Lifetime Fitness 2012 Annual Report Download - page 63

LIFE TIME FITNESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)
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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.
We do not believe that achievement of either the cumulative diluted EPS or the ROIC targets is currently probable,
and, therefore, we did not recognize any compensation expense associated with the grant during the year ended
December 31, 2012. If all of the targets had been considered probable at December 31, 2012, we would have
recognized $4.6 million of non-cash performance share-based compensation expense during the year ended
December 31, 2012. If it becomes probable that the cumulative diluted EPS and ROIC performance targets will be
achieved, a cumulative adjustment will be recorded and the remaining compensation expense will be recognized
over the remaining performance period. The probability of reaching the targets is evaluated each reporting period.
Our employee stock purchase plan (“ESPP”) provides for the sale of shares of our common stock to our employees
at discounted purchase prices. The cost per share under this plan is 90% of the fair market value of our common
stock on the last day of the purchase period, as defined. Compensation expense under the ESPP is based on the
discount of 10% at the end of the purchase period.
For more information on our share-based compensation, see Note 7.
Fair Value Measurements — The accounting guidance establishes a framework for measuring fair value and
expanded disclosures about fair value measurements. The guidance applies to all assets and liabilities that are
measured and reported on a fair value basis. This enables the reader of the financial statements to assess the inputs
used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the
information used to determine fair values. The guidance requires that each asset and liability carried at fair value be
classified into one of the following categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
Fair Value Measurements on a Recurring Basis
The fair value of the interest rate swap is determined using observable current market information such as the
prevailing Eurodollar interest rates, Eurodollar yield curve rates and current fair values as quoted by recognized
dealers, and also includes consideration of counterparty credit risk. The following table presents the fair value of our
derivative financial instrument as of December 31, 2012 and 2011: