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Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: o

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

We are selling shares of our common stock and the selling shareholders are selling shares of our common stock. We will not receive any of the proceeds from the shares of our common stock sold by the selling shareholders.

Prior to this firm commitment offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $ and $ per share. We will apply to list our common stock on the New York Stock Exchange under the symbol “LTM.”

The underwriters have an option to purchase a maximum of additional shares to cover over-allotments of shares of our common stock.

Investing in our common stock involves risks. See “Risk Factors” on page 9.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

You should rely only on the information contained in this document. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

Until , 2004, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

PROSPECTUS SUMMARY

The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all the information you should consider. Therefore, you should also read the more detailed information set out in this prospectus, including the financial statements.

We are one of the nation’s fastest growing operators of large sports, athletic, fitness and family recreation centers based on revenue. As of April 30, 2004, we operated 33 centers primarily in suburban locations across eight states under the LIFE TIME FITNESS® brand. In addition to traditional health club offerings, most of our centers include an expansive selection of premium amenities and services, such as indoor swimming pools, basketball and racquet courts, child care centers and spas, in a resort-like setting. We believe our distinctive centers provide a unique experience at a compelling value for our members, resulting in a high number of memberships per center.

Over the past 12 years, as we have opened new centers, we have refined the size and design of our centers. Of our 33 centers, we consider 24 to be of our large format design, and of these 24 centers, we consider 12 to be of our current model design. Although the size and design of our centers may vary, our business strategy and operating processes remain consistent across all of our centers. Each of our current model centers targets 11,500 memberships by offering approximately 105,000 square feet of health, fitness and family recreation programs and services. Most of the centers that we have opened since 2000 conform to our current model center, and each of these centers has delivered growth in membership levels, revenue and profitability across a range of geographic markets.

Throughout our history, we have consistently increased our revenue by opening new centers, increasing the number of memberships per existing center and focusing on the sale of additional products and services in our centers. For each of the fiscal years from 2000 to 2003, we experienced annual revenue growth of 74%, 45%, 43% and 32%, respectively, with revenue of $256.9 million in 2003; annual EBITDA growth of 92%, 54%, 35% and 63%, respectively, with EBITDA of $80.0 million in 2003; and annual net income growth of 55%, 7%, 86% and 178%, respectively, with net income of $20.6 million in 2003.

Our Competitive Strengths


	*We offer comprehensive and convenient programs and services.*

Our large format centers offer sports, athletic, fitness and family recreation programs and services and are conveniently located in high traffic suburban areas. Unlike traditional health clubs, these centers typically offer large indoor and outdoor family recreation pools, climbing walls and basketball and racquet courts, in addition to approximately 400 pieces of cardiovascular and resistance training equipment and an extensive offering of health and fitness classes, as well as child-care, spa and dining services. We design and operate our large format centers to accommodate a large and active membership base by providing access to the centers 24 hours a day, seven days a week.


	*We offer a value proposition that encourages membership loyalty.*

The variety of amenities and services we offer exceeds most other health and fitness center alternatives. Our monthly membership dues typically range from $40 to $60 per month for an individual membership and from $80 to $130 per month for a couple or family membership. Our value proposition and customer-focused approach create loyalty among our members, resulting in an attrition rate that was 6.3% better than the industry average in 2001 and 5.7% better than the industry average in 2002.


	*We have an established and profitable economic model.*

Our economic model is based on attracting a large membership base within a short time period, as well as retaining those members and maintaining tight expense control. We expect the typical membership

base at our large format centers to increase from approximately 35% of targeted membership capacity at the end of the first month of operations to over 90% of targeted membership capacity by the end of the third year of operations. Average targeted membership capacity for all of our large format centers is approximately 10,500, and 11,500 for our large format centers that are current model centers. Average revenue at our 15 large format centers that were opened in 2001 or earlier exceeded $10.7 million for the year ended December 31, 2003. At these centers during the same period, EBITDA averaged 40% of revenue, including corporate, general and administrative expense of approximately 9% of revenue, and net income averaged approximately 15% of revenue. Our investment for a large format center has averaged approximately $17.8 million, and for a current model center has averaged approximately $23.5 million.


	*We believe we have a disciplined and sophisticated site selection and development process.*

We believe we have developed a disciplined and sophisticated process to identify specific sites for future centers. This multi-step process is based upon demographic, psychographic and competitive criteria generated from profiles of already successful centers. As a result of our strict adherence to this process, we have never closed a center, and our large format centers produced, on average, EBITDA in excess of 21% of revenue and net income of less than 1% of revenue during their first year of operation.


	*We have a committed and experienced senior management team.*

Our senior management team has extensive and diverse professional experience. This team is led by our Chief Executive Officer and founder, Bahram Akradi, who has worked in the health and fitness industry for over 20 years, our Chief Operating Officer, Michael Gerend, and our Chief Financial Officer, Michael Robinson. The talented senior management team brings experience from both inside and outside the health and fitness industry and has been instrumental in building and growing our company.

Our Growth Strategy


	*Drive membership growth.*

New Centers. We opened four centers in 2003, and we plan to open six large format centers in 2004, five of which will be current model centers, and six current model centers in 2005 in both new and existing markets. We believe, based upon our data, that there is the potential for adding at least 225 additional current model centers throughout the U.S. in existing as well as new markets.

Existing Centers. Of our 33 centers, the nine that we opened in 2002 and 2003 averaged 65% of targeted membership capacity as of December 31, 2003. We expect the continuing ramp in memberships at these centers to contribute significantly to our growth in 2004 as these centers ramp toward our goal of 90% of targeted membership capacity by the end of their third year of operations. We also plan to continue to drive membership growth at other centers that are not yet at targeted capacity.


	*Increase revenue per membership.*

From 1999 to 2003, we increased revenue per membership from $659 to $1,089. We believe the revenue from sales of our in-center products and services will grow at a faster rate than enrollment fees and membership dues. From 1999 to 2003, revenue from the sale of in-center products and services grew from $10.6 million to $54.2 million. We expect to continue to drive in-center revenue by increasing sales of our current in-center products and services and introducing new products and services, thereby increasing revenue per membership.


	*Leverage the LIFE TIME FITNESS brand into the broader health and wellness industry.*

Our rapidly expanding membership base has allowed us to expand the LIFE TIME FITNESS brand into other wellness-related offerings. We plan to leverage the LIFE TIME FITNESS brand into other businesses in the broader health and wellness industry. We have developed and market a line of nutritional products, we circulate 500,000 copies of each issue of our magazine, Experience Life, and we attract an international field of participants to our annual LIFE TIME FITNESS triathlon.

Risks Affecting Us

Our business is subject to numerous risks as discussed more fully in the section entitled “Risk Factors” immediately following this Prospectus Summary. In particular, if we are unable to identify and acquire suitable sites for new centers, are unable to attract and retain members or experience delays in opening new centers, we may not be able to achieve our business objectives. If our business continues to grow, the continued growth may place strains on our systems and our management team, which has never had direct responsibility for managing a publicly traded company. In addition, because of the capital-intensive nature of our business, we will need to incur additional indebtedness and, if we are not able to access additional capital, our ability to expand our business may be impaired.

Our principal executive offices are located at 6442 City West Parkway, Eden Prairie, Minnesota 55344, and our telephone number is (952) 947-0000. Our web site is located at www.lifetimefitness.com. The information contained on our web site is not a part of this prospectus.

The Offering


Common stock offered by us		shares

Common stock offered by the selling shareholders		shares

Total		shares

Common stock to be outstanding after this offering		shares

Use of proceeds		We expect the net proceeds to us from this offering will be approximately $ million, or approximately $ million if the underwriters exercise their over-allotment option in full. We expect to use the net proceeds from this offering:

		• to finance our growth by opening new centers; and

		• for repayments of a portion of our indebtedness.

		See “Use of Proceeds” for more information. We will not receive any of the proceeds from the sale of the shares of our common stock by the selling shareholders.

Proposed New York Stock Exchange symbol		“LTM”

The number of shares of common stock outstanding after this offering is based on the number of shares outstanding as of , 2004, and excludes:

• shares of common stock issuable upon exercise of options outstanding under our stock option plans, at a weighted average exercise price of $ per share;

• shares of common stock reserved for future issuance under our stock incentive plans, of which options to purchase shares of common stock will be issued in connection with this offering at an exercise price per share equal to the price of shares sold in this offering.

Except as otherwise indicated, all information in this prospectus assumes:

• no exercise of the underwriters’ over-allotment option;

• all outstanding shares of our preferred stock have automatically converted into shares of common stock as a result of this offering; and

• no outstanding options have been exercised since , 2004.

Summary Consolidated Financial Data

You should read the following summary consolidated financial data in conjunction with our consolidated financial statements and the related notes, our “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.



														For the Three Months
												Pro Forma		Ended						Pro Forma
			For the Year Ended December 31,									December 31,		March 31,						March 31,

			2001			2002			2003			2003(1)		2003			2004			2004(1)


			(In thousands, except per share data)
Statement of Operations Data:
Revenue
	Center revenue
		Membership dues	$	94,652		$	132,124		$	171,596				$	39,919		$	49,179
		Enrollment fees		13,584			18,564			20,594					4,906			4,846
		In-center revenue(2)		25,191			38,270			54,237					12,931			16,919

	Total center revenue			133,427			188,958			246,427					57,756			70,944
	Other revenue			3,240			6,208			10,515					2,525			3,226

		Total revenue		136,667			195,166			256,942					60,281			74,170
Operating expenses
	Sports, fitness and family recreation center operations			74,025			102,343			131,825					30,705			39,053
	Advertising and marketing			6,350			11,722			11,045					2,690			3,680
	General and administrative			12,305			14,981			18,554					5,759			5,950
	Other operating			4,458			10,358			16,273					3,603			4,557
	Depreciation and amortization			17,280			20,801			25,264					5,833			6,947
	Impairment charge(3)			—			6,952			—					—			—

		Total operating expenses		114,418			167,157			202,961					48,590			60,187

Income from operations				22,249			28,009			53,981					11,691			13,983
Interest expense, net				(12,035	)		(14,950	)		(19,132	)				(4,563	)		(4,612	)
Loss from extinguishment of debt(4)				(2,911	)		—			—					—			—
Equity in earnings (loss) of affiliate(5)				(301	)		333			762					151			253

Income before income taxes				7,002			13,392			35,611					7,279			9,624
Provision for income taxes				3,019			5,971			15,006					3,067			3,977

Net income				3,983			7,421			20,605		$	20,605		4,212			5,647		$	5,647
Accretion of redeemable preferred stock				6,447			7,085			6,987			—		1,723			1,737			—

Net income (loss) applicable to common shareholders			$	(2,464	)	$	336		$	13,618		$	20,605	$	2,489		$	3,910		$	5,647

Basic earnings (loss) per share			$	(0.20	)	$	0.02		$	0.85		$	0.72	$	0.16		$	0.24		$	0.20
Weighted average number of common and common equivalent shares outstanding — basic				12,360			15,054			16,072			28,701		15,984			16,156			28,785
Diluted earnings (loss) per share			$	(0.20	)	$	0.02		$	0.72		$	0.68	$	0.15		$	0.19		$	0.18
Weighted average number of common and common equivalent shares outstanding — diluted(6)				12,360			16,430			28,612			30,224		27,771			29,217			30,829



											March 31, 2004
		December 31,
																Pro Forma
		2001			2002			2003			Actual			Pro Forma(1)		As Adjusted(7)


		(In thousands)
Balance Sheet Data:
	Cash and cash equivalents	$	2,208		$	8,860		$	18,446		$	2,307
	Working capital		(30,242	)		(29,819	)		(15,340	)		(44,779	)
	Total assets		346,815			419,024			453,346			453,880
	Total debt		176,727			231,320			233,232			219,111
	Total redeemable preferred stock		96,973			99,179			106,165			107,902		$	—
	Total shareholders’ equity		13,014			18,547			32,792			36,811		$	144,713



											For the Three Months
											Ended
		For the Year Ended December 31,									March 31,

		2001			2002			2003			2003			2004


		(In thousands, except center and membership data)
Cash Flow Data:
	Net cash provided by operating activities	$	32,609		$	43,558		$	52,576		$	14,831		$	20,783
	Net cash used in investing activities		(63,928	)		(31,350	)		(24,476	)		(3,223	)		(19,532	)
	Net cash provided by (used in) financing activities		28,245			(5,556	)		(18,514	)		(3,442	)		(17,390	)
Other Data:
	Comparable center revenue growth(8)		12.4	%		22.3	%		13.2	%		13.1	%		12.5	%
	Average revenue per membership(9)	$	877.67		$	989.11		$	1,089.15		$	267.97		$	286.58
	Average in-center revenue per membership(10)		165.71			200.33			239.71			58.75			68.91
	EBITDA(11)		36,317			49,143			80,007			17,675			21,183
	EBITDA margin(12)		26.6	%		25.2	%		31.1	%		29.3	%		28.6	%
	Capital expenditures(13)	$	94,923		$	87,432		$	81,846		$	12,740		$	25,587
Operating Data:(14)
	Centers open at end of period		24			29			33			29			33
	Number of memberships at end of period		173,875			215,387			249,192			229,851			267,474

(1) The statement of operations data for the year ended December 31, 2003 and the three months ended March 31, 2004 and the balance sheet data as of March 31, 2004 reflect the pro forma effect of the conversion of all the redeemable preferred stock into shares of common stock in connection with this offering.

(2) In-center revenue includes revenue generated at our centers from fees for personal training, group fitness training and other member activities, sales of products offered at our LifeCafe, sales of products and services offered at our LifeSpa and renting space in certain of our centers.

(3) For the year ended December 31, 2002 we recorded an asset impairment charge of $7.0 million related to our only executive facility, which is located in downtown Minneapolis, Minnesota, and a restaurant that we operate in the same building. The center is one of only two of our centers that are located in urban areas. This executive facility and restaurant differ significantly from our standard model and the initial cash flow results have not been as high as projected. Additionally, this facility and restaurant are located in a more costly geographic area of downtown Minneapolis. The charge represents the difference between the fair value of the assets as determined by discounted estimated future cash flows and the carrying amount of the assets.

(4) A loss on the extinguishment of debt of $2.9 million was recorded for the year ended December 31, 2001. The charge consisted of early extinguishment fees and the write-off of loan costs related to the original debt in connection with the refinancing of 10 of our centers.

(5) In 1999, we formed Bloomingdale LIFE TIME Fitness, L.L.C., referred to as Bloomingdale LLC, with two unrelated organizations for the purpose of constructing, owning and operating a sports, fitness and family recreation center in Bloomingdale, Illinois. Each member made an initial capital contribution of $2.0 million and owns a one-third interest in Bloomingdale LLC. The center


		commenced operations in February 2001. The terms of the relationship among the members are governed by an operating agreement. Bloomingdale LLC is accounted for as an investment in an unconsolidated affiliate and is not consolidated in our financial statements.


	(6)	The diluted weighted average number of common shares outstanding is the weighted average number of common shares plus the weighted average conversion of any dilutive common stock equivalents, such as redeemable preferred stock, and the assumed weighted average exercise of dilutive stock options using the treasury stock method. For the year ended December 31, 2001, there were no dilutive common stock equivalents. For the year ended December 31, 2002, only the shares issuable upon the exercise of stock options were dilutive. For the year ended December 31, 2003 and each of the three month periods ended March 31, 2003 and 2004, the shares issuable upon the exercise of stock options and the conversion of redeemable preferred stock were dilutive. The number of shares excluded from the computation of dilutive earnings per share was 14,247,600, 11,323,000 and 0 for the years ended December 31, 2001, 2002 and 2003, respectively, and 0 for the three months ended March 31, 2003 and 2004.

The following table summarizes the weighted average common shares for basic and diluted earnings per share computations:



	December 31,						March 31,

	2001		2002		2003		2003		2004


	(In thousands)
Weighted average number of common shares outstanding — basic		12,360		15,054		16,072		15,984		16,156
Effect of dilutive stock options		—		1,376		1,522		1,340		2,043
Effect of dilutive redeemable preferred shares outstanding		—		—		11,018		10,447		11,018

Weighted average number of common shares outstanding — dilutive		12,360		16,430		28,612		27,771		29,217

(7) Assumes the conversion of all preferred stock into shares of common stock upon completion of this offering and the sale by us of shares of common stock at an assumed initial public offering price of $ per share in this offering and the application of the estimated aggregate net proceeds to us of $ million after deducting underwriting discounts and commissions and estimated offering expenses payable by us of $ . We intend to use up to $15.0 million of the net proceeds to repay amounts outstanding under our revolving credit facility and, for purposes of this table, we have assumed that we will repay $15.0 million under our revolving credit facility. Amounts repaid under our revolving credit facility may, subject to the terms of the facility, be reborrowed by us. We also intend to use approximately $9.0 million to repay a loan under our construction facility. See “Use of Proceeds.” The as adjusted balance sheet data are presented as if this offering and the application of the net proceeds from this offering occurred on March 31, 2004.

(8) Membership dues, enrollment fees and in-center revenue for a center are included in comparable center revenue growth beginning on the first day of the thirteenth full calendar month of the center’s operation.

(9) Average revenue per membership is total center revenue for the period divided by an average number of memberships for the period, where average number of memberships for the period is derived from dividing the sum of the total memberships outstanding at the end of each month during the period by the total number of months in the period.


(10)	Average in-center revenue per membership is total in-center revenue for the period divided by the average number of memberships for the period, where the average number of memberships for the period is derived from dividing the sum of the total memberships outstanding at the end of each month during the period by the total number of months in the period.

(11)

EBITDA consists of net income plus interest expense, net, provision for income taxes and depreciation and amortization. This term, as we define it, may not be comparable to a similarly titled measure used by other companies and is not a measure of performance presented in accordance with GAAP. We use EBITDA as a measure of operating performance. 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. 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. Additional details related to EBITDA are provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures.”

The following table provides a reconciliation of net income, the most directly comparable GAAP measure, to EBITDA:



							Three Months Ended
	Fiscal Year Ended December 31,						March 31,

	2001		2002		2003		2003		2004


	(In thousands)
Net income	$	3,983	$	7,421	$	20,605	$	4,212	$	5,647
Interest expense, net		12,035		14,950		19,132		4,563		4,612
Provision for income taxes		3,019		5,971		15,006		3,067		3,977
Depreciation and amortization		17,280		20,801		25,264		5,833		6,947

EBITDA	$	36,317	$	49,143	$	80,007	$	17,675	$	21,183

(12) EBITDA margin is the ratio of EBITDA to total revenue.

(13) Capital expenditures represent investments in our new centers, costs related to updating and maintaining our existing centers and other infrastructure investments. For purposes of deriving capital expenditures from our cash flow statement, capital expenditures include our purchases of property and equipment and property and equipment purchases financed through notes payable and capital lease obligations.

(14) The operating data being presented in these items include the center owned by Bloomingdale LLC. See also footnote 5 for a discussion of Bloomingdale LLC. The data presented elsewhere in this section exclude the center owned by Bloomingdale LLC.

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below before participating in this offering. You should also refer to the other information in this prospectus, including our financial statements and the related notes. If any of the following risks actually occurs, our business, financial condition, operating results or cash flows could be materially harmed. As a result, the trading price of our common stock could decline, and you might lose all or part of your investment.

To successfully expand our business, we must identify and acquire sites that meet the site selection criteria we have established. In addition to finding sites with the right demographic and other measures we employ in our selection process, we also need to evaluate the penetration of our competitors in the market. We face significant competition from other health and fitness center operators for sites that meet our criteria, and as a result we may lose those sites, our competitors could copy our format or we could be forced to pay significantly higher prices for those sites. If we are unable to identify and acquire sites for new sports, fitness and family recreation centers, our revenue growth rate and profits may be negatively impacted. Additionally, if our analysis of the suitability of a site is incorrect, we may not be able to recover our capital investment in developing and building the new center. For example, in 2002 we recorded an asset impairment charge of $7.0 million related to our executive facility, which is located in downtown Minneapolis, Minnesota, and a restaurant that we operate in the same building.

The success of our business depends on our ability to attract and retain members, and we cannot assure you that we will be successful in our marketing efforts or that the membership levels at our centers will not materially decline, especially at those centers that have been in operation for an extended period of time. All of our members can cancel their membership at any time upon one month’s notice. In addition, we experience attrition and must continually attract new members in order to maintain our membership levels. There are numerous factors that could lead to a decline in membership levels or that could prevent us from increasing membership at newer centers where membership is generally not yet at a targeted capacity, including market maturity or saturation, a decline in our ability to deliver quality service at a competitive price, direct and indirect competition in the areas where our centers are located, a decline in the public’s interest in health and fitness, changes in discretionary spending trends and general economic conditions. In addition, we may decide to close a center and attempt to move members of that center to a different center or we may have to temporarily relocate members if a center is closed for remodeling or due to fire, earthquake or other casualty.

In order to meet our objectives, it is important that we open new centers on schedule. A significant amount of time and expenditure of capital is required to develop and construct new centers. If we are significantly delayed in opening new centers, our competitors may be able to open new clubs in the same market before we open our centers. This change in the competitive landscape could negatively impact our pre-opening sales of memberships and increase our investment costs. In addition, delays in opening new


	•	obtaining acceptable financing for construction of new sites;

	•	obtaining entitlements, permits and licenses necessary to complete construction of the new center on schedule;

	•	recruiting, training and retaining qualified management and other personnel;

	•	securing access to labor and materials necessary to develop and construct our centers;

	•	delays due to material shortages, labor issues, weather conditions or other acts of god, discovery of contaminants, accidents, deaths or injunctions; and

	•	general economic conditions.

Over the past several years, we have experienced significant growth in our business activities and operations, including an increase in the number of our sports, fitness and family recreation centers. Our past expansion has placed, and any future expansion will place, significant demands on our administrative, operational, financial and other resources. Any failure to manage growth effectively could seriously harm our business. To be successful, we will need to continue to implement management information systems and improve our operating, administrative, financial and accounting systems and controls. We will also need to train new employees and maintain close coordination among our executive, accounting, finance, marketing, sales and operations functions. These processes are time-consuming and expensive, will increase management responsibilities and will divert management attention.

We currently operate sports, fitness and family recreation centers in eight states. Our plans for 2004 include opening six new centers, four of which are in an existing market. With respect to existing markets, it has been our experience that opening new centers may attract some memberships away from other centers already operated by us in those markets and diminish their revenues. In addition, as a result of new center openings in existing markets, and because older centers will represent an increasing proportion of our center base over time, our comparable center revenue increases may be lower in future periods than in the past.

Another result of opening new centers is that our overall operating margins may be lower than they have been historically. We expect both the addition of pre-opening expenses and the lower revenue volumes characteristic of newly-opened centers to affect our operating margins at these new centers. We also expect certain operating costs, particularly those related to occupancy, to be higher than in the past in some newly-entered geographic regions. As a result of the impact of these rising costs, our total center contribution and operating margins may be lower in future periods than they have been in the past.

As of March 31, 2004, we had total consolidated indebtedness of $219.1 million, consisting principally of obligations under construction and term notes that are secured by certain of our properties, borrowings under our revolving credit facility that are secured by certain personal property, mortgage notes that are secured by certain of our sports, fitness and family recreation centers and obligations under capital leases.

Our level of indebtedness could have important consequences to us, including the following:


	•	our ability to obtain additional financing, if necessary, for capital expenditures, working capital, acquisitions or other purposes may be impaired or such financing may not be available on favorable terms;

	•	we will need a substantial portion of our cash flow to pay the principal of, and interest on, our indebtedness, including indebtedness that we may incur in the future;

	•	payments on our indebtedness will reduce the funds that would otherwise be available for our operations and future business opportunities;

	•	a substantial decrease in our cash flows from operations could make it difficult for us to meet our debt service requirements and force us to modify our operations;

	•	we may be more highly leveraged than our competitors, which may place us at a competitive disadvantage;

	•	our debt level may make us more vulnerable and less flexible than our competitors to a downturn in our business or the general economy; and

	•	some of our debt has a variable rate of interest, which increases our vulnerability to interest rate fluctuations.

In addition to the amount of indebtedness outstanding as of March 31, 2004, we have access to an additional $133.1 million under our credit facilities. Following this offering, we will continue to have the ability to incur new debt, subject to limitations under our existing credit facilities and in our debt financing agreements. Furthermore, we have 13 centers financed by Teachers Insurance and Annuity Association of America that are subject to cross-default and cross-collateral provisions, which would allow the lender to foreclose on each of these 13 centers if there is an event of default related to one or more of these centers. If we incur additional debt, the risks associated with our leverage, including our ability to service our debt, could intensify.

Our business requires significant levels of capital to finance the development of additional sites for new sports, fitness and family recreation centers and the construction of our centers. If cash from available sources is insufficient, or if cash is used for unanticipated needs, we may require additional capital sooner than anticipated. In the event that we are required or choose to raise additional funds, we may be unable to do so on favorable terms or at all. Furthermore, the cost of debt financing could significantly increase, making it cost-prohibitive to borrow, which could force us to issue new equity securities. If we issue new equity securities, existing shareholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise funds on acceptable terms, we may not be able to take advantage of future opportunities or respond to competitive pressures. Any inability to raise additional capital when required could have an adverse effect on our business plans and operating results.

We compete with other health and fitness centers, physical fitness and recreational facilities established by local non-profit organizations, governments, hospitals, and businesses, amenity and condominium clubs and similar non-profit organizations, local salons, cafes and businesses offering similar ancillary services, and, to a lesser extent, racquet, tennis and other athletic clubs, country clubs, weight reducing salons and the home fitness equipment industry. Competitors, which may have greater resources or greater name recognition than we have, may compete with us to attract members in our markets. Non-

We employ a business model that could allow competitors to duplicate our successes. We cannot assure you that our competitors will not attempt to copy our business model and that this will not erode our market share and brand recognition and impair our growth rate and profitability. In response to any such competitors, we may be required to decrease our membership fees, which may reduce our operating margins and profitability.

We currently operate multiple sports, fitness and family recreation centers in several metropolitan areas, including 14 in the Minneapolis/St. Paul market, seven in the Chicago market and five in the Detroit market, with continued planned expansion in other markets. As a result, any prolonged disruption in the operations of our centers in any of these markets, whether due to technical difficulties, power failures or destruction or damage to the centers as a result of a natural disaster, fire or any other reason, could harm our operating results. In addition, our concentration in these markets increases our exposure to adverse developments related to competition, as well as economic and demographic changes in these areas.

We are highly dependent on the services of our senior management team and other key employees at both our corporate headquarters and our centers, and on our ability to recruit, retain and motivate key personnel. Competition for such personnel is intense, and the inability to attract and retain the additional qualified employees required to expand our activities, or the loss of current key employees, could materially and adversely affect us.

Our growth and development to date have been largely dependent upon the services of Bahram Akradi, our Chairman of the Board of Directors, President, Chief Executive Officer and founder. If Mr. Akradi ceases to be Chairman of the Board of Directors and Chief Executive Officer for any reason other than due to his death or incapacity or as a result of his removal pursuant to our articles of incorporation or bylaws, we will be in default under the loan documents for our 13 centers financed with Teachers Insurance and Annuity Association of America. As a result, Mr. Akradi may be able to exert disproportionate control over our company because of the significant consequence of his departure. We do not have any employment or non-competition agreement with Mr. Akradi.

Use of our centers poses potential health or safety risks to members or guests through exertion and use of our equipment, swimming pools and other facilities and services. We cannot assure you that claims will not be asserted against us for injury or death suffered by someone using our facilities or services. In addition, the child-care services we offer at our centers expose us to claims related to child-care. Lastly, because we construct our own centers, we also face liability in connection with the construction of these centers.

Various federal and state laws and regulations govern our operations, including:


	•	general rules and regulations of the Federal Trade Commission, state and local consumer protection agencies and state statutes that prescribe certain forms and provisions of membership contracts and that govern the advertising, sale and collection of our memberships;

	•	state and local health regulations;

	•	federal regulation of health and nutritional products; and

	•	regulation of rehabilitation service providers.

Any changes in such laws could have a material adverse effect on our financial condition and results of operations.

In addition to our sports, fitness and family recreation centers, we have introduced other business initiatives in the areas of nutritional products, media and athletic events in order to capitalize on our brand identity and membership base. We have limited experience with these other initiatives and face significant competition against established companies with more retail experience and greater financial resources than us. We may not be able to compete effectively against these established companies, and these other business initiatives may not be profitable. In addition, we license from a third party the right to use the mark “LIFE TIME” in connection with our nutritional products, as well as the right to use certain ingredients of such products. These rights may be material to marketing and distributing our nutritional products. If these licenses are terminated for any reason, we may no longer be able to market and distribute nutritional products under the LIFE TIME FITNESS brand.

The nutritional products industry is currently the source of proposed federal laws and regulations, as well as numerous lawsuits. We advertise and offer for sale proprietary nutritional products within our centers, on the Internet and through selected national retail channels. We cannot assure you that there will be no claims against us regarding the ingredients in, manufacture of or results of using our nutritional products. Furthermore, we cannot assure you that any rights we have under indemnification provisions or insurance policies will be sufficient to cover any losses that might result from such claims.

We may have disputes with third parties to enforce our intellectual property rights, protect our trademarks, determine the validity and scope of the proprietary rights of others or defend ourselves from claims of infringement, invalidity or unenforceability. Such disputes may require us to engage in litigation. We may incur substantial costs and a diversion of resources as a result of such disputes and litigation, even if we win. In the event that we do not win, we may have to enter into royalty or licensing agreements, we may be prevented from using the marks within certain markets in connection with goods and services that are material to our business or we may be unable to prevent a third party from using our marks. We cannot assure you that we would be able to reach an agreement on reasonable terms, if at all. In particular, although we own an incontestable federal trademark registration for use of the LIFE TIME FITNESS® mark in the field of health and fitness centers, we are aware of entities in certain locations around the country that use LIFE TIME FITNESS or a similar mark in connection with goods and services related to health and fitness. The rights of these entities in such marks may predate our rights.

Current world tensions could escalate, potentially leading to war or acts of terrorism. This could have unpredictable consequences on the world economy and on our business.

Our management team has historically operated our business as a privately held company. Our management team has never had direct responsibility for managing a publicly traded company. We will incur increased costs as a result of being a public company, particularly in light of recently enacted and proposed changes in laws and regulations and listing requirements.

Our management will have significant discretion in the use of a substantial portion of the proceeds of this offering. Accordingly, it is possible that our management may allocate the proceeds differently than investors in this offering desire, or that we will fail to maximize our return on these proceeds.

The initial public offering price for our common stock will be determined through our negotiations with the underwriters and may not bear any relationship to the market price at which it will trade after this offering. Before this offering, there was no public trading market for our common stock, and we cannot assure you that one will develop or be sustained after this offering. If a market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at an attractive price or at all. We cannot predict the prices at which our common stock will trade. It is possible that in some future quarter our operating results may be below the expectations of financial market analysts and investors and, as a result of these and other factors, the price of our common stock may fall.

The trading price of our common stock following this offering may fluctuate substantially. The price of our common stock after this offering may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose part or all of your investment in our shares of common stock. Those factors that could cause fluctuations include, but are not limited to, the following:


	•	price and volume fluctuations in the overall stock market from time to time;

	•	significant volatility in the market price and trading volume of health and fitness companies;

	•	actual or anticipated changes in our earnings or fluctuations in our operating results or in the expectations of financial market analysts;

	•	investor perceptions of the health and fitness industry, in general, and our company, in particular;

	•	the operating and stock performance of comparable companies;

	•	general economic conditions and trends;

	•	the seasonality of our business;

	•	the opening of new centers;


	•	major catastrophic events;

	•	loss of external funding sources;

	•	sales of large blocks of our stock or sales by insiders; or

	•	departures of key personnel.

If you purchase shares of our common stock in this offering, you will experience significant and immediate dilution because the price that you pay will be substantially greater than the net tangible book value per share of the shares you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares. You will experience additional dilution upon the exercise of stock options to purchase common stock.

Our principal shareholders, directors and executive officers and entities affiliated with them will own approximately % of the outstanding shares of our common stock after this offering. As a result, these shareholders, if acting together, will be able to influence or control matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our shareholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

Anti-takeover provisions of our articles of incorporation, bylaws and Minnesota law could diminish the opportunity for shareholders to participate in acquisition proposals at a price above the then current market price of our common stock. For example, while we have no present plans to issue any preferred stock, our board of directors, without further shareholder approval, may issue shares of undesignated preferred stock and fix the powers, preferences, rights and limitations of such class or series, which could adversely affect the voting power of your shares. In addition, our bylaws provide for an advance notice procedure for nomination of candidates to our board of directors that could have the effect of delaying, deterring or preventing a change in control. Further, as a Minnesota corporation, we are subject to provisions of the Minnesota Business Corporation Act, or MBCA, regarding “control share acquisitions” and “business combinations.” We may, in the future, consider adopting additional anti-takeover measures. The authority of our board to issue undesignated preferred stock and the anti-takeover provisions of the MBCA, as well as any future anti-takeover measures adopted by us, may, in certain circumstances, delay, deter or prevent takeover attempts and other changes in control of the company not approved by our board of directors.

We have never declared or paid any cash dividends on our shares of common stock. We intend to retain any future earnings to fund the operation and expansion of our business and, therefore, we do not anticipate paying cash dividends on our shares of common stock in the foreseeable future. In addition, the terms of our revolving credit facility and certain of our debt financing agreements prohibit us from paying dividends without the consent of the lenders. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

If our shareholders sell substantial amounts of our common stock in the public market following this offering, the market price of our common stock could fall. These sales could also make it more difficult for us to sell shares of our common stock or equity-related securities in the future.

This prospectus contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include statements about:


	•	our estimates of future expenses, revenue and profitability;

	•	trends affecting our financial condition and results of operations;

	•	our ability to attract and retain members or achieve our targeted membership capacity;

	•	the availability and terms of debt financing;

	•	our ability to identify sites and open new centers on schedule;

	•	new initiatives to enhance our brand in the areas of exercise, nutrition and education;

	•	industry trends and the competitive environment;

	•	the impact of losing one or more senior executive or failing to attract additional key personnel; and

	•	other factors referenced in this prospectus, including those set forth under the caption “Risk Factors.”

In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions and are subject to risks and uncertainties. We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors.” Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this prospectus. You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

The net proceeds from the sale of the shares of our common stock offered by us are estimated to be approximately $ , after deducting the underwriting discount and estimated offering expenses and assuming an initial public offering price of $ , or approximately $ if the over-allotment option is exercised by the underwriters in full. We will not receive any of the proceeds from the shares of our common stock sold by the selling shareholders.

A principal purpose of this offering is to establish a public market for our common stock. We expect to use all of the net proceeds of this offering, except as described below, to finance our growth by opening additional sports, fitness and family recreation centers, including approximately $20 to $25 million for the purchase of land for centers we plan to open in 2005, approximately $15 to $20 million for the construction of the six centers we plan to open in 2004 and approximately $10 to $15 million for the purchase of the initial exercise equipment, furniture and fixtures for the six centers we plan to open in 2004. We expect to use a portion of the net proceeds to completely repay amounts outstanding under our revolving credit facility as soon as practicable after receiving the proceeds from this offering, which amount could be up to $15 million. The revolving credit facility bears interest at 4.0% over LIBOR and expires on June 30, 2005. The amounts to be repaid under the revolving credit facility were borrowed within the past year and were used to fund acquisition of land and construction of centers we plan to open in 2004 and other working capital needs. We also expect to use approximately $9 million of the net proceeds of this offering to repay a loan under the construction facility that we used to finance the development of our center in Plano, Texas. The term loan bears interest at 0.5% over the prime rate and expires on December 10, 2006.

The amounts and timing of our actual use of proceeds will depend upon numerous factors, including our plans for the construction and opening of new centers and our ability to obtain and extend our debt financing on favorable terms. The amounts that we may allocate to the particular uses of the net proceeds of this offering may vary from the above based primarily on amounts outstanding under our revolving credit facility and the distinct timing implications between membership dues generated and when funds are needed. In addition, the amount used for any particular component of constructing and opening a new center may vary depending on increases and decreases in costs of the different components and our ability to negotiate pricing. Although we do not currently have any specific plans for other uses of the proceeds, there are other potential uses of the proceeds, including expediting future land purchases, technological investment in our current in-center and corporate businesses, investment in our current corporate headquarters, acquisitions of free-standing single unit health clubs, acquisitions of other health club companies and initial investments in additional corporate businesses. Our management will have significant flexibility and discretion in applying the net proceeds of this offering. Until we use the proceeds for a particular purpose, we plan to invest the net proceeds of this offering generally in short-term, investment-grade instruments, interest-bearing securities or direct or guaranteed obligations of the United States, but we cannot assure you that these investments will yield a favorable return.

We have never declared or paid any cash dividends on our common stock. We currently intend to retain all future earnings for the operation and expansion of our business and do not anticipate declaring or paying any cash dividends on our common stock in the foreseeable future. In addition, the terms of our revolving credit facility and certain of our debt financing agreements prohibit us from paying dividends without the consent of the lenders. The payment of any dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, earnings, capital requirements, contractual restrictions, outstanding indebtedness and other factors deemed relevant by our board.


	•	on an actual basis; and


	•	on an as-adjusted basis to give effect to (1) the filing of our amended and restated articles of incorporation to provide for authorized capital stock of shares of common stock and shares of preferred stock, (2) the sale by us of shares of common stock at an assumed initial public offering price of $ per share in this offering and the receipt of the estimated $ million in net proceeds from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us of $ , and (3) the conversion of all preferred stock upon the completion of this offering.

You should read the information below in conjunction with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.


(1)	We are required to keep cash on deposit at certain financial institutions in accordance with certain of our credit facilities.

(2)	All redeemable preferred stock will convert into an aggregate of shares of our common stock upon completion of this offering.



	•	3,018,350 shares of common stock reserved for issuance upon exercise of outstanding stock options under our 1996 Stock Option Plan and our 1998 Stock Option Plan at a weighted average exercise price of $5.17 per share, of which options to purchase 1,485,525 shares were exercisable as of March 31, 2004;



	•	3,500,000 shares of common stock available for future issuance under our long-term incentive plan, of which options to purchase 850,000 shares of common stock will be issued in connection with this offering at an exercise price per share equal to the price of shares sold in this offering.

Our pro forma net tangible book value as of March 31, 2004 was approximately $ million, or $ per share of common stock. Pro forma net tangible book value per share is calculated by subtracting our total liabilities from our total tangible assets, which equals total assets less intangible assets, and dividing this amount by the number of shares of common stock outstanding, after giving effect to the conversion of all of our outstanding preferred stock, as of March 31, 2004.

Dilution in pro forma net tangible book value represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma adjusted net tangible book value per share of our common stock after completion of this offering. Assuming the conversion of all preferred stock into common stock upon the completion of this offering, our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of March 31, 2004 would have been approximately $ , or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to our existing shareholders and an immediate dilution in pro forma net tangible book value of $ per share to purchasers of common stock in this offering. The following table illustrates this per share dilution.

The following table sets forth, as of March 31, 2004 on the pro forma basis described above, the total number of shares of common stock purchased from us, the total consideration paid for these shares and the average price per share paid by our existing shareholders and by purchasers of common stock in this offering, before deducting underwriting discounts and commissions and estimated offering expenses payable by us, at an assumed initial public offering price of $ per share.

Sales by the selling shareholders in this offering will cause the number of shares held by existing shareholders to be reduced to , or % of the total number of shares of our common stock outstanding after this offering, and will increase the total number of shares held by new investors to , or % of the total number of shares of our common stock outstanding after this offering. If the underwriters’ over-allotment option is exercised in full, the number of shares held by existing shareholders after this offering would be reduced to , or %, and the number of shares held by new investors would increase to , or % of the total number of shares of our common stock outstanding after this offering.

