

10 Additional finance credit of non-equity shares

The Company had in issue ‘A’ preference shares which were redeemed in October 1999. The additional finance

credit in the year to 31 July 2000 represents the reversal of the provision made at 31 July 1999 in respect of

the accrued premium that would have been payable had these preference shares not been redeemed before

30 June 2006.


11 Earnings per share

2001 2000

Basic earnings per share calculations

Profit for the year after non-equity dividends £4,898,000 £2,817,000

Weighted average number of shares in issue during the year 39,978,949 34,748,324

Basic earnings per share 12.3p 8.1p

Diluted earnings per share calculations

Profit for the year £4,898,000 £2,817,000

Weighted average number of shares in issue and to be issued 40,290,971 34,927,612

Diluted earnings per share 12.2p 8.1p

The difference between the weighted average number of shares used to calculate the basic earnings per

share compared to the diluted earning per share relates to share options in issue at nil consideration.

12 Intangible fixed assets – Goodwill

Group

£’000

Cost

At 1 August 2000 37

Additions (see note 15) 42

At 31 July 2001 79

Amortisation

At 1 August 2000 10

Charge for year 2

At 31 July 2001 12

Net book value

At 31 July 2001 67

At 31 July 2000 27

LA Fitness plc


Page 30

13 Tangible fixed assets – Group

Freehold land Leasehold land Fixtures, fittings Motor

& buildings & buildings & equipment vehicles Total

£’000 £’000 £’000 £’000 £’000

Cost

At 1 August 2000 2,184 21,780 7,020 17 31,001

Additions 14,714 15,044 5,707 9 35,474

Disposals (1,824) - - (17) (1,841)

At 31 July 2001 15,074 36,824 12,727 9 64,634

Depreciation

At 1 August 2000 - 1,016 1,453 12 2,481

Charge for the year 37 761 1,337 1 2,136

Disposals - - - (12) (12)

At 31 July 2001 37 1,777 2,790 1 4,605

Net book value

At 31 July 2001 15,037 35,047 9,937 8 60,029

At 31 July 2000 2,184 20,764 5,567 5 28,520

At 31 July 2001 £35,047,000 (2000: £20,764,000) included within the net book value of leasehold land and

buildings relates to short leasehold land and buildings.

Included above are assets held under finance leases or hire purchase contracts with net book values as

follows:

2001 2000

£’000 £’000

Fixtures, fittings and equipment 2,276 1,141

Net obligations under finance lease and hire purchase contracts are secured on the assets acquired.


14 Tangible fixed assets – Company

Leasehold land Fixtures, fittings Motor

& buildings & equipment vehicles Total

£’000 £’000 £’000 £’000

Cost

At 1 August 2000 36 566 3 605

Additions 479 495 9 983

Disposals - - (3) (3)

At 31 July 2001 515 1,061 9 1,585

Depreciation

At 1 August 2000 13 147 2 162

Charge for the year 48 166 1 215

Disposals - - (2) (2)

At 31 July 2001 61 313 1 375

Net book value

At 31 July 2001 454 748 8 1,210

At 31 July 2000 23 419 1 443

At 31 July 2001, £454,000 (2000: £23,000) included within the net book value of leasehold land and

buildings relates to short leasehold land and buildings.

15 Investments

At 1 August 2000 Additions Disposals At 31 July 2001

£’000 £’000 £’000 £’000

Group investments

Cost and net book value 435 - - 435

Company

Cost and net book value 685 42 - 727

The Group’s investment of £435,000 relates to the purchase in March 2000 of 29.7% of the share capital of

Interactive Health & Fitness Limited, a company incorporated in England and whose principal activity is to

develop and operate an interactive television health and fitness club.

The Company’s investment of £42,000 during the year relates to the cost of the initial investment in

LA Health & Fitness Clubs, SL, which was a newly incorporated entity.

