Lifetime Fitness 2007 Annual Report Download - page 38

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Interest expense, net. Interest expense, net of interest income, was $17.4 million for the year ended December 31,
2006 compared to $14.1 million for the year ended December 31, 2005. This $3.3 million increase was primarily the
result of increased average debt balances.
Provision for income taxes. The provision for income taxes was $33.5 million for the year ended December 31, 2006
compared to $26.8 million for the year ended December 31, 2005. This $6.7 million increase was due to an increase
in income before income taxes of $16.1 million and an increase in the effective tax rate to 39.9% for the year ended
December 31, 2006 compared to 39.4% for the year ended December 31, 2005.
Net income. As a result of the factors described above, net income was $50.6 million, or 9.9% of total revenue, for
the year ended December 31, 2006 compared to $41.2 million, or 10.6% of total revenue, for the year ended
December 31, 2005.
Interest in an Unconsolidated Affiliated Entity
In 1999, we formed Bloomingdale LLC with two unrelated organizations for the purpose of constructing, owning
and operating a sports and athletic, professional fitness, family recreation and resort/spa center in Bloomingdale,
Illinois. The terms of the relationship among the members are governed by an operating agreement, referred to as
the Operating Agreement, which expires on the earlier of December 2039 or the liquidation of Bloomingdale LLC.
In December 1999, Bloomingdale LLC entered into a management agreement with us, pursuant to which we agreed
to manage the day-to-day operations of the center, subject to the overall supervision by the Management Committee
of Bloomingdale LLC, which is comprised of six members, two from each of the three members of the joint venture.
We have no unilateral control of the center, as all decisions essential to the accomplishments of the purpose of the
joint venture require the approval of a majority of the members. Bloomingdale LLC is accounted for as an
investment in an unconsolidated affiliate and is not consolidated in our financial statements. Additional details
related to our interest in Bloomingdale LLC are provided in Note 3 to our consolidated financial statements.
Non-GAAP Financial Measures
We use EBITDA and EBITDA margin as measures of operating performance. EBITDA should not be considered as
a substitute for net income, cash flows provided by operating activities, or other income or cash flow data prepared
in accordance with GAAP. The funds depicted by EBITDA are not necessarily available for discretionary use if they
are reserved for particular capital purposes, to maintain compliance with debt covenants, to service debt or to pay
taxes.
We believe EBITDA is useful to an investor in evaluating our operating performance and liquidity because:
xit is a widely accepted financial indicator of a company’s ability to service its debt and we are required to
comply with certain covenants and borrowing limitations that are based on variations of EBITDA in certain
of our financing documents; and
xit is widely used to measure a company’s operating performance without regard to items such as depreciation
and amortization, which can vary depending upon accounting methods and the book value of assets, and to
present a meaningful measure of corporate performance exclusive of our capital structure and the method by
which assets were acquired.
Our management uses EBITDA:
xas a measurement of operating performance because it assists us in comparing our performance on a
consistent basis;
xin presentations to the members of our board of directors to enable our board to have the same consistent
measurement basis of operating performance used by management; and
xas the basis for incentive bonuses paid to selected members of senior and center-level management.
We have provided reconciliations of EBITDA to net income in the section “Quarterly Results (Unaudited),” located
immediately following the Report of Independent Registered Public Accounting Firm.