This table assumes that no options were exercised after March 31, 2004. As of March 31, 2004, there were outstanding options to purchase a total of 3,018,350 shares of common stock at a weighted average exercise price of approximately $5.17 per share. To the extent that these options are exercised, there will be further dilution to new investors.

You should read the selected consolidated financial data below in conjunction with our consolidated financial statements and the related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The consolidated statement of operations data for the years ended December 31, 2001, 2002 and 2003 and the consolidated balance sheet data as of December 31, 2002 and 2003 are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The consolidated statement of operations data for the years ended December 31, 1999 and 2000 and the three months ended March 31, 2003 and 2004 and the balance sheet data as of December 31, 1999, 2000 and 2001 and March 31, 2004 are unaudited, have been derived from our internal records, have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, present fairly our consolidated financial position as of such dates and our consolidated results of operations for such periods. The unaudited interim consolidated financial statements include all adjustments, which include only normal and recurring adjustments, necessary to present fairly the data included therein. Historical results are not necessarily indicative of the results of operations to be expected for future periods, and interim results may not be indicative of results for the remainder of the year. See Note 2 to our consolidated financial statements for a description of the method used to compute basic and diluted net earnings (loss) per share.



	(1)	The statement of operations data for the year ended December 31, 2003 and the three months ended March 31, 2004 and the balance sheet data as of March 31, 2004 reflect the pro forma effect of the conversion of all the redeemable preferred stock into shares of common stock in connection with this offering.



	(2)	In-center revenue includes revenue generated at our centers from fees for personal training, group fitness training and other member activities, sales of products offered at our LifeCafe, sales of products and services offered at our LifeSpa and renting space in certain of our centers.



	(3)	For the year ended December 31, 2002, we recorded an asset impairment charge of $7.0 million related to our only executive facility, which is located in downtown Minneapolis, Minnesota, and a restaurant that we operate in the same building. The center is one of only two of our centers that are located in urban areas. This executive facility and restaurant differ significantly from our standard model and the initial cash flow results have not been as high as projected. Additionally, this facility and restaurant are located in a more costly geographic area of downtown Minneapolis. The charge represents the difference between the fair value of the assets as determined by discounted estimated future cash flows and the carrying amount of the assets.



	(4)	A loss on the extinguishment of debt of $2.9 million was recorded for the year ended December 31, 2001. The charge consisted of early extinguishment fees and the write-off of loan costs related to the original debt in connection with the refinancing of 10 of our centers.



	(5)	In 1999, we formed Bloomingdale LIFE TIME Fitness, L.L.C., referred to as Bloomingdale LLC, with two unrelated organizations for the purpose of constructing, owning and operating a sports, fitness and family recreation center in Bloomingdale, Illinois. Each member made an initial capital contribution of $2.0 million and owns a one-third interest in Bloomingdale LLC. The center commenced operations in February 2001. The terms of the relationship among the members are governed by an operating agreement. Bloomingdale LLC is accounted for as an investment in an unconsolidated affiliate and is not consolidated in our financial statements.



	(6)	The diluted weighted average number of common shares outstanding is the weighted average number of common shares plus the weighted average conversion of any dilutive common stock equivalents, such as redeemable preferred stock, and the assumed weighted average exercise of dilutive stock options using the treasury stock method. For the year ended December 31, 2001, there were no dilutive common stock equivalents. For the year ended December 31, 2002, only the shares issuable upon the exercise of stock options were dilutive. For the year ended December 31, 2003 and each of the three month periods ended March 31, 2003 and 2004, the shares issuable upon the exercise of stock options and the conversion of redeemable preferred stock were dilutive. The number of shares excluded from the computation of dilutive earnings per share was 14,247,600, 11,323,000 and 0 for the years ended December 31, 2001, 2002 and 2003, respectively, and 0 for the three months ended March 31, 2003 and 2004.


	The following table summarizes the weighted average common shares for basic and diluted earnings per share computations:



	(7)	Membership dues, enrollment fees and in-center revenue for a center are included in comparable center revenue growth beginning on the first day of the thirteenth full calendar month of the center’s operation.



	(8)	Average revenue per membership is total center revenue for the period divided by an average number of memberships for the period, where average number of memberships for the period is derived from dividing the sum of the total memberships outstanding at the end of each month during the period by the total number of months in the period.



	(9)	Average in-center revenue per membership is total in-center revenue for the period divided by the average number of memberships for the period, where the average number of memberships for the period is derived from dividing the sum of the total memberships outstanding at the end of each month during the period by the total number of months in the period.

measure used by other companies and is not a measure of performance presented in accordance with GAAP. We use EBITDA as a measure 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 debt covenants, to service debt or to pay taxes. Additional details related to EBITDA are provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures.”


	The following table provides a reconciliation of net income, the most directly comparable GAAP measure, to EBITDA:



(11)	EBITDA margin is the ratio of EBITDA to total revenue.



(12)	Capital expenditures represent investments in our new centers, costs related to updating and maintaining our existing centers and other infrastructure investments. For purposes of deriving capital expenditures from our cash flows statement, capital expenditures include our purchases of property and equipment and property and equipment purchases financed through notes payable and capital lease obligations.



(13)	The operating data being presented in these items include the center owned by Bloomingdale LLC. See also footnote 5 for a discussion of Bloomingdale LLC. The data presented elsewhere in this section exclude the center owned by Bloomingdale LLC.

The following discussion of our historical results of operations and our liquidity and capital resources should be read in conjunction with the consolidated financial statements and related notes that appear elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in “Risk Factors” beginning on page 9 of this prospectus.

We are one of the nation’s fastest growing operators of multi-purpose sports, fitness and family recreation centers, based on revenue. As of December 31, 2003 and April 30, 2004, we operated 33 centers primarily in suburban locations across eight states under the LIFE TIME FITNESS brand. We commenced operations in 1992 by opening centers in the Minneapolis and St. Paul, Minnesota area. During this period of initial growth, we refined the format and model of our center while building our membership base, infrastructure and management team. As a result, several of the centers that opened during our early years have designs that differ from our current model center.

Out of our 33 centers operating as of April 30, 2004, 24 are of our large format design and 12 of these 24 centers conform to our current model of approximately 105,000 square feet. Generally, the facility size is the only distinguishing characteristic between our current model centers and our other large format centers. Since 2000, we have opened four centers that are smaller than our current model, three of which are large format centers, in areas where we identified an opportunity to fill-in existing markets or compete in smaller metropolitan areas. We opened six centers in 2001, five centers in 2002 and four centers in 2003. We plan to open six large format centers in 2004, five of which will be current model centers, and six current model centers in 2005. By analyzing the number of our existing centers relative to the population of their respective major metropolitan markets, each of which has met our predetermined physical, demographic, psychographic and competitive criteria, we believe that there is a potential for adding at least 225 more of our current model centers throughout the U.S. in existing as well as new markets.

We compare the results of our centers based on how long the centers have been open at the most recent measurement period. We include a center for comparable center revenue purposes beginning on the first day of the thirteenth full calendar month of the center’s operation, prior to which time we refer to the center as a new center. As we grow our presence in existing markets by opening new centers, we expect to attract some memberships away from other centers already in those markets, reducing their revenue and initially lowering their profitability. In addition, as a result of new center openings in existing markets, and because older centers will represent an increasing proportion of our center base over time, our comparable center revenue increases may be lower in future periods than in the past. Of the six new centers we plan to open in each of 2004 and 2005, we expect that four in each year will be in existing markets. We do not expect that operating costs of our planned new centers will be higher than centers opened in the past, and we also do not expect that the planned increase in the number of centers will have a material adverse effect on the overall financial condition or results of operations of existing centers. However, as a result of the simultaneous pre-marketing advertising campaigns for five of the centers opening in 2004 and the costs related to those campaigns, we expect that operating margins may be negatively impacted in the second quarter of 2004. Our categories of new centers and comparable centers do not include the center owned by Bloomingdale LLC because it is accounted for as an investment in an unconsolidated affiliate and is not consolidated in our financial statements.

We measure performance using such key operating statistics as comparable center revenue growth, average revenue per membership, including dues and enrollment fees, average in-center revenue per membership and center operating expenses, with an emphasis on payroll and occupancy costs, as a percentage of sales. We use center EBITDA margins to evaluate overall performance on an individual

We have three primary sources of revenue. First, our largest source of revenue is membership dues and enrollment fees paid by our members. We recognize revenue from monthly membership dues in the month to which they pertain. We recognize revenue from enrollment fees over the expected average life of the membership, which is 36 months. Second, we generate revenue, which we refer to as in-center revenue, at our centers from fees for personal training, group fitness training and other member activities, sales of products at our LifeCafe, sales of products and services offered at our LifeSpa and renting space in certain of our centers. And third, we have expanded the LIFE TIME FITNESS brand into other wellness-related offerings that generate revenue, which we refer to as other revenue, including our media, nutritional product and athletic event businesses. Our primary media offering is our magazine, Experience Life. Other revenue also includes our restaurant located in the building where we operate a center designed as an urban executive facility in downtown Minneapolis, Minnesota.

Sports, fitness and family recreation center operations expenses consist primarily of salary, commissions, payroll taxes, benefits, real estate taxes and other occupancy costs, utilities, repairs and maintenance, supplies, administrative support and communications to operate our centers. Advertising and marketing expenses consist of our marketing department costs and media and advertising costs to support center membership growth and our media, nutritional product and athletic event businesses. General and administrative expenses include costs relating to our centralized support functions, such as accounting, information systems, procurement and member relations, as well as our real estate and development team and other members of senior management. Our other operating expenses include the costs associated with our media, nutritional product and athletic event businesses, our restaurant and other corporate expenses, as well as gains or losses on our dispositions of assets. Our total operating expenses may vary from period to period depending on the number of new centers opened during that period.

Our primary capital expenditures relate to the construction of new centers and updating and maintaining our existing centers. The land acquisition, construction and equipment costs for a current model center aggregate, on average, approximately $23.5 million, which could vary considerably based on variability in land cost and the cost of construction labor, as well as whether or not a tennis area is included. We perform maintenance and make improvements on our centers and equipment every year. We conduct a more thorough remodeling project at each center approximately every five years.

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S., or GAAP, requires us 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. Actual 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 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 weighted 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. We have identified below the following accounting policies that we consider to be critical.

Revenue recognition. We receive a one-time enrollment fee at the time a member joins and monthly membership dues for usage from our members. The enrollment fees are non-refundable after 30 days. Enrollment fees and related direct expenses, primarily commissions, are deferred and recognized on a straight-line basis over an estimated membership period of 36 months, which is based on historical

We provide services at each of our sports, fitness and family recreation centers, including personal training, LifeSpa, LifeCafe and other member services. The revenue associated with these services is recognized at the time the service is performed. Personal training revenue received in advance of training sessions and the related direct expenses, primarily commissions, are deferred and recognized when services are performed. Other revenue, which includes revenue generated from our nutritional products, media, athletic events and restaurant, is recognized when realized and earned. For nutritional products, revenue is recognized, net of sales returns and allowances, at the time the risk of loss passes to the customer. Media advertising revenue is recognized over the duration of the advertising placement. For athletic events, revenue is generated primarily through sponsorship sales and registration fees. Athletic event revenue is recognized upon the completion of the event. Restaurant revenue is recognized at the point of sale to the customer.

Pre-opening operations. We generally operate a preview center up to nine months prior to the planned opening of a sports, fitness and family recreation center during which time memberships are sold as construction of the center is being completed. The revenue and direct membership acquisition costs incurred during the period prior to a center opening are deferred and amortization begins when the center opens; however, the related advertising, office and rent expenses incurred during this period are expensed as incurred.

Impairment of long-lived assets. The carrying value of our long-lived assets is reviewed annually and whenever events or changes in circumstances indicate that such carrying values may not be recoverable. We consider a history of consistent and significant operating losses to be our primary indicator of potential impairment. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows, which is generally at an individual center level or the separate restaurant. The determination of whether an impairment has occurred is based on an estimate of undiscounted future cash flows directly related to that center or the restaurant, compared to the carrying value of the assets. If an impairment has occurred, the amount of impairment recognized is determined by estimating the fair value of the assets and recording a loss if the carrying value is greater than the fair value. For the year ended December 31, 2002, we recorded an asset impairment charge of $7.0 million related to our only executive facility, which is located in downtown Minneapolis, Minnesota, and a restaurant that we operate in the same building. The center is one of only two of our centers that are located in urban areas and the initial cash flow results have not been as high as projected. This executive facility and restaurant differ significantly from our standard model. Additionally, this facility and restaurant are located in a more costly geographic area of downtown Minneapolis. The charge represents the difference between the fair value of the assets as determined by discounted estimated future cash flows and the carrying amount of the assets.

The following table sets forth our statement of operations data as a percentage of total revenues for the periods indicated:

Total Revenue. Total revenue increased $13.9 million, or 23.0%, to $74.2 million for the three months ended March 31, 2004 from $60.3 million for the three months ended March 31, 2003.

Total center revenue grew $13.2 million, or 22.8%, to $70.9 million for the three months ended March 31, 2004 from $57.8 million for the three months ended March 31, 2003. Of the $13.2 million increase in total center revenue,



	•	70.0% was from membership dues, which increased $9.3 million.



	•	30.0% was from in-center revenue, which increased $4.0 million primarily as a result of our members’ increased use of personal training services and our LifeCafes and LifeSpas. As a result of this in-center revenue growth and our focus on broadening our offerings to our members, average in-center revenue per membership increased to $68.91 for the three months ended March 31, 2004 from $58.75 for the three months ended March 31, 2003.

Enrollment fees were essentially flat for the three months ended March 31, 2004 compared to March 31, 2003 primarily because no new centers were opened during either period, and there was a decrease in average enrollment fees.

Other revenue grew $0.7 million, or 27.8%, to $3.2 million from $2.5 million, which was primarily due to increased sales of our nutritional products and increased revenue generated from advertising sales in our media division.

Sports, fitness and family recreation center operations expenses. Sports, fitness and family recreation center operations expenses were $39.1 million, or 55.0% of total center revenue (or 52.7% of total revenue), for the three months ended March 31, 2004 compared to $30.7 million, or 53.2% of total center revenue (or 50.9% of total revenue), for the three months ended March 31, 2003. This $8.3 million increase primarily consisted of an increase of $5.2 million in payroll-related costs and an increase of $2.7 million in utilities and occupancy costs, both to support increased memberships at new and existing centers and increased expenses to support in-center products and services. The increase in occupancy costs also included $1.2 million in expenses related to a sale-leaseback transaction with respect to two of our current model centers that was entered into late in the third quarter of 2003.

Advertising and marketing expenses. Advertising and marketing expenses were $3.7 million, or 5.0% of total revenue, for the three months ended March 31, 2004 compared to $2.7 million, or 4.5% of total revenue, for the three months ended March 31, 2003. As a percentage of total revenue and in aggregate dollars, these expenses increased primarily due to a national advertising campaign for our nutritional products, including a major U.S. magazine advertising placement.

General and administrative expenses. General and administrative expenses were $6.0 million, or 8.0% of total revenue, for the three months ended March 31, 2004 compared to $5.8 million, or 9.6% of total revenue, for the three months ended March 31, 2003. This $0.2 million increase was primarily due to increased costs to support the growth in membership and the center base in 2004. As a percentage of total revenue, general and administrative expenses decreased primarily due to economies of scale achieved in shared service functions, including member relations, accounting and procurement, as our membership and center base expanded.

Other operating expenses. Other operating expenses were $4.6 million for the three months ended March 31, 2004 compared to $3.6 million for the three months ended March 31, 2003. This $1.0 million increase was primarily due to branding initiatives related to our media, nutritional product and athletic event businesses.

Depreciation and amortization. Depreciation and amortization was $6.9 million for the three months ended March 31, 2004 compared to $5.8 million for the three months ended March 31, 2003. This $1.1 million increase was due primarily to depreciation on our new centers opened in the summer and fall of 2003.

Interest expense, net. Interest expense, net of interest income, was $4.6 million for the three months ended March 31, 2004 compared to $4.6 million for the three months ended March 31, 2003.

Provision for income taxes. The provision for income taxes was $4.0 million for the three months ended March 31, 2004 compared to $3.1 million for the three months ended March 31, 2003. This $0.9 million increase was due to an increase in income before income taxes of $2.3 million.

Net income. As a result of the factors described above, net income was $5.7 million, or 7.6% of total revenue, for the three months ended March 31, 2004 compared to $4.2 million, or 7.0% of total revenue, for the three months ended March 31, 2003.

Total revenue. Total revenue increased $61.8 million, or 31.7%, to $256.9 million for the year ended December 31, 2003 from $195.2 million for the year ended December 31, 2002.

Total center revenue grew $57.5 million, or 30.4%, to $246.4 million from $189.0 million, driven by a 13.2% increase in comparable center revenue and the opening of four new centers in 2003 and the full-year contribution of centers opened in 2002. Of the $57.5 million increase in total center revenue,


	•	3.5% was from enrollment fees, which increased $2.0 million as a result of membership growth in existing centers and the opening of the four new centers. Total net memberships grew by approximately 33,800 during the year.

	•	27.8% was from in-center revenue, which increased $16.0 million primarily as a result of our members’ increased use of personal training services and our LifeCafes and LifeSpas. As a result of this in-center revenue growth and our focus on broadening our offerings to our members, average in-center revenue per membership increased from $200 to $240 for the year ended December 31, 2003.

Other revenue grew $4.3 million, or 69.4%, to $10.5 million from $6.2 million, which was primarily due to the increased sales of our nutritional products.

Sports, fitness and family recreation center operations expenses. Sports, fitness and family recreation center operations expenses were $131.8 million, or 53.5% of total center revenue (or 51.3% of total revenue), for the year ended December 31, 2003 compared to $102.3 million, or 54.2% of total center revenue (or 52.4% of total revenue), for the year ended December 31, 2002. This $29.5 million increase primarily consisted of an increase of $15.8 million in payroll-related costs and an increase of $6.0 million in utilities and occupancy costs, both to support increased memberships at new and existing centers and increased sales of in-center products and services. As a percentage of total revenue, these expenses decreased primarily due to the leveraging of payroll, utilities and occupancy costs over a growing membership base and an expanded number of centers.

Advertising and marketing expenses. Advertising and marketing expenses were $11.0 million, or 4.3% of total revenue, for the year ended December 31, 2003 compared to $11.7 million, or 6.0% of total revenue, for the year ended December 31, 2002. As a percentage of total revenue and in aggregate dollars, these expenses decreased primarily due to lower advertising expenditures at existing centers and the opening of fewer centers during 2003.

General and administrative expenses. General and administrative expenses were $18.6 million, or 7.2% of total revenue, for the year ended December 31, 2003 compared to $15.0 million, or 7.7% of total revenue, for the year ended December 31, 2002. This $3.6 million increase was primarily due to increased payroll expenses to support the growth in membership and the center base during 2003. As a percentage of total revenue, general and administrative expenses decreased primarily due to economies of scale achieved in shared service functions, including member relations, accounting and procurement, as our membership and center base expanded.

Other operating expenses. Other operating expenses were $16.3 million for the year ended December 31, 2003 compared to $10.4 million for the year ended December 31, 2002. This $5.9 million increase was primarily due to branding initiatives related to our media, nutritional product and athletic event businesses, as well as a $0.5 million increase in losses recognized on the disposal of assets from updating and refurbishing certain centers.

Depreciation and amortization. Depreciation and amortization was $25.3 million for the year ended December 31, 2003 compared to $20.8 million for the year ended December 31, 2002. This $4.5 million increase was due to the opening of four centers during the year, as well as the full-year effect of depreciation for those centers opened in 2002.

Interest expense, net. Interest expense, net of interest income, was $19.1 million for the year ended December 31, 2003 compared to $15.0 million for the year ended December 31, 2002. This $4.2 million increase was primarily due to the increase in outstanding debt related to the five centers that opened during 2002 and the opening of four additional centers in 2003.

Provision for income taxes. The provision for income taxes was $15.0 million for the year ended December 31, 2003 compared to $6.0 million for the year ended December 31, 2002. This $9.0 million increase was due to an increase in income before income taxes of $22.2 million, partially offset by a

Net income. As a result of the factors described above, net income was $20.6 million, or 8.0% of total revenue, for the year ended December 31, 2003 compared to $7.4 million, or 3.8% of total revenue, for the year ended December 31, 2002.

Total revenue. Total revenue increased $58.5 million, or 42.8%, to $195.2 million for the year ended December 31, 2002 from $136.7 million for the year ended December 31, 2001.

Total center revenue grew $55.5 million, or 41.6%, to $189.0 million from $133.4 million, driven by a 22.3% increase in comparable center revenue and the opening of five new centers in 2002 and the full-year contribution of centers opened in 2001. Of the $55.5 million increase in total center revenue,


	•	67.5% was from membership dues, which increased $37.5 million.

	•	9.0% was from enrollment fees, which increased $5.0 million as a result of membership growth in existing centers and the opening of the five new centers. Total net memberships grew by approximately 41,500 during the year.

	•	23.5% was from in-center revenue, which increased $13.1 million primarily as a result of our members’ increased use of personal training services and our LifeCafes and LifeSpas. As a result of this in-center growth and our focus on broadening our offerings to our members, average in-center revenue per membership increased from $166 to $200 for the year ended December 31, 2002.

Other revenue grew $3.0 million, or 91.6%, to $6.2 million from $3.2 million, which was primarily due to the increased sales of our nutritional products.

Sports, fitness and family recreation center operations expenses. Sports, fitness and family recreation center operations expenses were $102.3 million, or 54.2% of total center revenue (or 52.4% of total revenue), for the year ended December 31, 2002 compared to $74.0 million, or 55.5% of total center revenue (or 54.2% of total revenue), for the year ended December 31, 2001. This $28.3 million increase primarily consisted of an increase of $14.1 million in payroll-related costs and an increase of $5.7 million in utilities and occupancy costs, both to support increased memberships at new and existing centers and increased sales of in-center products and services. As a percentage of total revenue, these expenses decreased primarily due to the leveraging of payroll and utilities costs over a growing membership base and an expanded number of centers.

Advertising and marketing expenses. Advertising and marketing expenses were $11.7 million, or 6.0% of total revenue, for the year ended December 31, 2002 compared to $6.4 million, or 4.6% of total revenue, for the year ended December 31, 2001. This $5.3 million increase was primarily due to increased marketing efforts at existing centers and advertising related to five new center openings. As a percentage of total revenue, these expenses increased primarily due to broader marketing campaigns at existing and new centers.

General and administrative expenses. General and administrative expenses were $15.0 million, or 7.7% of total revenue, for the year ended December 31, 2002 compared to $12.3 million, or 9.0% of total revenue, for the year ended December 31, 2001. This $2.7 million increase was primarily due to increased payroll expenses to support the 23.9% increase in net memberships and the opening of five new centers during the period. As a percentage of total revenue, general and administrative expenses decreased primarily due to economies of scale achieved in the information systems, accounting, real estate and development and procurement functions as our membership and center base expanded.

Other operating expenses. Other operating expenses were $10.4 million for the year ended December 31, 2002 compared to $4.5 million for the year ended December 31, 2001. This $5.9 million

Depreciation and amortization. Depreciation and amortization was $20.8 million for the year ended December 31, 2002 compared to $17.3 million for the year ended December 31, 2001. This $3.5 million increase was primarily due to the opening of five new centers during the year as well as the full-year effect of depreciation for those centers opened in 2001.

Asset Impairment. In 2002, we recorded an asset impairment charge of $7.0 million related to our only executive facility, which is located in downtown Minneapolis, Minnesota, and a restaurant that we operate in the same building. The center is one of only two of our centers that are located in urban areas. This executive facility and restaurant differ significantly from our standard model and the initial cash flow results have not been as high as projected. Additionally, this facility and restaurant are located in a more costly geographic area of downtown Minneapolis. The charge represents the difference between the fair value of the assets as determined by discounted estimated future cash flows and the carrying amount of the assets.

Interest expense, net. Interest expense, net of interest income, was $15.0 million for the year ended December 31, 2002 compared to $12.0 million for the year ended December 31, 2001. This $3.0 million increase was primarily due to the increase in outstanding debt related to additional centers that opened during 2001 and the five new centers opened during 2002.

Provision for income taxes. The provision for income taxes was $6.0 million for the year ended December 31, 2002 compared to $3.0 million for the year ended December 31, 2001. This $3.0 million increase was due to an increase in income before income taxes of $6.4 million and an increase in the effective tax rate to 44.6% for the year ended December 31, 2002 compared to 43.1% for the year ended December 31, 2001.

Net income. As a result of the factors described above, net income was $7.4 million, or 3.8% of total revenue, for the year ended December 31, 2002 compared to $4.0 million, or 2.9% of total revenue, for the year ended December 31, 2001.

In 1999, we formed Bloomingdale LIFE TIME Fitness, L.L.C., referred to as Bloomingdale LLC, with two unrelated organizations for the purpose of constructing, owning and operating a sports, fitness and family recreation center in Bloomingdale, Illinois. Each member made an initial capital contribution of $2.0 million and owns a one-third interest in Bloomingdale LLC. The center commenced operations in February 2001. 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 1, 2039 or the liquidation of Bloomingdale LLC. Bloomingdale LLC is accounted for as an investment in an unconsolidated affiliate and is not consolidated in our financial statements. Pursuant to the terms of a management agreement, we manage the center owned by Bloomingdale LLC.

On December 1, 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. The management agreement expires on December 31, 2039 unless it terminates earlier pursuant to the management agreement. We do not receive a management fee in connection with our duties under the management agreement, but we do receive an overhead cost recovery charge equal to the lesser of the lowest rate charged to any of our other centers or 9.0% of the net revenue of the Bloomingdale LLC center, provided, however, that in no event would Bloomingdale LLC be charged overhead cost recovery at a rate in excess of the ratio of our total overhead expense to our total net center revenue.

Bloomingdale LLC issued indebtedness in June 2000 through a taxable bond financing that is secured by a letter of credit in an amount not to exceed $14.7 million. All of the members separately guaranteed one-third of these obligations to the bank for the letter of credit and pledged their membership interest to the bank as security for the guarantee.

Pursuant to the terms of the Operating Agreement, beginning in March 2002 and continuing throughout the term of such agreement, the members are entitled to receive monthly cash distributions from Bloomingdale LLC. The amount of this monthly distribution is, and will continue to be throughout the term of the agreement, $55,784 per member. In the event that Bloomingdale LLC does not generate sufficient cash flow through its own operations to make the required monthly distributions, we are obligated to make such payments to each of the other two members. To date, Bloomingdale LLC has generated cash flows sufficient to make all such payments. Additional details related to our interest in Bloomingdale LLC are provided in Note 3 to our consolidated financial statements.

We use the term “EBITDA” and “EBITDA margin” throughout this prospectus. EBITDA consists of net income plus interest expense, net, provision for income taxes and depreciation and amortization. This term, as we define it, may not be comparable to a similarly titled measure used by other companies and is not a measure of performance presented in accordance with GAAP.

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:


	•	it 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;

	•	it 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; and

	•	it helps investors to more meaningfully evaluate and compare the results of our operations from period to period by removing from our operating results the impact of our capital structure, primarily interest expense from our outstanding debt, and asset base, primarily depreciation and amortization of our properties.


	•	as a measurement of operating performance because it assists us in comparing our performance on a consistent basis, as it removes from our operating results the impact of our capital structure, which includes interest expense from our outstanding debt, and our asset base, which includes depreciation and amortization of our properties;

	•	in 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

	•	as 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 footnote 11 under “Summary Consolidated Financial Data,” footnote 11 under “Selected Consolidated Financial Data” and under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quarterly Results.”

Our quarterly operating results may fluctuate significantly because of several factors, including the timing of new sports, fitness and family recreation center openings and related expenses, timing of price increases for enrollment fees and membership dues and general economic conditions.

In the past, our pre-opening costs, which primarily consist of compensation and related expenses, as well as marketing, have varied significantly from quarter to quarter, primarily due to the timing of center openings. In addition, our compensation and related expenses as well as our operating costs in the beginning of a center’s operations are greater than what can be expected in the future, both in aggregate dollars and as a percentage of membership revenue. Accordingly, the volume and timing of new center openings in any quarter have had, and are expected to continue to have, an impact on quarterly pre-opening costs, compensation and related expenses and occupancy and real estate costs. Due to these factors, results for a quarter may not indicate results to be expected for any other quarter or for a full fiscal year.



(1)	In the fourth quarter of 2002, we recorded an asset impairment charge of $7.0 million related to our only executive facility, which is located in downtown Minneapolis, Minnesota, and a restaurant that we operate in the same building. The center is one of only two of our centers that are located in urban areas. This executive facility and restaurant differ significantly from our standard model and the initial cash flow results have not been as high as projected. Additionally, this facility and restaurant are located in a more costly geographic area of downtown Minneapolis. The charge represents the difference between the fair value of the assets as determined by discounted estimated future cash flows and the carrying amount of the assets.


(2)	EBITDA consists of net income plus interest expense, net, provision for income taxes and depreciation and amortization. This term, as we define it, may not be comparable to a similarly titled measure used by other companies and is not a measure of performance presented in accordance with GAAP. We use EBITDA as a measure 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 debt covenants, to service debt or to pay taxes. Additional details related to EBITDA are provided in


	“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures.”

Seasonal trends have a limited effect on our overall business. Generally, we have experienced greater membership growth at the beginning of the year and we have not experienced an increased rate of membership attrition during any particular season of the year. During the summer months, we have experienced a slight increase in operating expenses due to our outdoor aquatics operations.

Historically, we have satisfied our liquidity needs through various debt arrangements, sales of equity to private investors and cash from operations. Principal liquidity needs have included the development of new sports, fitness and family recreation centers, debt service requirements and expenditures necessary to maintain and update our existing centers and their related fitness equipment. We believe that we will be able to satisfy our debt service obligations and capital expenditure requirements through 2005 with available cash balances, including the net proceeds from this offering, cash flow from operations, our committed debt facilities and by the extension of certain of our debt facilities. We believe that we can satisfy our longer-term debt service obligations and capital expenditure requirements with cash flow from operations, by the extension of the terms of or refinancing our existing debt facilities, through sale-leaseback transactions and by continuing to raise long-term debt, although there can be no assurance that such actions can be completed. Our business model operates with negative working capital because we carry minimal accounts receivable due to our ability to have monthly membership dues paid by electronic draft and because we fund the construction of our new centers under standard arrangements with our vendors that are paid with proceeds from long-term debt.

As of March 31, 2004, we had total cash and cash equivalents of $2.3 million and $12.5 million of restricted cash that serves as collateral for certain of our debt arrangements. As described below, in January 2004, we repaid all of the debt, totaling $18.0 million, related to two of our centers. We also had $32.0 million available under the terms of our revolving credit facility as of March 31, 2004.

Net cash provided by operating activities was $20.8 million for the three months ended March 31, 2004 compared to $14.8 million for the three months ended March 31, 2003. The increase of $6.0 million

Net cash provided by operating activities was $52.6 million for 2003 compared to $43.6 million for 2002. The increase of $9.0 million was primarily due to a $20.9 million increase in net income adjusted for non-cash charges, which was offset by an increase in cash used for net operating assets and liabilities in 2003 compared to 2002. The cash used for net operating assets and liabilities was primarily due to increases in prepaid insurance expenses, lease deposits and income taxes receivable.

Net cash provided by operating activities was $43.6 million for 2002 compared to $32.6 million for 2001. The increase of $11.0 million was primarily due to a $6.9 million increase in net income adjusted for non-cash charges and in cash provided by net operating assets and liabilities in 2002 compared to 2001. The cash provided by net operating assets and liabilities was a result of an increased number of centers and memberships and included increases in deferred revenues, accrued expenses and accounts payable.

Investing activities consist primarily of purchasing real property, constructing new sports, fitness and family recreation centers and purchasing new fitness equipment. In addition, we make capital expenditures to maintain and update our existing centers. We finance the purchase of our property and equipment by cash payments or by financing through notes payable or capital lease obligations. For current model centers, our investment has averaged approximately $23.5 million, which includes the land, the building and approximately $2.5 million of exercise equipment, furniture and fixtures.

Capital expenditures related to new centers were $86.2 million in 2001, $81.3 million in 2002 and $69.1 million in 2003. Of the $81.3 million spent in 2002, $7.9 million was for land for centers which opened in 2003, $47.5 million was for construction of the five centers which opened in 2002, $14.5 million was for the construction of three of the four centers which opened in 2003 and $11.4 million was for the initial equipment for the five centers opened in 2002. As a percentage of total building construction costs, 59.8% and 29.2% of construction costs were completed in 2002 for the centers which opened in 2003 and 2004, respectively. Of the $69.1 million spent in 2003, $14.0 million was for land for centers to open in 2004, $32.9 million was for construction of the four centers which opened in 2003, $13.3 million was for the construction of five of the six centers we plan to open in 2004 and $8.9 million was for the initial equipment for the four centers opened in 2003. As a percentage of total building construction costs, 69.5% and 15.4% of construction costs were completed in 2003 for the centers that opened in 2003 and we plan to open in 2004, respectively.

At March 31, 2004, we had purchased the real property for the five new current model centers that we plan to open in 2004 and we had entered into agreements to purchase real property for the development of three of the new centers that we plan to open in 2005.

Capital expenditures to maintain and update our existing centers were $8.7 million in 2001, $6.1 million in 2002 and $12.7 million in 2003.

We expect our capital expenditures to be approximately $155.0 million in 2004. Of the $155.0 million expected to be spent in 2004, approximately $25 million is for the purchase of land for centers we plan to open in 2005, approximately $60 million is for construction of the six centers we plan to open in 2004, approximately $40 million is for the construction of the six centers that we plan to open in 2005 and approximately $15 million is for the initial equipment for the six centers we plan to open in 2004. As a percentage of total building construction costs, approximately 75% and 30% of construction costs are expected to be completed in 2004 for the centers that we plan to open in 2004 and 2005, respectively. In addition to the new center expansion, we expect to spend approximately $15 million for the maintenance of existing centers and corporate infrastructure.

In May 2001, we entered into a sale-leaseback transaction with respect to one of our large format centers. Pursuant to the terms of this transaction, we sold the center for $7.2 million and simultaneously entered into a capital lease of the center for a period of 20 years.

In September 2003, we entered into a sale-leaseback transaction with respect to two of our current model centers. Pursuant to the terms of this transaction, we sold the centers for $42.9 million and simultaneously entered into an operating lease of the centers for a period of 20 years.

We have several secured credit facilities. We have a $55.0 million revolving credit facility led by Antares Capital Corporation that expires on June 30, 2005. Availability under this facility is determined based upon a multiple of a variation of EBITDA as defined in the credit agreement. Additionally, we are restricted in our borrowings and in general under the revolving credit facility by certain financial covenants, including capital expenditure levels and maintaining leverage ratios, fixed charge and interest coverage ratios and a loan to value ratio. As of March 31, 2004, our capital expenditures are limited to 2.10 times the usable square footage of all open centers we own plus financed capital expenditures. As of March 31, 2004, we are required to maintain a senior leverage ratio not in excess of 2.75 to 1.00, a total leverage ratio not in excess of 4.5 to 1.0, a fixed charge coverage ratio not in excess of 1.15 to 1.00, an interest coverage ratio not in excess of 3.0 to 1.0, an adjusted total leverage ratio not in excess of 4.0 to 1.0 and a loan to value ratio not in excess of 0.5 to 1.0. The revolving credit facility also contains covenants that, among other things, restrict our ability to incur certain additional debt, pay dividends, create certain liens and engage in certain transactions. We are in compliance in all material respects with our covenants and we do not expect the limits on our borrowing ability to prevent us from obtaining the funds we need under the revolving credit facility. As security for our obligations under the revolving credit facility, we have granted a security interest in all of our personal property. Interest accrues at the rate of either the prime rate plus 2.5% or LIBOR plus 4.0%, as we elect from time to time. As of March 31, 2004, we had $18.0 million outstanding, $5.0 million in committed letters of credit and $32.0 million available for additional borrowings under this facility.

We also have a $75.0 million construction credit facility led by U.S. Bank, National Association. Pursuant to the terms of the construction credit facility, the lending group has committed to make up to seven individual loans, the purpose of which is to fund the construction costs related to completing the construction of certain centers. The current commitment to lend expires on January 1, 2006. Borrowings under this facility are limited to the lesser of 55.0% of the total land and construction cost, or 75.0% of the appraised value, of the specific centers currently under construction and are due and payable no later than three years from the closing date of each individual loan. As security for the obligations owing under the construction credit facility, we have granted mortgages on each of the specific centers that are financed by means of the construction credit facility. Funds are available only after we have first contributed our

We have financed 13 of our centers with Teachers Insurance and Annuity Association of America pursuant to the terms of individual notes. The obligations under these notes are due in full in June 2011, and are secured by mortgages on each of the centers specifically financed, and we maintain a letter of credit in the amount of $5.0 million in favor of the lender. The obligations related to 10 of the notes are being amortized over a 20-year period, while the obligations related to the other three notes are being amortized over a 15-year period. The interest rate payable under these notes has been fixed at 8.25%. The loan documents provide that we will be in default if Mr. Akradi ceases to be Chairman of the Board of Directors and Chief Executive Officer for any reason other than due to his death or incapacity or as a result of his removal pursuant to our articles of incorporation or bylaws. As of March 31, 2004, $135.2 million remained outstanding on the notes.

We have financed our centers in Champlin and Savage, Minnesota separately. These obligations bear interest at a fixed rate of 6.0% and are being amortized over a 15-year period. The obligation related to our Champlin center is due in full in January 2007 and the obligation for our Savage center is due in full in August 2007. As security for the obligations, we have granted mortgages on these two centers. At March 31, 2004, $5.5 million was outstanding with respect to these obligations.

We have financed our center in Plymouth, Minnesota. This obligation bears interest at a variable rate of 0.5% plus the prime rate and is being amortized over a 15-year period. We are restricted under this obligation by a requirement that we maintain a total leverage ratio not in excess of 4.5 to 1.0 and a fixed charge coverage ratio not in excess of 1.15 to 1.0. The loan documents also contain covenants that, among other things, restrict our ability to pay dividends and engage in certain transactions. We are in compliance with our covenants in all material respects. As security for the obligation, we have granted a mortgage on this center. The obligation for our Plymouth center is due in full in February 2007. As of March 31, 2004, a total of $3.5 million was outstanding with respect to this obligation.

In May 2001, we financed one of our Minnesota centers pursuant to the terms of a sale-leaseback transaction that qualified as a capital lease. Pursuant to the terms of the lease, we agreed to lease the center for a period of 20 years. At March 31, 2004, the present value of the future minimum lease payments due under the lease amounted to $7.0 million.

We have financed our purchase of most of our equipment through capital lease agreements with an agent and lender, on behalf of itself and other lenders. The terms of such leases are typically 60 months and our interest rates range from 7.1% to 12.8%. As security for the obligations owing under the capital lease agreements, we have granted a security interest in the leased equipment to the lender or its assigns. At March 31, 2004, $35.3 million was outstanding under these leases.

In December 2003, we entered into a $35.0 million mortgage facility led by General Electric Capital Corporation. The purpose of this credit facility is to refinance outstanding obligations under the construction credit facility; however, this facility could also be used to finance the construction of new centers. Borrowings under this facility are limited to 65.0% of the total land and construction cost of certain centers. Funds are available for advance within 12 months of the closing date of the credit facility and bear interest at a per annum rate equal to 4.5% plus the most current rate quoted by the Federal Reserve as the 5-year rate for U.S. Government Treasury Securities. Advances made under this credit facility will be amortized over a 15-year period and will be due in full on December 31, 2011. We are restricted by a financial covenant that requires that each center financed under this facility maintain a fixed charge ratio of not less than 1.0 to 1.0 during the first 18 months of the advancement of borrowings for such center and a fixed charge ratio of not less than 1.2 to 1.0 thereafter. No amounts are outstanding under this facility.