LA Fitness plc


Page 32

15 Investments continued

Details of the Company’s subsidiary companies are as follows:

Subsidiary undertakings Nature of business Percentage held Country of incorporation

LA Fitness (1998) Limited Health and Fitness 100% Great Britain

LA Fitness (Luton) Limited Health and Fitness 91% Great Britain

LA Leisure Limited Health and Fitness 100% Great Britain

CS Leisure Plc Dormant 100% Great Britain

LA (Golders Green) Limited Dormant 100% Great Britain

LA Hair & Beauty Limited Dormant 100% Great Britain

LA Westminster Limited Dormant 100% Great Britain

LA Health and Fitness Clubs, SL Health and Fitness 100% Spain

The Company’s investment is in the ordinary share capital of its subsidiaries except for CS Leisure Plc where

it also owns the ‘B’ ordinary shares and the ‘A’ preference shares.

16 Stocks

Group Group Company Company

2001 2000 2001 2000

£’000 £’000 £’000 £’000

Finished goods for resale 301 195 173 140

17 Debtors


2001 2000 2001 2000

£’000 £’000 £’000 £’000

Due within one year

Trade debtors 5 273 - 254

Other debtors 285 461 48 180

Corporation tax 35 - - -

Prepayments and accrued income 2,517 877 462 165

2,842 1,611 510 599

Due after more than one year

Amounts owed by group undertakings - - 38,889 16,968

2,842 1,611 39,399 17,567


18 Creditors: amounts falling due within one year


2001 2000 2001 2000

£’000 £’000 £’000 £’000

Bank loans and overdrafts (note 19) 2,972 - - -

Trade creditors 3,582 3,361 866 164

Amounts owed to group undertakings - - - 96

Corporation tax 176 241 - -

Taxes and social security costs 24 449 72 108

Net obligations under finance leases and hire purchase contracts 616 296 - -

Accruals and deferred income 5,186 3,871 505 186

Dividends payable 274 121 274 121

12,830 8,339 1,717 675

19 Creditors: amounts falling due after more than one year


2001 2000 2001 2000

£’000 £’000 £’000 £’000

Bank loans (see below) 13,000 - 13,000 -

Net obligations under finance leases and hire purchase contracts 1,290 588 - -

14,290 588 13,000 -

Analysis of loan repayments:


2001 2000 2001 2000

£’000 £’000 £’000 £’000

Bank loans and overdrafts:

Due within one year 2,972 - - -

Due after 5 years 13,000 - 13,000 -

15,972 - 13,000 -

LA Fitness plc


Page 34

19 Creditors: amounts falling due after more than one year continued


2001 2000 2001 2000

£’000 £’000 £’000 £’000

Finance leases and hire purchase obligations:

Due within one year 616 296 - -

Due between one and two years 582 316 - -

Due between two and five years 708 272 - -

1,906 884 - -

Bank loans and overdrafts are secured by a fixed and floating charge over all assets of Group undertakings

and an unlimited multilateral company guarantee given by the Group undertakings to secure the liabilities of

each other.

Interest was charged on the bank loans and overdrafts at rates of between 1% and 1.1% (plus associated

mandatory costs) above LIBOR and Base Rate respectively.

Net obligations under finance lease and hire purchase contracts are secured on the assets concerned.

20 Financial instruments

The Group’s financial instruments at 31 July 2001 comprised finance leases, cash at bank and various items

such as trade debtors, trade creditors etc, that arise directly from its operations. The main purpose of these

financial instruments is to provide working capital for the Group’s operations. It is not the Group policy to

actively trade in derivatives, and no derivative transactions have been entered into during the period.

The Board regularly monitors risks relating to financial instruments. The main risks arising from the Group’s

financial instruments are interest rate risk and liquidity risk.

The financial assets and liabilities as defined in FRS 13 ‘Derivatives and other financial instruments:

disclosure’ are set out below.

Financial assets

Financial assets consist of £54,000 (2000: £28,000) which represents cash at bank and in hand.

