Lifetime Fitness 2012 Annual Report Download - page 38

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estimated average membership life on a quarterly basis, or more frequently if circumstances change. Changes in
member behavior, competition, economic conditions and our performance may cause attrition levels to change,
which could impact the estimated average membership life. During the years ended December 31, 2010, 2011 and
2012, our annual attrition rate fluctuated between 35.0% and 38.2%, resulting in the estimated average membership
life remaining at 33 months during those periods. If the estimated average membership life had been 36 months or
30 months for the entire year ended December 31, 2012, the impact of this change in accounting estimate on our
income from continuing operations and net income would have been less than $0.1 million, and the change in
accounting estimate would have had no impact on our basic and diluted earnings per common share. If the direct
expenses related to the enrollment fees exceed the enrollment fees for any center, the amount of direct expenses in
excess of the enrollment fees are expensed in the current period instead of deferred over the average membership
life. The amount of direct expenses in excess of enrollment fees totaled $20.7 million, $14.9 million and $14.9
million for the years ended December 31, 2012, 2011 and 2010, respectively. Monthly membership dues paid in
advance of a center opening are deferred until the center opens. We only offer members month-to-month
memberships and recognize as revenue the monthly membership dues in the month to which they pertain.
We provide services at each of our centers, including personal training, spa, café and other member services.
Revenue from spa and café services and products is recognized at the point of sale to the customer. Personal training
revenue received in advance of training sessions and the related commissions are deferred and recognized when
services are performed based on historical member usage.
Other revenue includes revenue from our media, health, athletic events and race registration and timing businesses.
Media advertising revenue is recognized over the duration of the advertising placement. Health revenue is
recognized primarily at the time the service is performed. For athletic events, revenue is generated primarily through
sponsorship sales and race registration fees. Athletic event revenue and race registration revenue is recognized upon
the completion of the event. Race timing revenue is recognized at the time of delivery to the customer.
Share-based compensation. We maintain share-based incentive plans, which include nonvested share awards, stock
options and an employee stock purchase plan ("ESPP"). See Note 7, Share-Based Compensation to the Notes to
Consolidated Financial Statements for a complete discussion of our share-based compensation plans.
We determine the fair value of our nonvested share awards at the date of grant using the closing market price of our
stock. Performance-based restricted share awards require management to make assumptions regarding the likelihood
of achieving performance goals.
In June 2009 and August 2010, the Compensation Committee approved the grant of 996,000 and 20,000 shares,
respectively, of long-term performance-based restricted stock to serve as an incentive to our senior management
team to achieve certain diluted earnings per share (“EPS”) targets in 2011 and 2012. As of December 31, 2012,
448,000 of these shares were still outstanding. A specified EPS target was achieved for fiscal 2011 and 50% of the
restricted shares vested. A specified EPS target was achieved for fiscal 2012 and the remaining 50% of the restricted
shares vested. The probability of reaching the targets was evaluated each reporting period. As of December 31, 2011
we determined that the second 50% vesting was probable. As such, we recognized the remaining portion of non-cash
performance share-based compensation expense of approximately $2.6 million (pretax) ratably in 2012. A total of
$18.8 million (pretax) was recognized as compensation expense with respect to this grant.
In May and August 2012, the Compensation Committee approved the grant of 598,000 and 20,000 shares,
respectively, of long-term performance-based restricted stock to serve as an incentive to our senior management
team to achieve certain cumulative diluted EPS and return on invested capital (“ROIC”) targets during performance
periods that end on December 31, 2015 and December 31, 2016. The cumulative diluted EPS target measures
cumulative diluted EPS for each quarter during the period from April 1, 2012 to the end of the applicable
performance period. The ROIC target is measured in the last year of the applicable performance period. If the
specified cumulative diluted EPS and ROIC targets are met or exceeded for the performance period ending
December 31, 2015, 50% of the restricted shares will vest. If the specified cumulative diluted EPS and ROIC targets
are met or exceeded for the performance period ending December 31, 2016, then all of the restricted shares will
vest. In the event that we do not achieve the specified cumulative diluted EPS and ROIC targets for the performance
period ending December 31, 2016, the restricted shares will be forfeited. A maximum of $28.5 million could be
recognized as compensation expense with respect to this grant if all cumulative diluted EPS and ROIC targets are
met.