The following is a summary of our contractual obligations as of December 31, 2003:


(1)	Purchase obligations consist primarily of our contracts with construction subcontractors for the completion of five of our centers in 2004 and contracts for the purchase of land.

In May 2003, the Financial Accounting Standards Board, or the FASB, issued Statement of Financial Accounting Standard, or SFAS, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, or SFAS No. 150. This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments of both liabilities and equity. SFAS No. 150 requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. For public entities, SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and at the beginning of the first interim period beginning after June 15, 2003 for all existing financial instruments. As of March 31, 2004, we did not have financial instruments within the scope of SFAS No. 150.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, or FIN 46. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. In December 2003, the FASB revised FIN 46 to exclude from its scope certain entities which meet the definition of a business under Emerging Issues Task Force No. 98-3, Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business. FIN 46, as revised, shall be applied no later than the first reporting period ending after March 15, 2004. The adoption of FIN 46, as revised, will not have a material impact on our financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. FASB No. 4 required all gains or losses from extinguishment of debt to be classified as extraordinary items net of income taxes. SFAS No. 145 requires that gains and losses from extinguishment of debt be evaluated under the provisions of APB Opinion No. 30, and be classified as ordinary items unless they are unusual or infrequent or meet the specific criteria for treatment as an extraordinary item. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. As a result of SFAS No. 145, we reclassified the loss from early extinguishment of debt of $2.9 million from an extraordinary item to a component of continuing operations in our 2001 statement of operations.

We believe that inflation has not had a material impact on our results of operations for any of the years in the three-year period ended December 31, 2003 or the three months ended March 31, 2004. We

We do not believe that we have any significant risk related to interest rate fluctuations since we have primarily fixed-rate debt. We invest our excess cash in highly liquid short-term investments. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income we earn on our cash and cash equivalents and, therefore, impact our cash flows and results of operations. As of December 31, 2003 and March 31, 2004, our floating rate indebtedness was approximately $44.4 million and $34.3 million, respectively. If long-term floating interest rates were to have increased by 100 basis points during 2003, our interest costs would have increased by approximately $0.4 million. If short-term interest rates were to have increased by 100 basis points during 2003, our interest income from cash equivalents would have increased by approximately $0.2 million. These amounts are determined by considering the impact of the hypothetical interest rates on our floating rate indebtedness and cash equivalents balances at December 31, 2003.

During 2002, we replaced Arthur Andersen LLP as our independent auditors and, upon authorization by our board of directors, engaged Deloitte & Touche LLP as our independent accountants. Arthur Andersen did not have any disagreement with us on any matter of accounting principles or practices, financial statement disclosure of auditing scope or procedures, which disagreement, if not resolved to the satisfaction of Arthur Andersen, would have caused it to make reference to the subject matter of the disagreement in connection with its report on our financial statements. We did not consult with Deloitte & Touche on any financial or accounting matters in the period before its appointment.

We are one of the nation’s fastest growing operators of large sports, athletic, fitness and family recreation centers under the LIFE TIME FITNESS® brand, based on revenue. We design and develop our own centers, and we focus on providing our members and customers with products and services at a compelling value in the areas of exercise, education and nutrition.

As of April 30, 2004, we operated 33 centers primarily in suburban locations across eight states. In addition to traditional health club offerings, most of our centers include an expansive selection of premium amenities and services, such as indoor swimming pools with water slides, basketball and racquet courts, interactive and entertaining child centers, full-service spas and dining services and, in many cases, climbing walls and outdoor swimming pools. We believe our centers provide a unique experience for our members, resulting in a high number of memberships per center and attrition rates that were 6.3% better than the industry average in 2001 and 5.7% better than the industry average in 2002.

As a result of the growth of our business and our brand recognition, we are expanding the LIFE TIME FITNESS brand into complementary wellness-related businesses. For example, we utilize our award winning magazine, Experience Life, to educate our members and subscribers and to continually drive the educational attributes of our brand. We further grow the LIFE TIME FITNESS brand by offering a line of nutritional products and by organizing athletic events.

Throughout our history, we have consistently increased our revenue by opening new sports, fitness and family recreation centers, increasing the number of memberships per existing center and focusing on the sale of additional programs and services in our centers. For each of the fiscal years from 2000 to 2003, we experienced annual revenue growth of 74%, 45%, 43% and 32%, respectively, with revenue of $256.9 million in 2003; annual EBITDA growth of 92%, 54%, 35% and 63%, respectively, with EBITDA of $80.0 million in 2003; and annual net income growth of 55%, 7%, 86% and 178%, respectively, with net income of $20.6 million in 2003.

We were incorporated on October 15, 1990 as a Minnesota corporation under the name FCA, Ltd. and we began doing business under the name LIFE TIME FITNESS in July 1992. We changed our name to Life Time Fitness, Inc. on December 8, 1998 to match our brand name.

Our large format centers offer high quality sports, athletic, fitness and family recreation programs and services in a resort-like setting and are generally situated on a parcel of land of at least 10 acres. Unlike traditional health clubs, these centers typically offer large indoor and outdoor family recreation pools, climbing walls and basketball and racquet courts, in addition to approximately 400 pieces of cardiovascular and resistance training equipment and an extensive offering of health and fitness classes. Our staff of customer-focused employees, each trained through our specifically designed program of classes, is committed to providing an environment that is comfortable, friendly, inviting and clean. Our large format centers include luxurious reception areas and locker rooms, child-care facilities with spacious play areas and computers, spas offering massage and beauty services and cafes with healthy product offerings throughout the day.

The amenities and services we offer exceed most other health and fitness center alternatives available to our members. We offer different types of membership plans for individuals, couples and families. Our monthly membership dues typically range from $40 to $60 per month for an individual membership and from $80 to $130 per month for a couple or family membership. Each of our memberships includes all of the primary member’s children under the age of 12 at no additional cost. We provide our members with a variety of complimentary services, including child-care, lockers, towels, group fitness classes and our magazine, Experience Life. Our membership plans are month-to-month, cancelable at any time on one month’s notice and include initial 30-day money back guarantees. Our value proposition and customer-focused approach create loyalty among our members that reduces our attrition rate.

Our centers are generally situated in high-traffic suburban areas and are easily accessible and centrally located among the residential, business and shopping districts of the surrounding community. We design and operate our centers to accommodate a large and active membership base by providing access to the centers 24 hours a day, seven days a week. In addition, we provide sufficient lockers and equipment to allow our members to exercise with little or no waiting time, even at peak hours and when center membership levels are at targeted capacity. Our child-care services are available for up to two hours per day at no additional cost and most of our centers offer the convenience of spa and dining services under the same roof. Membership generally affords our members the right to utilize any of our centers.

Our economic model is based on attracting a large membership base within a short time period after a new center is opened, as well as retaining those members and maintaining tight expense control. For each of the fiscal years from 2000 to 2003, this economic model has resulted in annual revenue growth of 74%, 45%, 43% and 32%, respectively, with revenue of $256.9 million in 2003; annual EBITDA growth of 92%, 54%, 35% and 63%, respectively, with EBITDA of $80.0 million in 2003; and annual net income growth of 55%, 7%, 86% and 178%, respectively, with net income of $20.6 million in 2003. Based on historical performance, we expect the typical membership base at our large format centers to increase from approximately 35% of targeted membership capacity at the end of the first month of operations to over 90% of our targeted membership capacity by the end of the third year of operations. Average targeted membership capacity for all of our large format centers is approximately 10,500, and 11,500 for our current model centers. Average revenue at our 15 large format centers that we opened in 2001 or earlier exceeded $10.7 million for the year ended December 31, 2003. At these centers during the same period, EBITDA averaged 40.0% of revenue, and net income averaged approximately 15% of revenue. Our investment for a large format center has averaged approximately $17.8 million, which includes the land, the building and approximately $2.5 million of exercise equipment, furniture and fixtures, and our typical investment for a current model center has averaged approximately $23.5 million.

We believe we have developed a disciplined and sophisticated process to evaluate metropolitan markets in which to build new centers, as well as specific sites for future centers within those markets. This multi-step process is based upon demographic, psychographic and competitive criteria generated from profiles of already successful centers. We continue to modify these criteria based upon the performance of our centers. A formal business plan is developed for each proposed new center and the plan must pass multiple stages of management approval. By utilizing a wholly owned construction subsidiary, FCA Construction Holdings, LLC, that is dedicated solely to building our centers, we maintain maximum flexibility over the design process of our centers and control over the cost and timing of the construction

Our senior management team has extensive and diverse management experience. This team is led by our Chief Executive Officer and founder, Bahram Akradi. Mr. Akradi has worked in the health and fitness industry for over 20 years, has held various leadership positions at other health club organizations and is a founder of the health and fitness Industry Leadership Council. Steve Rowland, President of our company’s wholly owned construction subsidiary, has been with our company for five years and has over 20 years of experience in the construction industry. Mark Zaebst, Senior Vice President of Real Estate and Development, has over 20 years of experience in the health and fitness industry and over eight years of experience in commercial real estate development. Eric Buss, Senior Vice President of Corporate Development, General Counsel and Secretary, has been with our company for over four years. Key additions to our senior management team from outside the health and fitness industry since 2002 the past two years include Michael Gerend, Executive Vice President and Chief Operating Officer, and Michael Robinson, Executive Vice President and Chief Financial Officer. Messrs. Gerend and Robinson have had extensive operations and financial management experience, respectively, prior to joining us and further strengthen our talented and experienced senior management team that has been instrumental in growing and building our company. Despite the experience described above, our senior management team has never had direct responsibility for managing a publicly traded company.

New Centers. Since the beginning of 1999 through 2003, we have expanded our base of centers from nine to 33. We opened four centers in 2003, and we plan to open six large format centers in 2004, five of which will be current model centers, and six current model centers in 2005. The new centers we plan to open will be built in both new and existing markets. We have already purchased the land for, and commenced construction of, the centers that we plan to open in 2004, and have entered into a lease for the sixth center. We have selected the markets and identified potential sites for the centers we plan to open in 2005. We believe that, based upon our data, there is the potential for adding at least 225 additional current model centers throughout the U.S. in existing as well as new markets. We have built a corporate infrastructure that we believe will support our growth for the next several years.

Existing Centers. Of our 33 centers, the nine that opened in 2002 and 2003 averaged 65% of targeted membership capacity as of December 31, 2003. We expect the continuing ramp in memberships at these centers to contribute significantly to our growth in 2004 as these centers move toward our goal of 90% of targeted membership capacity by the end of their third year of operations. We also plan to continue to drive membership growth at centers that are not yet at targeted capacity. In order to achieve this goal, we employ marketing programs to effectively communicate our value proposition to prospective members and we are implementing a customer relationship management system that will allow us to better manage and increase prospective member conversion.

From 1999 to 2003, we increased revenue per membership from $659 to $1,089 primarily due to a shift toward more couple and family memberships and increased sales of in-center products and services. We believe the revenue from sales of our in-center products and services will grow at a faster rate than enrollment fees and membership dues. Our centers offer a variety of these in-center products and services, including private and group sessions with highly skilled and professional personal trainers, relaxing LifeSpa salon and spa services, engaging member activities programs and a nutritional LifeCafe restaurant. These high quality and convenient in-center products and services produce incremental revenue and profit. From

We plan to leverage the LIFE TIME FITNESS brand that we have established through our sports, fitness and family recreation centers into other businesses in the broader health and wellness industry. We have developed and market a line of nutritional products that we distribute in our centers, on our web site and through selected national retail chains. Our award-winning magazine, Experience Life, is distributed to each of our members and is also available for purchase by subscription or at selected major bookstores nationwide. Experience Life has a current circulation of approximately 500,000 copies and is expected to be published 10 times in 2004. The annual LIFE TIME FITNESS Triathlon, a nationally televised and award winning event, attracts an international field of professional and amateur participants to a uniquely-designed race for the sport’s largest cash purse.

We participate in the large and growing U.S. health and wellness industry, which we define to include health and fitness centers, fitness equipment, athletics, physical therapy, wellness education, nutritional products, athletic apparel, spa services and other wellness-related activities. According to IHRSA, the estimated market size of the U.S. health club industry, which is a relatively small part of the health and wellness industry, was approximately $14.1 billion in revenues with approximately 23,500 clubs and 39.4 million memberships at the end of 2003. According to IHRSA, the percentage of the total U.S. population with health club memberships increased from 7.4%, or 20.7 million memberships, in 1990 to 13.5%, or 33.8 million memberships, in 2001. IHRSA also reports that total U.S. health club memberships increased from 24.1 million memberships in 1995 to 39.4 million memberships in 2003, resulting in a compound annual growth rate of 6.3%. Over this same period, total U.S. health club industry revenues increased from $7.8 billion to $14.1 billion. We believe such growth is a result of the following trends in the health club industry:

Changing demographics in the U.S. According to IHRSA, there are now 75 million “Baby Boomers” between the ages of 40 and 58. IHRSA reported that, between the years of 1997 and 2001, the percentage of health club memberships rose 19% overall, or 5.5 million memberships, with the percentage rising 59%, or 4.2 million memberships, for persons age 45 and older. According to IHRSA, members of the age group 45 years and older represented 24.7% of health club memberships in 1997 and grew to 33.1% of memberships in 2001, which is among the fastest growth rate of all groups. We expect this trend to continue as the large number of “Baby Boomers” continue to age and enter the 45 and older age group. The interest shown in the benefits of fitness by these demographics has fueled the health club industry’s growth during the past decade and represents a strong growth opportunity for the health club industry in the future.

Increased awareness of health benefits of being physically fit. There has been a significant increase in the awareness of the health benefits of being physically fit and of the risks of sedentary behavior. At the end of 2000, 65% of Americans over the age of 19 were considered overweight and 31% were considered obese according to the Centers for Disease Control and Prevention. Moreover, between 1980 and 2000, the percentage of overweight children between the ages of six and 11 more than doubled from 7% in 1980 to 15% in 2000 and the percentage of overweight adolescents between the ages of 12 and 19 tripled from 5% in 1980 to 15% in 2000, according to the Centers for Disease Control and Prevention. In both 1996 and 2001, the U.S. Surgeon General’s office released reports which documented this rise of obesity in the U.S. and urged people to become more active. Such statistics have increased the awareness of benefits from exercise, and have also encouraged more frequent participation in physical activities. A study done for

Rising healthcare costs. To combat increasing healthcare costs, health maintenance organizations, preferred provider organizations and corporations are exploring ways to decrease their healthcare-related expenses. Empirical research cited by the Wellness Councils of America and IHRSA indicates that fitness programs can reduce a company’s overall healthcare costs and lead to lower employee turnover, reduced absenteeism and improved productivity. As a result, many organizations have implemented programs which promote health and wellness, including subsidizing health club memberships for their employees or insureds.

Use of health and fitness clubs as gathering places and for family entertainment. We believe that people are seeking reasonably-priced entertainment and social opportunities that can also positively impact their health and wellness. Members can engage in a variety of interactive programs, while also relieving stress and improving their fitness level. Participating in activities at a local health and fitness club gives members a chance to socialize and connect with others in their community.

We strive to offer our members a healthy way of life in the areas of exercise, nutrition and education by providing high quality products and services both in and outside of our centers. We promote continuous education as an easy and inspiring part of every member’s experience by offering free seminars on health, nutrition, stress reduction, time management and life extension to educate members on the benefits of a regular fitness program and a well-rounded lifestyle. Moreover, our sports, fitness and family recreation centers offer interactive learning opportunities, such as personal training, group fitness sessions and member activities classes and programs. We believe that by helping our members experience the rewards of developing their bodies and challenging and investing in themselves, they will associate our company with healthy living.

Our sports, fitness and family recreation centers have evolved over the past several years. Out of our 33 centers, 24 are of our large format design and 12 of these 24 centers conform to our current model center. Our current model center is approximately 105,000 square feet and serves as an all-in-one sports and athletic club, family recreation center, professional fitness facility, spa and cafe. Our distinctive format is designed to provide an efficient and inviting use of space that accommodates our targeted capacity of 11,500 memberships and provides a premium assortment of amenities and services. Our 12 centers that have the large format design, but do not conform to our current model center, average approximately 85,000 square feet and have an average targeted capacity of 9,500 memberships. Generally, targeted capacity for a center is 1,100 memberships for every 10,000 square feet at a center. This targeted capacity is designed to maximize the customer experience based upon our historical understanding of membership usage.

Our centers are centrally located in areas that offer convenient access from the residential, business and shopping districts of the surrounding community, and also provide free and ample parking. We plan to open six large format centers in 2004, five of which will be current model centers, and six current model centers in 2005.

Our sports, fitness and family recreation centers combine modern architecture and décor with state-of-the-art amenities to create an innovative and functional health and recreation destination for the entire family. All of our current model centers and most of our large format centers are scalable, freestanding buildings designed with open architecture and naturally illuminated atriums that create a

The table below displays the wide assortment of amenities and services typically found at our centers:

Fitness Equipment and Facilities. To help a member lose weight, train for athletic events or develop and maintain a healthy way of living, our centers have up to 400 pieces of cardiovascular, free weight and resistance training equipment. At each of our centers, exercise equipment is arranged in spacious workout areas to allow for easy movement from machine to machine, thus providing a convenient and efficient workout. Equipment in these areas is arranged in long parallel rows that are clearly labeled by body part, allowing members to easily customize their exercise programs and reduce downtime during their workouts. Due to the large amount of equipment in each center, members rarely have to wait to use a machine. We have in-house technicians that service and maintain our equipment, which generally enables us to repair or replace any piece of equipment within 24 hours. In addition, we have a comprehensive system of large-

Our current model centers have full-sized indoor and outdoor recreation pools with zero depth entrances and water slides, lap pools, saunas, steam baths and whirlpools. These centers also have two regulation-size basketball courts that can be used for various sports activities, as well as other dedicated facilities for group fitness, rock climbing, racquetball and squash. In addition, three of our current model centers have tennis courts.

Personalized Services. We offer professional personal training programs that involve regular one-on-one sessions designed to help members achieve their personal fitness goals. Our personal trainers are required to be certified by the American Council on Exercise, one of two accredited certifying organizations in the fitness industry. On average, we employ over 25 personal trainers at a current model center. Our personal trainers also provide the education and nutritional information essential for a safe and effective exercise plan. In addition to one-on-one sessions, we offer other personalized small group activities. Many of our members realize the value of working with the same person over a long period of time to achieve their personal fitness goals and develop a strong relationship with their trainers.

Fitness Programs and Classes. Our centers offer fitness programs, including group fitness classes and health and wellness training seminars on subjects ranging from stress management to personal nutrition. Each current model center has two group fitness studios and makes use of the indoor and outdoor pool areas for classes. On average, we offer over 90 group fitness classes per week at each current model center, including spinning, pilates, step workout, circuit training and yoga classes. The volume and variety of activities at each center allow each member of the family to enjoy the center, whether participating in personalized activities or with other family members in group activities.

Other Center Services. Our large format centers feature a LifeCafe, which offers fresh and healthy sandwiches, snacks and shakes to our members. Our LifeCafe offers members the choice of dining indoors, ordering their meals and snacks to go or, in each of our current model centers and certain of our other large format centers, dining outdoors at the poolside bistro. Our LifeCafes also carry our own line of nutritional products.

Our current model centers and almost all of our other large format centers also feature a LifeSpa, which is a full-service spa and salon located inside the centers. Our LifeSpas offer hair, body, skin care and massage therapy services, customized to each person’s individual needs. The LifeSpas are located in separate, self-contained areas that provide a relaxing environment.

Almost all of our centers offer free on-site child-care services for children ages three months to 11 years for up to two hours while members are using our centers. The children’s area includes games, educational toys, computers, maze structures and junior basketball courts. We hire experienced personnel that are dedicated to working in the child-care centers to ensure that children have an enjoyable and safe experience.

All of our large format centers offer a variety of programs for children, including swimming lessons, activity programs, karate classes, sports programs and craft programs, all of which are open to both members and non-members. We also offer several children’s camps during the summers and holidays. For adults, we offer various sports leagues and karate classes.

Our month-to-month membership plans include 24-hour access, free child-care, free locker and towel service, a full range of educational programs and other premium amenities. Moreover, we offer an initial 30-day money back guarantee on upfront membership enrollment fees and the first month’s membership dues, which is a longer period than required by state law and longer than offered by most other health clubs. We believe our customer service, broad appeal to multiple family members and attractive value proposition reduce our attrition rate. We continually monitor member satisfaction through roundtable

As part of our value proposition, each new member is entitled to receive a free “360 Fitness Assessment,” which consists of fitness testing, exercise history, percent body fat measurement and goal setting. Fitness clinics on different types of workouts and other courses in nutrition and stress management are also offered free of charge. New members are encouraged to take advantage of free equipment orientations and a free introductory consultation with a personal trainer.

We have a flexible membership structure, which includes different types of membership plans, the most common of which are the Fitness and Sports plans. Our Fitness membership plan is our standard plan and offers a member access to the majority of our centers. Our Sports membership plan offers a member access to all but one of our centers, while also offering discounts on our other center services and third-party facilities, such as participating golf courses, ski resorts and tennis clubs throughout the nation. In addition, the Sports membership plan entitles a member to free use of the center’s racquetball and squash courts and climbing walls, as well as a free running club membership and discounts on certain personal training programs. We also offer an Athletic membership option at our executive center located in downtown Minneapolis, which is not accessible to our other members. The Athletic membership plan offers all of the benefits of our Fitness and Sports memberships, access to all of our centers and additional executive benefits. In certain clubs we also offer an Express membership plan, which involves a lower membership fee but restricts access to one center.

We have always offered a convenient month-to-month membership, with no long-term contracts, a low, one-time enrollment fee and an initial 30-day money back guarantee. Depending upon the market area and the membership plan, new members typically pay a one-time enrollment fee of $125 to $300 for individual members, plus $50 to $100 for each additional family member over the age of 12. Members typically pay monthly membership dues ranging from $40 to $60 for individuals and $80 to $130 for couples or families. Monthly membership dues for Express memberships are at the lower end of our price ranges and monthly membership dues for Athletic memberships are at the higher end. Our memberships include all of the primary member’s children under the age of 12 at no additional cost. As a result, our current model centers that have a targeted 11,500 membership capacity average approximately 2.4 people per membership.

Our sports, fitness and family recreation centers are generally open 24 hours a day, seven days a week and our current model centers average over 68,000 visits per month. We typically experience the highest level of member activity at a center during the 5:00 a.m. to 10:00 a.m. and 4:00 p.m. to 8:00 p.m. time periods on weekdays and during the 8:00 a.m. to 5:00 p.m. time period on weekends. Our centers are staffed accordingly to provide each member with a positive experience during peak and non-peak hours.

Site Selection. Our management devotes significant time and resources to analyzing each prospective site on the basis of predetermined physical, demographic, psychographic and competitive criteria in order to achieve maximum return on our investment. Our ideal site for a current model center is a tract of land with at least 10 acres and a relatively flat topography affording good access and proper zoning. We target market areas that have at least 150,000 people within a five-mile radius that meet certain demographic criteria regarding income, education, age and household size. We focus mainly on markets that will allow us to operate multiple centers that create certain efficiencies in marketing and branding activities; however, we select each site based on whether that site can support an individual center on a stand-alone basis.

After we identify a potential site, we develop a business plan for the center on the site that requires approvals from all areas of operations and the finance committee of our board of directors. We believe that our structured process provides discipline and reduces the likelihood that we would develop a site that the market cannot support. As a result of our strict adherence to this disciplined process, we have never closed

Construction. We have an experienced in-house construction team that is solely dedicated to overseeing the construction of each center through opening. Our architects have developed a set of design and construction plans and specifications that can be easily adapted to each new site to build our current model centers. They also assist in obtaining bids and permits in connection with constructing each new center. We have dedicated internal personnel who work on expediting the permit process and scheduling the project. Our contract administrators obtain referrals for local subcontractors and monitor project costs, and they also coordinate compliance with safety requirements and prepare site documentation. Our project management group oversees the construction of each new center and works with our architects to review bids and monitor quality. Our construction procurement group bids each component of our projects to ensure cost-effective pricing and, by using the same materials at each center to maintain a consistent look and feel, we are generally able to purchase materials in sufficient quantities to receive favorable pricing. Our construction team also has a dedicated safety consultant and controller. Each center has an on-site construction manager responsible for coordinating the entire project. By utilizing our own dedicated design and construction group, we are able to maximize our flexibility in the design process and retain control over the cost and timing of the construction process.

Overview of Marketing. Our centralized marketing department is responsible for generating membership leads for our sales force, supporting our corporate business and promoting our brand. Our marketing department consists of six fully integrated divisions, which are advertising, creative, entertainment, marketing research, public relations and web site. By centralizing our marketing effort, we bring our marketing experience and strategy to each new market we enter in a coordinated manner. We also market to corporations and, in some situations, we offer discounted enrollment fees for persons associated with these corporations.

Overview of Sales. We have a trained, commissioned sales staff in each center that is responsible for converting the leads generated by our centralized marketing department into new memberships. During the pre-opening and grand opening phases described below, we have up to 12 sales representatives on staff at a center. As the center matures, we reduce the number of sales representatives on staff to between six and eight professionals. Our sales staff also uses our customer relationship management system to introduce and sell additional products to members and manage existing member relationships.

Pre-Opening Phase. Our pre-opening marketing program is one of the reasons why our large format centers have attracted sufficient membership to generate, on average, EBITDA in excess of 21% of revenue and net income of less than 1% of revenue during their first year of operation. We generally begin selling memberships up to nine months prior to a center’s scheduled opening. New members are attracted during this period primarily through targeted direct mail, print advertising, corporate sales and referral promotions. To further attract new members during this period, we offer discounted enrollment fees and distribute free copies of our Experience Life magazine to households in the immediate vicinity of the new center. Membership enrollment activity is tracked to gauge the effectiveness of each marketing medium, which can be adjusted as necessary throughout the pre-opening process.

Grand Opening Phase. We deploy a marketing program during the first month of a center’s operation that builds on our pre-opening efforts. The reach and frequency of the advertising campaign culminate when all households within a five-mile radius receive “Opening Soon” and “Now Open” poster mailings. Simultaneously, prospective members receive special invitations to grand opening activities and educational seminars designed to assist them in their orientation to the center. Our corporate clients receive special enrollment opportunities, as well as invitations to open house activities.

Membership Growth Phase. After the grand opening phase, marketing activities and costs decrease significantly as drive-by visibility and word-of-mouth marketing become more important. The goal of each center is to achieve consistent membership growth until targeted capacity is reached. Once the center has reached its targeted capacity, marketing efforts are directed at keeping membership levels stable and at selling other in-center services to existing members. Marketing plans for each center are formulated on an annual basis and reviewed monthly by marketing and center-level sales personnel. At monthly intervals, a comprehensive situation analysis is performed to ensure sales and retention objectives are meeting the goals of the center’s business plan.

We are building a national brand by delivering products and services in the areas of exercise, education and nutrition at an attractive price. We are further strengthening the LIFE TIME FITNESS brand by growing our Experience Life magazine, our line of nutritional products and our internationally-recognized and award winning triathlon.

Education. We work to educate people by offering educational information and tips on our web site, www.lifetimefitness.com, and by distributing Experience Life to each of our members. Our web site offers various educational features, including healthy cooking recipes, health news and exercise tips. The web site also has interactive functions that allow a user to ask exercise or fitness questions and create an ongoing personalized nutrition program that meets the user’s weight-loss and nutrition objectives.

Our Experience Life magazine includes an average of 96 full-color pages of health tips and insights, articles featuring quality-of-life topics and advertisements and has a current circulation of approximately 500,000 copies to all of our members, non-member subscribers, households in new market areas and selected major bookstores nationwide. Experience Life averages 36 pages of advertising per issue and is expected to be published 10 times in 2004. The Minnesota Magazine Publishing Association named Experience Life a 2002 Gold medal winner for Design Excellence.

Nutritional Products. We offer a line of nutritional products, including multi-vitamins, energy bars, powder drink mixes, ready-to-drink beverages and supplements. Our products use high quality ingredients and are available in our LifeCafes, through our web site and through selected retail channels. Our current nutritional product line focuses on four areas, which are daily health, weight management, energy and athletic performance. Our weight management products, which have never included ephedra, work safely and effectively to manage weight. Our formulations are created and tested by a team of external physicians and experts and each formulation undergoes extensive testing. We use experienced and professional third-parties to manufacture our nutritional products and commission independent testing to ensure that the product labels accurately list the ingredients delivered in the products.

Athletic Events. Our annual LIFE TIME FITNESS Triathlon attracted participants from 39 states and 14 countries in 2003, as well as national sponsors. The LIFE TIME FITNESS Triathlon offers an invitation-only professional division that allows male and female professionals to compete directly against each other for the sport’s largest purse. In addition to significant selected local media coverage, the LIFE TIME FITNESS Triathlon was broadcast nationally by NBC in 2003 and will be broadcast by NBC again in 2004. Competitor Magazine honored the 2003 LIFE TIME FITNESS Triathlon as its “2003 Event of the Year.” In addition to the Triathlon, we organize several shorter run/walks during the year, such as the 5K Reindeer Run in most of the cities where we have centers and the Torchlight 5K in Minneapolis, Minnesota.

Most of our current model centers are staffed with over 250 full-time and part-time employees, of which approximately 15 are in management positions, all of whom are trained to provide members with a positive experience. Our personal trainers, massage therapists, physical therapists and cosmetologists are required to maintain a professional license or one of their industry’s top certifications, as the case may be.

All center employees are required to participate in a training program that is specifically designed to promote a friendly, personable environment at each center and a consistent standard of performance across all of our centers. Employees also receive ongoing mentoring, and continuing education is required before they are permitted to advance to other positions within our company.

As of April 30, 2004, we had approximately 7,400 employees, including approximately 4,200 part-time employees. We are not a party to a collective bargaining agreement with any of our employees. Although we experience turnover of non-management personnel, historically we have not experienced difficulty in obtaining adequate replacement personnel. In general, we believe relations with our employees are good.

In addition to our standard operating and administrative systems, we utilize an integrated and flexible member management system to manage the flow of member information within each of our centers and between centers and our corporate office. We have designed and developed the system to allow us to collect information in a secure and easy-to-use environment. Our system enables us to, among other things, enroll new members with a paperless membership agreement, acquire and print digital pictures of members and capture and maintain specific member information, including frequency of use. The system allows us to streamline the collection of membership dues electronically, thereby offering additional convenience for our members while at the same time reducing our corporate overhead and accounts receivable exposure. We are in the process of deploying a customer relationship management system to enhance our sales and marketing campaigns and provide management oversight regarding daily sales and marketing activities.

Our corporate headquarters, located in Eden Prairie, Minnesota, is an approximately 49,000 square-foot facility that is currently under lease until October 2007.

As of April 30, 2004, we operated 33 centers, of which we leased 12 sites, were parties to long-term ground leases for four sites and owned 17 sites. We expect to open six large format centers in the Dallas and Houston, Texas markets in 2004, five of which will generally conform to our current model center. We have already purchased the land for, and commenced construction of, five of the centers that we plan to open in 2004, and we have entered into a lease for the sixth site. Excluding renewal options, the terms of leased centers, including ground leases, expire at various dates from 2005 through 2041. The majority of our leases have renewal options and a few give us the right to purchase the property. The table below contains information about our current sports, fitness and family recreation center locations:


(1)	In a few of our centers, we sublease space to third parties who operate our LifeCafe or climbing wall or to hospitals that use the space to provide physical therapy. The square footage figures include those subleased areas. The square footage figures exclude areas used for tennis courts and outdoor swimming pools. These figures are approximations.

(2)	We are the sole lessee of the center pursuant to the terms of a sale-leaseback transaction.

(3)	The square footage figure excludes approximately 24,000 square feet that we sublease to third parties.

(4)	This is a joint venture project in which we have a one-third interest.

There are a number of health club industry participants that compete directly and indirectly with us that may have significantly greater financial resources, higher revenues and greater economies of scale. However, due to the innovative nature of our complete product and service offering, we believe that there are no competitors in this industry offering the same experience and services we offer at a comparable value. We consider the following groups to be the primary competitors in the health and fitness industry:


	•	health club operators, including Bally Total Fitness Holding Corporation, 24 Hour Fitness Worldwide, Inc., Town Sports International, Inc., The WellBridge Company doing business under various names such as Northwest Athletic Club, LA Fitness and The Sports Club Company, Inc.;

	•	the YMCA and similar non-profit organizations;

	•	physical fitness and recreational facilities established by local governments, hospitals and businesses;

	•	local salons, cafes and businesses offering similar ancillary services;

	•	amenity and condominium clubs;

	•	racquet, tennis and other athletic clubs;

	•	country clubs;

	•	weight reducing salons; and

	•	the home-use fitness equipment industry.

Competition in the health club industry varies from market to market and is based on several factors, including the breadth of product and service offerings, the level of enrollment fees and membership dues, the flexibility of membership options and the overall quality of the offering. We believe that our comprehensive product offering and focus on customer service provide us with a distinct competitive advantage.

Our nutrition and education products and services compete against large, established companies and organizations that have more experience selling retail products. We may not be able to compete effectively against these established companies.

All areas of our operations and business practices are subject to regulation at federal, state and local levels. The general rules and regulations of the Federal Trade Commission and other consumer protection agencies apply to our advertising, sales and other trade practices, including, but not limited to, our line of nutritional products.

State statutes and regulations affecting the health club industry have been enacted or proposed that prescribe certain forms for, and regulate the terms and provisions of, membership contracts, including:


	•	giving the member the right under various state “cooling-off” statutes to cancel, in most cases, within three to ten days after signing, his or her membership and receive a refund of any enrollment fee paid;


	•	requiring an escrow for funds received from pre-opening sales or the posting of a bond or proof of financial responsibility; and

	•	establishing maximum prices and terms for membership contracts and limitations on the financing term of contracts.

As we pursue new business initiatives by selling nutritional products, dietary supplements and sports drinks, we may become further subject to the extensive federal and state regulations governing the manufacture and sale of supplement and food products in the U.S. The U.S. Food and Drug Administration and the Federal Trade Commission are increasingly scrutinizing claims made for supplement and food products, especially claims relating to weight loss. We work with the manufacturers of our food and supplement products to ensure that appropriate regulatory notices have been provided, where necessary, and that product labeling conforms to regulatory requirements. The failure of these manufacturers to comply with applicable regulations, or negligence or other misconduct on their part, could have a material adverse effect on our financial condition or results of operations. We require our manufacturing partners to warrant to us that the products are safe and effective. In most cases, the manufacturer agrees to indemnify us for losses we suffer arising from claims related to the product and in many cases we are named as an additional insured on the manufacturer’s insurance policy. In addition, we carry our own products liability insurance coverage.

All laws, rules and regulations are subject to varying interpretations by a large number of state and federal enforcement agencies and the courts. We maintain internal review procedures in order to comply with these requirements and believe our activities are in substantial compliance with all applicable statutes, rules and decisions.

We own several trademarks and service marks registered with the U.S. Patent and Trademark Office, referred to as the USPTO, including “LIFE TIME FITNESS®,” “EXPERIENCE LIFE®” and “LEANSOURCE®.” We have also registered our logo, our design depicting six circles of fitness activities and our LIFE TIME FITNESS Triathlon logo. We have several applications pending with the USPTO for trademark registrations. We also registered or have applications pending in certain foreign countries for the “LIFE TIME FITNESS” mark. In addition to our trademarks, we filed a patent application for one of our nutritional products.

We believe our trademarks and trade names have become important components in our marketing and branding strategies. We believe that we have all licenses necessary to conduct our business. In particular, we license the mark “LIFE TIME” in connection with our nutritional products so that we can market and distribute them under the LIFE TIME FITNESS brand.

Although we may be subject to litigation from time to time in the ordinary course of our business, we are not party to any pending legal proceedings that we believe will have a material adverse impact on our business.

The following table sets forth the name, age and positions of each of our directors and executive officers as of April 30, 2004:

Bahram Akradi founded our company in 1992 and has been a director and President since our inception. Mr. Akradi was elected Chief Executive Officer and Chairman of the Board of Directors in May 1996. Mr. Akradi has over 20 years of experience in the field of sports, health and fitness programs. From 1984 to 1989, he led U.S. Swim & Fitness Corporation as its co-founder and Executive Vice President. Mr. Akradi was a founder of the health and fitness Industry Leadership Council.

Michael J. Gerend was elected Executive Vice President and Chief Operating Officer upon joining our company in March 2003. Prior to joining our company, Mr. Gerend was President and Chief Executive Officer of Grand Holdings, Inc., doing business as Champion Air, the largest dedicated provider of charter airlift in the airline industry, from July 1998 to January 2003. Mr. Gerend also held senior management positions at Northwest Airlines, Inc. from April 1991 to December 1997.

Michael R. Robinson was elected Executive Vice President and Chief Financial Officer upon joining our company in March 2002. Prior to joining our company, Mr. Robinson was most recently Executive Vice President and Chief Financial Officer of Next Generation Network, Inc., a digital video advertising company, from April 2000 to March 2002. Prior to April 2000, Mr. Robinson spent approximately 17 years with Honeywell International, Inc., a diversified technology and manufacturing company, where he held senior management positions from 1994 to March 2000. From 1995 to 1997, Mr. Robinson held the position of Vice President of Investor Relations and he was responsible for financial communications with investors and other third parties. From 1997 to 2000, he was the Vice President of Finance, Logistics and Supply for Europe, the Middle East and Africa where he managed accounting, finance, tax and treasury functions.

Stephen F. Rowland was elected President of our company’s wholly owned construction subsidiary, FCA Construction Holdings, LLC, upon joining our company in April 1998. Prior to joining our company, Mr. Rowland served 17 years as President and CEO of Diversified Construction of Minneapolis, Inc., a commercial and residential construction company, where he acted as an independent general contractor for both the U.S. Swim & Fitness Corporation and our company.

Mark L. Zaebst joined our company in January 1996 as Director, Real Estate, and was named Senior Vice President of Real Estate and Development, in December 2001. Mr. Zaebst has over 20 years of experience in the health and fitness industry. Mr. Zaebst was instrumental in assisting Mr. Akradi in the creation, expansion and day-to-day operations of U.S. Swim & Fitness Corporation until 1991, at which time he started a career in real estate.

Eric J. Buss joined our company in September 1999 as Vice President of Finance and General Counsel. Mr. Buss was elected Secretary in September 2001 and was named Senior Vice President of Corporate Development, in December 2001. Prior to joining our company, Mr. Buss was an associate with the law firm of Faegre & Benson LLP from 1996 to August 1999. Prior to beginning his legal career, Mr. Buss was employed by Arthur Andersen LLP.

Timothy C. DeVries was elected a director of our company in February 2002. Mr. DeVries is a managing general partner with the investment firm of Norwest Equity Partners, a firm he joined in 1998. From 1982 to 1992, Mr. DeVries was Managing Director and a member of the board of directors at Churchill Companies, a diversified industrial and financial company. Mr. DeVries is also a member of the board of directors of Attachment Technologies, Inc., Aurafin, LLC, Gaymar Industries, Inc., Highland Manufacturing, LLC, Longwood Industries, Inc. and Michaels of Oregon Co.