Financial liabilities

The financial liabilities consist of £1,906,000 (2000: £884,000) which represent finance leases with a

weighted average interest rate of 8.0% (2000: 8.1%) and a weighted average outstanding term of 36

months (2000: 30 months). All rates are fixed for the duration of the agreements.

At the year end the Group had a committed overdraft facility of £8 million in addition to the £13 million of

loans drawn down. After the year end, the Group put in place committed borrowing facilities of £40 million

bearing interest at rates of LIBOR plus 90 base points. The Directors have reviewed the scope of those

facilities in preparing their comments on the going concern status of the Group set out on page 13 above.


21 Provisions for liabilities and charges

Deferred Other

taxation provisions Total

£’000 £’000 £,000

Balance at 1 August 2000 - 817 817

Charge for the year - - -

Balance at 31 July 2001 - 817 817

Other provisions represents the benefit of a VAT planning scheme which has been challenged by HM

Customs & Excise. The Directors believe that it is prudent to recognise the benefit of the scheme only when

agreement is reached with the tax authorities.

Deferred taxation provided in the accounts and the amounts not provided are as follows:


2001 2000 2001 2000

£’000 £’000 £’000 £’000

Provided - - - -

Not provided

Accelerated capital allowances 2,510 1,329 32 24

Other short term timing differences (8) (3) - (2)

Trading losses (18) (330) - (281)

Other 38 - - -

Liability/(asset) 2,522 996 32 (259)

There is a deferred tax liability in respect of timing differences on capital allowances and depreciation.

This has not been provided for on the grounds that it is unlikely to crystallise in the foreseeable future.

LA Fitness plc


Page 36

22 Share capital

31 July 2001 31 July 2000

Number of Number of

shares £’000 shares £’000

Authorised

Ordinary shares of 5p each 50,000,000 2,500 50,000,000 2,500

Issued and Fully Paid

Ordinary shares of 5p each 40,853,117 2,043 36,767,806 1,838

Following the 1 for 9 rights issue on 25 October 2000, 4,085,311 ordinary shares were issued at 267p per

share. The net proceeds of the share issue were £10,230,000.

The Company operates a share option scheme which comprises two parts, namely the LA Fitness Approved

Executive Share Option Scheme and the LA Fitness Unapproved Executive Share Option Scheme.

Under the scheme, one Director (details of whom are included within the Report of the Board on Directors’

Remuneration on pages 14 to 16 above) and 163 employees held options at 31 July 2001 over 914,870

unissued ordinary shares of 5p each (2000: 348,895) as follows:

At Granted Exercised Lapsed At

Date of 1 August during during during 31 July Exercise Period Exercise

grant 2000 year year year 2001 from to price (p)

10.08.99 115,500 - (7,913) 107,587 10.08.02 09.08.09 41.25

17.08.99 115,500 - (10,948) 104,552 17.08.02 16.08.09 41.25

20.10.99 54,969 - (5,077) 49,892 20.10.02 19.10.09 148.5

04.04.00 62,926 - (12,629) 50,297 04.04.03 03.04.10 339

09.11.00 184,221 - (20,679) 163,542 09.11.03 08.11.10 266

06.04.01 388,818 - (18,000) 370,818 06.04.04 05.04.11 242

30.04.01 68,182 - - 68,182 30.04.04 29.04.11 268

348,895 641,221 - 75,246 914,870

Following the variation in share capital resulting from the rights issue in October 2000, share options which

had been granted prior to that date were adjusted such that the exercise price was multiplied by 294/297

and the number of shares multiplied by 297/294.

The market price of the ordinary shares at 31 July 2001 was 291p. The shares traded during the year in the

range 212p to 321p.


23 Share premium account

£’000

Group and Company

Balance at 1 August 2000 15,830

Shares issued at premium 10,704

Expenses of share issue (679)

Balance at 31 July 2001 25,855

24 Other reserves

£’000

Group

Other reserve (249)

The above reserve has arisen due to the difference between the nominal value of 3,399,960 and 1,600,000

ordinary shares of 5 pence each issued to the shareholders of LA Leisure Limited and LA Westminster

Limited respectively, and the nominal value of 1,000 and 160 ordinary shares of £1 each acquired in

LA Leisure Limited and LA Westminster Limited respectively.

25 Profit and loss account

£’000

Group

Retained profits at 1 August 2000 3,653

Profit for the year 4,489

Retained profits at 31 July 2001 8,142

Company

Retained profits at 1 August 2000 667

Retained profit for the year 354

Retained profits at 31 July 2001 1,021

LA Fitness plc


Page 38


The cumulative total of goodwill written off against consolidated profit and loss account reserve in respect

of acquisitions prior to August 1998 when FRS 10: Goodwill and Intangible Assets was adopted amounts to

£146,000 (2000: £146,000).

The profit for the year of the Company before the payment of dividends is £765,000 (2000: £763,000).

During the year the Company paid an interim dividend of 0.33p per ordinary share amounting to £135,000

(2000: £ nil).

26 Reconciliations of movements in shareholders’ funds

Group Company

£’000 £’000

Profit for the financial year 4,898 763

Dividends (409) (409)

4,489 354

Shares issued during the year 205 205

Share premium 10,025 10,025

Net addition to shareholders’ funds 14,719 10,584

Opening shareholders’ funds at 1 August 2000 21,072 18,335

Closing shareholders’ funds at 31 July 2001 35,791 28,919

27 Prior year adjustment

Following the issue in July 2000 of UITF Abstract 24 – Accounting for Start-up Costs, the Company changed

its accounting policy in respect of the treatment of sales and marketing costs incurred prior to a new club

opening. The previous policy was to write off these costs over the first 12 months of a club trading (clubs

opened prior to 1 August 1998 – costs written off over first 24 months of trading). Under the revised policy,

the costs incurred prior to a new club opening and which are not capitalised within tangible fixed assets are

written off to the profit and loss account as incurred. This resulted in a prior year adjustment of £480,000

during the year ended 31 July 2000.

28 Capital commitments

Capital commitments at the end of the financial year, for which no provision has been made, are as follows:

Group Company

2001 2000 2001 2000

£’000 £’000 £’000 £’000

Contracted 7,177 5,240 - -

29 Other lease commitments

Annual commitments under non-cancellable operating leases are as follows:

Land and buildings Land and buildings

Group Company

2001 2000 2001 2000

£’000 £’000 £’000 £’000

Expiry date

Within one year 28 - 28 28

Between two and five years 135 - 135 -

In more than five years 3,310 2,510 - -

3,473 2,510 163 28

30 Transactions with directors

During the year, rents totalling £72,914 (2000: £72,000) were paid to Spiremill Limited, a company in which

Mr D Turner has an interest as a director and a shareholder. The amount outstanding to Spiremill Limited at

31 July 2001 amounted to £ nil (2000: £ nil).

During the year rents totalling £6,900 (2000: £ nil) were paid to Speedwell Property and Mortgage Company

Limited, a company in which Mr D Turner has an interest as both a director and a shareholder. The amount

outstanding to Speedwell Limited at 31 July 2001 amounted to £5,615 (2000: £4,025).

31 Contingent liabilities

The Company has provided cross guarantees to its bankers in respect of the bank borrowings of other

Group undertakings. A contingent liability therefore exists to the extent of the bank borrowings of the other

Group undertakings. At the year end this amounted to £5,061,000 (2000: £247,000).

LA Fitness plc


Page 40

32 Gross cash flows

2001 2000

£’000 £’000

Reconciliation of operating profit to net cash inflows

from operating activities

Operating profit (after exceptional item) 5,710 3,156

Depreciation and amortisation 2,138 1,279

Loss on disposal of tangible fixed assets 4 -

Increase in debtors (1,195) (539)

Increase in stock (106) (142)

Increase in creditors 1,111 1,955

Net cash inflow from operating activities 7,662 5,709

Returns on investments and servicing of finance

Interest received 27 251

Interest paid (305) (97)

Interest element of finance lease rentals (159) (102)

Non-equity dividends paid - (38)

Net cash (outflow)/inflow for returns on investments and servicing of finance (437) 14

Capital expenditure

Purchase of tangible and intangible fixed assets (33,970) (13,494)

Purchase of investments - (435)

Receipts from sale of fixed assets 1,825 -

Net cash outflow for capital expenditure (32,145) (13,929)

Financing

Issue of share capital

Issue of ordinary shares 10,909 15,320

Expenses paid in connection with issue of ordinary shares (679) (1,067)

Repayment - capital element of finance lease rentals (524) (314)

Bank loans drawn down / (repaid) 13,000 (5,194)

Net cash inflow from financing 22,706 8,745


33 Analysis of net debt

At 1 August Cash Other At 31 July

2000 flow changes 2001

£’000 £’000 £’000 £’000

Net cash

Cash at bank and in hand 28 26 - 54

Overdrafts - (2,972) - (2,972)

28 (2,946) - (2,918)

Debt

Finance leases (884) 524 (1,546) (1,906)

Loans - (13,000) - (13,000)

(884) (12,476) (1,546) (14,906)

Net debt (856) (15,422) (1,546) (17,824)

34 Major non-cash transactions

During the year the Group entered into new hire purchase contracts with a capital value of £1,546,000

(2000: £196,000).

35 Post balance sheet events

On 28 August 2001 the Company completed a sale and leaseback transaction involving the disposal of a

freehold property valued at £3.0m, resulting in no profit or loss on disposal.

LA Fitness plc


Page 42

Notice of AnnualGeneral MeetingNotice is hereby given that the Annual General Meeting of the Members of LA Fitness plc will be held at theoffices of Old Mutual Securities Limited, 2 Lambeth Hill, London EC4V 4GG at noon on 27 November 2001 forthe following purposes:

ORDINARY BUSINESS

1 To receive and adopt the financial statements for the year ended 31 July 2001, together with Reports of theDirectors and Auditors thereon.

2 To re-elect Jeremy Taylor as a Director of the Company.

3 To re-elect Michael Mills as a Director of the Company.

4 To declare the final dividend of 0.67p per ordinary share recommended by the Directors in respect of theyear ended 31 July 2001.

5 To re-appoint Auditors to hold office until the conclusion of the next Annual General Meeting and toauthorise the Directors to fix their remuneration.

SPECIAL BUSINESS

To consider and if thought fit to pass the following resolutions, which will be proposed as an ordinaryresolution and a special resolution respectively:

6 That in substitution for all existing authorities granted to the Directors in respect of the allotment ofrelevant securities but without prejudice to the prior exercise of such authorities, the Directors be generallyand unconditionally authorised pursuant to Section 80 of the Companies Act 1985 (“the Act”) to exercise allthe powers of the Company to allot relevant securities (within the meaning of Section 80(2) of the Act) upto an aggregate nominal amount of £457,344.15 provided that this authority shall expire five years from the date of the passing of this resolution save that the Company may before such expiry make offers,agreements or other arrangements which would or might require relevant securities to be allotted after such expiry and the Directors may allot relevant securities in pursuance of such offers, agreements or other arrangements as if the authority conferred hereby had not expired.

7 That subject to the passing of the immediately preceding resolution the Directors be empowered pursuantto Section 95 of the Act to allot equity securities (within the meaning Section 94(2) of the Act) for cashpursuant to the authority conferred by the immediately preceding resolution as if sub-section (1) of Section89 of the Act did not apply to any such allotment (such authority to be in substitution for all existingauthorities granted to the Directors in respect of the allotment of equity securities as if section 89(1) of the Act did not apply) provided that this power shall be limited to:

(a) the allotment of equity securities in connection with issues by way of rights or other pre-emptive offer in favour of all holders of a class or classes of equity securities (provided that such issue shall be to ordinary shareholders or shall be accompanied by an issue on appropriate terms to ordinaryshareholders) where the equity securities respectively attributable to the interest of all holders ofsecurities of each such class are either proportionate (as nearly as may be) to the respective numbers of equity securities of that class held by them or are otherwise allotted in accordance with the rightsconferred on such equity securities (but subject in either case to such exclusions or other arrangementsas the Directors may deem necessary or expedient to deal with fractional entitlements or legal orpractical problems arising under the laws of, or the requirements of any regulatory body or any stockexchange in, any territory or otherwise howsoever); and

(b) the allotment (otherwise than pursuant to sub-paragraph (a) above) of equity securities up to anaggregate nominal amount of £102,132.79.

(c) and shall expire five years from the date of the passing of this resolution save that the Company maybefore such expiry make offers, agreements or other arrangements which would or might require equitysecurities to be allotted after expiry and the Directors may allot equity securities in pursuance of suchoffers, agreements or other arrangements as if the power conferred hereby had not expired.


Graham Taylor Registered Office

Company Secretary 101 Commercial Road11 October 2001 London E1 1RD

A member entitled to attend and vote may appoint one or more proxies to attend and, on a poll, voteinstead of him. A proxy need not also be a member. To be effective, a form of proxy, together with a powerof attorney (if any) under which it is executed or a notarially certified copy of such power of attorney mustbe lodged not later than 48 hours before the meeting at the Company’s Registrars, Computershare ServicesPLC, PO Box 82, The Pavilions, Bridgwater Road, Bristol BS99 7NH, and if in default the instrument of proxywill not be treated as valid. A form of proxy is enclosed for use if desired. Completion of a form of proxywill not preclude shareholders from attending and voting at the meeting if they wish to do so.

The Register of Directors’ Interests, together with copies of the Directors’ service agreements and a copy ofthe Company’s Articles of Association will be available for inspection during usual business hours on anyweekday (Saturdays and Public Holidays excluded) at the registered office of the Company until the date ofthe Annual General Meeting and at the place of the Meeting for 15 minutes prior to and until thetermination of the Meeting.

Fitness Clubs

Aldgatetel: 020 7265 1544

Bromleytel: 020 8460 3725

Finchleytel: 020 8346 7253

Golders Greentel: 020 8731 7312

Hatton Gardentel: 020 7404 4042

Highgatetel: 020 7482 4487

Holborntel: 020 7841 1130

Isleworthtel: 020 8568 8844

Kingstontel: 020 8547 0970

Leadenhalltel: 020 7488 2934

Piccadillytel: 020 7839 8448

Purleytel: 020 8407 1999

Southgatetel: 020 8886 8883

St. Paulstel: 020 7600 0900

Sydenhamtel: 020 8778 9818

South Kensingtontel: 020 7838 0500

Victoriatel: 020 7828 3647

Waldorftel: 020 7379 5606

West India Quaytel: 020 7531 0191

Armagh

Bedfordtel: 01234 353800

Belfasttel: 02890 641800

Billericaytel: 01277 633633

Birmingham tel: 0121 632 3950

Burytel: 0161 764 6177

Bury St Edmundstel: 01284 749847

Cheltenhamtel: 01242 682000

Colchester

East Grinsteadtel: 01342 314113

Huntingdon tel: 01480 412252

Kings Heathtel: 0121 444 6616

Kings Lynn

Leedstel: 0113 243 3025

Lincolntel: 01522 687 711

Liverpool

Livingston

Lutontel: 01582 452288

Manchestertel: 0161 831 0200

Newburytel: 01635 550585

Northwich tel: 01606 810700

Sale

Salisburytel: 01722 321808

Stevenagetel: 01438 768720

Sutton Coldfieldtel: 0121 377 8081

Thorpe Baytel: 01702 586466

Tunbridge Wellstel: 01892 513444

Warwicktel: 01926 499779

Nationwide

London

•Clubs opened as at 31st July 2001

•Clubs under construction

Design and Production: Energy Design Studio 020 7684 9960

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