Lifetime Fitness 2007 Annual Report Download - page 56

LIFE TIME FITNESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)
50
The pro forma net income applicable to common shareholders, basic and diluted, for the year ended December 31,
2005, includes the compensation cost related to the vesting of certain stock options that were granted to certain
members of management at or around the time of our initial public offering. Upon meeting specific market
performance criteria governing these stock options, sixty percent of these shares had vested as of December 31,
2005. The remaining forty percent of the shares, upon meeting additional specific market performance criteria,
vested during the second quarter of 2006.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used:
December 31,
2007 2006 2005
Risk-free interest rate ...................................................................... 4.7% 4.8% 4.0%
Expected dividend yield.................................................................. — — —
Expected life in years...................................................................... 5 5 6
Volatility ......................................................................................... 36.9% 35.9% 42.7%
The volatility and expected life assumptions presented are based on an average of the volatility assumptions reported
by a peer group of publicly traded companies.
For more information on our share-based compensation plans, see Note 8.
Dividends — We have not declared or paid any cash dividends on our common stock in the past. As discussed in
Note 4, the terms of our revolving credit facility and certain debt financing agreements prohibit us from paying
dividends without the consent of the lenders.
Fair Value of Financial Instruments — The carrying amounts related to cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate fair value due to the relatively short maturities of
such instruments. The fair value of the term notes payable and capital leases approximated $245.1 million and $11.8
million, respectively, as of December 31, 2007. The fair value of our other long-term debt approximates the carrying
value and is based on variable rates or interest rates for the same or similar debt offered to us having the same or
similar remaining maturities and collateral requirements.
Use of Estimates — The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Ultimate results could
differ from those estimates. In recording transactions and balances resulting from business operations, we use
estimates based on the best information available. We use estimates for such items as depreciable lives, volatility
factors and expected life in determining fair value of option grants, tax provisions and provisions for uncollectible
receivables. We also use estimates for calculating the amortization period for deferred enrollment fee revenue and
associated direct costs, which are based on the historical average expected life of center memberships. We revise the
recorded estimates when better information is available, facts change or we can determine actual amounts. These
revisions can affect operating results.