W. John Driscoll was elected a director of our company in May 1994. Mr. Driscoll is the retired Chairman and Chief Executive Officer of Rock Island Company, a private investment firm. Mr. Driscoll served as Chairman and Chief Executive Officer of Rock Island Company from 1973 to 1994. Mr. Driscoll is also a member of the board of directors of Nuveen Investments, Inc.

Guy C. Jackson was elected a director of our company in March 2004. In June 2003, Mr. Jackson retired from the accounting firm of Ernst & Young LLP after 35 years with the firm and with one of its predecessors, Arthur Young & Company. During his career, Mr. Jackson served as the audit partner for numerous public companies in Ernst & Young’s New York and Minneapolis offices. He also serves as a director, and the chair of the audit committee, of Cyberonics, Inc., Digi International Inc. and Urologix, Inc.

David A. Landau was elected a director of our company in August 2000. Mr. Landau is a managing director of Apax Partners, Inc., an international private equity investment advisory firm affiliated with Apax Managers, Inc. Mr. Landau joined Apax Partners, Inc. in 1991 after working in brand management at The Procter & Gamble Company, a manufacturer and marketer of consumer products, and strategy consulting at Monitor Company, a strategy consulting firm. Mr. Landau is also a member of the board of directors of Performance, Inc. and Phillips-Van Heusen Corporation.

Stephen R. Sefton was elected a director of our company in May 1996. Mr. Sefton has been a partner with Norwest Equity Partners, an investment firm, since 1989, a firm he joined in 1986. In May 1997, Mr. Sefton founded Equity Research, Inc., a private equity investment firm. Mr. Sefton spends approximately 25% of his time overseeing two investments held by Norwest Equity Partners, including its investment in our company. The other 75% of his time is spent at Equity Research, Inc. Prior to 1986, Mr. Sefton spent nine years in commercial and investment banking. Mr. Sefton is also a member of the board of directors of Savillex Corporation and Streamfeeder, L.L.C.

Certain members of our board of directors were elected as designees of investors that had contractual rights to nominate a director under the terms of our preferred stock financing documents. Mr. DeVries was elected by the holders of our Series B preferred stock, which vote is controlled by Norwest Equity Partners. Mr. Landau was elected by the holders of our Series C and Series D preferred stock, which vote is controlled by Apax Partners. Mr. Sefton was originally elected by the holders of our Series A preferred stock, which vote was controlled by Norwest Equity Partners, before those shares were converted to common stock, and most recently he was elected by the holders of our Series B, Series C and Series D preferred stock, which vote is controlled by Norwest Equity Partners and Apax Partners. The rights of the investors to nominate a designee will terminate upon completion of this offering; however, we intend for each of these directors to continue to serve on our board of directors.

Under our bylaws, our directors hold office until the next annual shareholders meeting or the director’s resignation or removal. Under our bylaws, our officers hold office until their successors are elected and qualified or the officer’s removal.

Our board of directors currently consists of six members. We are in the process of identifying candidates for nomination to our board of directors.

Our board of directors has an audit committee, a compensation committee, a governance and nominating committee and a finance committee.

Audit Committee. Our audit committee consists of Messrs. Jackson (Chair), Driscoll and Sefton. The functions of the audit committee include oversight of the integrity of our financial statements, our compliance with legal and regulatory requirements and the performance, qualifications and independence of our independent auditors. Our audit committee is directly responsible, subject to shareholder ratification, for the appointment of any independent auditor engaged for the purpose of preparing or issuing an audit report or related work. Our audit committee is also responsible for the retention, compensation, evaluation, termination and oversight of our independent auditor. The purpose and responsibilities of our audit committee are set forth in the Audit Committee Charter approved by our board of directors on March 17, 2004.

Our board of directors has determined that Mr. Jackson qualifies as an “audit committee financial expert” as defined by applicable regulations of the SEC and that he is “independent” as defined by the listing standards of the New York Stock Exchange. Our board of directors has also determined that Mr. Jackson’s service on the audit committees of three other public companies does not impair his ability to effectively serve on our audit committee.

Compensation Committee. Our compensation committee consists of Messrs. Landau (Chair), Sefton and DeVries. The functions of the compensation committee include reviewing and approving the goals and objectives relevant to compensation of our Chief Executive Officer, evaluating the Chief Executive Officer’s performance in light of those goals and objectives and determining and approving the Chief Executive Officer’s compensation level based on this evaluation. Our compensation committee also approves and makes recommendations to our board with respect to compensation of other executive officers, incentive-compensation plans and equity-based plans. The purpose and responsibilities of our compensation committee are set forth in the Compensation Committee Charter approved by our board of directors on April 28, 2004.

Governance and Nominating Committee. Our governance and nominating committee consists of Messrs. Sefton (Chair), DeVries, Jackson and Landau. The functions of the governance and nominating committee include identifying individuals qualified to become members of our board and overseeing our corporate governance principles. The purpose and responsibilities of our governance and nominating committee are set forth in the Governance and Nominating Committee Charter approved by our board of directors on April 28, 2004.

Finance Committee. Our finance committee consists of Messrs. DeVries (Chair), Sefton, Akradi and Landau. The functions of the finance committee include reviewing our financial performance, annual budgets, capital planning projects, capital structure and financing decisions and selection of locations for new centers. The purpose and responsibilities of our finance committee are set forth in the Finance Committee Charter approved by our board of directors on March 17, 2004.

Under the Minnesota Business Corporation Act, our articles of incorporation provide that our directors shall not be personally liable for monetary damages to us or our shareholders for a breach of fiduciary duty to the full extent that the law permits the limitation or elimination of the personal liability of directors.

Our non-employee directors are reimbursed for expenses actually incurred in attending meetings of our board of directors and committees of our board of directors. We are in the process of evaluating the compensation for our non-employee directors and we expect to adopt a compensation package prior to the completion of this offering.

During 2003, Messrs. DeVries, Landau and Sefton served as the members of our compensation committee. No executive officer serves, or in the past has served, as a member of the board of directors or compensation committee of any entity that has any of its executive officers serving as a member of our board of directors or compensation committee.

The following table shows, for our Chief Executive Officer and each of the four other most highly compensated executive officers of our company, who are referred to as the named executive officers, information concerning annual and long-term compensation earned for services in all capacities during the fiscal year ended December 31, 2003.

(1)

The amount for Mr. Akradi includes $22,250 related to the use of company aircraft, $13,520 for personal use of a company car and other car expenses, $2,500 of personal tax services provided by company personnel, a $1,000 car allowance and $106 of executive medical benefits. The amount for Mr. Rowland includes $6,820 for personal use of company aircraft. The amount for Mr. Gerend includes an $8,000 car allowance and $160 of executive medical benefits. The amount for Mr. Robinson includes a $9,000 car allowance and $5,078 of executive medical benefits. The amount for Mr. Zaebst includes $10,894 for personal use of a company car and $3,101 of executive medical benefits.


(2)	These amounts include our matching contribution to our 401(k) plan in the amount of $6,000 for the accounts of Messrs. Akradi, Robinson and Zaebst. These amounts also include our payment of premiums for short-term disability insurance in the amount of $3,006 for Mr. Akradi, $2,299 for Mr. Rowland, $1,896 for Mr. Robinson and $2,909 for Mr. Zaebst.

(3)	Mr. Gerend joined us in March 2003.

The following table sets forth certain information concerning option grants to the named executive officers during the fiscal year ended December 31, 2003.


(1)	Options to purchase a total of 333,000 shares of our common stock at an exercise price of $8.00 per share and options to purchase a total of 303,500 shares of our common stock at an exercise price of $12.00 per share were granted in 2003.

(2)	In accordance with the rules of the SEC, the amounts shown on this table represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on the assumed rates of stock appreciation of 5% and 10% compounded annually and do not reflect our estimates or projections of the future price of our common stock. These amounts represent assumed rates of appreciation in the value of our common stock from the initial public offering price, assuming an initial public offering price of $ per share. The gains shown are net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise. Actual gains, if any, on stock option exercises will depend on the future performance of our common stock, the option holder’s continued employment through the option period, and the date on which the options are exercised.

(3)	The options were granted under our 1998 Plan and vest as to 20% of the shares on each of the first five anniversaries of the date of grant.

(4)	The options were granted under our 1998 Plan and vest as to 20% of the shares on each January 1st, commencing January 1, 2004.

(5)	The options were granted under our 1998 Plan and vest as to 50% of the shares on August 15, 2005 and as to 25% of the shares on each of August 15, 2006 and August 15, 2007, respectively.

The following table sets forth certain information concerning stock option exercises by the named executive officers during the fiscal year ended December 31, 2003 and unexercised options held by the named executive officers as of December 31, 2003.


(1)	There was no public trading market for our common stock as of December 31, 2003. Accordingly, the value realized and the value of the unexercised in-the-money options listed above have been calculated on the basis of the assumed initial public offering price of $ per share, less the applicable exercise price per share multiplied by the number of shares underlying the options.

We were a party to an employment agreement with Bahram Akradi, our Chairman of the Board of Directors, President and Chief Executive Officer, that expired on December 31, 2003. The terms of the agreement, as amended, provided for a base salary of $660,000 in 2003 and incentive compensation based upon the attainment of certain financial goals. Mr. Akradi’s bonus was based primarily on our earnings before taxes performance as compared to our plan. We measured performance monthly and made bonus payments monthly if we continued to meet or exceed our year-to-date plan with respect to earnings before taxes. Mr. Akradi was granted options to purchase 600,000 shares of common stock at $1.66 per share concurrent with the signing of the agreement in May 1996. These options fully vest on November 8, 2005 and expire 10 years from the date of grant. However, vesting will be accelerated if our common stock is publicly traded and the price remains above $10.00 per share for 30 consecutive trading days or there is a sale of all of our stock or all or substantially all of our assets that results in proceeds to our shareholders of at least $10.00 per share. Commencing January 1, 2004, Mr. Akradi is no longer subject to an employment agreement with us and we do not expect to negotiate any new employment or non-competition agreement with him. We believe that Mr. Akradi’s significant ownership of our stock provides adequate incentive for him to continue his employment with us and refrain from competing with us. Mr. Akradi’s compensation for 2004 was determined by our compensation committee using similar performance measures as were used to determine the compensation of other executives. We expect that Mr. Akradi’s compensation for future years will be determined annually by our compensation committee in the same manner.

We are a party to an employment agreement, dated January 23, 2003, with Michael J. Gerend, our Executive Vice President and Chief Operating Officer. The terms of the agreement provide for a base salary of $264,000 and incentive compensation of up to $132,000 based upon the attainment of certain financial goals. Mr. Gerend’s annual compensation is subject to annual review and adjustment by our Chief Executive Officer or our board of directors, but it may not be reduced below the total amount of salary plus bonus in the prior year except in the case of across-the-board reductions. In addition, the agreement provides Mr. Gerend with a $850.00 per month car allowance, a $300.00 per month cellular phone allowance and reimbursement of Mr. Gerend’s fees for membership to two professional organizations. The agreement also includes a non-competition covenant that covers the term of Mr. Gerend’s employment plus a period of two years after the termination of his employment. The agreement can be terminated by either party at any time and will terminate automatically in the event of the death or disability of the

executive. In March 2003, Mr. Gerend was granted options to purchase 200,000 shares of common stock at $8.00 per share in connection with the commencement of his employment. These options vest as to 20% of the shares on the first through fifth anniversaries of the date of grant and expire 10 years from the date of grant. However, vesting will be accelerated in full in the event that Mr. Gerend’s employment is terminated or certain other events occur following a change of control of our company and may be partially accelerated in the event that his employment is terminated without cause or he terminates for good reason. If Mr. Gerend’s employment is terminated without cause or if he terminates his employment for good reason, as defined in the agreement, Mr. Gerend is entitled to receive a lump sum payment equal to the annual amount of the guaranteed component of his salary plus an additional payment equal to two-thirds of such annual guaranteed component to be paid over 24 months commencing one year after termination so long as his non-competition obligations remain in effect.

We are a party to an employment agreement, dated March 4, 2002, with Michael R. Robinson, our Executive Vice President and Chief Financial Officer. The terms of the agreement provide for a base salary of $228,000 plus incentive compensation of up to $32,000 based upon the attainment of certain financial goals. Mr. Robinson’s annual compensation is subject to annual review and adjustment by our Chief Executive Officer or our board of directors, but it may not be reduced below the total amount of salary plus bonus in the prior year except in the case of across-the-board reductions. In addition, the agreement provides Mr. Robinson with a $750.00 per month car allowance and a $100.00 per month cellular phone allowance. The agreement also includes a non-competition covenant that covers the term of Mr. Robinson’s employment plus a period of two years after the termination of his employment. The agreement can be terminated by either party at any time and will terminate automatically in the event of the death or disability of the executive. Mr. Robinson was granted options to purchase 100,000 shares of common stock at $8.00 per share in connection with his commencement of employment on March 11, 2002. These options vest as to 20% of the shares on the first through fifth anniversaries of the date of grant and expire 15 years from the date of grant. However, vesting will be accelerated in the event of a change of control of our company, as defined in the agreement, and the options will be ratably vested for any portion of a year during which Mr. Robinson is terminated without cause or he terminates for good reason. If Mr. Robinson’s employment is terminated without cause or if he terminates his employment for good reason, as defined in the agreement, Mr. Robinson is entitled to receive a lump sum payment equal to one-half of the annual amount of the guaranteed component of his salary and $100.00 per month for 24 months so long as his non-competition obligations remain in effect.

Our compensation committee has approved a form of employment agreement to be executed with certain of our executive officers and other members of management. We expect that these agreements will also replace the employment agreements currently in effect with Messrs. Gerend and Robinson. The terms of the agreement include a non-competition covenant that covers the term of employment plus a period of up to two years after the termination of employment. If the executive’s employment is terminated without cause or the executive terminates his employment for good reason, as defined in the agreement, the executive is entitled to receive payments equal to nine or 18 months of salary and bonus, depending upon the employment level of the executive, over such time period. If, following a change of control as defined in the agreement, the executive’s position at the company is eliminated or the executive’s responsibilities are diminished within the following year, the executive will be entitled to receive payments equal to 12 to 21 months of salary and bonus, depending upon the employment level of the executive, over such time period.

All of our executive officers also participate in a performance bonus program pursuant to which additional bonus payments are made based upon achievement of company-level financial performance measures. In addition, our executive officers are entitled to the benefits that we generally provide to our other employees under applicable benefit plans and policies.

In March 1997, we implemented a 401(k) plan covering qualified full-time employees. Under our 401(k) plan, participants may defer compensation, subject to the limits established by the Internal

Revenue Service, and we may make a discretionary matching contribution at the option of our board of directors. We made a matching contribution for 2003 and 2002 but not for 2001, and we may make matching contributions in the future. The trustee under the 401(k) plan holds and invests the 401(k) plan contributions at the participant’s written direction. Participants in our 401(k) plan are immediately vested in their contributions; however, the vesting of our matching contribution is based upon the participant’s years of continuous service. The 401(k) plan qualifies under Section 401(a) of the Internal Revenue Code of 1986, as amended, or the Code, and, as a result, the related trust is not subject to tax under current tax law. Although we have not expressed any intent to do so, we do have the right to discontinue our matching contributions to the 401(k) plan at any time and to terminate or amend the 401(k) plan, subject to the provisions of the Employee Retirement Income Security Act of 1974.

During 1996, we adopted the FCA, Ltd. 1996 Stock Option Plan, referred to as the 1996 Plan, which reserved up to 2,000,000 shares of our common stock for issuance thereunder. Under the 1996 Plan, our board of directors may grant options to purchase shares of our common stock to eligible employees, directors and contractors. Incentive stock options are granted at a price determined by our board of directors but not less than 100% of the fair market value at the time of the grant, and nonqualified stock options are granted at prices determined by our board of directors. Incentive stock options expire no later than 10 years from the date of grant, and nonqualified stock options expire no later than 15 years from the date of grant. As of March 31, 2004, we had granted options to purchase a total of 1,700,000 shares of our common stock at exercises prices of $1.25 to $3.00 per share under the 1996 Plan, of which options to purchase 1,350,000 shares are outstanding. Of those options, incentive stock options to purchase 640,000 shares of our common stock at an exercise price of $1.66 per share were granted under the 1996 Plan to seven employees that included two executive officers, Messrs. Akradi and Zaebst. These options vest upon the public market price of our common stock remaining above $10.00 for 30 consecutive days, or approximately 10 years from the date of grant, whichever occurs first.

During 1998, we adopted the LIFE TIME FITNESS, Inc. 1998 Stock Option Plan, referred to as the 1998 Plan, which reserved up to 1,600,000 shares of our common stock for issuance thereunder. In December 2003, our board of directors and shareholders approved an amendment to the 1998 Plan providing that an additional 1,500,000 shares of our common stock could be issued under this Plan. Under the 1998 Plan, the compensation committee of our board of directors may grant options to purchase shares of our common stock to eligible employees, directors and contractors. Incentive stock options are granted at a price determined by our compensation committee but not less than 100% of the fair market value at the time of the grant, and nonqualified stock options are granted at prices determined by the compensation committee. Incentive stock options expire no later than 10 years from the date of grant, and nonqualified stock options expire no later than 15 years from the date of grant. As of March 31, 2004, we had granted options to purchase a total of 1,957,500 shares of our common stock at exercise prices of $4.00 to $12.00 per share under the 1998 Plan, of which options to purchase 1,668,350 shares are outstanding.

On April 30, 2004, our board of directors adopted, subject to shareholder approval, the Life Time Fitness, Inc. 2004 Long-Term Incentive Plan, referred to as the 2004 Plan, which reserved up to 3,500,000 shares of our common stock for issuance thereunder. Our shareholders approved the 2004 Plan on May 10, 2004. Under the 2004 Plan, the compensation committee of our board of directors administers the 2004 Plan and has the power to select the persons to receive awards and determine the type, size and terms of awards and establish objectives and conditions for earning awards. The types of awards that may be granted under the 2004 Plan include incentive and non-qualified options to purchase shares of our common stock, stock appreciation rights, restricted shares, restricted share units, performance awards and other types of stock-based awards. Eligible participants under the 2004 Plan include our officers, employees, non-employee directors and consultants. Each award agreement will specify the number and type of award, together with any other terms and conditions as determined by our compensation committee. No shares or rights to acquire shares have been issued under the 2004 Plan; however, in

We believe that the transactions set forth below were on terms no less favorable than we could have obtained from unaffiliated parties. We intend that all future transactions between us and our officers, directors, principal shareholders and their affiliates will be approved by a majority of our independent and disinterested directors, and will be on terms no less favorable to us than we could obtain from unaffiliated third parties.

Certain of our refurbishing and remodeling construction projects at our centers in Minnesota were managed by a general contractor, which is primarily owned by Mr. Rowland, the President of our construction subsidiary. We did not pay any amounts for these services in 2003 or the three months ended March 31, 2004 and we do not anticipate doing so in the future. We paid $418,400 and $48,500 for these services in 2001 and 2002, respectively.

We leased one jet until June 2003, and two jets in 2001 and 2002, from an aviation company that is wholly owned by Mr. Akradi, our Chairman of the Board of Directors, President and Chief Executive Officer, and Mr. Rowland. Each month we were charged the equivalent of the debt service for the exclusive use of the jets. We also paid an hourly fee for the periodic use of other aircraft owned by the aviation company. Beginning in July 2003, we paid an hourly market rate for the periodic use of one jet owned by the aviation company. We were charged $1,052,700, $857,100 and $891,600 for the use of the aircraft in 2001, 2002 and 2003, respectively. We purchased one jet from the aviation company for fair market value of $4.0 million in January 2004 and, as a result, we will no longer lease any aircraft from this aviation company. The price we paid was determined based on the average of three independent appraisals. We may continue to pay hourly fees for the periodic use of aircraft owned by the aviation company.

Until August 2003, Mr. Akradi was the landlord under a lease involving a center leased for one of our Minnesota centers. We made payments for monthly rent to Mr. Akradi under the lease in the amounts of $349,000, $355,000 and $234,200 during 2001, 2002 and 2003, respectively.

We lease various fitness and office equipment for use at the center in Bloomingdale, Illinois. We then sublease this equipment to Bloomingdale LIFE TIME Fitness, L.L.C., of which our company has a one-third interest. Bloomingdale LLC is charged the equivalent of the debt service for the use of the equipment. We charged Bloomingdale LLC $339,700, $426,400 and $424,900 in 2001, 2002 and 2003, respectively. We anticipate that we will charge Bloomingdale LLC similar amounts in the future.

In May 2001, we completed a transaction to sell and simultaneously lease back one of our large format centers. This center was developed at a cost of $6.6 million and we sold it at a price of $7.2 million. The purchaser and landlord in such transaction is a limited liability company, of which Mr. Rowland owns 61% of the membership interests. We paid $550,000, $880,000 and $880,000 in 2001, 2002 and 2003, respectively, in rent pursuant to the lease of the center. We expect to pay $880,000 in rent annually in the future. This lease expires in May 2026. In connection with the sale in 2001, we received a note in the amount of approximately $264,000, which was repaid in December 2003. This transaction was reviewed and approved by our board of directors. Our board of directors considered our desire to finance this center and the general market conditions for financing transactions to determine that the terms of this transaction were favorable to our company.

In October 2003, we leased a center located within a shopping center that is owned by a general partnership in which Mr. Akradi has a 50% interest. In December 2003, our company and the general partnership executed an addendum to this lease whereby we leased an additional 5,000 square feet of office space on a month-to-month basis within the shopping center. We paid rent pursuant to this lease of $125,000 in 2003 and anticipate paying approximately $540,000 in rent annually in the future. The terms of the lease were negotiated by one of our independent directors on behalf of our company and were reviewed and approved by our board of directors. To assist our board of directors in evaluating this

The following table summarizes sales of our preferred stock to certain of our directors, executive officers and holders of more than 5% of our voting securities, and their affiliated entities, in private placement financing transactions. All shares are reported on an as-converted basis based on the assumption that all possible conversion ratio adjustments that could cause the number of shares of common stock to be issued upon conversion to increase will have occurred.



	(1)	See “Principal and Selling Shareholders” for additional information about ownership of shares held by these shareholders.



	(2)	The Series A preferred stock was sold in May 1996 for an aggregate purchase price of $6.3 million. All shares of Series A preferred stock converted into shares of common stock. Each share of Series A preferred stock converted into five and three-tenths shares of our common stock. As a result, there are no shares of Series A preferred stock currently outstanding.



	(3)	The Series B preferred stock was sold in December 1998 for an aggregate purchase price of $20.0 million. Each share of Series B preferred stock is currently convertible into 4.571428 shares of common stock. The Series B preferred stock will automatically convert into shares of common stock upon the closing of this offering.



	(4)	The Series C preferred stock was sold in August 2000 for an aggregate purchase price of $45.0 million. Each share of Series C preferred stock is currently convertible into one share of common stock. The Series C preferred stock will convert into shares of common stock upon the closing of this offering. If the initial public offering price of our common stock is less than $30.00 per share and does not yield a 30% internal rate of return, each share of Series C preferred stock will convert into 1.25 shares of common stock. For purposes of disclosing these shares on an as-converted basis, we have assumed these targets will not be met and the conversion price adjustment will occur.



	(5)	The Series D preferred stock was sold in July 2001 for an aggregate purchase price of $19.5 million. Each share of Series D preferred stock is currently convertible into one share of common stock. The Series D preferred stock will convert into shares of common stock upon the closing of this offering. If the initial public offering price of our common stock is less than $30.00 per share and does not yield a 30% internal rate of return, each share of Series D preferred stock will convert into 1.25 shares of common stock. For purposes of disclosing these shares on an as-converted basis, we have assumed these targets will not be met and the conversion price adjustment will occur.


	(6)	Includes shares held in a trust for which his spouse has sole voting and investment power. Mr. Driscoll disclaims beneficial ownership of such shares.


	(7)	Mr. Landau is an officer and shareholder of Apax Managers, Inc., which is the general partner of the general partner of the affiliated limited partnerships that hold our stock.

	(8)	Mr. Sefton is a general partner of Minnesota Private Equity Fund.

	(9)	Mr. Sefton is a general partner of the general partner of Norwest Equity Partners V, L.P. Mr. DeVries is a general partner of the general partner of Norwest Equity Partners VI, L.P. and one of three managing partners of the general partner of Norwest Equity Partners, VII, L.P.


(10)	Mr. Akradi and Mr. Rowland are each 50% shareholders of Windsor Aviation, Inc.

We expect to grant stock options at an exercise price per share equal to the initial public offering price in this offering. The proposed grants, which have been reviewed by our compensation committee, to our executive officers include Mr. Akradi — 300,000 shares; Mr. Rowland — 67,500 shares; Mr. Gerend — 54,000 shares; Mr. Robinson — 67,500 shares; Mr. Zaebst — 54,000 shares and Mr. Buss — 54,000 shares. The options would vest as to 50% of the shares on each of the sixth and seventh anniversaries of the date of grant, subject to accelerated vesting. Under the accelerated vesting provisions, 20% of the shares would vest if the public market price of our common stock remains above $25.00 for a consecutive 90 calendar day period, and an additional 20% would vest if the public market price remains above $30.00, $35.00, $40.00 and $45.00, respectively, in each case for a consecutive 90 calendar day period.

The following table sets forth information with respect to the beneficial ownership of our common stock as of April 30, 2004, and after the sale of shares in this offering, by:


	•	each person who is known by us to own beneficially more than 5% of our voting securities;

	•	each current director;

	•	each of the named executive officers;

	•	all directors and executive officers as a group; and

	•	each selling shareholder participating in this offering.

Beneficial ownership is determined in accordance with the SEC’s rules. In computing percentage ownership of each person, shares of common stock subject to options held by that person that are currently exercisable or convertible, or exercisable or convertible within 60 days of April 30, 2004, are deemed to be beneficially owned by that person. These shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person.

Except as indicated in this table and pursuant to applicable community property laws, each shareholder named in the table has sole voting and investment power with respect to the shares set forth opposite such shareholder’s name. Percentage of ownership is based on 28,825,566 shares of our common stock outstanding on April 30, 2004, which assumes the conversion of all preferred stock into common stock at the respective conversion ratios based on the assumption that all possible conversion ratio adjustments that could cause the number of shares of common stock to be issued upon conversion to increase will have occurred. All shares in the following table and notes are reported on an as-converted basis. The address for each executive officer is 6442 City West Parkway, Eden Prairie, MN 55344.



	(1)	Mr. Akradi and Mr. Driscoll are listed below and also own beneficially more than 5.0% of our voting securities. The address for Mr. Akradi is the address for our principal executive officers and the address for Mr. Driscoll appears in footnote 5 below.



	(2)	Includes 4,835,998 shares of common stock and 3,507,928 shares of common stock issuable upon conversion of preferred stock owned by Norwest Equity Partners V, L.P., 30,473 shares of common stock and 914,285 shares of common stock issuable upon conversion of preferred stock owned by Norwest Equity Partners VI, L.P. and 1,562,500 shares of common stock issuable upon conversion of



		preferred stock owned by Norwest Equity Partners VII, L.P. The shares being offered include 1,326,850 shares offered by Norwest Equity Partners V, L.P. If the over-allotment option is exercised in full, Norwest Equity Partners V, L.P. will sell an additional 234,150 shares. Immediately following the offering and assuming the over-allotment option is exercised in full, Norwest Equity Partners’ percentage ownership would be %. The address for Norwest Equity Partners is 3600 IDS Center, 80 South Seventh Street, Minneapolis, MN 55402.



	(3)	Includes 4,273,586 shares of common stock issuable upon conversion of preferred stock owned by APAX Excelsior VI, L.P., 144,249 shares of common stock issuable upon conversion of preferred stock owned by Patricof Private Investment Club III, L.P., 349,310 shares of common stock issuable upon conversion of preferred stock owned by APAX Excelsior VI-A C.V. and 232,853 shares owned by APAX Excelsior VI-B C.V. The shares being offered include 726,509 shares offered by APAX Excelsior VI, L.P., 24,523 shares offered by Patricof Private Investment Club III, L.P., 59,383 shares offered by APAX Excelsior VI-A C.V., and 39,585 shares offered by APAX Excelsior VI-B C.V. If the over-allotment option is exercised in full, APAX Excelsior VI, L.P. will sell an additional 128,208 shares, Patricof Private Investment Club III, L.P. will sell an additional 4,327 shares, APAX Excelsior VI-A C.V. will sell an additional 10,479 shares and APAX Excelsior VI-B C.V. will sell an additional 6,986 shares. Immediately following the offering and assuming the over-allotment option is exercised in full, Apax Managers, Inc.’s percentage ownership would be %. The address for Apax Managers, Inc. is 445 Park Ave., New York, NY 10022.



	(4)	Includes 30,473 shares of common stock and 914,285 shares of common stock issuable upon conversion of preferred stock owned by Norwest Equity Partners VI, L.P. Mr. DeVries is a general partner of Itasca LBO Partners VI, LLP, the general partner of Norwest Equity Partners VI, L.P. Mr. DeVries disclaims beneficial ownership of such shares except to the extent of his indirect pecuniary interest therein. Also includes 1,562,500 shares of common stock issuable upon conversion of preferred stock owned by Norwest Equity Partners VII, L.P. Mr. DeVries is a managing partner of Itasca LBO Partners VII, LLP, the general partner of Norwest Equity Partners VII, L.P. The address for Mr. DeVries is 3600 IDS Center, 80 South Seventh Street, Minneapolis, MN 55402.



	(5)	Includes 1,680,000 shares of common stock held in trusts of which Mr. Driscoll has sole voting and investment power. Includes 12,000 shares of common stock underlying options that are exercisable within 60 days of April 30, 2004. Also includes 12,500 shares of common stock issuable upon conversion of preferred stock held in a trust for which his spouse has sole voting and investment power. Mr. Driscoll disclaims beneficial ownership of such shares. The shares being offered include 952,000 shares offered by W. John Driscoll Trustee of the W. John Driscoll 2003 Grantor Retained Annuity Trust dated July 29, 2003. If the over-allotment option is exercised in full, W. John Driscoll Trustee of the W. John Driscoll 2003 Grantor Retained Annuity Trust dated July 29, 2003 will sell an additional 168,000 shares. Immediately following the offering and assuming the over-allotment option is exercised in full, Mr. Driscoll’s percentage ownership would be %. The address for Mr. Driscoll is 30 East Seventh Street, Suite 2000, St. Paul, MN 55101.



	(6)	Includes 4,273,586 shares of common stock issuable upon conversion of preferred stock owned by Apax Excelsior VI, L.P., 144,249 shares of common stock issuable upon conversion of preferred stock owned by Apax Excelsior VI-A, C.V., 232,853 shares of common stock issuable upon conversion of preferred stock owned by Apax Excelsior VI-B, C.V. and 144,249 shares of common stock issuable upon conversion of preferred stock owned by Patricof Private Investment Club III, L.P. Mr. Landau is an officer and shareholder of Apax Managers, Inc., the general partner of Apax Excelsior VI Partners, L.P., which is the general partner of each of the affiliated limited partnerships that hold shares of our stock. Mr. Landau disclaims beneficial ownership of all such shares except to the extent of his indirect pecuniary interest therein. The shares being offered include 726,509 shares offered by APAX Excelsior VI, L.P., 24,523 shares offered by Patricof Private Investment Club III, L.P., 59,383 shares offered by APAX Excelsior VI-A C.V., and 39,585 shares offered by APAX Excelsior VI-B C.V. If the over-allotment option is exercised in full, APAX Excelsior VI, L.P. will sell an additional 128,208 shares, Patricof Private Investment Club III, L.P. will sell an additional 4,327 shares, APAX Excelsior VI-A C.V. will sell an additional 10,479 shares and APAX Excelsior



	(7)	Includes 4,835,998 shares of common stock and 3,507,928 shares of common stock issuable upon conversion of preferred stock owned by Norwest Equity Partners V, L.P. Mr. Sefton is a general partner of Itasca Partners V, LLP, the general partner of Norwest Equity Partners V, L.P. Mr. Sefton disclaims beneficial ownership of such shares except to the extent of his indirect pecuniary interest therein. Also includes 271,285 shares of common stock issuable upon conversion of preferred stock owned by Minnesota Private Equity Fund, L.P. Mr. Sefton is the general partner of Minnesota Private Equity Fund, L.P. The shares being offered include 1,326,850 shares offered by Norwest Equity Partners V, L.P. and 33,150 shares offered by Minnesota Private Equity Fund, L.P. If the over-allotment option is exercised in full, Norwest Equity Partners V, L.P. will sell an additional 234,150 shares and Minnesota Private Equity Fund, L.P. will sell an additional 5,850 shares. Immediately following the offering and assuming the over-allotment option is exercised in full, Mr. Sefton’s percentage ownership would be %. The address for Mr. Sefton is 3001 Hennepin Avenue, Suite D-210, Minneapolis, MN 55408.



	(8)	Includes 450,000 shares of common stock underlying options that are exercisable within 60 days of April 30, 2004. Also includes 201,554 shares of common stock and 12,500 shares of common stock issuable upon conversion of preferred stock owned by Windsor Aviation, Inc. Mr. Akradi owns 50% of the voting stock of Windsor Aviation. Also includes 38,000 shares of common stock owned by William J. Garlick, 10,000 shares of common stock owned by Abdollah J. Javidan and 5,000 shares of common stock owned by Scott Tracy Carlston. Mr. Akradi has a contractual right to vote such shares held by Messrs. Garlick, Javidan and Carlston pursuant to agreements that will terminate upon the completion of this offering, which will reduce Mr. Akradi’s beneficial ownership by 53,000 shares. If the over-allotment option is exercised in full, Mr. Akradi will sell 80,000 shares and Windsor Aviation, Inc. will sell 40,000 shares. Immediately following the offering and assuming the over-allotment option is exercised in full, Mr. Akradi’s percentage ownership would be %.



	(9)	Includes 40,000 shares of common stock underlying options that are exercisable within 60 days of April 30, 2004.



(10)	Includes 41,000 shares of common stock underlying options that are exercisable within 60 days of April 30, 2004.



(11)	Includes 140,700 shares of common stock underlying options that are exercisable within 60 days of April 30, 2004. Also includes 201,554 shares of common stock and 12,500 shares of common stock issuable upon conversion of preferred stock owned by Windsor Aviation, Inc. Mr. Rowland owns 50% of the voting stock of Windsor Aviation. If the over-allotment option is exercised in full, Windsor Aviation, Inc. will sell 40,000 shares. Immediately following the offering and assuming the over-allotment option is exercised in full, Mr. Rowland’s percentage ownership would be %.



(12)	Includes 61,000 shares of common stock underlying options that are exercisable within 60 days of April 30, 2004.



(13)	Includes 12,000 shares of common stock underlying options issued to one non-employee director and 780,700 shares of common stock underlying options issued to six executive officers that are exercisable within 60 days of April 30, 2004. If the over-allotment option is exercised in full, all directors and officers as a group will sell an additional 582,000 shares. Immediately following the offering and assuming the over-allotment option is exercised in full, the percentage ownership of all directors and officers as a group would be %.



(14)	Includes 31,250 shares of common stock issuable upon conversion of preferred stock. If the over-allotment option is exercised in full, WWF & Co. will sell an additional 63,030 shares. Immediately following the offering and assuming the over-allotment option is exercised in full, WWF & Co.’s percentage ownership would be %.



(15)	If the over-allotment option is exercised in full, Eagan 30.7C, a Minnesota Limited Partnership will sell an additional 45,000 shares. Immediately following the offering and assuming the over-allotment option is exercised in full, Eagan 30.7C, a Minnesota Limited Partnership’s percentage ownership would be %.



(16)	If the over-allotment option is exercised in full, E.R. Middleton, F.T. Weyerhaeuser & A.E. Zaccaro, Trustees u/a T/A executed by Margaret W. Driscoll June 13, 1958 FBO W. John Driscoll will sell an additional 25,641 shares. Immediately following the offering and assuming the over-allotment option is exercised in full, E.R. Middleton, F.T. Weyerhaeuser & A.E. Zaccaro, Trustees u/a T/A executed by Margaret W. Driscoll June 13, 1958 FBO W. John Driscoll’s percentage ownership would be %.



(17)	Includes 68,571 shares of common stock issuable upon conversion of preferred stock. If the over-allotment option is exercised in full, Piper Jaffray Investors — Fund XI will sell an additional 9,000 shares. Immediately following the offering and assuming the over-allotment option is exercised in full, Piper Jaffray Investors — Fund XI’s percentage ownership would be %.



(18)	This includes the selling shareholders listed below, none of whom beneficially owns more than 1% of our capital stock. The shares to be sold that are listed below represent 85% of the total shares that the selling shareholders have committed to sell in this offering. Each of these selling shareholders will sell the remaining 15% of the shares they committed to sell if the over-allotment option is exercised in full.



	•	Antares Capital Corporation beneficially owns 247,321 shares prior to the offering and will sell 210,222 shares.



	•	David M. Schultz beneficially owns 200,000 shares prior to the offering and will sell 42,500 shares.



	•	Joan M. Marks beneficially owns 167,920 shares prior to the offering and will sell 71,366 shares.



	•	Atwell & Co. beneficially owns 160,000 shares prior to the offering and will sell 102,000 shares.



	•	Paul D. Kelly beneficially owns 160,000 shares prior to the offering and will sell 136,000 shares.



	•	SPEC Investments, a Minnesota partnership beneficially owns 160,000 shares prior to the offering and will sell 95,200 shares.



	•	Shaun P. Nugent beneficially owns 146,880 shares prior to the offering and will sell 65,348 shares. Mr. Nugent was the Chief Financial Officer of our company until October 2001 and Secretary of our company until September 2001.



	•	U.S. Bancorp Piper Jaffray ECM Fund II, LLC beneficially owns 112,500 shares prior to the offering and will sell 47,813 shares.



	•	Joe Hall beneficially owns 101,200 shares prior to the offering and will sell 21,250 shares. Mr. Hall is an employee of our company.



	•	David P. Kraker beneficially owns 80,000 shares prior to the offering and will sell 34,000 shares.



	•	Philip W. Ordway beneficially owns 80,000 shares prior to the offering and will sell 68,000 shares.



	•	A. Jody Rowland beneficially owns 80,000 shares prior to the offering and will sell 17,000 shares.



	•	T. Jay Salmen & Associates, Inc. beneficially owns 80,000 shares prior to the offering and will sell 68,000 shares.



	•	Michael G. Schultz beneficially owns 80,000 shares prior to the offering and will sell 34,000.



	•	Joseph H. Whitney beneficially owns 80,000 shares prior to the offering and will sell 59,500 shares.



	•	Martha G. Schultz beneficially owns 80,000 shares prior to the offering and will sell 68,000 shares.



	•	Sargent Management Co. beneficially owns 68,000 shares prior to the offering and will sell 57,800 shares.



	•	Howard E. Dalton beneficially owns 60,000 shares prior to the offering and will sell 51,000 shares.



	•	Robert L. Gauthier beneficially owns 56,000 shares prior to the offering and will sell 26,350 shares.



	•	Elrie J. Iverson beneficially owns 52,000 shares prior to the offering and will sell 35,700 shares.



	•	Susan B. Iverson beneficially owns 52,000 shares prior to the offering and will sell 44,200 shares.



	•	Ankeny Trusts beneficially own 40,000 shares prior to this offering and will sell 17,005 shares. The Ankeny Trusts include twenty-one separate family trusts.



	•	Richard E. Eichhorn beneficially owns 40,000 shares prior to the offering and will sell 17,000 shares.



	•	Jay D. Goldberg beneficially owns 40,000 shares prior to the offering and will sell 14,450 shares.



	•	Gary D. Hanovich beneficially owns 40,000 shares prior to the offering and will sell 8,500 shares.



	•	David P. Kelly beneficially owns 40,000 shares prior to the offering and will sell 17,000 shares.



	•	Thomas D. and Susan S. Mazer JTWRS beneficially owns 40,000 shares prior to the offering and will sell 8,500 shares.



	•	Mark A. Gaasedelen beneficially owns 34,444 shares prior to the offering and will sell 8,500 shares.



	•	Abdollah J. Javidan beneficially owns 30,000 shares prior to the offering and will sell 6,375 shares.



	•	Dermot Rowland beneficially owns 30,000 shares prior to the offering and will sell 2,550 shares.



	•	Ecker Family Limited Partnership beneficially owns 20,000 shares prior to the offering and will sell 6,800 shares.



	•	Janna N. Siftar beneficially owns 20,000 shares prior to the offering and will sell 8,500 shares.



	•	David L. and Catherine M. Swanson JTWRS beneficially owns 20,000 shares prior to the offering and will sell 8,500 shares.



	•	Mary H. Townsend beneficially owns 20,000 shares prior to the offering and will sell 8,500 shares.



	•	Wold Family Limited Partnership beneficially owns 20,000 shares prior to the offering and will sell 12,750 shares.



	•	Paul T. and Susan B. Yellin JTWRS beneficially owns 16,000 shares prior to the offering and will sell 5,100 shares.



	•	HRJ Trust u/w FBO Harrison Johnston III beneficially owns 13,334 shares prior to the offering and will sell 11,334 shares.



	•	HRJ Trust u/w FBO Alexander Johnston beneficially owns 13,333 shares prior to the offering and will sell 11,333 shares.



	•	HRJ Trust u/w FBO Anne Smith beneficially owns 13,333 shares prior to the offering and will sell 11,333 shares.



	•	Mary McGuire beneficially owns 8,000 shares prior to the offering and will sell 3,400 shares.



	•	Scott Tracy Carlston beneficially owns 5,000 shares prior to the offering and will sell 2,000 shares.



	•	Lois E. Quam beneficially owns 4,571 shares prior to the offering and will sell 850 shares. Ms. Quam was a director on our board of directors until February 2002.



	•	Annie C. Bullert beneficially owns 4,000 shares prior to the offering and will sell 425 shares.

Our authorized capital stock consists of 50,000,000 shares of common stock, par value $0.02 per share, and 10,000,000 shares of preferred stock, par value $0.02 per share. As of April 30, 2004, the following shares of stock, and rights to purchase stock, were outstanding:


	•	16,196,332 shares of common stock held of record by 128 shareholders;

	•	1,000,000 shares of Series B preferred stock held by nine shareholders;

	•	4,500,000 shares of Series C preferred stock held by five shareholders;

	•	1,946,250 shares of Series D preferred stock held by 23 shareholders; and


	•	options to purchase 2,966,350 shares of common stock.

As of April 30, 2004, each share of Series B preferred stock was convertible into 4.571428 shares of common stock, each share of Series C preferred stock was convertible into one share of common stock and each share of Series D preferred stock was convertible into one share of common stock. The conversion ratio of each of the Series C preferred stock and Series D preferred stock will be adjusted to 1.25 shares of common stock for each share of Series C preferred stock and Series D preferred stock if the initial public offering price of our common stock is less than $30.00 per share and does not yield a 30% internal rate of return with respect to such series based on the date of purchase.


	•	have the right to receive ratably any dividends from funds legally available therefor, when, as and if declared by our board of directors,

	•	are entitled to share ratably in all of our assets available for distribution to holders of our common stock upon liquidation, dissolution or winding up of the affairs of our company, and

	•	are entitled to one vote per share on all matters which shareholders may vote on at all meetings of shareholders.

All shares of our common stock now outstanding are fully paid and nonassessable and the shares of common stock to be issued upon completion of this offering will be fully paid and nonassessable. There are no redemption, sinking fund, conversion or preemptive rights with respect to the shares of our common stock.

The holders of our common stock do not have cumulative voting rights. Subject to the rights of any future series of preferred stock, the holders of more than 50% of such outstanding shares voting for the election of our directors can elect all of the directors to be elected, if they so choose. In such event, the holders of the remaining shares will not be able to elect any of our directors.

Upon completion of this offering, all of our issued and outstanding Series B preferred stock, Series C preferred stock and Series D preferred stock will be converted into an aggregate of shares of common stock. The conversion will occur at the applicable conversion price of each series of preferred stock, as provided in our articles of incorporation.

Under governing Minnesota law and our amended and restated articles of incorporation, no action by our shareholders is necessary, and only action of our board of directors is required, to authorize the issuance of shares of undesignated preferred stock. Our board of directors is empowered to establish, and to designate the name of, each class or series of the undesignated preferred shares and to set the terms of such shares, including terms with respect to redemption, sinking fund, dividend, liquidation, preemptive, conversion and voting rights and preferences. Accordingly, our board of directors, without shareholder approval, may issue preferred stock having rights, preferences, privileges or restrictions, including voting rights, that may be greater than the rights of holders of common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of our common stock until our board of directors determines the specific rights of the holders of such preferred stock. However, the effects might include, among other things, restricting dividends on our common stock, diluting the voting power of our common stock, impairing the liquidation rights of our common stock and delaying or preventing a change in control of our company without further action by our shareholders. Our board of directors has no present plans to issue any shares of preferred stock.

The purchasers of our preferred stock have demand registration and piggyback registration rights under the terms of our preferred stock purchase agreements.

The demand registration rights as to shares of common stock issued, or issuable upon conversion of preferred stock, to holders of each series of our preferred stock may be exercised at any time after the expiration of the lock-up period in connection with the initial public offering of our common stock. Each series of preferred stock may demand registration of the shares of common stock issued or issuable upon conversion of that series upon a request by holders of a majority of such shares. For purposes of these demand registration rights, holders of Series C preferred stock and Series D preferred stock vote together as one series. There is no limit on the number of demand registrations on Form S-3 that such holders may request.

Each of these holders also has certain piggyback registration rights. If we propose to register any securities under the Securities Act of 1933, as amended, or the Securities Act, for our own account or for the account of our shareholders, holders of piggyback rights may require that we include all of their registrable securities in such registration. In connection with any such offering, the managing underwriter thereof can limit the number of shares held by persons with piggyback registration rights to be included in such registration.

We will be responsible for all expenses incurred in connection with the registration rights described above.

Certain provisions of Minnesota law and our articles of incorporation and bylaws described below could have an anti-takeover effect. These provisions are intended to provide management with flexibility in responding to an unsolicited takeover offer and to discourage certain types of unsolicited takeover offers for our company. However, these provisions could have the effect of discouraging attempts to acquire us, which could deprive our shareholders of opportunities to sell their shares at prices higher than prevailing market prices.

Section 302A.671 of the Minnesota Business Corporation Act applies, with certain exceptions, to any acquisition of our voting stock from a person, other than us and other than in connection with certain mergers and exchanges to which we are a party, that results in the acquiring person owning 20% or more of our voting stock then outstanding. Similar triggering events occur at the one-third and majority ownership levels. Section 302A.671 requires approval of any such acquisition by a majority vote of our disinterested shareholders and a majority vote of all of our shareholders. In general, shares acquired in

Section 302A.673 of the Minnesota Business Corporation Act generally prohibits us or any of our subsidiaries from entering into any business combination transaction with a shareholder for a period of four years after the shareholder acquires 10% or more of our voting stock then outstanding. An exception is provided for circumstances in which, before the 10% share-ownership threshold is reached, either the transaction or the share acquisition is approved by a committee of our board of directors composed of one or more disinterested directors.

The Minnesota Business Corporation Act contains a “fair price” provision in Section 302A.675. This provision provides that no person may acquire any of our shares within two years following the person’s last purchase of our shares in a takeover offer unless all shareholders are given the opportunity to dispose of their shares to the person on terms that are substantially equivalent to those in the earlier takeover offer. This provision does not apply if the acquisition is approved by a committee of disinterested directors before any shares are acquired in the takeover offer.

Section 302A.553, subdivision 3, of the Minnesota Business Corporation Act prohibits us from purchasing any voting shares owned for less than two years from a holder of more than 5% of our outstanding voting stock for more than the market value of the shares. Exceptions to this provision are provided if the share purchase is approved by a majority of our shareholders or if we make a repurchase offer of equal or greater value to all shareholders.

Our articles of incorporation provide that the holders of our common stock do not have cumulative voting rights. For the shareholders to call a special meeting, our bylaws require that at least 10% of the voting power must join in the request, except that a special meeting to take action concerning a business combination requires that at least 25% of the voting power join in the request. Our articles of incorporation give our board of directors the power to issue any or all of the shares of undesignated preferred stock, including the authority to establish one or more series and to fix the powers, preferences, rights and limitations of such class or series, without seeking shareholder approval. Our board of directors also has the right to fill vacancies of the board, including a vacancy created by an increase in the board of directors.

Our bylaws provide for an advance notice procedure for the nomination, other than by or at the direction of the board of directors, of candidates for election as directors, as well as for other shareholder proposals to be considered at annual meetings of shareholders. In general, notice of intent to nominate a director or raise matters at such meetings will have to be received by us not less than 90 days prior to the date fixed for the annual meeting, and must contain certain information concerning the persons to be nominated or the matters to be brought before the meeting and concerning the shareholders submitting the proposal.

The Transfer Agent and Registrar with respect to our common stock will be Wells Fargo Bank, N.A.

We will apply to list our shares of common stock on the New York Stock Exchange under the symbol “LTM.”

Upon the completion of this offering, based upon the number of shares of our common stock outstanding as of April 30, 2004, and assuming the automatic conversion of all outstanding shares of our preferred stock into shares of our common stock upon the completion of this offering, we will have shares of our common stock outstanding. Of these shares, the shares of our common stock sold in this offering will be freely tradable without restriction under the Securities Act, except that any shares of our common stock purchased by our affiliates, as that term is defined in Rule 144 under the Securities Act, may generally only be sold in compliance with the limitations of Rule 144 described below.

The remaining shares of our common stock outstanding upon completion of this offering are deemed “restricted shares” under Rule 144 or Rule 701 under the Securities Act. Of these restricted shares of our common stock, shares will be eligible for sale in the public market on the date of this prospectus. Ninety days from the date of this prospectus shares of our common stock will be eligible for sale in the public market pursuant to Rule 701 and Rule 144. Upon expiration of the lock-up agreements described below, 180 days after the date of this prospectus, an additional shares of our common stock will be eligible for sale in the public market pursuant to Rule 144 or 701.

Rule 144. In general, under Rule 144 under the Securities Act, a person, or persons whose shares are aggregated, who owns shares that were acquired from the issuer or an affiliate at least one year ago would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:


	•	one percent of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering, or

	•	the average weekly trading volume of our common stock on the New York Stock Exchange during the four calendar weeks preceding the date of filing of a notice on Form 144 with respect to the sale.

Sales under Rule 144 are also generally subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.

Rule 144(k). Under Rule 144(k), a person, or persons whose shares are aggregated, who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale and who owns shares that were acquired from the issuer or an affiliate at least two years ago is entitled to sell the shares without complying with the manner of sale, public information, volume limitations or notice of sale provisions of Rule 144. Therefore, unless otherwise restricted, the shares eligible for sale under Rule 144(k) may be sold immediately upon the completion of this offering.

Rule 701. Rule 701 generally allows a shareholder who purchased shares of our common stock pursuant to a written compensatory plan or contract and who is not deemed to have been an affiliate of our company to sell these shares in reliance upon Rule 144, but without being required to comply with the public information, holding period, volume limitation or notice provisions of Rule 144. Rule 701 also permits affiliates of our company to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. As a result, most of our employees, officers, directors or consultants who purchased shares under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701, but all holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling their shares pursuant to the Rule.

Lock-Up Agreements. We, the selling shareholders, our officers and directors and certain other shareholders have agreed that, during the period beginning on the date of this prospectus and continuing to and including the date 180 days after the date of this prospectus, none of us will, directly or indirectly:


	•	offer, sell, offer to sell, contract to sell or otherwise dispose of any shares of our common stock or any of our securities which are substantially similar to the common stock, including but not limited


		to any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or any such substantially similar securities, or

	•	enter into any swap, option, future, forward or other agreement that transfers, in whole or in part, the economic consequence of ownership of common stock or any securities substantially similar to the common stock,

without the prior written consent of Credit Suisse First Boston LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated. The lock-up agreements permit transfers of shares of common stock purchased in the open market and, subject to certain restrictions, transfers of shares as a gift, to trusts or immediate family members, or to certain entities or persons affiliated with the shareholder.

Registration Rights. Following this offering, under specified circumstances and subject to customary conditions, holders of approximately shares of our common stock will be entitled to rights with respect to the registration of their shares under the Securities Act. Sales of these shares pursuant to such registration would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates. See “Description of Capital Stock — Registration Rights.”

Stock Options. Following this offering, we intend to file with the Securities and Exchange Commission registration statements under the Securities Act covering the shares of common stock reserved for issuance under our stock option plans. The registration statements are expected to become effective as soon as practicable after the closing of this offering. Accordingly, shares registered under these registration statements will, subject to Rule 144 volume limitations applicable to affiliates and the lock-up agreements described above, be available for sale in the open market.

The following is a discussion of the material U.S. federal income and estate tax considerations of the acquisition, ownership, and disposition of our common stock acquired pursuant to this prospectus by a beneficial owner that, for U.S. federal income tax purposes, is a “non-U.S. holder” as we define that term below. We assume in this discussion that non-U.S. holders will hold our common stock as a capital asset, which generally is property held for investment. As used in this discussion, the term “non-U.S. holder” means a beneficial owner of our common stock that is not, for U.S. federal income tax purposes:


	•	an individual who is a citizen or resident of the U.S.;

	•	a corporation, including any entity treated as a corporation for U.S. tax purposes, organized in or under the laws of the United States, any state thereof or the District of Columbia;

	•	an estate, the income of which is includible in gross income for U.S. tax purposes regardless of its source; or

	•	a trust, in general, if (i) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust or (ii) the trust was in existence on August 20, 1996, was treated as a U.S. person prior to such date, and validly elected to continue to be so treated.

An individual may be treated as resident of the United States in any calendar year for U.S. federal income tax purposes, instead of a nonresident, by, among other ways, being present in the United States on at least 31 days in that calendar year and for an aggregate of at least 183 days during a 3-year period ending in the current calendar year. For purposes of this calculation, you would count all of the days present in the current year, one-third of the days present in the immediately preceding year and one-sixth of the days present in the second preceding year. Residents are taxed for U.S. federal income tax purposes in the same manner as U.S. citizens.

This discussion does not consider U.S. state or local or non-U.S. tax consequences, and it does not consider all aspects of U.S. federal taxation that may be important to particular non-U.S. holders in light of their individual investment circumstances, such as special tax rules that may apply to a non-U.S. holder

If a partnership is a beneficial owner of our common stock, the treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A beneficial owner of our common stock that is a partnership and partners in such a partnership should consult their tax advisors about the U.S. federal income tax consequences of acquiring, owning, and disposing of our common stock.

The following discussion is based on provisions of the Internal Revenue Code, applicable U.S. Treasury regulations and administrative and judicial interpretations, all as in effect and generally available on the date of this prospectus. All of these authorities are subject to change, retroactively or prospectively. We advise each prospective investor to consult its own tax advisor regarding the personal federal, state, local and non-U.S. tax consequences with respect to acquiring, owning, and disposing of our common stock.

As described under “Dividend Policy” above, we do not anticipate paying dividends on our common stock in the foreseeable future. However, if we make cash distributions on our common stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess of earnings and profits will constitute a return of capital that is applied against and reduces the non-U.S. holder’s adjusted tax basis in our common stock. Any remaining excess will be treated as gain realized on the sale or other disposition of the common stock and will be treated as described under “— Gain on Disposition of Common Stock” below.

Dividends paid to a non-U.S. holder that are not effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States will generally be subject to withholding of U.S. federal income tax at the rate of 30 percent, or if a tax treaty applies, a lower rate specified by the treaty. Non-U.S. holders should consult their tax advisers regarding their entitlement to benefits under a relevant income tax treaty.

Under applicable U.S. Treasury regulations, for purposes of the withholding discussed above and for purposes of determining the applicability of a tax treaty rate:


	•	a non-U.S. holder who claims the benefit of an applicable income tax treaty rate generally will be required to satisfy certain certification and other requirements;

	•	in the case of common stock held by a foreign trust, the certification requirement will generally be applied to the trust or the beneficial owners of the trust depending on whether the trust is a “foreign complex trust,” “foreign simple trust,” or “foreign grantor trust” as defined in the U.S. Treasury regulations; and

	•	look-through rules will apply for foreign simple trusts and foreign grantor trusts.

Dividends that are effectively connected with a non-U.S. holder’s conduct of a trade or business in the United States and, if an income tax treaty applies, attributable to a permanent establishment in the United States are taxed on a net income basis at the regular graduated U.S. federal income tax rates in much the same manner as if the non-U.S. holder were a resident of the United States. In such cases, we will not have to withhold U.S. federal income tax if the non-U.S. holder complies with applicable certification and disclosure requirements. In addition, a “branch profits tax” may be imposed at a 30 percent rate, or a

To claim the benefit of a tax treaty or an exemption from withholding because the income is effectively connected with the conduct of a trade or business in the United States, a non-U.S. holder must provide a properly executed Internal Revenue Service, or IRS, Form W-8BEN for treaty benefits or W-8ECI for effectively connected income, before the payment of dividends. These forms must be periodically updated. Non-U.S. holders may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund.

A non-U.S. holder generally will not be subject to U.S. federal income tax or any withholding thereof with respect to gain realized on a sale or other disposition of our common stock unless one of the following applies:


	•	the gain is effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States and, if an income tax treaty applies, is attributable to a permanent establishment maintained by the non-U.S. holder in the United States; in these cases, the non-U.S. holder will generally be taxed on its net gain derived from the disposition at the regular graduated U.S. federal income tax rates and in much the same manner applicable to U.S. persons and, if the non-U.S. holder is a foreign corporation, the “branch profits tax” described above may also apply;

	•	the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of the disposition and meets certain other requirements; in this case, the non-U.S. holder will be subject to a 30% tax on the gain derived from the disposition; or

	•	our common stock constitutes a “United States real property interest” by reason of our status as a “United States real property holding corporation,” or a “USRPHC,” for U.S. federal income tax purposes at any time during the shorter of the 5-year period ending on the date you dispose of our common stock or the period you held our common stock. The determination of whether we are a USRPHC depends on the fair market value of our United States real property interests relative to the fair market value of our other business assets. We believe that we currently may be, or in the future may become, a USRPHC. However, as long as our common stock is “regularly traded on an established securities market” within the meaning of Section 897(c)(3) of the Code, such common stock will be treated as a United States real property interest only if you owned directly or indirectly more than 5% of such regularly traded common stock at any time during the shorter of the 5-year period ending on the date you dispose of our common stock or the period you held our common stock and we were a USRPHC at any time during such period. We believe that our common stock will be “regularly traded on an established securities market.” If we are or were to become a USRPHC and a non-U.S. holder owned directly or indirectly more than 5% of our common stock at any time during the periods described above or our common stock is not “regularly traded on an established securities market,” then any gain recognized by a non-U.S. holder on the sale or other disposition of our common stock would be treated as effectively connected with a U.S. trade or business and would be subject to U.S. federal income tax at regular graduated U.S. federal income tax rates and in much the same manner as applicable to U.S. persons. In such a case, the non-U.S. holder could also be subject to certain withholding taxes imposed on the gross proceeds realized with respect to the sale or other disposition of our common stock.

We must report annually to the IRS and to each non-U.S. holder the amount of dividends paid to that holder and the tax withheld from those dividends. These reporting requirements apply regardless of whether withholding was reduced or eliminated by an applicable tax treaty. Copies of the information returns reporting those dividends and withholding may also be made available to the tax authorities in the

Under some circumstances, U.S. Treasury regulations require additional information reporting and backup withholding on reportable payments on common stock. The gross amount of dividends paid to a non-U.S. holder that fails to certify its non-U.S. holder status in accordance with applicable U.S. Treasury regulations generally will be reduced by backup withholding at the applicable rate, currently 28%.

The payment of the proceeds of the sale or other disposition of common stock by a non-U.S. holder or through the U.S. office of any broker, U.S. or foreign, generally will be reported to the IRS and reduced by backup withholding, unless the non-U.S. holder either certifies its status as a non-U.S. holder under penalties of perjury or otherwise establishes an exemption and the broker has no actual knowledge to the contrary. The payment of the proceeds of the disposition of common stock by a non-U.S. holder to or through a non-U.S. office of a non-U.S. broker will not be reduced by backup withholding or reported to the IRS, unless the non-U.S. broker has certain enumerated connections with the United States. In general, the payment of proceeds from the disposition of common stock by or through a non-U.S. office of a broker that is a U.S. person or has certain enumerated connections with the United States will be reported to the IRS and may be reduced by backup withholding at the applicable rate, currently 28%, unless the broker receives a statement from the non-U.S. holder that certifies its status as a non-U.S. holder under penalties of perjury or the broker has documentary evidence in its files that the holder is a non-U.S. holder and the broker has no actual knowledge to the contrary.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a non-U.S. holder can be refunded or credited against the non-U.S. holder’s U.S. federal income tax liability, if any, provided that the required information is furnished to the IRS in a timely manner. These backup withholding and information reporting rules are complex and non-U.S. holders are urged to consult their own advisors regarding the application of these rules to them.

Common stock owned or treated as owned by an individual who is not a citizen or resident of the Untied States, as specifically defined for U.S. federal estate tax purposes, at the time of death will be included in the individual’s gross estate for U.S. federal estate tax purposes unless an applicable estate tax or other treaty provides otherwise and, therefore, may be subject to U.S. federal estate tax. Estates of non-resident aliens are generally allowed a statutory credit that has the effect of offsetting the U.S. federal estate tax imposed on the first $60,000 of the taxable estate.

Under the terms and subject to the conditions contained in an underwriting agreement dated , we and the selling shareholders have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as representatives, the following respective numbers of shares of common stock:

The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in this offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that, if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or this offering may be terminated.

We and the selling shareholders have granted to the underwriters a 30-day option to purchase on a pro rata basis up to additional shares from us and an aggregate of additional outstanding shares from the selling shareholders at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock.

The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a selling concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the representatives may change the public offering price and concession and discount to broker/dealers.

The following table summarizes the compensation and estimated expenses that we and the selling shareholders will pay:

The representatives have informed us that the underwriters do not expect discretionary sales to exceed 5% of the shares of common stock being offered.

We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the

Our officers, directors, the selling shareholders and certain other shareholders have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any of these transactions are to be settled by delivery of our common stock or other securities, in cash or otherwise, or publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse First Boston LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated for a period of 180 days after the date of this prospectus. This 180-day period may be extended by Credit Suisse First Boston LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated in order to enable the underwriters to comply with NASD Rule 2711(f)(4), which restricts, subject to certain exceptions, any of the underwriters from publishing or otherwise distributing a research report concerning us within 15 days of the expiration, waiver or termination of this 180-day period.

We and the selling shareholders have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make in that respect.

We will apply to list the shares of common stock on The New York Stock Exchange. In connection with the listing of the common stock on the New York Stock Exchange, the underwriters will undertake to sell round lots of 100 shares or more to a minimum of 2,000 beneficial owners.

Some of the underwriters or their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with us. They have received customary fees and commissions for these transactions. In particular, an affiliate of Merrill Lynch is a lender under one of our current credit facilities and a former affiliate of Piper Jaffray & Co. is a lender under another credit facility. In connection with our application of the net proceeds of this offering, less than 10% of such proceeds to us will be used to repay indebtedness to the affiliate of Merrill Lynch.

Through various private placements from 1996 through 2001, Piper Jaffray & Co. owns, directly or through its affiliates, 239,999 shares of our common stock, 15,000 shares of our Series B preferred stock and 106,250 shares of our Series D preferred stock. Upon the conversion of all of our outstanding preferred stock in connection with this offering, it will, directly or indirectly, own 441,382 shares of our common stock assuming that the preferred stock converts into common stock at the respective conversion ratios determined based on the assumption that all possible conversion ratio adjustments that could cause the number of shares of common stock to be issued to increase will have occurred.

There has been no public market for our common stock prior to this offering. We and the underwriters will negotiate the initial offering price. In determining the price, we and the underwriters expect to consider a number of factors in addition to prevailing market conditions, including:


	•	the information set forth in this prospectus and otherwise available to the representatives;

	•	the history and the prospects for the industry in which we compete;

	•	the ability of our management;

	•	our prospects for future earnings;


	•	our current financial position;

	•	the general condition of the securities markets at the time of this offering; and

	•	the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies.

We and the underwriters will consider these and other relevant factors in relation to the price of similar securities of generally comparable companies. Neither we nor the underwriters can assure investors that an active trading market will develop for our common stock, or that our common stock will trade in the public market at or above the initial offering price.

In connection with this offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934, or the Exchange Act.


	•	Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

	•	Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any covered short position by exercising their over-allotment option and/or by purchasing shares in the open market.

	•	Syndicate covering transactions involve purchases of our common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over- allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in this offering.

	•	Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when our common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the New York Stock Exchange or otherwise and, if commenced, may be discontinued at any time.

A prospectus in electronic format will be made available on the web sites maintained by certain of the underwriters, or selling group members, if any, participating in this offering. The representatives will agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations. Other than the prospectus in electronic format, the information on the web sites is not part of this prospectus.

The distribution of our common stock in Canada is being made only on a private placement basis exempt from the requirement that we and the selling shareholders prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are made. Any resale of our common stock in Canada must be made under applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of our common stock.

By purchasing common stock in Canada and accepting a purchase confirmation, a purchaser is representing to us, the selling shareholders and the dealer from whom the purchase confirmation is received that:


	•	the purchaser is entitled under applicable provincial securities laws to purchase our common stock without the benefit of a prospectus qualified under those securities laws,

	•	where required by law, the purchaser is purchasing as principal and not as agent, and

	•	the purchaser has reviewed the text above under “Resale Restrictions.”

Under Ontario securities legislation, a purchaser who purchases a security offered by this prospectus during the period of distribution will have a statutory right of action for damages or, while still the owner of the shares, for rescission against us and the selling shareholders in the event that this prospectus contains a misrepresentation. A purchaser will be deemed to have relied on the misrepresentation. The right of action for damages is exercisable not later than the earlier of 180 days from the date the purchaser first had knowledge of the facts giving rise to the cause of action and three years from the date on which payment is made for the shares. The right of action for rescission is exercisable not later than 180 days from the date on which payment is made for the shares. If a purchaser elects to exercise the right of action for rescission, the purchaser will have no right of action for damages against us or the selling shareholders. In no case will the amount recoverable in any action exceed the price at which the shares were offered to the purchaser and, if the purchaser is shown to have purchased the securities with knowledge of the misrepresentation, we and the selling shareholders will have no liability. In the case of an action for damages, we and the selling shareholders will not be liable for all or any portion of the damages that are proven to not represent the depreciation in value of the shares as a result of the misrepresentation relied upon. These rights are in addition to, and without derogation from, any other rights or remedies available at law to an Ontario purchaser. The foregoing is a summary of the rights available to an Ontario purchaser. Ontario purchasers should refer to the complete text of the relevant statutory provisions.

All of our directors and officers as well as the experts named herein and the selling shareholders may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or those persons. All or a substantial portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of Canada.

Canadian purchasers of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in our common stock in their particular circumstances and about the eligibility of our common stock for investment by the purchaser under relevant Canadian legislation.

The validity of the shares of common stock offered by this prospectus and other legal matters will be passed upon for us by Faegre & Benson LLP, Minneapolis, Minnesota. Certain legal matters in connection with this offering will be passed upon for the underwriters by Morgan, Lewis & Bockius LLP, New York, New York.

The consolidated financial statements of Life Time Fitness, Inc. and its consolidated subsidiaries as of December 31, 2002 and December 31, 2003 and for the years ended December 31, 2001, December 31, 2002 and December 31, 2003 included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

We have filed a registration statement on Form S-1 with the Securities and Exchange Commission for the stock we are offering by this prospectus. This prospectus does not include all of the information contained in the registration statement. You should refer to the registration statement and its exhibits for additional information. Statements in this prospectus as to the contents of any contract, agreement or other document referred to are materially complete. As a result of this offering, we will also be required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission.

You may read and copy all or any portion of the registration statement or any reports, statements or other information that we file at the Securities and Exchange Commission’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the Securities and Exchange Commission. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Our Securities and Exchange Commission filings, including the registration statement, are also available to you on the Securities and Exchange Commission’s web site http://www.sec.gov.

We have audited the accompanying consolidated balance sheets of LIFE TIME FITNESS, Inc. (a Minnesota corporation) and Subsidiaries (the Company) as of December 31, 2002 and 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly the financial position of the Company as of December 31, 2002 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

Life Time Fitness, Inc. and the Subsidiaries (collectively, the Company) are primarily engaged in designing, building and operating sports, fitness and family recreation centers, principally in suburban locations of major metropolitan areas. As of December 31, 2003 and March 31, 2004, the Company operated 33 centers, including 14 in Minnesota, seven in Illinois, five in Michigan, two in Virginia, two in Arizona, and one each in Ohio, Indiana and Texas.

Principles of Consolidation — The consolidated financial statements include the accounts of LIFE TIME FITNESS, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Interim Financial Statements (unaudited) — The consolidated balance sheet as of March 31, 2004, the consolidated statements of operations and cash flows for the three months ended March 31, 2003 and 2004, and the consolidated statement of stockholders’ equity for the three months ended March 31, 2004 have been prepared by the Company without audit. The amounts as of and for the three months ended March 31, 2003 and 2004 included within the Notes to Consolidated Financial Statements have also been prepared by the Company without audit. In the opinion of the Company’s management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows, and changes in stockholders’ equity at March 31, 2004 and for the periods ended March 31, 2003 and 2004 have been made. Interim results are not necessarily indicative of the results that will be achieved for the year.

Pro Forma Presentation (unaudited) — The consolidated balance sheet as of March 31, 2004 reflects the pro forma effect of the mandatory conversion of all the redeemable preferred stock into shares of common stock. The consolidated statements of operations for the year ended December 31, 2003 and the three months ended March 31, 2004 reflect the pro forma effect of the mandatory conversion of all the redeemable preferred stock into shares of common stock upon the consummation of a qualified initial public offering as of January 1, 2003 and January 1, 2004, respectively. The conversion ratio assumes the maximum number of shares to be issued upon the conversion of the redeemable preferred stock.

Pro forma basic earnings (loss) per common share (EPS) is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period presented plus the maximum number of shares to be issued upon the conversion of the redeemable preferred stock. Pro forma diluted EPS is computed similarly to pro forma basic EPS, except that the denominator is increased for the assumed conversion of dilutive stock options using the treasury stock method.

Revenue Recognition — The Company receives a one-time enrollment fee at the time a member joins and monthly membership dues for usage from its members. The enrollment fees are nonrefundable after 30 days. Enrollment fees and related direct expenses (primarily commissions) are deferred and recognized on a straight-line basis over an estimated membership period of 36 months, which is based on historical membership experience. In addition, monthly membership dues paid in advance of a sports, fitness and family recreation center’s opening are deferred until the center opens. The Company offers members month-to-month memberships and recognizes as revenue the monthly membership dues in the month to which they pertain.

The Company provides services at each of its sports, fitness and family recreation centers, including personal training, spa, café and other member services. The revenue associated with these services is

recognized at the time the service is performed. Personal training revenue received in advance of training sessions and the related direct expenses (primarily commissions) are deferred and recognized when services are performed. Other revenue, which includes revenue generated from the Company’s nutritional products, media, athletic events and a restaurant, is recognized when realized and earned. For nutritional products, revenue is recognized, net of sales returns and allowances, at the time the risk of loss passes to the customer. Media advertising revenue is recognized over the duration of the advertising placement. For athletic events, revenue is generated primarily through sponsorship sales and registration fees. Athletic event revenue is recognized upon the completion of the event. Restaurant revenue is recognized at the point of sale to the customer.

Preopening Operations — The Company generally operates a preview center up to nine months prior to the planned opening of a sports, fitness and family recreation center during which time memberships are sold as construction of the center is being completed. The revenue and direct membership acquisition costs incurred during the period prior to a center opening are deferred until the center opens; however, the related advertising, office and rent expenses incurred during this period are expensed as incurred.

Cash and Cash Equivalents — The Company considers all unrestricted cash accounts and highly liquid debt instruments purchased with original maturities of three months or less to be cash and cash equivalents.

Restricted Cash — The Company is required to keep funds on deposit at certain financial institutions related to certain of its credit facilities. The Company’s lender or lenders, as the case may be, may access the restricted cash after the occurrence of an event of default, as defined under their respective credit facilities.

Accounts Receivable — Accounts receivable is presented net of allowance for doubtful accounts and sales returns and allowances of $28, $446 and $677 as of December 31, 2001, 2002 and 2003, respectively.

Inventories — Inventories consisted primarily of nutritional products, operational supplies and uniforms. These inventories are stated at the lower of cost or market value.

Prepaid Expenses and Other Current Assets — Prepaid expenses and other current assets consisted primarily of prepaid insurance, other prepaid operating expenses and deposits.

Property and Equipment — Property, equipment and leasehold improvements are recorded at cost. Improvements are capitalized, while repair and maintenance costs are charged to operations when incurred.

Depreciation is computed primarily using the straight-line method over estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the original lease term or the estimated useful life of the improvement.

At March 31, 2004, the Company had five sports, fitness and family recreation centers under construction in Texas.

The Company has developed web-based systems to facilitate member enrollment and management. Costs related to these projects have been capitalized in accordance with Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.

Other center equipment consists primarily of furniture, playground equipment and laundry facilities.

Impairment of Long-lived Assets — The carrying value of long-lived assets is reviewed annually and whenever events or changes in circumstances indicate that such carrying values may not be recoverable. The Company considers a history of consistent and significant operating losses to be its primary indicator of potential impairment. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows, which is generally at an individual center level or the separate restaurant. The determination of whether impairment has occurred is based on an estimate of undiscounted future cash flows directly related to that center or the restaurant, compared to the carrying value of these assets. If an impairment has occurred, the amount of impairment recognized is determined by estimating the fair value of these assets and recording a loss if the carrying value is greater than the fair value. For the year ended December 31, 2002, an impairment charge of $6,952 was recorded related to one of the centers designed as an urban executive facility located in downtown Minneapolis, Minnesota and a restaurant the Company operates in the same building. The urban executive facility and restaurant differ significantly

from the Company’s standard model and initial cash flow results have not been as high as projected. Additionally, these facilities are located in a more costly geographic area of downtown Minneapolis. The Company opened this center and accompanying restaurant in 2000, but did not recognize an impairment prior to December 31, 2002, as the Company determined it was too early to assess the viability of their operations.

Other Assets — The Company records its intangible assets at cost. Amortization of financing costs is computed over the periods of the related debt financing. Other assets consist of the following:

Pre-development costs consist of legal, travel, architectural, feasibility and other direct expenditures incurred for certain prospective new center projects. Capitalization commences when acquisition of a particular property is deemed probable by management. Should a specific project be deemed not viable for construction, any capitalized costs related to that project are charged to operations at the time of that determination. Costs incurred prior to the point at which the acquisition is deemed probable are expensed as incurred. Pre-development costs capitalized in the years ended December 31, 2002 and 2003 were approximately $452 and $2,094, respectively, and approximately $1,116 in the three months ended March 31, 2004. Upon completion of a project, the pre-development costs are classified as property and equipment and depreciated over the useful life of the asset.

Accrued Expenses — The Company records accrued expenses to properly match costs to its respective revenue. Accrued expenses consist of the following:

Income Taxes — The Company files consolidated federal and state income tax returns. Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the

reported amounts of assets and liabilities and their tax bases at currently enacted tax rates. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Earnings (Loss) per Common Share — Basic earnings (loss) per common share (EPS) is computed by dividing net income (loss) applicable to common shareholders by the weighted average number of shares of common stock outstanding during each year. Diluted EPS is computed similarly to basic EPS, except that the numerator is adjusted to add back any redeemable preferred stock accretion and the denominator is increased for the conversion of any dilutive common stock equivalents, such as redeemable preferred stock, and the assumed exercise of dilutive stock options using the treasury stock method.

Accretion on redeemable preferred stock is computed based on the per share annual return on the respective series of redeemable preferred stock plus any accumulated but unpaid dividends. The discount on redeemable preferred stock attributable to offering expenses is also being accreted over the period to the mandatory redemption date. Accretion on redeemable preferred stock was as follows:

The following table summarizes the weighted average common shares for basic and diluted EPS computations:

The effect of the shares issuable upon the conversion of redeemable preferred stock was not included in the calculation of diluted EPS for the year ended December 31, 2002 and the effect of the shares issuable upon both the conversion of redeemable preferred stock and the effect of stock options were not included in the calculation of diluted EPS for the year ended December 31, 2001 as they were antidilutive. The number of equivalent shares excluded from the computation of diluted EPS was 14,247,600, 11,323,000 and 0 for the years ended December 31, 2001, 2002 and 2003, respectively, and 0 for the three months ended March 31, 2003 and 2004.

Stock-Based Compensation — The Company has stock option plans for employees and accounts for these option plans in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. For more information on the Company’s stock-based compensation plans, see Note 6.

Had compensation cost for these plans been determined consistent with Statement of Financial Accounting Standards (SFAS) No. 123, the Company’s net income (loss) applicable to common shareholders, basic EPS and diluted EPS would have been reduced to the following pro forma amounts:

The weighted-average fair value of options granted was $4.64, $4.42 and $4.15 for the years ended December 31, 2001, 2002 and 2003, respectively, and $3.30 and $0 for the three months ended March 31, 2003 and 2004, respectively.

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:

Fair Value of Financial Instruments — The carrying amounts related to cash and cash equivalents approximate fair value due to the relatively short maturities of such instruments. The fair value of long-term debt approximates the carrying value and is based on interest rates for the same or similar debt offered to the Company 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. Actual results could differ from those estimates. In recording transactions and

balances resulting from business operations, the Company uses estimates based on the best information available. The Company uses estimates for such items as depreciable lives, volatility factors in determining fair value of option grants, tax provisions, provisions for uncollectible receivables and for calculating the amortization period for deferred enrollment fee revenue and associated direct costs (based on the weighted average expected life of center memberships). The Company revises the recorded estimates when better information is available, facts change, or the Company can determine actual amounts. Those revisions can affect operating results.

Interest Income — Interest income included in interest expense, net, for the years ended December 31, 2001, 2002 and 2003 was $185, $196 and $337, respectively, and $113 and $36 for the three months ended March 31, 2003 and 2004, respectively.

Supplemental Cash Flow Information — Changes in operating assets and liabilities, reflecting increases (decreases) in cash, are as follows:

New Accounting Pronouncements — In May 2003, the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standard, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS No. 150). This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments of both liabilities and equity. SFAS No. 150 requires issuers to classify as liabilities (or assets in some

circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. For public entities, SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and at the beginning of the first interim period beginning after June 15, 2003 for all existing financial instruments. As of March 31, 2004, the Company did not have financial instruments within the scope of SFAS No. 150.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. FIN 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. In December 2003, the FASB revised FIN 46 to exclude from its scope certain entities which meet the definition of a business under Emerging Issues Task Force No. 98-3, Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business. FIN 46, as revised, shall be applied no later than the first reporting period ending after March 15, 2004. The adoption of FIN 46, as revised, will not have a material impact on the Company’s financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS No. 145). FASB No. 4 required all gains or losses from extinguishment of debt to be classified as extraordinary items net of income taxes. SFAS No. 145 requires that gains and losses from extinguishment of debt be evaluated under the provisions of APB Opinion No. 30, and be classified as ordinary items unless they are unusual or infrequent or meet the specific criteria for treatment as an extraordinary item. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. As a result of SFAS No. 145, the loss from early extinguishment of debt of $2,911 has been reclassified from an extraordinary item to a component of continuing operations in the Company’s 2001 statement of operations.

In December 1999, the Company, together with two unrelated organizations, formed an Illinois limited liability company named LIFE TIME Fitness Bloomingdale L.L.C. (Bloomingdale LLC) for the purpose of constructing and operating a sports, fitness and family recreation center in Bloomingdale, Illinois. The center opened for business in February 2001. Each of the three members maintains an equal interest in Bloomingdale LLC. Pursuant to the terms of the agreement that governs the formation and operation of Bloomingdale LLC (the Operating Agreement), each of the three members contributed $2,000 to Bloomingdale LLC. The Operating Agreement expires on the earlier of December 1, 2039 or the liquidation of Bloomingdale LLC. The Company accounts for its interest in Bloomingdale LLC on the equity method.

On December 1, 1999, Bloomingdale LLC entered into a management agreement with the Company, pursuant to which the Company agreed to manage the day-to-day operations of the center. The management agreement expires on December 31, 2039 unless it terminates earlier pursuant to its terms. The Company does not receive a management fee in connection with its duties under the management agreement, but does receive an overhead cost recovery charge equal to the lesser of (i) the lowest rate charged to any of the Company’s other sports, fitness and family recreation centers, or (ii) 9.0% of the net revenue of the Bloomingdale LLC sports, fitness and family recreation center, provided, however, that in no event would Bloomingdale LLC be charged overhead cost recovery at a rate in excess of the ratio of the Company’s total overhead expense to its total net center revenue. Overhead cost recovery charges to

Bloomingdale LLC were $517, $799 and $988 for the years ended December 31, 2001, 2002 and 2003, respectively.

Bloomingdale LLC issued indebtedness in June 2000 in a taxable bond financing that is secured by a letter of credit in an amount not to exceed $14,700. All of the members separately guaranteed one-third of these obligations to the bank for the letter of credit and pledged their membership interest to the bank as security for the guarantee.

Pursuant to the terms of the Operating Agreement, beginning in March 2002 and continuing throughout the term of such agreement, the members are entitled to receive monthly cash distributions from Bloomingdale LLC. The amount of this monthly distribution is, and will continue to be throughout the term of the agreement, $56 per member. In the event that Bloomingdale LLC does not generate sufficient cash flow through its own operations to make the required monthly distributions, the Company is obligated to make such payments to each of the other two members. To date, Bloomingdale LLC has generated cash flows sufficient to make all such payments. Each of the three members received distributions from Bloomingdale LLC in the amount of $281 and $614 in 2002 and 2003, respectively.

In June and October 2001, the Company, through certain of its wholly owned subsidiaries, refinanced 10 of its centers pursuant to the terms of individual notes issued to an insurance company. Outstanding obligations under the notes bear interest at 8.25%. In 2001, the Company began making monthly payments of principal and interest on these obligations, based upon a 20-year amortization period. The Company’s obligations to the insurance company mature in June 2011. In connection with this refinancing, the Company incurred expenses of $2,344 in early extinguishment fees and $567 to write off loan costs related to the original debt.

In November 2002, the Company, through certain of its wholly owned subsidiaries, refinanced three additional centers pursuant to the terms of individual notes issued to an insurance company. Outstanding obligations under the notes bear interest at 8.25%. In December 2002, the Company began making monthly payments of principal and interest on these obligations, based upon a 15-year amortization period. The Company’s obligations to the insurance company mature in June 2011. In connection with this refinancing, the Company incurred expenses of $382 to write off loan costs, which are included in interest expense.

The Company is a party to a $75,000 construction credit facility. Pursuant to the terms of the construction credit facility, the lending group has committed to make up to seven separate series loans, the purpose of which is to fund the construction costs related to completing the construction of certain centers. The commitment to continue to make loans available to the Company under this facility has been renewed by the lenders annually. The current commitment to lend expires on June 30, 2004. Borrowings under this facility are limited to the lesser of 55.0% of the total land and construction costs, or 75% of the appraised value, of the specific centers currently under construction and are due and payable no later than three years from the date of the series supplement for each series loan. As security for the obligations owing under the construction credit facility, the Company has granted mortgages on each of the specific centers that are financed by means of the construction credit facility. Interest accrues at the reference rate plus 0.5%. At December 31, 2003, $25,865 was outstanding related to three specific centers and $49,135 was available for additional borrowings under this facility. In January 2004, the Company retired all of the debt on two of the centers, totaling $17,950.

The Company is a party to a revolving credit facility with a group of financial institutions. The revolving credit facility, as amended and restated, allows for borrowings and letters of credit of up to $55,000 (of which $15,000 is a term loan). Availability under the facility is determined based upon a multiple of operating cash flow adjusted for outstanding indebtedness, as defined therein. As of December 31, 2003, $15,000 was outstanding, $5,000 of letters of credit were outstanding and the Company had approximately $35,000 available for additional borrowings under this facility. Interest accrues at the rate of either a base rate plus 2.5% or LIBOR plus 4.0%, as the Company may elect from time to time. The revolving credit facility requires payment of commitment fees of 0.5% on unused credit availability. As of December 31, 2003, the Company is required to maintain a senior leverage ratio not in excess of 2.75 to 1.00, a total leverage ratio not in excess of 4.5 to 1.0, a fixed charge coverage ratio not in excess of 1.15 to 1.00, an interest coverage ratio not in excess of 3.0 to 1.0, an adjusted total leverage ratio not in excess of 4.0 to 1.0 and a loan to value ratio not in excess of 0.5 to 1.0. The revolving credit facility also contains covenants that, among other things, restrict the ability to incur certain additional debt, pay dividends, create certain liens and engage in certain transactions.

In May 2001, the Company entered into a sale/leaseback transaction with respect to one of its centers. Pursuant to the terms of this transaction, the Company sold the center for $7,200. The Company did not recognize any material gain or loss on the sale of the center. The Company retired $2,900 of indebtedness related to this center. At the time of the sale, the Company simultaneously entered into a lease of the center. Pursuant to the lease, the Company has agreed to lease the center for a period of 20 years. As of December 31, 2003, the present value of the future minimum lease payments due under the lease amounted to $7,008 and is included in obligations under capital lease.

In December 2003, the Company entered into a $35.0 million mortgage facility. The purpose of this credit facility is to refinance outstanding obligations under the construction credit facility; however, this facility could also be used to finance the construction of new centers. Borrowings under this facility are limited to 65.0% of the total land and construction cost of certain centers. Funds are available for advance within 12 months of the closing date of the credit facility and bear interest at a per annum rate equal to 4.5% plus the most current rate quoted by the Federal Reserve as the 5-year rate for U.S. Government

Treasury Securities. Advances made under this credit facility will be amortized over a 15-year period and will be due in full on December 31, 2011. The credit facility requires that each center financed under the facility maintain a fixed charge ratio of not less than 1.0 to 1.0 during the first 18 months of the advancement of borrowings for such center and a fixed charge ratio of not less than 1.2 to 1.0 thereafter. No amounts are outstanding under this facility.

The Company was in compliance in all material respects with all restrictive and financial covenants under its various credit facilities as of December 31, 2003.

Aggregate annual future maturities of long-term debt (excluding capital leases) at December 31, 2003 are as follows:

The Company is a party to capital equipment leases with third parties which provide for monthly rental payments of approximately $1,489 as of December 31, 2003. The following is a summary of property and equipment recorded under capital leases:

Future minimum lease payments and the present value of net minimum lease payments on capital leases at December 31, 2003 are as follows:

The provision for income taxes differs from the federal statutory rate as follows:

Deferred income taxes are the result of provisions of the tax laws that either require or permit certain items of income or expense to be reported for tax purposes in different periods than they are reported for

financial reporting. The tax effect of temporary differences that gives rise to the deferred tax asset (liability) are as follows:

Authorized Shares — The Company’s Articles of Incorporation, as amended, authorize the aggregate issuance of 60,000,000 shares of stock consisting of 10,000,000 shares of preferred stock, $0.02 par value per share, of which 1,000,000 shares have been designated as Series B redeemable preferred stock, 4,500,000 shares have been designated as Series C redeemable preferred stock, 2,000,000 shares have been designated as Series D redeemable preferred stock, and 2,500,000 shares are undesignated, and 50,000,000 shares of common stock, par value $0.02 per share.

Redeemable Preferred Stock — On May 7, 2001, the holders of the Series A redeemable preferred stock elected to convert certain of the Series A redeemable preferred stock into common stock. At a conversion ratio of 1 to 5.3, the Company issued 2,539,991 shares of its common stock in exchange for the retirement of 479,244 shares of the Series A redeemable preferred stock. On May 7, 2002, the holders of the Series A redeemable preferred stock elected to convert the remaining 479,243 shares of Series A redeemable preferred stock. Under the same conversion ratio the Company issued 2,539,986 shares of its common stock in exchange for the retirement of the remaining 479,243 shares of Series A redeemable preferred stock.

In connection with a stock purchase agreement dated December 8, 1998, the Company sold 1,000,000 shares of Series B redeemable preferred stock for $20.00 per share (less offering expenses of $84). The Series B redeemable preferred stock is subject to mandatory conversion upon the consummation of a qualified initial public offering, as defined by the Series B certificate of designation, as amended, and is convertible into common stock, unless previously redeemed, at a 1:4.571428 conversion ratio, subject to adjustment in certain events. This conversion ratio, which was previously 1:4, was adjusted on December 31, 2003 pursuant to the Series B certificate of designation, as amended, to reflect the reduction of the conversion price to 87.5% of the original conversion ratio as the Company did not achieve certain per share net income targets for the 12-month period ended December 31, 2003. In addition, the Series B redeemable preferred stock is subject to mandatory redemption in equal amounts on December 31, 2004 and 2005. The per share redemption price is $20.00, plus an amount representing a per share annual return of 7%, plus any accumulated but unpaid dividends, if declared. An amount equal to the cumulative return is accreted to the preferred stock balance to reflect the redemption amount, if not previously converted into common shares.

In connection with a stock purchase agreement dated August 16, 2000, the Company sold 4,500,000 shares of Series C redeemable preferred stock for $10.00 per share (less offering expenses of $2,578). The Series C redeemable preferred stock is convertible into common stock, unless previously redeemed, at a 1:1 conversion ratio, and is subject to mandatory conversion upon the consummation of a qualified initial public offering, as defined by the Series C certificate of designation, as amended. In addition, the Series C redeemable preferred stock is subject to mandatory redemption on August 16, 2006. The per share redemption price is $10.00, plus an amount representing a per share annual return of 8%, plus any accumulated but unpaid dividends, if declared. An amount equal to the cumulative return is accreted to the preferred stock balance to reflect the redemption amount, if not previously converted into common shares. The discount on the preferred stock attributable to offering expenses is being accreted to the preferred stock balance over a six-year period.

In connection with a stock purchase agreement dated July 19, 2001, the Company sold 1,946,250 shares of Series D redeemable preferred stock for $10.00 per share (less offering expenses of $72). The Series D redeemable preferred stock is convertible into common stock, unless previously redeemed, at a 1:1 conversion ratio, and is subject to mandatory conversion upon the consummation of a qualified initial public offering, as defined by the Series D certificate of designation, as amended. In addition, the Series D redeemable preferred stock is subject to mandatory redemption on August 16, 2006. The per share redemption price is $10.00, plus an amount representing a per share annual return of 8%, plus any accumulated but unpaid dividends, if declared. An amount equal to the cumulative return is accreted to the redeemable preferred stock balance to reflect the redemption amount, if not previously converted into common shares.

In connection with the sale of its Series D redeemable preferred stock, the Company agreed that the conversion ratio for each of the Series C and the Series D redeemable preferred stock would be adjusted from 1:1 to 1:1.25, in the event that a change of ownership of the Company occurs, including a qualifying initial public offering, and the return on investment for the holders of the Series C and the Series D redeemable preferred stock realized in connection with the change of ownership does not achieve a certain rate of return with respect to such series, as defined in the Series C and Series D certificates of designation, based on the date of purchase.

No dividends were declared on any of the redeemable preferred stocks for the years ended December 31, 2001, 2002 and 2003.

Stock Options — During 1994, the Company granted options to acquire an aggregate of 320,000 shares of common stock with an exercise price of $0.75 per share to members of the Board of Directors. As of December 31, 2003, no options remained outstanding related to the 1994 grant.

During 1996, the Company adopted the FCA, Ltd. 1996 Stock Option Plan (the 1996 Plan), which reserved up to 2,000,000 shares of the Company’s common stock for issuance under the 1996 Plan. Under the 1996 Plan, the Board of Directors have the authority to grant incentive and nonqualified options to purchase shares of the Company’s common stock to eligible employees, directors, and contractors at a price of not less than 100% of the fair market value at the time of the grant. Incentive stock options expire no later than 10 years from the date of grant, and nonqualified stock options expire no later than 15 years from the date of grant. As of December 31, 2003, the Company had granted a total of 1,700,000 options to purchase common stock under the 1996 Plan, of which 1,358,000 were outstanding.

During 1998, the Company adopted the LIFE TIME FITNESS, Inc. 1998 Stock Option Plan (the 1998 Plan), which reserved up to 1,600,000 shares of the Company’s common stock for issuance. Under the 1998 Plan, the Board of Directors have the authority to grant incentive and nonqualified options to purchase shares of the Company’s common stock to eligible employees, directors and contractors at a price of not less than 100% of the fair market value at the time of the grant. Incentive stock options expire no

later than 10 years from the date of grant, and nonqualified stock options expire no later than 15 years from the date of grant. The 1998 Plan was amended in December 2003 by the Company’s Board of Directors and shareholders to reserve an additional 1,500,000 shares of the Company’s common stock for issuance. As of December 31, 2003, the Company had granted a total of 1,957,500 options to purchase common stock at exercise prices of $4.00 to $12.00 under the 1998 Plan, of which 1,673,475 were outstanding.

The options granted generally vest over a period of three to five years from the date of grant. At December 31, 2003, options to purchase 1,345,550 shares were exercisable. The following table summarizes information concerning options outstanding and exercisable as of December 31, 2003:

In December 2003, the Company granted 303,500 options to purchase common stock under the 1998 Plan at $12.00 per share. The fair value per share was determined to be $16.00, resulting in intrinsic value of $4.00 per share which the Company is recording as compensation expense of $255 per year over the weighted average vesting period of 4.8 years. The fair value of the common stock was determined on a contemporaneous basis by management. Management did not obtain an independent contemporaneous valuation at the time of the grant due to an independent valuation that was performed as of June 30, 2003. Events occurring since June 30, 2003, including the Company’s contemplated initial public offering, were considered by management in determining the value of the Company’s common stock for the December 2003 grant of stock options.

The Company determined its operations are conducted mainly through one reportable operating segment because all centers are aggregated — sports, fitness and family recreation centers. The Company’s chief operating decision maker uses EBITDA as the primary measure of segment performance. For purposes of segment financial reporting and discussion of results of operations, sports, fitness and family recreation centers represent the revenue and associated costs (including general and administrative expenses) from membership dues and enrollment fees, all in-center activities including personal training, spa, café and other activities offered to members and non-member participants and rental income. Included in the “All Other” category in the table below is operating information related to nutritional products, media, athletic events, and a restaurant, and expenses, including interest expense, and corporate assets (including depreciation and amortization) not directly attributable to sports, fitness and family recreation centers. The accounting policies of the sports, fitness and family recreation centers and operations classified as “All Other” are the same as those described in the summary of significant accounting policies.

Financial data and reconciling information for the Company’s reporting segment to the consolidated amounts in the financial statements are as follows:


(a)	Eliminations relate to the sale of the Company’s nutritional products to the Company’s owned cafes.

Lease Commitments — The Company leases certain property and equipment under operating leases. The minimum annual payments under all noncancelable operating leases at December 31, 2003 are as follows:

Rent expense under these operating leases was $4,138, $4,890 and $6,135 for the years ended December 31, 2001, 2002 and 2003. Certain lease agreements call for escalating lease payments over the term of the lease, resulting in a deferred rent liability due to the expense being recognized on the straight-line basis over the life of the lease.

In September 2003, the Company entered into a sale/leaseback transaction with respect to two of its Michigan centers. Pursuant to the terms of this transaction, the Company sold the centers for $42,900. The Company retired $22,390 of indebtedness related to these centers. At the time of the sale, the Company simultaneously entered into a 20-year operating lease for the centers. The gain on the sale/leaseback transaction of $504 has been deferred and is being recognized as a reduction of lease expense over the term of the lease.

Litigation — The Company is engaged in legal proceedings incidental to the normal course of business. Although the ultimate outcome of these matters cannot be determined, management believes that the final disposition of these proceedings will not have a material adverse effect on the consolidated financial position or results of operations of the Company.

401(k) Savings and Investment Plan — The Company offers a 401(k) savings and investment plan (the 401(k) Plan) to substantially all full-time employees who have at least one year of service and 1,000 hours worked during the year and are at least 21 years of age. The Company made discretionary contributions to the 401(k) Plan in the amount of $634 and $753 for the years ended December 31, 2002 and 2003. The Company did not make a discretionary matching contribution in 2001.

Related-Party Transactions — Certain of the Company’s refurbishing and remodeling construction projects at its centers in Minnesota were managed by a general contractor, which is primarily owned by the president of one of the Company’s wholly owned subsidiaries. The Company paid such general contractor $418 and $49 for the years ended December 31, 2001 and 2002, respectively. No such payments were made in 2003 or for the three months ended March 31, 2004.

The Company leased one jet until June 2003 (two jets in 2001 and 2002) from an aviation company that is wholly owned by the Company’s chief executive officer and the president of a wholly owned subsidiary of the Company. Each month the Company was charged the equivalent of the debt service for the exclusive use of the jets. The Company also paid an hourly fee for the periodic use of other aircraft owned by the aviation company. Beginning in July 2003, the Company paid an hourly rate for the periodic use of the one jet owned by the aviation company. The Company was charged in total $1,053, $857 and $892 for the use of this aircraft or aircrafts, as the case may be, for the years ended December 31, 2001,

2002 and 2003. The Company purchased one jet from the aviation company for fair market value of $3,950 in January 2004.

The Company’s chief executive officer was the landlord under a lease involving a center leased by the Company. Consequently, the Company made payments for monthly rent to its chief executive officer under such lease in the amounts of $349, $355 and $234 for the years ended December 31, 2001, 2002 and 2003, respectively. In August 2003, the Company’s chief executive officer sold his position as landlord under the lease to an entity unrelated to the Company.

The Company leases various fitness and office equipment for use at the center in Bloomingdale, Illinois. The Company then subleases this equipment to Bloomingdale LLC. The terms of the sublease are such that Bloomingdale LLC is charged the equivalent of the debt service for the use of the equipment. The Company charged $340, $426 and $425 for the years ended December 31, 2001, 2002 and 2003.

As noted in Note 4, in May 2001, the Company completed a transaction to sell and simultaneously lease back one of its Minnesota centers. The Company did not recognize any material gain or loss on the sale of the center. The purchaser and landlord in such transaction is an entity composed of four individuals, one of whom is the president of a wholly owned subsidiary of the Company. The Company paid rent pursuant to the lease of $880 for the years ended December 31, 2001, 2002 and 2003. In connection with the sale, the Company received a note in the amount of approximately $264 which was repaid in December 2003.

In October 2003, the Company leased a center located within a shopping center that is owned by a general partnership in which the Company’s chief executive officer has a 50% interest. In December 2003, the Company and the general partnership executed an addendum to this lease whereby the Company leased an additional 5,000 square feet of office space on a month-to-month basis within the shopping center. The Company paid rent pursuant to this lease of $125 for the year ended December 31, 2003.

In April 2004, the Company’s Board of Directors adopted the Life Time Fitness, Inc. 2004 Long-Term Incentive Plan (the 2004 Plan), which reserved up to 3,500,000 shares of the Company’s common stock for issuance under the 2004 Plan. The 2004 Plan was approved by the Company’s shareholders in May 2004. Under the 2004 Plan, the Compensation Committee of the Board of Directors has the authority to grant incentive and non-qualified stock options to purchase shares of the Company’s common stock, stock appreciation rights, restricted shares, restricted share units, performance awards and other types of stock-based awards to eligible employees, non-employee directors and consultants.

In April 2004, the Company amended its construction credit facility with a group of financial institutions that allows for borrowings of up to $75,000 to extend the term of the facility to January 1, 2006.

Expenses in connection with the issuance and distribution of the shares of common stock being registered hereunder, other than underwriting commissions and expenses, are set forth below. These expenses, other than the SEC registration fee, the NASD filing fee and the New York Stock Exchange listing fee, are estimated.

Section 302A.521, subd. 2, of the Minnesota Statutes requires that we indemnify a person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of the person with respect to the company, against judgments, penalties, fines, including, without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements, and reasonable expenses, including attorneys’ fees and disbursements, incurred by the person in connection with the proceeding with respect to the same acts or omissions if such person (i) has not been indemnified by another organization or employee benefit plan for the same judgments, penalties or fines, (ii) acted in good faith, (iii) received no improper personal benefit, and statutory procedure has been followed in the case of any conflict of interest by a director, (iv) in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful, and (v) in the case of acts or omissions occurring in the person’s performance in the official capacity of director or, for a person not a director, in the official capacity of officer, board committee member or employee, reasonably believed that the conduct was in the best interests of the company, or, in the case of performance by a director, officer or employee of the company involving service as a director, officer, partner, trustee, employee or agent of another organization or employee benefit plan, reasonably believed that the conduct was not opposed to the best interests of the company. In addition, Section 302A.521, subd. 3, requires payment by us, upon written request, of reasonable expenses in advance of final disposition of the proceeding in certain instances. A decision as to required indemnification is made by a disinterested majority of our board of directors present at a meeting at which a disinterested quorum is present, or by a designated committee of the board, by special legal counsel, by the shareholders, or by a court.

Our articles of incorporation and by-laws provide that we shall indemnify each of our directors, officers and employees to the fullest extent permissible by Minnesota Statute, as detailed above. We also maintain a director and officer liability insurance policy.

In addition, the registration rights provisions of the stock purchase agreements we entered into with our preferred shareholders obligate us to indemnify such shareholders requesting or joining in a registration and each underwriter of the securities so registered, as well as the officers, directors and partners of such

The Underwriting Agreement filed as Exhibit 1 to this Registration Statement provides for indemnification by the underwriters of us and our officers and directors for certain liabilities arising under the Securities Act, or otherwise.

Since January 1, 2001, we have issued and sold the following unregistered securities:

Since January 1, 2001, we have granted options to purchase 1,303,500 shares of our common stock to employees, officers and consultants under our 1998 Stock Option Plan at exercise prices ranging from $8.00 to $12.00 per share. During the same period, we issued and sold 468,355 shares of our common stock pursuant to option exercises at prices ranging from $0.75 to $8.00 per share. All of these grants were made to our employees, officers, directors or consultants under written compensatory benefit plans within the limits on the amount of securities than can be issued under Rule 701. Accordingly, these grants and sales were made in reliance on Rule 701 of the Securities Act.

From July 20, 2001 to October 18, 2001, we issued an aggregate of 1,946,250 shares of our Series D Preferred Stock to 23 accredited investors at a purchase price of $10.00 per share for an aggregate consideration of $19,462,500. On July 20, 2001, we issued and sold 1,500,000 shares of our Series D Preferred Stock to 16 accredited investors for an aggregate consideration of $15,000,000. On August 24, 2001, we issued and sold 106,250 shares of our Series D Preferred Stock to two accredited investors for an aggregate consideration of $1,062,500. On October 11, 2001, we issued and sold 90,000 shares of our Series D Preferred Stock to four accredited investors for an aggregate consideration of $900,000. On October 18, 2001, we issued and sold 250,000 shares of our Series D Preferred Stock to one accredited investor for an aggregate consideration of $2,500,000. These sales were made in reliance on Rule 506 of Regulation D under the Securities Act and we filed a Form D for each transaction.

The information required by Schedule II — Valuation and Qualifying Accounts is provided in Note 2 to the Consolidated Financial Statements.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions summarized in Item 14 above, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director,

The undersigned Registrant hereby undertakes to provide to the Underwriters, at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser.


	(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

	(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 2 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis, State of Minnesota, on May 20, 2004.


	By	/s/ MICHAEL R. ROBINSON



	Michael R. Robinson
	Executive Vice President and
	Chief Financial Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to Registration Statement has been signed on May 20, 2004 by the following persons in the capacities indicated.


*	Michael R. Robinson, by signing his name hereto, does hereby sign this document on behalf of each of the above-named officers and/or directors of the Registrant pursuant to powers of attorney duly executed by such persons.


*	To be filed by Amendment.

EX-1 2 n82215a2exv1.txt FORM OF UNDERWRITING AGREEMENT EXHIBIT 1 __________ SHARES LIFE TIME FITNESS, INC. COMMON STOCK, PAR VALUE $0.02 PER SHARE UNDERWRITING AGREEMENT _____________, 2004 CREDIT SUISSE FIRST BOSTON LLC MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED As Representatives of the Several Underwriters, c/o Credit Suisse First Boston LLC Eleven Madison Avenue New York, N.Y. 10010-3629 Dear Sirs: 1. Introductory. LIFE TIME FITNESS, Inc., a Minnesota corporation (the "COMPANY"), proposes to issue and sell to the several underwriters listed on Schedule A hereto (the "UNDERWRITERS"), for whom Credit Suisse First Boston LLC ("CSFB") and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as the representatives (the "REPRESENTATIVES"), shares of its common stock, par value $0.02 per share (the "COMMON STOCK"), and the shareholders listed in Schedule B hereto (the "SELLING SHAREHOLDERS") propose severally to sell to the Underwriters an aggregate of outstanding shares of the Common Stock (such shares of Common Stock to be sold by the Company and the Selling Shareholders being hereinafter referred to as the "FIRM SECURITIES"). The Company also proposes to sell to the Underwriters, at the option of the Underwriters, an aggregate of not more than additional shares of its Common Stock and certain of the Selling Shareholders also propose to sell to the Underwriters, at the option of the Underwriters, an aggregate of not more than additional outstanding shares of the Common Stock, as set forth below (such additional shares being hereinafter referred to as the "OPTIONAL SECURITIES"). The Firm Securities and the Optional Securities are herein, collectively, called the "OFFERED SECURITIES". The Company and the Selling Shareholders hereby agree with the several Underwriters as follows: 2. Representations and Warranties of the Company and the Selling Shareholders. (a) The Company represents and warrants to, and agrees with, the several Underwriters that: (i) A registration statement (No. 333-113764) relating to the Offered Securities, including a form of prospectus, has been filed with the Securities and Exchange Commission ("COMMISSION") and either (A) has been declared effective under the Securities Act of 1933 ("ACT") and is not proposed to be amended or (B) is proposed to be amended by amendment or post-effective amendment. If such registration statement (the "INITIAL REGISTRATION STATEMENT") has been declared effective, either (A) an additional registration statement (the "ADDITIONAL REGISTRATION STATEMENT") relating to the Offered Securities may have been filed with the Commission pursuant to Rule 462(b) ("RULE 462(b)") under the Act and, if so filed, has become effective upon filing pursuant to such Rule and the Offered Securities all have been duly registered under the Act pursuant to the initial registration statement and, if applicable, the additional registration statement or (B) such an additional registration statement is proposed to be filed with the Commission pursuant to Rule 462(b) and will become effective upon filing pursuant to such Rule and, upon such filing, the Offered Securities will all have been duly registered under the Act pursuant to the initial registration statement and such additional registration statement. If the Company does not propose to amend the initial registration statement or if an additional registration statement has been filed and the Company does not propose to amend it, and if any post-effective amendment to either such registration statement has been filed with the Commission prior to the execution and delivery of this Agreement, the most recent amendment (if any) to each such registration statement has been declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c) ("RULE 462(c)") under the Act or, in the case of the additional registration statement, Rule 462(b). For purposes of this Agreement, "EFFECTIVE TIME," with respect to the initial registration statement, or, if filed prior to the execution and delivery of this Agreement, the additional registration statement, means (A) if the Company has advised the Representatives that it does not propose to amend such registration statement, the date and time as of which such registration statement, or the most recent post-effective amendment thereto (if any) filed prior to the execution and delivery of this Agreement, was declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c), or (B) if the Company has advised the Representatives that it proposes to file an amendment or post-effective amendment to such registration statement, the date and time as of which such registration statement, as amended by such amendment or post-effective amendment, as the case may be, is declared effective by the Commission. If an additional registration statement has not been filed prior to the execution and delivery of this Agreement but the Company has advised the Representatives that it proposes to file one, "EFFECTIVE TIME," with respect to such additional registration statement, means the date and time as of which such registration statement is filed and becomes effective pursuant to Rule 462(b). "EFFECTIVE DATE," with respect to the initial registration statement or the additional registration statement (if any), means the date of the Effective Time thereof. The initial registration statement, as amended at its Effective Time, including all information contained in the additional registration statement (if any) and deemed to be a part of the initial registration statement as of the Effective Time of the additional registration statement pursuant to the General Instructions of the Form on which it is filed and including all information (if any) deemed to be a part of the initial registration statement as of its Effective Time pursuant to Rule 430A(b) ("RULE 430A(b)") under the Act, is hereinafter referred to as the "INITIAL REGISTRATION STATEMENT". The additional registration statement, as amended at its Effective Time, including the contents of the initial registration statement incorporated by reference therein and including all information (if any) deemed to be a part of the additional registration statement as of its Effective Time pursuant to Rule 430A(b), is hereinafter referred to as the "ADDITIONAL REGISTRATION STATEMENT". The Initial Registration Statement and the Additional Registration are hereinafter referred to, collectively, as the "REGISTRATION STATEMENTS" and, individually, as a "REGISTRATION STATEMENT". The form of prospectus relating to the Offered Securities, as first filed with the Commission pursuant to and in accordance with Rule 424(b) ("RULE 424(b)") under the Act or (if no such filing is required) as included in a Registration Statement, is hereinafter referred to as the "PROSPECTUS". No document has been or will be prepared or distributed in reliance on Rule 434 under the Act. (ii) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement: (A) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement conformed in all respects to the requirements of the Act and the rules and regulations of the Commission ("RULES AND REGULATIONS") and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (B) on the Effective Date of the Additional Registration Statement (if any), each Registration Statement conformed, or will conform, in all respects to the requirements of the Act and the Rules and Regulations and did not include, or will not include, any untrue statement of a material fact and did not omit, or will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (C) on the date of this Agreement, the Initial Registration Statement and, if the Effective Time of the Additional Registration Statement is prior to the execution and delivery of this Agreement, the Additional Registration Statement each conforms, and at the time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the Effective Date of the Additional Registration Statement in which the Prospectus is included, each Registration Statement and the Prospectus will conform, in all respects to the requirements of the Act and the Rules and Regulations, and neither of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement: on the Effective Date of the Initial Registration Statement, the Initial Registration Statement and the Prospectus will conform in all respects to the requirements of the Act and the Rules and Regulations, neither of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and no Additional Registration Statement has been or will be filed. The two preceding sentences do not apply to statements in or omissions from a Registration Statement or the Prospectus based upon written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information is that described as such in Section 7(c) hereof. 2 (iii) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Minnesota, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus. The Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification. (iv) Except for the Company's non-profit foundation, each Subsidiary of the Company (as defined below) has been duly formed and is an existing limited liability company in good standing under the laws of the jurisdiction of its formation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus. Each Subsidiary is duly qualified to do business as a foreign company in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification. All of the issued and outstanding membership units of each Subsidiary have been duly authorized and validly issued and are fully paid and nonassessable, and the membership units of each Subsidiary owned by the Company, directly or through any Subsidiary, are owned free from liens, encumbrances and defects. The subsidiaries listed on Exhibit 21 to the Registration Statement are the only subsidiaries of the Company (collectively, the "SUBSIDIARIES" and, individually, a "SUBSIDIARY"). (v) The Company has an authorized capitalization as set forth in the Registration Statement. The Offered Securities and all other outstanding shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable (with respect to all outstanding shares) and, upon issuance as contemplated by this Agreement, will be fully paid and nonassessable (with respect to all Offered Securities not yet issued and outstanding), and conform to the description thereof contained in the Prospectus; and the shareholders of the Company have no preemptive rights with respect to the Securities. Except as disclosed in the Prospectus, no options, warrants or other rights to purchase, agreements or other obligations to issue, or rights to convert any obligations into or exchange any securities for, shares of capital stock of or other ownership interests in the Company are outstanding. (vi) Except as disclosed in the Prospectus, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finder's fee or other like payment in connection with the transactions contemplated by this Agreement. (vii) Except as disclosed in the Prospectus or as waived in writing prior to the date hereof, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to a Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act. (viii) The Securities have been approved for listing subject to notice of issuance on The New York Stock Exchange. (ix) No consent, approval, authorization, or order of, or filing with, any governmental agency or body or any court is required to be obtained or made by the Company for the consummation of the transactions contemplated by this Agreement in connection with the sale of the Offered Securities, except such as have been obtained and made under the Act and such as may be required under state securities laws or pursuant to the rules of the National Association of Securities Dealers, Inc. (the "NASD"). (x) The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of, result in the imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary under, or constitute a default under, any statute, rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over the Company or any Subsidiary or any of their respective properties, or any agreement or instrument to which the Company or any such Subsidiary is a party or by which the Company or any such Subsidiary is bound or to which any of the properties of the Company or any such Subsidiary is subject, or the charter, by-laws or other constituent documents of the Company or any such Subsidiary, as 3 applicable. For purposes of this Agreement, any reference to any property or asset shall include all owned and leased properties or assets, as applicable. (xi) This Agreement has been duly authorized, executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as the enforcement of rights to indemnity and contribution hereunder may be limited by federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of obligations of the Company hereunder may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether applied in a proceeding in law or equity). (xii) Except as disclosed in the Prospectus, the Company and the Subsidiaries have good and marketable title to all real properties and all other properties and assets owned by them, in each case free from claims, liens, encumbrances and defects that would materially affect the value of the affected property or asset or materially interfere with the use made or to be made of the same by them; and, except as disclosed in the Prospectus, the Company and the Subsidiaries hold any leased real or personal property under valid and enforceable leases which are in full force and effect, with no exceptions that would materially interfere with the use made or to be made of the affected property by them. (xiii) The Company and the Subsidiaries possess adequate certificates, authorities or permits issued by appropriate governmental agencies or bodies necessary to conduct the business now operated by them and to use and occupy their properties and assets as currently used and occupied for their business and have not received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit that, if determined adversely to the Company or any of the Subsidiaries, would, individually or in the aggregate, have a material adverse effect on the condition (financial or other), business, properties or results of operations of the Company and the Subsidiaries taken as a whole (a "MATERIAL ADVERSE EFFECT"). All of the properties and assets of the Company and the Subsidiaries, including, without limitation, all buildings, building systems, structural components, roofs and building equipment, are in good condition and repair suitable for their intended purposes and the purposes for which they are currently being used, in each case in all material respects. (xiv) Neither the Company nor any of the Subsidiaries is in violation of or default under any of the terms or provisions of its charter, by-laws or other constituent documents or in default (and no event has occurred which, with notice or lapse of time or both, would constitute a default) under any indenture, real property lease or sublease, mortgage, deed of trust, loan or credit agreement or any provision of any agreement or instrument to which the Company or any such Subsidiary is a party or by which the Company or any such Subsidiary is bound or to which any of the properties of the Company or any such Subsidiary is subject that would, individually or in the aggregate, have a Material Adverse Effect. (xv) No labor dispute with the employees of the Company or any Subsidiary exists or, to the knowledge of the Company, is imminent that might have a Material Adverse Effect. (xvi) The Company and the Subsidiaries own, possess or can acquire on reasonable terms adequate trademarks, trade names and other rights to inventions, know-how, patents, copyrights, confidential information and other intellectual property (collectively, "INTELLECTUAL PROPERTY RIGHTS") necessary to conduct the business now operated by them, and have not received any notice of infringement of or conflict with asserted rights of others with respect to any intellectual property rights that, if determined adversely to the Company or any of the Subsidiaries, would, individually or in the aggregate, have a Material Adverse Effect. (xvii) Except as disclosed in the Prospectus, neither the Company, any of the Subsidiaries nor any of their properties or assets is in violation of any statute, rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, including those relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances (collectively, "ENVIRONMENTAL LAWS"). Neither the Company nor any of the Subsidiaries owns or operates any real property contaminated with any substance that is subject to any environmental laws, is liable for any off-site disposal or contamination pursuant to any environmental laws, or is subject to any claim relating to any environmental laws, which violation, contamination, liability or claim would, 4 individually or in the aggregate, have a Material Adverse Effect; and the Company is not aware of any pending investigation which might lead to any such claim. (xviii) Except as disclosed in the Prospectus, there are no pending actions, suits or proceedings against or affecting the Company, any of the Subsidiaries or any of their respective properties that, if determined adversely to the Company or any of the Subsidiaries, would, individually or in the aggregate, have a Material Adverse Effect, or would materially and adversely affect the ability of the Company to perform its obligations under this Agreement, or which are otherwise material in the context of the sale of the Offered Securities; and no such actions, suits or proceedings are threatened or, to the Company's knowledge, contemplated. (xix) The financial statements included in each Registration Statement and the Prospectus present fairly the financial position of the Company and its consolidated subsidiaries as of the dates shown and their results of operations and cash flows for the periods shown, and such financial statements comply as to form with the applicable accounting requirements of the Act and have been prepared in conformity with the generally accepted accounting principles in the United States applied on a consistent basis (except as otherwise noted therein); and the schedules included in each Registration Statement present fairly the information required to be stated therein. Any financial data set forth under the caption "Selected Financial Data" in the Prospectus and Registration Statement fairly present, on the basis stated in the Prospectus and the Registration Statement, the information included therein and have been compiled on a basis consistent with the financial statements included in the Registration Statement and Prospectus. The assumptions used in preparing the pro forma financial statements included in each Registration Statement and the Prospectus provide a reasonable basis for presenting the significant effects directly attributable to the transactions or events described therein, the related pro forma adjustments give appropriate effect to those assumptions, and the pro forma columns therein reflect the proper application of those adjustments to the corresponding historical financial statement amounts. (xx) Except as disclosed in the Prospectus, since the date of the latest audited financial statements included in the Prospectus, there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and the Subsidiaries taken as a whole, and, except as disclosed in or contemplated by the Prospectus, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (xxi) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as defined in the Investment Company Act of 1940. (xxii) The Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; all policies of insurance and fidelity or surety bonds insuring the Company and the Subsidiaries or their respective businesses, assets, employees, officers and directors are in full force and effect and the Company and the Subsidiaries are in compliance with the terms of such policies and instruments in all material respects. There are no claims by the Company or any of the Subsidiaries under any such policy or instrument as to which any insurance company is denying liability or defending under a reservation of rights clause and neither the Company nor any Subsidiary has been refused any insurance coverage sought or applied for. Neither the Company nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. (xxiii) Deloitte & Touche LLP, which has audited the financial statements of the Company and the Subsidiaries included in the Prospectus, is an independent public accountant as required by the Act and the Rules and Regulations. (xxiv) Neither the Company nor any entity that is or was a member of the Company's controlled group (within the meaning of Section 412(n)(6) of The Internal Revenue Code of 1986, as amended (the "CODE")) has any direct, contingent or secondary liability under Title IV of The Employee Retirement Income Security Act of 1974 or Section 412 of the Code. 5 (xxv) There are no transfer taxes or other similar fees or charges under Federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement or the issuance by the Company or sale by the Company of the Offered Securities. (xxvi) Following the first Closing Date (as hereinafter defined), the Company and the Subsidiaries will maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company is not aware of (A) any significant deficiency or material weakness in the design or operation of the Company's internal control over financial reporting which is reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information or (B) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting; and no change in the Company's internal control over financial reporting occurred during or since the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. (b) Each Selling Shareholder severally and not jointly represents and warrants to, and agrees with, the several Underwriters that: (i) Such Selling Shareholder has, and on each Closing Date hereinafter mentioned will have, valid and unencumbered title to the Offered Securities to be delivered by such Selling Shareholder on such Closing Date and full right, power and authority to enter into this Agreement, the Custody Agreement (as hereinafter defined) and Irrevocable Power of Attorney (the "POWER OF ATTORNEY") entered into by such Selling Shareholder in connection with the transactions contemplated hereby and to sell, assign, transfer and deliver the Offered Securities to be delivered by such Selling Shareholder on such Closing Date hereunder; and upon the delivery of and payment for the Offered Securities on each Closing Date hereunder the several Underwriters will acquire valid and unencumbered title to the Offered Securities to be delivered by such Selling Shareholder on such Closing Date. (ii) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement: (A) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement conformed in all respects to the requirements of the Act and the Rules and Regulations and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (B) on the Effective Date of the Additional Registration Statement (if any), each Registration Statement conformed, or will conform, in all respects to the requirements of the Act and the Rules and Regulations and did not include, or will not include, any untrue statement of a material fact and did not omit, or will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (C) on the date of this Agreement, the Initial Registration Statement and, if the Effective Time of the Additional Registration Statement is prior to the execution and delivery of this Agreement, the Additional Registration Statement each conforms, and at the time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the Effective Date of the Additional Registration Statement in which the Prospectus is included, each Registration Statement and the Prospectus will conform, in all respects to the requirements of the Act and the Rules and Regulations, and neither of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement: on the Effective Date of the Initial Registration Statement, the Initial Registration Statement and the Prospectus will conform in all respects to the requirements of the Act and the Rules and Regulations, neither of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. With respect to such Selling Shareholder, the first two sentences of this Section 2(b)(ii) apply only to the extent that statements in or omissions from a Registration Statement or the Prospectus are based upon written information furnished to the Company by such Selling Shareholder specifically for use therein. 6 (iii) This Agreement, the Custody Agreement and the Power of Attorney have each been duly authorized, executed and delivered by or on behalf of such Selling Shareholder and this Agreement, the Custody Agreement and the Power of Attorney each constitute the legal, valid and binding obligations of such Selling Shareholder enforceable against such Selling Shareholder in accordance with their respective terms, except as the enforcement of rights to indemnity and contribution hereunder and thereunder may be limited by federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of obligations of such Selling Shareholder hereunder and thereunder may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether applied in a proceeding in law or equity). (iv) No consent, approval, authorization, or order of, or filing with, any governmental agency or body or any court is required to be obtained or made by such Selling Shareholder for the consummation of the transactions contemplated by this Agreement, the Custody Agreement and the Power of Attorney in connection with the sale of the Offered Securities, except such as have been obtained and made under the Act and such as may be required under state securities laws or pursuant to the rules of the NASD. (v) Except as disclosed in the Prospectus, there are no contracts, agreements or understandings between such Selling Shareholder and any person that would give rise to a valid claim against such Selling Shareholder or any Underwriter for a brokerage commission, finder's fee or other like payment in connection with the transactions contemplated by this Agreement, the Custody Agreement and the Power of Attorney. (vi) The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of, result in the imposition of any lien, charge or encumbrance upon any property or assets of such Selling Shareholder under, or constitute a default under, any statute, rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over such Selling Shareholder or any of his, her or its properties, or any agreement or instrument to which such Selling Shareholder is a party or by which such Selling Shareholder is bound or to which any of the properties of such Selling Shareholder is subject, or the charter, by-laws or other constituent documents of such Selling Shareholder. (vii) Except as disclosed in the Prospectus or as waived in writing prior to the date hereof, there are no contracts, agreements or understandings between the Company and such Selling Shareholder granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such Selling Shareholder or to require the Company to include such securities in the securities registered pursuant to a Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act. 3. Purchase, Sale and Delivery of Offered Securities. On the basis of the representations, warranties and agreements contained herein, but subject to the terms and conditions set forth herein, the Company and each Selling Shareholder agree, severally and not jointly, to sell to each Underwriter, and each Underwriter agrees, severally and not jointly, to purchase from the Company and each Selling Shareholder, at a purchase price of $ per share, that number of Firm Securities (rounded up or down, as determined by the Representatives in their discretion, in order to avoid fractions) obtained by multiplying Firm Securities, in the case of the Company, and the number of Firm Securities set forth opposite the name of such Selling Shareholder in Schedule B hereto, in the case of a Selling Shareholder, in each case by a fraction, the numerator of which is the number of Firm Securities set forth opposite the name of such Underwriter in Schedule A hereto and the denominator of which is the total number of Firm Securities. Certificates in negotiable form for the Offered Securities to be sold by the Selling Shareholders hereunder have been placed in custody, for delivery under this Agreement, under a Custody Agreement (the "CUSTODY AGREEMENT") made with Wells Fargo Bank, N.A., as custodian ("CUSTODIAN"). Each Selling Shareholder agrees that the shares represented by the certificates held in custody for the Selling Shareholders under such Custody Agreement are subject to the interests of the Underwriters hereunder, that the arrangements made by the Selling Shareholders for such custody are to that extent irrevocable, and that the obligations of the Selling Shareholders hereunder shall not be terminated by operation of law, whether by the death of any individual Selling Shareholder or the occurrence of any 7 other event, or in the case of a trust, by the death of any trustee or trustees or the termination of such trust. If any individual Selling Shareholder or any such trustee or trustees should die, or if any other such event should occur, or if any of such trusts should terminate, before the delivery of the Offered Securities hereunder, certificates for such Offered Securities shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death or other event or termination had not occurred, regardless of whether or not the Custodian shall have received notice of such death or other event or termination. The Company and the Custodian will deliver the Firm Securities to the Representatives for the accounts of the Underwriters, against payment of the purchase price in Federal (same day) funds by official bank check or checks or wire transfer to an account at a bank acceptable to the Representatives drawn to the order of , in the case of shares of Firm Securities, and , in the case of shares of Firm Securities, at the office of , at A.M., New York time, on or at such other time not later than seven full business days thereafter as the Representatives and the Company determine, such time being herein referred to as the "FIRST CLOSING DATE". For purposes of Rule 15c6-1 under the Securities Exchange Act of 1934, the First Closing Date (if later than the otherwise applicable settlement date) shall be the settlement date for payment of funds and delivery of securities for all the Offered Securities sold pursuant to the offering of the Offered Securities. The certificates for the Firm Securities to be so delivered will be in definitive form, in such denominations and registered in such names as the Representatives request and will be made available for checking and packaging at the [above] office of at least 24 hours prior to the First Closing Date. In addition, upon written notice from the Representatives given to the Company and the Selling Shareholders from time to time not more than 30 days subsequent to the date of the Prospectus, the Underwriters may purchase all or less than all of the Optional Securities at the purchase price per Security to be paid for the Firm Securities. The Company and the certain Selling Shareholders agree, severally and not jointly, to sell to the Underwriters the respective numbers of Optional Securities obtained by multiplying the number of Optional Securities specified in such notice by a fraction the numerator of which is , in the case of the Company, and the number of shares set forth opposite the names of such Selling Shareholders in Schedule B hereto under the caption "Number of Optional Securities to be Sold", in the case of the Selling Shareholders, and the denominator of which is the total number of Optional Securities (subject to adjustment by the Representatives to eliminate fractions). Such Optional Securities shall be purchased from the Company and such Selling Shareholders for the account of each Underwriter in the same proportion as the number of Firm Securities set forth opposite such Underwriter's name bears to the total number of Firm Securities (subject to adjustment by the Representatives to eliminate fractions) and may be purchased by the Underwriters only for the purpose of covering over-allotments made in connection with the sale of the Firm Securities. No Optional Securities shall be sold or delivered unless the Firm Securities previously have been, or simultaneously are, sold and delivered. The right to purchase the Optional Securities or any portion thereof may be exercised from time to time and to the extent not previously exercised may be surrendered and terminated at any time upon notice by the Representatives to the Company and such Selling Shareholders. Each time for the delivery of and payment for the Optional Securities, being herein referred to as an "OPTIONAL CLOSING DATE", which may be the First Closing Date (the First Closing Date and each Optional Closing Date, if any, being sometimes referred to as a "CLOSING DATE"), shall be determined by the Representatives but shall be not later than five full business days after written notice of election to purchase Optional Securities is given. The Company and the Custodian will deliver the Optional Securities being purchased on each Optional Closing Date to the Representatives for the accounts of the several Underwriters, against payment of the purchase price therefor in Federal (same day) funds by official bank check or checks or wire transfer to an account at a bank acceptable to the Representatives drawn to the order of , in the case of Optional Securities, and , in the case of Optional Securities, at the [above] office of . The certificates for the Optional Securities being purchased on each Optional Closing Date will be in definitive form, in such denominations and registered in such names as the Representatives request upon reasonable notice prior to such Optional Closing Date and will be made available for checking and packaging at the [above] office of at a reasonable time in advance of such Optional Closing Date. 4. Offering by Underwriters. It is understood that the several Underwriters propose to offer the Offered Securities for sale to the public as set forth in the Prospectus. 8 5. Certain Agreements of the Company and the Selling Shareholders. The Company and the Selling Shareholders agree with the several Underwriters that: (a) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Company will file the Prospectus with the Commission pursuant to and in accordance with subparagraph (1) (or, if applicable and if consented to by the Representatives, subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second business day following the execution and delivery of this Agreement or (B) the fifteenth business day after the Effective Date of the Initial Registration Statement. The Company will advise the Representatives promptly of any such filing pursuant to Rule 424(b). If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement and an additional registration statement is necessary to register a portion of the Offered Securities under the Act but the Effective Time thereof has not occurred as of such execution and delivery, the Company will file the additional registration statement or, if filed, will file a post-effective amendment thereto with the Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00 P.M., New York time, on the date of this Agreement or, if earlier, on or prior to the time the Prospectus is printed and distributed to any Underwriter, or will make such filing at such later date as shall have been consented to by the Representatives. (b) The Company will advise the Representatives promptly of any proposal to amend or supplement the initial or any additional registration statement as filed or the related prospectus or the Initial Registration Statement, the Additional Registration Statement (if any) or the Prospectus and will not effect such amendment or supplementation without the Representatives' consent; and the Company will also advise the Representatives promptly of the effectiveness of each Registration Statement (if its Effective Time is subsequent to the execution and delivery of this Agreement) and of any amendment or supplementation of a Registration Statement or the Prospectus and of the institution by the Commission of any stop order proceedings in respect of a Registration Statement and will use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible its lifting, if issued. (c) If, at any time when a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, any event occurs as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will promptly notify the Representatives of such event and will promptly prepare and file with the Commission, at its own expense, an amendment or supplement which will correct such statement or omission or an amendment which will effect such compliance. Neither the Representatives' consent to, nor the Underwriters' delivery of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 6. (d) As soon as practicable, but not later than the Availability Date (as defined below), the Company will make generally available to its securityholders an earning statement covering a period of at least 12 months beginning after the Effective Date of the Initial Registration Statement (or, if later, the Effective Date of the Additional Registration Statement) which will satisfy the provisions of Section 11(a) of the Act. For the purpose of the preceding sentence, "AVAILABILITY DATE" means the 45th day after the end of the fourth fiscal quarter following the fiscal quarter that includes such Effective Date, except that, if such fourth fiscal quarter is the last quarter of the Company's fiscal year, "AVAILABILITY DATE" means the 90th day after the end of such fourth fiscal quarter. (e) The Company will furnish to the Representatives copies of each Registration Statement (seven of which will be signed and will include all exhibits), each related preliminary prospectus, and, so long as a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, the Prospectus and all amendments and supplements to such documents, in each case in such quantities as the Representatives request. The Prospectus shall be so furnished on or prior to 3:00 P.M., New York time, on the business day following the later of the execution and delivery of this Agreement or the Effective Time of the Initial Registration Statement. The Company also will deliver one copy of each of the foregoing to each counsel for a Selling Shareholder delivering an opinion pursuant to Section 6(e). All other such documents shall be so furnished as soon as available. The Company will pay the expenses of printing and distributing to the Underwriters and to such counsel all such documents. 9 (f) The Company will arrange for the qualification of the Offered Securities for sale under the laws of such jurisdictions as the Representatives designate and will continue such qualifications in effect so long as required for the distribution. (g) For a period of 180 days after the date of the initial public offering of the Offered Securities, the Company will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Commission a registration statement under the Act relating to, any additional shares of its Securities or securities convertible into or exchangeable or exercisable for any shares of its Securities, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of the Representatives, except issuances of Common Stock pursuant to the conversion or exchange of convertible or exchangeable securities or the exercise of warrants or options issued and outstanding as of the date hereof, or grants of employee stock options or the sale or issuance of Common Stock pursuant to the terms of an employee equity incentive or stock option purchase plan in effect on the date hereof. For the purpose of allowing the Underwriters to comply with NASD Rule 2711(f)(4), if (1) during the period that begins on the date that is 18 calendar days before the last day of the lock-up period and ends on the last day of the lock-up period, (a) the Company issues an earnings release, (b) the Company publicly announces material news or (c) a material event relating to the Company occurs; or (2) prior to the expiration of the lock-up period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the lock-up period, then the restrictions in this agreement, unless otherwise waived by the Representatives in writing, shall continue to apply until the expiration of the date that is 18 calendar days after the date on which (a) the Company issues the earnings release, (b) the Company publicly announces material news or (c) a material event relating to the Company occurs; provided, however, that this provision will not apply to any research report concerning the Company to be published or distributed by an Underwriter pursuant to Rule 139 promulgated under the Securities Act at a time when the Company's shares of Common Stock are "actively traded securities," as defined in Regulation M, 17 C.F.R. 242.101(c)(1). (h) The Company and each Selling Shareholder agree with the several Underwriters that the Company will pay all expenses incident to the performance of the obligations of the Company and such Selling Shareholder, as the case may be, under this Agreement, for any filing fees and other expenses (including fees and disbursements of counsel) in connection with qualification of the Offered Securities for sale under the laws of such jurisdictions as the Representatives designate and the printing of memoranda relating thereto, for the filing fee incident to the review by the NASD of the Offered Securities and any fees and disbursements of Underwriters' counsel and other related expenses in connection with the clearance of this offering by the NASD, for any travel expenses of the Company's officers and employees and any other expenses of the Company in connection with attending or hosting meetings with prospective purchasers of the Offered Securities and for expenses incurred in distributing preliminary prospectuses and the Prospectus (including any amendments and supplements thereto) to the Underwriters; provided, however, that the Selling Shareholders will be responsible for any fees and disbursements of any counsel for the Selling Shareholders other than [Fafinski Mark & Johnson, P.A.] and for any commissions or transfer taxes on the sale by the Selling Shareholders of the Offered Securities to the Underwriters . (i) Each Selling Shareholder agrees, for a period of 180 days after the date of the initial public offering of the Offered Securities (the "LOCK-UP PERIOD") not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any additional shares of the Common Stock of the Company or securities convertible into or exchangeable or exercisable for any shares of the Common Stock, enter into a transaction which would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of any shares of the Common Stock, whether any such aforementioned transaction is to be settled by delivery of any shares of the Common Stock or such other securities, in cash or otherwise, or publicly disclose the intention to make any such offer, sale, pledge or disposition, or enter into any such transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of the Representatives. In addition, each Selling Shareholder agrees that, without the prior written consent of the Representatives, it will not, during the Lock-Up Period, make any demand for or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for shares of Common Stock. For the purpose of allowing the Underwriters to comply with NASD Rule 2711(f)(4), if (1) during the period that begins on the date that is 18 calendar days before the last day of the lock-up period and ends on the last day of the lock-up period, (a) the Company issues an earnings release, (b) the Company publicly announces material news or (c) a material event relating to the Company occurs; or (2) prior to the expiration of the lock-up period, the Company announces that it will release earnings results during the 16-day period beginning on 10 the last day of the lock-up period, then the restrictions in this agreement, unless otherwise waived by the Representatives in writing, shall continue to apply until the expiration of the date that is 18 calendar days after the date on which (a) the Company issues the earnings release, (b) the Company publicly announces material news or (c) a material event relating to the Company occurs; provided, however, that this provision will not apply to any research report concerning the Company to be published or distributed by an Underwriter pursuant to Rule 139 promulgated under the Securities Act at a time when the Company's shares of Common Stock are "actively traded securities," as defined in Regulation M, 17 C.F.R. 242.101(c)(1). Any shares of Common Stock received upon exercise of options granted to a Selling Shareholder will also be subject to this subsection (i). The restrictions on transfers of this subsection (i), however, will not apply to (x) the sale of any shares of Common Stock to the Underwriters pursuant to this Agreement and (y) any shares of Common Stock acquired by the undersigned in the open market. A transfer of shares of Common Stock in connection with a bona fide gift or to a family member or trust may be made, provided the transferee agrees to be bound in writing by the terms of this Agreement. In addition, notwithstanding the foregoing, if a Selling Shareholder is a corporation, business trust, association, limited liability company, partnership, limited liability partnership, limited liability limited partnership or other entity (collectively, the "ENTITIES" or, individually, the "ENTITY"), such Selling Shareholder may transfer shares of Common Stock or securities convertible into or exchangeable or exercisable for any shares of Common Stock to any Entity which is directly or indirectly controlled by, or is under common control with, such Selling Shareholder and, if such Selling Shareholder (other than Norwest Equity Partners, Apax Managers, Inc. or any affiliate thereof) is a partnership or limited liability company, such Selling Shareholder may transfer the Common Stock or securities convertible into or exchangeable or exercisable for any shares of Common Stock to its partners, former partners or an affiliated partnership (or members former members or an affiliated limited liability company) managed by the same manager or managing partner (or managing member, as the case may be) or management company, or managed by an entity controlling, controlled by, or under common control with, such manager or managing partner (or managing member) or management company in accordance with partnership (or membership) interests; provided, however, that in any such case, it shall be a condition to the transfer that the transferee execute an agreement stating that the transferee is receiving and holding such shares of Common Stock or securities convertible into or exchangeable or exercisable for any shares of Common Stock subject to the provisions of this Agreement and there shall be no further transfer of such Common Stock or securities convertible into or exchangeable or exercisable for any shares of Common Stock except in accordance with this Agreement, and provided further that any such transfer shall not involve a disposition for value. (j) The Company will be in compliance, upon the First Closing Date, with all applicable provisions of the Sarbanes-Oxley Act of 2002, as amended (the "SARBANES-OXLEY ACT"), that are effective and is actively taking steps to ensure that it will be in compliance with other applicable provisions of the Sarbanes-Oxley Act upon the effectiveness of such provisions. 6. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Firm Securities on the First Closing Date and the Optional Securities to be purchased on each Optional Closing Date will be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Shareholders herein, to the accuracy of the statements of Company officers made pursuant to the provisions hereof, to the performance by the Company and the Selling Shareholders of their obligations hereunder and to the following additional conditions precedent: (a) The Representatives shall have received a letter, dated the date of delivery thereof (which, if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to such Effective Time), of Deloitte & Touche LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating to the effect that: (i) in their opinion the financial statements and schedules examined by them and included in the Registration Statements comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; 11 (ii) they have performed the procedures specified by the American Institute of Certified Public Accountants for a review of interim consolidated financial information as described in Statement of Auditing Standards No. 100, Interim Financial Information, on the unaudited financial statements included in the Registration Statements; (iii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim consolidated financial statements of the Company, inquiries of officials of the Company who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that: (A) the unaudited consolidated financial statements included in the Registration Statements do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations or any material modifications should be made to such unaudited consolidated financial statements for them to be in conformity with generally accepted accounting principles; (B) the unaudited consolidated total revenues, net income and net income applicable to common shareholders amounts for the three-month periods ended March 31, 2003 and March 31, 2004 included in the Prospectus do not agree with the amounts set forth in the unaudited consolidated financial statements for those same periods or were not determined on a basis substantially consistent with that of the corresponding amounts in the audited statements of income; (C) at the date of the latest available consolidated balance sheet read by such accountants, or at a subsequent specified date not more than three business days prior to the date of this Agreement, there was any change in the capital stock or any increase in short-term indebtedness or long-term debt of the Company and its consolidated subsidiaries or, at the date of the latest available consolidated balance sheet read by such accountants, there was any decrease in consolidated net current assets or net assets, as compared with amounts shown on the latest balance sheet included in the Prospectus; or (D) for the period from the closing date of the latest consolidated income statement included in the Prospectus to the closing date of the latest available consolidated income statement read by such accountants, there were any decreases, as compared with the corresponding period of the previous year and with the period of corresponding length ended the date of the latest income statement included in the Prospectus, in consolidated total revenues, net income or net income applicable to common shareholders or in per share amounts of net income applicable to common shareholders; except in all cases set forth in clauses (C) and (D) above for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (iv) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statements (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Company and the Subsidiaries subject to the internal controls of the Company's accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter. For purposes of this subsection, (i) if the Effective Time of the Initial Registration Statements is subsequent to the execution and delivery of this Agreement, "REGISTRATION STATEMENTS" shall mean the initial registration statement as proposed to be amended by the amendment or post-effective amendment to be filed shortly prior to its Effective Time, (ii) if the Effective Time of the Initial Registration Statements is prior to the execution and delivery of this Agreement but the Effective Time of the Additional Registration 12 Statement is subsequent to such execution and delivery, "REGISTRATION STATEMENTS" shall mean the Initial Registration Statement and the additional registration statement as proposed to be filed or as proposed to be amended by the post-effective amendment to be filed shortly prior to its Effective Time, and (iii) "PROSPECTUS" shall mean the prospectus included in the Registration Statements. (b) If the Effective Time of the Initial Registration Statement is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or such later date as shall have been consented to by the Representatives. If the Effective Time of the Additional Registration Statement (if any) is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or, if earlier, the time the Prospectus is printed and distributed to any Underwriter, or shall have occurred at such later date as shall have been consented to by the Representatives. If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Prospectus shall have been filed with the Commission in accordance with the Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing Date, no stop order suspending the effectiveness of a Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or, to the knowledge of any Selling Shareholder, the Company or the Representatives, shall be contemplated by the Commission. (c) Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) any change, or any development or event involving a prospective change, in the condition (financial or other), business, properties or results of operations of the Company and the Subsidiaries taken as one enterprise which, in the judgment of a majority in interest of the Underwriters, including the Representatives, is material and adverse and makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities; (ii) any downgrading in the rating of any debt securities of the Company by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Act), or any public announcement that any such organization has under surveillance or review its rating of any debt securities of the Company (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating); (iii) any change in U.S. or international financial, political or economic conditions or currency exchange rates or exchange controls as would, in the judgment of a majority in interest of the Underwriters, including the Representatives, be likely to prejudice materially the success of the proposed issue, sale or distribution of the Offered Securities, whether in the primary market or in respect of dealings in the secondary market; (iv) any material suspension or material limitation of trading in securities generally on The New York Stock Exchange, or any setting of minimum prices for trading on such exchange; (v) any suspension of trading of any securities of the Company on any exchange or in the over-the-counter market; (vi) any banking moratorium declared by U.S. Federal or New York authorities; (vii) any major disruption of settlements of securities or clearance services in the United States; or (viii) any attack on, outbreak or escalation of hostilities or act of terrorism involving the United States, any declaration of war by Congress or any other national or international calamity or emergency if, in the judgment of a majority in interest of the Underwriters, including the Representatives, the effect of any such attack, outbreak, escalation, act, declaration, calamity or emergency makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities. (d) The Representatives shall have received an opinion, dated such Closing Date, of Faegre & Benson LLP, counsel for the Company, to the effect that: (i) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Minnesota, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus. The Company is duly qualified to do business as a foreign corporation in good standing in all jurisdictions listed on Schedule A attached thereto in which its ownership or lease of property or the conduct of its business requires such qualification; (ii) Each Subsidiary of the Company (as defined below) has been duly formed and is an existing limited liability company in good standing under the laws of the jurisdiction of its formation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus. Each Subsidiary is duly qualified to do business as a foreign company in good standing in all jurisdictions listed on Schedule A attached thereto in which its ownership or lease of property or the conduct of its business requires such qualification. All of the issued and outstanding membership units of each Subsidiary have been duly authorized and 13 validly issued and are fully paid and nonassessable, and the membership units of each Subsidiary owned by the Company, directly or through any Subsidiary, are owned free from liens, encumbrances and defects. The subsidiaries listed on Exhibit 21 to the Registration Statement are the only subsidiaries of the Company (collectively, the "SUBSIDIARIES" and, individually, a "SUBSIDIARY"); (iii) The Company has an authorized capitalization as set forth in the Registration Statement. The Offered Securities and all other outstanding shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable (with respect to all outstanding shares) and, upon issuance as contemplated by this Agreement, will be fully paid and nonassessable (with respect to all Offered Securities not yet issued and outstanding), and conform to the description thereof contained in the Prospectus; and the shareholders of the Company have no preemptive rights with respect to the Securities. Except as disclosed in the Prospectus, no options, warrants or other rights to purchase, agreements or other obligations to issue, or rights to convert any obligations into or exchange any securities for, shares of capital stock of or ownership interests in the Company are outstanding; (iv) Except as disclosed in the Prospectus or as waived in writing prior to the date hereof, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to a Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act; (v) The Securities have been approved for listing subject to notice of issuance on The New York Stock Exchange; (vi) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as defined in the Investment Company Act of 1940; (vii) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required to be obtained or made by the Company for the consummation of the transactions contemplated by this Agreement in connection with the sale of the Offered Securities, except such as have been obtained and made under the Act and such as may be required under state securities laws or pursuant to the rules of the NASD; (viii) The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of, result in the imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over the Company or any Subsidiary or any of their respective properties, or any agreement or instrument to which the Company or any such Subsidiary is a party or by which the Company or any such Subsidiary is bound or to which any of the properties of the Company or any such Subsidiary is subject, or the charter, by-laws or other constituent documents of the Company or any such Subsidiary, as applicable; (ix) The Initial Registration Statement was declared effective under the Act as of the date and time specified in such opinion, the Additional Registration Statement (if any) was filed and became effective under the Act as of the date and time (if determinable) specified in such opinion, the Prospectus either was filed with the Commission pursuant to the subparagraph of Rule 424(b) specified in such opinion on the date specified therein or was included in the Initial Registration Statement or the Additional Registration Statement (as the case may be), and, to the best of the knowledge of such counsel, no stop order suspending the effectiveness of a Registration Statement or any part thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Act, and each Registration Statement and the Prospectus, and each amendment or supplement thereto, as of their respective effective or issue dates, complied as to form in all material respects with the requirements of the Act and the Rules and Regulations; 14 (x) This Agreement has been duly authorized, executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as the enforcement of rights to indemnity and contribution hereunder may be limited by federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of obligations of the Company hereunder may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether applied in a proceeding in law or equity); (xi) Neither the Company nor any of the Subsidiaries is (A) in violation of or default under any of the terms or provisions of its charter, by-laws or other constituent documents or (B) in default (and no event has occurred which, with notice or lapse of time or both, would constitute a default) under any indenture, real property lease or sublease, mortgage, deed of trust, loan or credit agreement or any provision of any agreement or instrument to which the Company or any such Subsidiary is a party or by which the Company or any such Subsidiary is bound or to which any of the properties of the Company or any such Subsidiary is subject that, in the case of clause (B), would, individually or in the aggregate, have a material adverse effect on the condition (financial or other), business, properties or results of operations of the Company and the Subsidiaries taken as a whole ("MATERIAL ADVERSE EFFECT"); (xii) Except as disclosed in the Prospectus, there are no pending actions, suits or proceedings against or affecting the Company, any of the Subsidiaries or any of their respective properties that, if determined adversely to the Company or any of the Subsidiaries, would, individually or in the aggregate, have a Material Adverse Effect, or would materially and adversely affect the ability of the Company to perform its obligations under this Agreement; and, to such counsel's knowledge, no such actions, suits or proceedings are threatened or contemplated; (xiii) To such counsel's knowledge, (A) there are no contracts, licenses, agreements, leases or documents of a character which are required to be filed as exhibits to the Registration Statement or to be summarized or described in the Prospectus which have not been so filed, summarized or described as required and (B) there are no actions, suits, claims, investigations, proceedings pending or threatened to which the Company or any of the Subsidiaries is subject or by which any of their respective properties is subject at law or in equity or before or by any federal, state or local government or regulatory commission, board, body, authority or agency which are required to be described in the Prospectus but are not so described as required; and (xiv) Such counsel has read the statements in the Prospectus under the captions "Risk Factors - We are subject to extensive government regulation, and changes in these regulations could have a negative effect on our financial condition and results of operations," "Business - Government Regulation," "Business - Legal Proceedings," "Management - 401(k) Plan," "Management - Stock Option Plans and Other Employee Incentive Plans," "Certain Relationships and Related Party Transactions," "Description of Capital Stock," "Shares Eligible for Future Sale" and "U.S. Federal Tax Considerations for Non-U.S. Holders," and insofar as such statements constitute summaries of legal matters, contracts, agreements, documents or proceedings referred to therein or refer to statements of law or legal conclusions, such statements are accurate in all material respects and fairly present the information purported to be shown. At the time the foregoing opinion is delivered, such counsel for the Company shall also state that it has participated in conferences with the Representatives, officers and representatives of the Company and the representatives of the independent public accountant for the Company, at which conferences the contents of the Registration Statements and the Prospectus and related matters were discussed and, although such counsel does not pass upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statements and the Prospectus, on the basis of the foregoing (relying as to materiality in part upon the factual statements of officers and representations of the Company) such counsel has no reason to believe that any part of a Registration Statement or any amendment thereto, as of its effective date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading; or that the Prospectus or any amendment or supplement thereto, as of its issue date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; it being understood that such counsel need express no 15 opinion as to the financial statements or other financial data contained in the Registration Statements or the Prospectus. (e) The Representatives shall have received an opinion, dated such Closing Date, of counsel for each of the Selling Shareholders, to the effect that: (i) Each Selling Shareholder had valid and unencumbered title to the Offered Securities delivered by such Selling Shareholder on such Closing Date and had full right, power and authority to sell, assign, transfer and deliver the Offered Securities delivered by such Selling Shareholder on such Closing Date hereunder; and the several Underwriters have acquired valid and unencumbered title to the Offered Securities purchased by them from the Selling Shareholders on such Closing Date hereunder; (ii) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required to be obtained or made by any Selling Shareholder for the consummation of the transactions contemplated by the Custody Agreement or this Agreement in connection with the sale of the Offered Securities sold by the Selling Shareholders, except such as have been obtained and made under the Act and such as may be required under state securities laws or pursuant to the rules of the NASD; (iii) The execution, delivery and performance of the Custody Agreement and this Agreement and the consummation of the transactions therein and herein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court having jurisdiction over any Selling Shareholder or any of his, her or its properties or any agreement or instrument to which any Selling Shareholder is a party or by which any Selling Shareholder is bound or to which any of the properties of any Selling Shareholder is subject, or the charter or by-laws or other constituent documents of any Selling Shareholder which is a corporation or other entity; (iv) The Power of Attorney and related Custody Agreement with respect to each Selling Shareholder have been duly authorized, executed and delivered by such Selling Shareholder and constitute valid and legally binding obligations of each such Selling Shareholder enforceable in accordance with their terms, except as the enforcement of rights to indemnity and contribution thereunder may be limited by federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of obligations of such Selling Shareholder thereunder may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether applied in a proceeding in law or equity); and (v) This Agreement has been duly authorized, executed and delivered by each Selling Shareholder and constitutes the legal, valid and binding obligation of such Selling Shareholder, enforceable against such Selling Shareholder in accordance with its terms, except as the enforcement of rights to indemnity and contribution hereunder may be limited by federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of obligations of such Selling Shareholder hereunder may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether applied in a proceeding in law or equity). (f) The Representatives shall have received from Morgan, Lewis & Bockius LLP, counsel for the Underwriters, such opinion or opinions, dated such Closing Date, with respect to the incorporation of the Company, the validity of the Offered Securities delivered on such Closing Date, the Registration Statements, the Prospectus and other related matters as the Representatives may require, and the Selling Shareholders and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. In rendering such opinion, Morgan, Lewis & Bockius LLP may rely as to the incorporation of the Company and all other matters governed by Minnesota law upon the opinion of Faegre & Benson LLP referred to above. (g) The Representatives shall have received a certificate, dated such Closing Date, of the President or any Vice President and a principal financial or accounting officer of the Company in which such officers, to the best of their knowledge after reasonable investigation, shall state that: (1) the representations and warranties of the Company in this Agreement are true and correct; (2) the Company has complied with all agreements and satisfied all 16 conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date; (3) no stop order suspending the effectiveness of any Registration Statement has been issued and no proceedings for that purpose have been instituted or are contemplated by the Commission; and (4) the Additional Registration Statement (if any) satisfying the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of the applicable filing fee in accordance with Rule 111(a) or (b) under the Act, prior to the time the Prospectus was printed and distributed to any Underwriter; and (5) subsequent to the date of the most recent financial statements in the Prospectus, there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and the Subsidiaries taken as a whole, except as set forth in the Prospectus or as described in such certificate. (h) The Representatives shall have received a letter, dated such Closing Date, of Deloitte & Touche LLP which meets the requirements of subsection (a) of this Section, except that the specified date referred to in such subsection will be a date not more than three days prior to such Closing Date for the purposes of this subsection. (i) On or prior to the date of this Agreement, the Representatives shall have received lock-up letters from each of the executive officers, directors and shareholders of the Company who are not Selling Shareholders except as agreed to by the Representatives. (j) The Custodian shall have delivered to the Representatives a letter stating that they will deliver to each Selling Shareholder a United States Treasury Department Form 1099 (or other applicable form or statement specified by the United States Treasury Department regulations in lieu thereof) on or before January 31 of the year following the date of this Agreement. To avoid a 28% backup withholding tax each Selling Shareholder will deliver to the Custodian or the Representatives, as appropriate, a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). The Selling Shareholders and the Company will furnish the Representatives with such conformed copies of such opinions, certificates, letters and documents as the Representatives reasonably request. The Representatives may, in their sole discretion, waive on behalf of the Underwriters compliance with any conditions to the obligations of the Underwriters hereunder, whether in respect of an Optional Closing Date or otherwise. 7. Indemnification and Contribution. (a) The Company will indemnify and hold harmless each Underwriter, its partners, affiliates, members, directors and officers and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Act, against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in subsection (c) below. (b) Each of the Selling Shareholders, severally and not jointly, will indemnify and hold harmless each Underwriter, its partners, affiliates, members, directors and officers and each person who controls such Underwriter within the meaning of Section 15 of the Act, against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities 17 (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that such Selling Shareholder will be liable in any such case only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by such Selling Shareholder specifically for use therein. (c) Each Underwriter will, severally and not jointly, indemnify and hold harmless the Company, its directors and officers and each person, if any, who controls the Company within the meaning of Section 15 of the Act, and each Selling Shareholder against any losses, claims, damages or liabilities to which the Company or such Selling Shareholder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by the Company and each Selling Shareholder in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred, it being understood and agreed that the only such information furnished by any Underwriter consists of (i) the following information in the Prospectus furnished on behalf of each Underwriter: the concession and reallowance figures appearing under the caption "Underwriting"; and (ii) the information in the Prospectus furnished on behalf of Piper Jaffray & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated with respect to their prior or current relationships with the Company, as applicable, under the caption "Underwriting." (d) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under subsection (a), (b) or (c) above, notify the indemnifying party of the commencement thereof; but the failure to notify the indemnifying party shall not relieve it from any liability that it may have under subsection (a), (b) or (c) above except to the extent that it has been materially prejudiced (through the forfeiture of substantive rights or defenses) by such failure; and, provided further, that the failure to notify the indemnifying party shall not relieve it from any liability that it may have to an indemnified party otherwise than under subsection (a), (b) or (c) above. In case any such action is brought against any indemnified party and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election to so assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such (i) settlement includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action and (ii) does not include a statement as to, or an admission of, fault, culpability or a failure to act by or on behalf of an indemnified party. (e) If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party under subsection (a), (b) or (c) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a), (b) or (c) above (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other from the offering of 18 the Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Shareholders, on the one hand, and the Underwriters, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholders, on the one hand, and the Underwriters, on the other hand, shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Shareholders bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Shareholders or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (e). Notwithstanding the provisions of this subsection (e), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (e) to contribute are several in proportion to their respective underwriting obligations and not joint. (f) The obligations of the Company and the Selling Shareholders under this Section shall be in addition to any liability which the Company and the Selling Shareholders may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each director of the Company, to each officer of the Company who has signed a Registration Statement and to each person, if any, who controls the Company within the meaning of the Act. (g) To the extent that any interim reimbursement payment pursuant to Section 7 is held to be improper by a court of competent jurisdiction, any indemnified party that received such payment shall promptly return it to the indemnifying party. 8. Default of Underwriters. If any Underwriter or Underwriters default in their obligations to purchase Offered Securities hereunder on either the First or any Optional Closing Date and the aggregate number of shares of Offered Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date, the Representatives may make arrangements satisfactory to the Company and the Selling Shareholders for the purchase of such Offered Securities by other persons, including any of the Underwriters, but if no such arrangements are made by such Closing Date, the non-defaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Offered Securities that such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of shares of Offered Securities with respect to which such default or defaults occur exceeds 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date and arrangements satisfactory to the Representatives, the Company and the Selling Shareholders for the purchase of such Offered Securities by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter, the Company or the Selling Shareholders, except as provided in Section 9 (provided that if such default occurs with respect to Optional Securities after the First Closing Date, this Agreement will not terminate as to the Firm Securities or any Optional Securities purchased prior to such termination). As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. 19 9. Survival of Certain Representations and Obligations. The respective indemnities, agreements, representations, warranties and other statements of the Selling Shareholders, of the Company or its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, any Selling Shareholder, the Company or any of their respective representatives, officers or directors or any controlling person, and will survive delivery of and payment for the Offered Securities. If this Agreement is terminated pursuant to Section 8 or if, for any reason, the purchase of the Offered Securities by the Underwriters is not consummated, the Company and the Selling Shareholders shall remain responsible for the expenses to be paid or reimbursed by them pursuant to Section 5 and the respective obligations of the Company, the Selling Shareholders, and the Underwriters pursuant to Section 7 shall remain in effect, and if any Offered Securities have been purchased hereunder the representations and warranties in Section 2 and all obligations under Section 5 shall also remain in effect. If the purchase of the Offered Securities by the Underwriters is not consummated for any reason other than solely because of the termination of this Agreement pursuant to Section 8 or the occurrence of any event specified in clause (iii), (iv), (vi), (vii) or (viii) of Section 6(c), the Company and the Selling Shareholders will, jointly and severally, reimburse the Underwriters for all out-of-pocket expenses (including fees and disbursements of counsel) reasonably incurred by them in connection with the offering of the Offered Securities. 10. Notices. All communications hereunder will be in writing and, if sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed to the Representatives, c/o Credit Suisse First Boston LLC, Eleven Madison Avenue, New York, NY 10010-3629, Attention: Transactions Advisory Group, or, if sent to the Company, will be mailed, delivered or telegraphed and confirmed to it at 6442 City West Parkway, Eden Prairie, MN 55344, Attention: Chief Financial Officer , or, if sent to the Selling Shareholders or any of them, will be mailed, delivered or telegraphed and confirmed to the Selling Shareholders c/o LIFE TIME FITNESS, Inc., 6442 City West Parkway, Eden Prairie, MN 55344, Attention: Eric Buss; provided, however, that any notice to an Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed and confirmed to such Underwriter. 11. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective personal representatives and successors and the officers and directors and controlling persons referred to in Section 7, and no other person will have any right or obligation hereunder. 12. Representation. The Representatives will act for the several Underwriters in connection with the transactions contemplated by this Agreement, and any action under this Agreement taken by the Representatives jointly or by CSFB will be binding upon all the Underwriters. Eric Buss or Michael Robinson, as the Attorneys in Fact, will act for the Selling Shareholders in connection with such transactions, and any action under or in respect of this Agreement taken by such persons will be binding upon all of the Selling Shareholders. 13. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. 14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. The Company hereby submits to the non-exclusive jurisdiction of the Federal and state courts in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. 20 If the foregoing is in accordance with the Representatives' understanding of our agreement, kindly sign and return to the Company one of the counterparts hereof, whereupon it will become a binding agreement among the Selling Shareholders, the Company and the several Underwriters in accordance with its terms. Very truly yours, Acting on behalf of the Selling Shareholders listed in Schedule B hereto as the Attorney in Fact ---------------------------------------- Eric J. Buss LIFE TIME FITNESS, INC. By: ------------------------------------- Name: Title: The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. Acting on behalf of themselves and as the Representatives of the several Underwriters CREDIT SUISSE FIRST BOSTON LLC By: ------------------------------------- Name: Title: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: ------------------------------------- Name: Title: 21 SCHEDULE A

SCHEDULE B

EX-3.1 3 n82215a2exv3w1.txt ARTICLES OF INCORPORATION EXHIBIT 3.1 ARTICLES OF AMENDMENT AND RESTATEMENT OF ARTICLES OF INCORPORATION OF FCA, LTD. 1. The name of the corporation is FCA, Ltd. 2. The following is the full text of the Articles of Incorporation of FCA, Ltd., as amended and restated: "The following Amended and Restated Articles of Incorporation shall supersede and take the place of the existing Articles of Incorporation and all amendments thereto: ARTICLE 1. NAME The name of the corporation is "FCA, Ltd." ARTICLE 2. REGISTERED OFFICE The address of the registered office of the corporation is 6442 City West Parkway, Suite 275, Eden Prairie, Minnesota 55344. ARTICLE 3. AUTHORIZED SHARES The aggregate number of authorized shares of the corporation is 60,000,000 shares, of which 50,000,000 shares shall be designated Common Stock, $.02 par value and 10,0000 shares, $.02 par value, shall be divisible into such classes and series, have the designations, voting rights, and other rights and preferences and be subject to the restrictions, as the Board of Directors of the corporation may from time to time establish, fix and determine consistent with these Amended and Restated Articles of Incorporation. Unless otherwise designated in these Amended and Restated Articles or by the Board of Directors, all issued shares shall deemed common stock with equal rights and preferences. ARTICLE 4. NO CUMULATIVE VOTING There shall be no cumulative voting by the shareholders of the corporation. ARTICLE 5. NO PREEMPTIVE RIGHTS The shareholders of the corporation shall not have any preemptive rights to subscribe for or acquire securities or rights to purchase securities of any class, kind, or series of the corporation. ARTICLE 6. WRITTEN ACTION BY DIRECTORS An action required or permitted to be taken at a meeting of the Board of Directors of the corporation may be taken by a written action signed, or counterparts of a written action signed in the aggregate, by all of the directors unless the action need not be approved by the shareholders of the corporation, in which case the action may be taken by a written action signed, or counterparts of a written action signed in the aggregate, by the number of directors that would be required to take the same action at a meeting of the Board of Directors of the corporation at which all of the directors were present. ARTICLE 7. DIRECTOR LIABILITY No director of this corporation shall be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its shareholders; (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (iii) under Sections 302A.559 or 80A.23 of the Minnesota Statutes; or (iv) for any transaction from which the director derives any improper personal benefit. If the Minnesota Business Corporation Act is hereafter amended to authorize any further limitation of the liability of a director, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Minnesota Business Corporation Act, as amended. Any repeal or modification of the foregoing provisions of this Article 7 by the shareholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification." 3. The foregoing Amended and Restated Articles of Incorporation were adopted by the Board of Directors and the shareholders of FCA, Ltd. in accordance with the Minnesota Business Corporation Act, Minn. Stat. 302A. IN WITNESS WHEREOF, the undersigned, President of FCA, Ltd., being duly authorized on behalf of such corporation, has executed this certificate this 26th day of April, 1996. ________________________________________ Bahram Akradi President 2 ARTICLES OF AMENDMENT OF AMENDED AND RESTATED ARTICLES OF INCORPORATION OF FCA, LTD. 1. The name of the corporation is FCA, Ltd., a Minnesota corporation. 2. Article 1 of the Company's Amended and Restated Articles of Incorporation is hereby amended in its entirety as follows: "ARTICLE 1. NAME The name of the corporation is "LIFE TIME FITNESS, Inc."" 3. The foregoing amendment was adopted by the Board of Directors and the shareholders of the corporation in accordance with the Minnesota Business Corporation Act, Minn. Stat. 302A. IN WITNESS WHEREOF, the undersigned President of the corporation, being duly authorized on behalf of the corporation, has executed this certificate this 8th day of December, 1998. _______________________________________ Bahram Akradi President MINNESOTA SECRETARY OF STATE NOTICE OF CHANGE OF REGISTERED OFFICE/ REGISTERED AGENT Please read the instructions on the back before completing this form. 1. Entity Name: LIFE TIME FITNESS, Inc. 2. Registered Office Address (No. & Street): List a complete street address or rural route and rural route box number. A POST OFFICE BOX IS NOT ACCEPTABLE. 6442 City West Parkway, Suite 375 Eden Prairie MN 55344 - --------------------------------- ------------ ----- -------- Street City State Zip Code 3. Registered Agent (Registered agents are required for foreign corporations but optional for MINNESOTA corporations): Shaun Nugent ----------------------------------------------------------------------- If you do not wish to designate an agent, you must list "NONE" in this box. DO NOT LIST THE ENTITY NAME. In compliance with Minnesota Statutes, Section 302A.123, 303.10, 308A.025, 317A.123 or 322B.135 I certify that the above listed company has resolved to change the entity's registered office and/or agent as listed above. I certify that I am authorized to execute this notice and I further certify that I understand that by signing this notice I am subject to the penalties of perjury as set forth in Minnesota Statutes Section 609.48 as if I had signed this notice under oath. /s/ Shaun Nugent ------------------------------ Signature of Authorized Person Name and Telephone Number of a Contact Person: Shaun P. Nugent (612) 996-1105 -------------------------------- please print legibly Filing Fee: Minnesota Corporations, Cooperatives and Limited Liability Companies: $35.00. Non-Minnesota Corporations: $50.00. Make checks payable to Secretary of State Return to: Minnesota Secretary of State 180 State Office Bldg. 100 Constitution Ave. St. Paul, MN 55155-1299 (612) 296-2803 CERTIFICATE OF DESIGNATION OF SERIES OF PREFERRED STOCK LIFE TIME FITNESS, INC. AMENDMENT AND RESTATEMENT OF STATEMENT OF DESIGNATION OF RIGHTS, PREFERENCES AND LIMITATIONS OF SERIES B CONVERTIBLE PREFERRED STOCK The undersigned hereby certifies that the following resolutions amending and restating the rights, powers and preferences of the Series B Convertible Preferred Stock of LIFE TIME FITNESS, Inc., (formerly known as FCA, Ltd.) a Minnesota corporation (the "corporation"), pursuant to Minnesota Statutes, Section 302A.401 were duly adopted by the Board of Directors of the corporation (the "Board of Directors") and approved by the shareholders of the corporation and by the holders (acting together as a class) of at least sixty percent of the shares of Series B Preferred Stock at the time outstanding. RESOLVED, that, subject to the filing of the Amendment and Restatement of Designation of Rights, Preferences and Limitations of the Series B Convertible Preferred Stock, the rights, powers and preferences of the series of preferred stock of this corporation known as Series B Convertible Preferred Stock are hereby amended and restated, and that such series shall hereafter have the following rights, powers and preferences: (1) Designation of Series of Preferred Stock. Of the 60,000,000 shares of capital stock which the corporation is authorized to issue under its Articles of Incorporation (as hereinafter defined), 1,000,000 of such shares shall be designated as shares of Series B Convertible Preferred Stock of the corporation (the "Series B Preferred Stock"), par value $.02 per share. Such shares of Series B Preferred Stock, together with the 479,243 shares of Series A Convertible Preferred Stock of the corporation (the "Series A Preferred Stock"), the 4,500,000 shares of Series C Convertible Preferred Stock of the corporation (the "Series C Preferred Stock"), the 2,000,000 shares of Series D Convertible Preferred Stock of the corporation (the "Series D Preferred Stock"), the 50,000,000 authorized shares of Common Stock of the corporation (the "Common Stock"), the balance of the undesignated shares of capital stock of the corporation and any other common stock or preferred stock that may hereafter be authorized in or pursuant to the Articles of Incorporation of the corporation, are sometimes hereinafter collectively referred to as the "capital stock." The shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are referred to herein collectively as the "Preferred Stock." 1 (2) Voting Privileges. (a) General. Each holder of Series B Preferred Stock shall have that number of votes on all matters submitted to the shareholders that is equal to the number of shares of Common Stock into which such holder's shares of Series B Preferred Stock are then convertible, as hereinafter provided. Except as otherwise provided herein, and except as otherwise required by agreement or law, the shares of capital stock of the corporation shall vote as a single class on all matters submitted to the shareholders. (b) Election of Directors: General. So long as any shares of Series B Preferred Stock are outstanding, (i) the Board of Directors of the corporation shall consist of not more than seven members, (ii) the holders of the Series A Preferred Stock, exclusively and voting as a single class, shall be entitled, by a vote of a majority of the outstanding shares of Series A Preferred Stock held by such holders, to elect one of the directors of the corporation and to exercise any right of removal or replacement of such director, provided, that at such time as no shares of Series A Preferred Stock are outstanding, and so long as shares of Series B Preferred Stock and Series C Preferred Stock are both outstanding, and the director elected pursuant to this subparagraph (ii) is removed pursuant to Section 6 of the Amended and Restated Shareholders Agreement, dated as of July 19, 2001 (the "Shareholders Agreement") among the corporation, the Shareholders and Co-Sale Parties named therein, the holders of (A) at least sixty percent of the outstanding shares of Series B Stock and (B) a majority of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock, voting together as a class, exclusively, shall together be entitled to elect one of the directors of the corporation and to exercise any right of removal or replacement of such director, (iii) the holders of the Series B Preferred Stock, exclusively and voting as a single class, shall be entitled, by a vote of a majority of the outstanding shares of Series B Preferred Stock held by such holders, to elect one of the directors of the corporation and to exercise any right of removal or replacement of such director, (iv) the holders of the Series C Preferred Stock and Series D Preferred Stock, exclusively and voting together as a class, shall be entitled, by a vote of a majority of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock held by such holders, to elect one of the directors of the corporation and to exercise any right of removal or replacement of such director, (v) subject to subparagraph 2(c) below, the holders of the Common Stock, exclusively and voting as a single class, shall be entitled, by a vote of a majority of the outstanding shares of Common Stock held by such holders, to elect one of the directors of the corporation and to exercise any right of removal or replacement of such director, and (vi) subject to subparagraph 2(c) below, the holders of the Common Stock, the Series A Preferred Stock, exclusively and voting together as a single class, shall be entitled, by a vote of a majority of the total votes to which such holders are entitled as set forth in subparagraph (a) above, to elect the remaining directors of the corporation, and to exercise any right of removal or replacement of such directors. (c) Election of Directors: Certain Events of Default. Upon the occurrence of an Event of Default as defined in (i) the Stock Purchase Agreement dated May 7, 1996, as amended by the First Amendment and Waiver dated as of December 8, 1998, by the 2 Second Amendment and Waiver dated as of August 16, 2000 and by the Third Amendment and Waiver dated as of July 19, 2001 (the "First Purchase Agreement") among the corporation and the Purchasers named therein, (ii) the Stock Purchase Agreement dated December 8, 1998, as amended by the First Amendment and Waiver dated as of August 16, 2000 and by the Second Amendment and Waiver dated as of July 19, 2001 (the "Second Purchase Agreement") among the corporation and the Purchasers named therein, (iii) the Stock Purchase Agreement dated as of August 16, 2000, as amended by the First Amendment and Waiver dated as of July 19, 2001 (the "Third Purchase Agreement") among the corporation and the Purchasers named therein, (iv) the Stock Purchase Agreement dated as of July 19, 2001 (the "Fourth Purchase Agreement") among the corporation and the Purchasers named therein, or (v) the Shareholders Agreement, and so long as such Event of Default continues unremedied, and unless such Event of Default shall have been waived by the holders of at least sixty percent of the outstanding shares of each of the Series A Preferred Stock and Series B Preferred Stock and by the holders of a majority of the outstanding shares of the Series C Preferred Stock and Series D Preferred Stock, voting together as a class, the holders of the outstanding shares of Preferred Stock, shall be entitled to, at the same time as the removal of all directors not elected exclusively by the holders of Series A Preferred Stock (pursuant to subparagraph (2)(b)(ii) hereof), Series B Preferred Stock (pursuant to subparagraph (2)(b)(iii) hereof), or Series C Preferred Stock and Series D Preferred Stock (pursuant to subparagraph (2)(b)(iv) hereof), in accordance with Section 5 of the Shareholders Agreement, to elect such number of additional directors of the corporation as shall be necessary in order for the Board of Directors of the corporation to be made up of an equal number of directors elected by (x) the holders of at least sixty percent of the outstanding shares of Series A Preferred Stock and Series B Preferred Stock, exclusively and voting together as a single class, on the one hand and (y) the holders of a majority of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock, exclusively and voting together as a class, on the other hand, and to exercise any right of removal or replacement of such directors. In the event the holders of the outstanding shares of Preferred Stock are entitled to elect members of the Board of Directors of the corporation pursuant to the immediately preceding sentence, the corporation shall, immediately upon receiving written notice from the holders of at least sixty percent of the outstanding shares of each of the Series A Preferred Stock and Series B Preferred Stock or from the holders of a majority of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock, voting together as a class, call a special shareholders' meeting to be held as soon as possible, but in any event within five days of the date of the notice of such meeting. At such special shareholders' meeting the directors of the corporation shall be elected pursuant to this paragraph. Any right to continue to elect members of the Board of Directors of the corporation shall expire, and a shareholders' meeting to elect new directors shall be called, three months after the later of (a) the curing of the Event of Default upon which the right was exercised, or (b) the curing of any Event of Default occurring after the Event of Default upon which such right was exercised. When, to its knowledge, any Event of Default described herein has occurred or exists, the corporation agrees to give written notice within three business days of obtaining such knowledge of such Event of Default to the holders of all outstanding shares of Preferred Stock. If the holder of any shares of Preferred Stock shall give any notice or take any other actions in 3 respect of a claimed Event of Default, the corporation will forthwith give written notice thereof to all other holders of Preferred Stock at the time outstanding, describing such notice or action and the nature of the claimed Event of Default. (d) Additional Class Votes by Series B Preferred Stock. Without the affirmative vote or written consent of the holders (acting together as a class) of sixty percent of the shares of Series B Preferred Stock at the time outstanding, the corporation shall not: (1) authorize any additional shares of Common Stock; or (2) other than the Series C Preferred Stock and the Series D Stock, authorize or issue any additional shares of Series B Preferred Stock, or any shares of stock having priority over Series B Preferred Stock or ranking on a parity therewith as to the payment or distribution of assets upon the liquidation or dissolution, voluntary or involuntary, of the corporation; or (3) amend the articles of incorporation of the corporation, including any certificate of designation for preferred stock (the "Articles of Incorporation"), so as to materially and adversely alter any existing provision relating to Series B Preferred Stock or the holders thereof, whether such amendment is by merger, consolidation, recapitalization or otherwise, or waive any of the rights granted to the holders of the Series B Preferred Stock by the Articles of Incorporation; or (4) sell, lease, license or otherwise dispose of all or substantially all of the assets of the corporation or of any subsidiary of the corporation, or any asset or assets which have a material effect upon the business or financial condition of the corporation or any subsidiary of the corporation, nor shall the corporation or any subsidiary of the corporation consolidate with or merge into any other corporation or entity, or permit any other corporation or entity to consolidate or merge into the corporation or any subsidiary of the corporation, or enter into a plan of exchange with any other corporation or entity, or otherwise acquire any other corporation or entity (other than a merger effected exclusively for the purpose of changing the state of incorporation of the corporation to the State of Delaware). (3) Dividends. The holders of Series B Preferred Stock will be entitled to receive annual dividends of $1.40 per share, if, as and when declared by the Board of Directors on a non-cumulative basis. In the event any dividend or distribution is declared or made with respect to outstanding shares of Common Stock, a comparable dividend or distribution must be simultaneously declared or made with respect to the outstanding shares of the Preferred Stock, minus any dividend paid pursuant to the first sentence of this paragraph. In the event any dividend or distribution is declared or made with respect to the Common Stock, each holder of shares of the Preferred Stock shall be paid such comparable 4 dividend or receive such comparable distribution on the basis of the number of shares of Common Stock into which such holder's shares of the Preferred Stock are then convertible, as hereinafter provided. Dividends on shares of capital stock of the corporation shall be payable only out of funds legally available therefor. (4) Other Terms of the Series B Preferred Stock. (a) Liquidation Preference. In the event of an involuntary or voluntary liquidation or dissolution of the corporation at any time, the holders of shares of Series B Preferred Stock shall be entitled to receive out of the assets of the corporation a per share amount (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected) equal to the sum of (i) $20 and (ii) an amount (taking into account dividends actually paid) representing a per share annual rate of return of $1.40, plus all dividends declared but unpaid thereon, if any. In the event of either an involuntary or a voluntary liquidation or dissolution of the corporation payment shall be made to the holders of shares of Series A Preferred Stock in the amounts herein fixed and to the holders of shares of Series B Preferred Stock in the amounts to which such holders are entitled before any payment shall be made or any assets distributed to the holders of the Common Stock or any other class of shares of the corporation ranking junior to such Preferred Stock with respect to payment upon dissolution or liquidation of the corporation, but after requisite payment is made to the holders of Series C Preferred Stock and Series D Preferred Stock to which such holders are entitled. Thereafter, no further payments or distributions shall be made with respect to the Preferred Stock. If upon any liquidation or dissolution of the corporation and after requisite payment to the holders of Series C Preferred Stock and Series D Preferred Stock in connection with such liquidation or distribution, the assets available for distribution shall be insufficient to pay the holders of all outstanding shares of Series A Preferred Stock and Series B Preferred Stock the full amounts to which they respectively shall be entitled, the holders of such Series A Preferred Stock and Series B Preferred Stock shall share ratably in any distribution of assets of the corporation in proportion to the respective amounts which would be payable in respect of the shares of Series A Preferred Stock and Series B Preferred Stock held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. For purposes of this paragraph (4), at the option of the holders of sixty percent of the outstanding shares of series B Preferred Stock, a liquidation of the corporation shall be deemed to occur upon the occurrence of any one of the following events: (i) a merger, consolidation, reorganization or other transaction involving the corporation (whether as a single transaction or a series of related transactions, a "Transaction") in which the holders of the outstanding shares of capital stock of the corporation immediately prior to such Transaction are not the holders of a majority of the outstanding shares of capital stock of the corporation, or of the entity or entities surviving the corporation, immediately after such Transaction or (ii) a sale of all, or substantially all, of the corporation's assets. 5 Within 30 days of the liquidation or dissolution of the corporation, the corporation shall mail to each holder of record of Series B Preferred Stock written notice thereof, specifying the amount, time and manner of payment to be made to such holder of record pursuant to this paragraph (4). Nothing hereinabove set forth shall affect in any way the right of each holder of shares of Series B Preferred Stock to convert such shares at any time and from time to time in accordance with subparagraph (c) below. (b) Redemption; Certain Events of Default. Upon the occurrence of (i) a Six-Year Right (as such term is defined below) or (ii) an Event of Default specified in Section 11.2 of the Second Purchase Agreement, and upon the written demand for redemption of the holders of at least sixty percent of the outstanding shares of Series B Preferred Stock, the corporation shall, to the extent that funds are legally available therefor, redeem all of the outstanding shares of Series B Preferred Stock at a redemption price, in cash, of a per share amount (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected) equal to the sum of (A) $20 and (B) an amount (taking into account dividends actually paid) representing a per share annual rate of return of $1.40, plus all dividends declared but unpaid thereon, if any. Notwithstanding any provision contained in the previous paragraph, the corporation shall not redeem any shares of the outstanding Series B Preferred Stock without the prior consent of the holders (acting together as a class) of a majority of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock. A "Six-Year Right" shall be deemed to occur if, on or prior to the sixth anniversary of the closing of the Third Purchase Agreement, the corporation has not completed any one of the following events: (i) a Qualified IPO, (ii) a sale, liquidation or dissolution of the corporation or (iii) a sale of all, or substantially all, of the corporation's assets. For purposes of the previous sentence and of the first sentence of paragraph 4(d) hereof, a "Qualified IPO" is an initial public offering of the shares of the Common Stock (i) at an offering price per share of (A) not less than 2 times the purchase price per share of Series C Preferred Stock (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected), if such initial public offering is consummated within a period of 30 months following the closing of the Third Purchase Agreement or (B) not less than 2.5 times the purchase price per share of the Series C Preferred Stock (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected), if such initial public offering is consummated after the period of 30 months following the closing of the Third Purchase Agreement and prior to expiration of the six-year period following the closing of the Third Purchase Agreement, (ii) with gross proceeds to the corporation of at least $50,000,000 (fifty million U.S. dollars) and (iii) underwritten on a firm commitment basis by an investment banking firm of national standing approved by the holders of a majority of the outstanding shares of the Series C Preferred Stock. 6 If at the time of any required redemption the funds legally available for such redemption shall be insufficient to redeem the number of shares of Series B Preferred Stock specified in the first paragraph of this subparagraph (b) and the number of shares of Series A Preferred Stock, Series C Preferred Stock and Series D Preferred Stock required to be redeemed at the same time, the corporation shall make payments to redeem all shares of Series C Preferred Stock and Series D Preferred Stock required to be redeemed pursuant to the Third Purchase Agreement and the Fourth Purchase Agreement before any such payments are made to redeem shares of Series A Preferred Stock or Series B Preferred Stock. Thereafter, as and to the extent legally available funds for the redemption thereof exist from time to time, the corporation shall redeem additional shares of Preferred Stock, pro rata as among the holders thereof, in proportion to the full amounts to which such holders would otherwise be entitled, until all shares of Preferred Stock required to be redeemed have been redeemed. In the event of a redemption of less than all of the outstanding shares of Series B Preferred Stock pursuant to the first paragraph of this subparagraph (b), redemptions as among the holders of such shares of Series B Preferred Stock shall be on a pro rata basis. Optional redemptions of shares of Series B Preferred Stock by the corporation from any holder thereof in addition to the aforesaid required redemptions are not permitted without the consent of such holder. The corporation shall give notice by mail of redemptions to the holders of record of the shares of Series B Preferred Stock at least 30 days prior to the date of redemption. The notice (i) shall specify the date of redemption and the number of shares to be redeemed from each shareholder and (ii) shall be addressed to each shareholder at his post-office address as shown on the records of the corporation. On or after the date fixed for redemption, each holder of shares of Series B Preferred Stock called for redemption shall surrender the certificate or certificates evidencing such shares to the corporation at the place designated in such notice and shall thereupon be entitled to receive payment. If notice of redemption has been given under this paragraph, from and after the redemption date for the shares of Series B Preferred Stock called for redemption (unless default shall be made by the corporation in providing money for the payment of the redemption price of the shares so called for redemption), such shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as shareholders of the corporation (except the right to receive the redemption price without interest) shall cease. Upon surrender in accordance with such notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors or a duly authorized committee thereof shall so require and the notice shall so state), such shares shall be redeemed by the corporation at the redemption price aforesaid. If less than all of the shares represented by any such surrendered certificate or certificates are redeemed, the corporation shall issue a new certificate for the unredeemed shares. (c) Conversion Right. At the option of the holders thereof, the shares of Series B Preferred Stock shall be convertible, at the office of the corporation (or at such other office or offices, if any, as the Board of Directors may designate), into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100th of a 7 share) of Common Stock of the corporation, at the conversion price, determined as hereinafter provided, in effect at the time of conversion, each share of Series B Preferred Stock being deemed to have a value of $20 for the purpose of such conversion. The price at which shares of Common Stock shall be delivered upon conversion (herein called the "conversion price") shall be initially $5 per share of Common Stock (i.e., at an initial conversion rate of four shares of Common Stock for each share of Series B Preferred Stock), provided, however, that such initial conversion price shall be subject to adjustment from time to time in certain instances as hereinafter provided. In the case of the call for redemption of any shares of Series B Preferred Stock, such right of conversion shall cease and terminate as to the shares designated for redemption from and after the date fixed for redemption, unless there shall have been a default by the corporation in providing money for the payment of the redemption price of the shares so called for redemption. The following provisions shall govern such right of conversion: (1) In order to convert shares of Series B Preferred Stock into shares of Common Stock of the corporation, the holder thereof shall surrender at any office hereinabove mentioned the certificate or certificates therefor, duly endorsed to the corporation or in blank, and give written notice to the corporation at such office that such holder elects to convert such shares. Shares of Series B Preferred Stock shall be deemed to have been converted immediately prior to the close of business on the day of the surrender of such shares for conversion as herein provided, and the person entitled to receive the shares of Common Stock of the corporation issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock at such time. As promptly as practicable on or after the conversion date, the corporation shall issue and deliver or cause to be issued and delivered at such office a certificate or certificates for the number of shares of Common Stock of the corporation issuable upon such conversion. (2) The conversion price shall be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the conversion price each holder of shares of Series B Preferred Stock shall thereafter be entitled to receive the number of shares of Common Stock of the corporation obtained by multiplying the conversion price in effect immediately prior to such adjustment by the number of shares issuable pursuant to conversion immediately prior to such adjustment and dividing the product thereof by the conversion price resulting from such adjustment. Not in limitation of the foregoing, any adjustment of the conversion price hereafter effected shall apply to shares of Series B Preferred Stock issued subsequent to the adjustment. (3) Except for (a) options to purchase shares of Common Stock and the issuance of awards of Common Stock pursuant to key employee and consultant benefit plans adopted by the corporation and shares of Common Stock issued upon the exercise of such options granted pursuant to such plans (provided that the aggregate number of shares thus awarded and 8 covered by unexercised options and thus issued pursuant to such options shall not be in excess of 1,242,000 (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected)), (b) warrants issued in connection with bona fide financing transactions (including, without limitation, equipment financing arrangements and bank lines of credit) with conventional institutional lenders entered into in the ordinary course of their business and shares of Common Stock issued upon exercise of such warrants (provided that the aggregate number of shares thus issued on exercise and covered by unexercised warrants shall not be in excess of 600,000 (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar change hereafter effected)), (c) dividends payable in Common Stock, (d) shares of Common Stock issued or issuable upon exercise of the Warrants (as defined in the Second Purchase Agreement), and (e) shares of Common Stock issued or issuable upon conversion of the Preferred Stock, if and whenever the corporation shall issue or sell any shares of its Common Stock for a consideration per share less than the conversion price in effect immediately prior to the time of such issue or sale, then, forthwith upon such issue or sale, the conversion price shall be reduced to the price (calculated to the nearest cent) determined by dividing (A) an amount equal to the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the then existing conversion price and (2) the consideration, if any, received by the corporation upon such issue or sale, by (B) an amount equal to the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issue or sale and (2) the number of shares of Common Stock thus issued or sold. Solely for purposes of (A) and (B) above, the term "Common Stock outstanding" shall include those shares of Common Stock issuable upon conversion of outstanding shares of Preferred Stock but shall exclude shares of Common Stock issuable upon exercise of stock options and warrants. No adjustment of the conversion price, however, shall be made in an amount less than 2% of the conversion price in effect on the date of such adjustment, but any such lesser adjustment shall be carried forward and shall be made at the earlier of (i) the time and together with the next subsequent adjustment which, together with any such adjustment so carried forward, shall be an amount equal to or greater than 4% of the conversion price then in effect and (ii) conversion of the Series B Preferred Stock. For the purposes of this subparagraph (3), the following provisions (i) to (v), inclusive, shall also be applicable: (i) In case at any time the corporation shall grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, (a) Common Stock 9 or (b) any obligations or any shares of stock of the corporation which are convertible into, or exchangeable for, Common Stock (any of such obligations or shares of stock being hereinafter called "Convertible Securities") whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined by dividing (x) the total amount, if any, received or receivable by the corporation as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the corporation upon the exercise of such rights or options, plus, in the case of such rights or options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue of such Convertible Securities and upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options) shall be less than the conversion price in effect immediately prior to the time of the granting of such rights or options, then the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date of granting of such rights or options) be deemed to have been issued for such price per share. Except as provided in subparagraph 4(c)(6) below, no further adjustments of the conversion price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such rights or options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. (ii) In case the corporation shall issue or sell (whether directly or by assumption in a merger or otherwise) any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (x) the total amount received or receivable by the corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the corporation upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the conversion price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, 10 provided that (a) except as provided in subparagraph 4(c)(6) below, no further adjustments of the conversion price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and (b) if any such issue or sale of such Convertible Securities is made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the conversion price have been or are to be made pursuant to other provisions of this subparagraph 4(c)(3), no further adjustment of the conversion price shall be made by reason of such issue or sale. (iii) In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the corporation therefor, without deducting therefrom any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed to third parties by the corporation in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the corporation shall be deemed to be the fair value of such consideration as determined in good faith by the Board of Directors of the corporation, without deducting therefrom any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed to third parties by the corporation in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase such Common Stock or Convertible Securities shall be issued in connection with any merger or consolidation in which the corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value as determined in good faith by the Board of Directors of the corporation of such portion of the assets and business of the non-surviving corporation or corporations as such Board shall determine in good faith to be attributable to such Common Stock, Convertible Securities, rights or options, as the case may be. In the event of any consolidation or merger of the corporation in which the corporation is not the surviving corporation or in the event of any sale of all or substantially all of the assets of the corporation for stock or other securities of any other corporation, the corporation shall be deemed to have issued a number of shares of its Common Stock for stock or securities of the other corporation computed on the basis of the actual exchange ratio on which the transaction was predicated and for a consideration equal to the fair market value on the date of such transaction of such stock or securities of the other corporation, and if any such calculation results in adjustment of the conversion price, the determination of the number of shares of Common Stock issuable upon conversion immediately prior to such merger, 11 conversion or sale, for purposes of subparagraph 4(c)(7) below, shall be made after giving effect to such adjustment of the conversion price. (iv) In case the corporation shall take a record of the holders of its Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock or in Convertible Securities, or in any rights or options to purchase any Common Stock or Convertible Securities, or (b) to subscribe for or purchase Common Stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such rights of subscription or purchase, as the case may be. (v) The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the corporation, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purpose of this subparagraph 4(c)(3). (4) In case the corporation shall (i) declare a dividend upon the Common Stock payable in Common Stock (other than a dividend declared to effect a subdivision of the outstanding shares of Common Stock, as described in subparagraph 4(c)(5) below) or Convertible Securities, or in any rights or options to purchase Common Stock or Convertible Securities, or (ii) declare any other dividend or make any other distribution upon the Common Stock, then thereafter each holder of shares of Series B Preferred Stock upon the conversion thereof will be entitled to receive the number of shares of Common Stock into which such shares of Series B Preferred Stock have been converted, and, in addition and without payment therefor, each dividend described in clause (i) above and each dividend or distribution described in clause (ii) above (except to the extent previously received pursuant to the provisions of paragraph (3) hereof) which such holder would have received by way of dividends or distributions if continuously since such holder became the record holder of such shares of Series B Preferred Stock such holder (i) had been the record holder of the number of shares of Common Stock then received, and (ii) had retained all dividends or distributions in stock or securities (including Common Stock or Convertible Securities, and any rights or options to purchase any Common Stock or Convertible Securities) payable in respect of such Common Stock or in respect of any stock or securities paid as dividends or distributions and originating directly or indirectly from such Common Stock. (5) In case the corporation shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares, the conversion price in effect immediately prior to such subdivision shall be 12 proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the corporation shall be combined into a smaller number of shares, the conversion price in effect immediately prior to such combination shall be proportionately increased. (6) If (i) the purchase price provided for in any right or option referred to in clause (i) of subparagraph 4(c)(3), or (ii) the additional consideration, if any, payable upon the conversion or exchange of Convertible Securities referred to in clause (i) or clause (ii) of subparagraph 4(c)(3), or (iii) the rate at which any Convertible Securities referred to in clause (i) or clause (ii) of subparagraph 4(c)(3) are convertible into or exchangeable for Common Stock, shall change at any time (other than under or by reason of provisions designed to protect against dilution), the conversion price then in effect hereunder shall forthwith be decreased to such conversion price as would have obtained had the adjustments made upon the issuance of such rights, options or Convertible Securities been made upon the basis of (a) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exercise of such options or rights or upon the conversion or exchange of such Convertible Securities, and the total consideration received therefor, and (b) the issuance at the time of such change of any such options, rights, or Convertible Securities then still outstanding for the total consideration, if any, received by the corporation therefor and to be received on the basis of such changed price; and on the expiration of any such option or right or the termination of any such right to convert or exchange such Convertible Securities, the conversion price then in effect hereunder shall forthwith be increased to such conversion price as would have obtained had the adjustments made only upon the issuance of such rights or options or Convertible Securities been made upon the basis of the issuance of the shares of Common Stock theretofore actually delivered (and the total consideration received therefor) upon the exercise of such rights or options or upon the conversion or exchange of such Convertible Securities. If the purchase price provided for in any right or option referred to in clause (i) of subparagraph 4(c)(3), or the rate at which any Convertible Securities referred to in clause (i) or clause (ii) of subparagraph 4(c)(3) are convertible into or exchangeable for Common Stock, shall decrease at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of Common Stock upon the exercise of any such right or option or upon conversion or exchange of any such Convertible Security, the conversion price then in effect hereunder shall forthwith be decreased to such conversion price as would have obtained had the adjustments made upon the issuance of such right, option or Convertible Security been made upon the basis of the issuance of (and the total consideration received for) the shares of Common Stock delivered as aforesaid. (7) If any capital reorganization or reclassification of the capital stock of the corporation, or consolidation or merger of the corporation with 13 another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, and subject to subparagraph 4(a) above, lawful and adequate provision shall be made whereby the holders of Series B Preferred Stock shall thereafter have the right to receive upon the basis and upon the terms and conditions specified herein and in lieu of the shares of the Common Stock of the corporation immediately theretofore receivable upon the conversion of Series B Preferred Stock such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore receivable upon the conversion of Series B Preferred Stock had such reorganization, reclassification, consolidation, merger or sale not taken place, plus all dividends declared but unpaid thereon to the date of such reorganization, reclassification, consolidation, merger or sale, and in any such case appropriate provision shall be made with respect to the rights and interests of the holders of Series B Preferred Stock to the end that the provisions hereof (including without limitation provisions for adjustments of the conversion price and of the number of shares receivable upon the conversion of Series B Preferred Stock) shall thereafter be applicable, as nearly as may be in relation to any shares of stock, securities or assets thereafter receivable upon the conversion of Series B Preferred Stock. The corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the corporation) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument executed and mailed to the registered holders of Series B Preferred Stock, at the last addresses of such holders appearing on the books of the corporation, the obligation to deliver to such holders such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to receive. (8) On earlier to occur of (i) an Income Adjustment Event (as hereinafter defined) and (ii) a Sale Adjustment Event (as hereinafter defined), if any, the conversion price shall, on a one-time basis only, be decreased to eighty-seven and 50/100s percent (87.5%) of the conversion price in effect immediately prior to the Income Adjustment Event or the Sale Adjustment Event, as the case may be. For purposes of this subparagraph 4(c)(8), the following defined terms shall have the following meanings: "Income Adjustment Event" shall mean the failure of the corporation to achieve after-tax operating income of the corporation of at least $1.185 per share (appropriately adjusted to reflect stock splits, stock 14 dividends, reorganizations, consolidations and similar changes hereafter effected) on a fully-diluted basis as determined by the corporation's independent public accountants in accordance with generally accepted accounting principles, consistently applied, for the twelve-month period ending on December 31, 2003. For purposes of the preceding sentence, extraordinary items shall be excluded from determining after-tax income unless all members of the Board of Directors of the corporation determine that an extraordinary item should be included (provided, however, that in no event will an extraordinary item related to a disposition of assets by the corporation be included) and after-tax operating income of the corporation shall be calculated as of December 31, 2003 by the corporation's independent public accountants upon completion of the year-end audit for 2003 in the manner required under Sections 8.2 and 8.3 of the Second Purchase Agreement. "Sale Adjustment Event" shall mean the failure of the Sale Consideration (as hereinafter defined) distributable to a holder of Series B Preferred Stock in connection with a Sale of the Company (as hereinafter defined) to be equal to or greater than a 30% Internal Rate of Return (as hereinafter defined) on such holder's Series B Preferred Stock. "Sale Consideration" distributable to any holder of Series B Preferred Stock shall be equal to the greater of (i) the product obtained by multiplying (A) the number of shares of Series B Preferred Stock held by such holder by (B) the per share purchase price to be received by holders of Series B Preferred Stock in the Sale of the Company, and (ii) the product obtained by multiplying (A) the number of shares of Common Stock into which the shares of Series B Preferred Stock held by such holder may be converted immediately prior to the Sale of the Company (but before any adjustment to the conversion price as contemplated by this subparagraph 4(c)(8)) by (B) the value of the cash, securities or other property distributable to shareholders of the corporation in their capacity as shareholders of the corporation, on a fully-diluted per share basis, as a result of, or in connection with, a Sale of the Company, with the value of non-cash and deferred consideration to be valued in the manner set forth below. "Sale of the Company" shall mean a single transaction or a series of transactions resulting in (i) a sale, exchange or other disposition of 50% or more of the ownership of the corporation by or through its shareholders, or (ii) the sale, lease, exchange or other disposition by the corporation of assets with a fair market value greater than 50% of the aggregate fair market value of all assets of the corporation immediately prior to such sale, lease, exchange or other disposition; provided that, for purposes of this definition, such transaction or series of transactions shall include, without limitation, a merger, consolidation, joint venture, tender offer, exchange offer, or other similar transaction satisfying the above criteria. 15 "Internal Rate of Return", with respect to shares of Series B Preferred Stock, shall mean the annual discount rate which, when applied to the purchase price of such shares paid by the holder thereof and to all amounts paid and payable by the corporation with respect to such shares on a pre-tax basis, yields a net present value of zero. For purposes of determining the amount of the Sale Consideration and the amounts payable with respect to shares of Series B Preferred Stock in connection with a Sale of the Company, the following provisions shall apply: (i) In the event that all or a portion of the Sale Consideration consists of securities or property (other than cash), the fair value of any portion of the Sale Consideration consisting of (x) securities listed on a national securities exchange or unlisted securities for which closing price information is available shall be the closing price averaged over a period of 30 trading days prior to the closing of the Sale of the Company, (y) unlisted securities for which there is an established trading market shall be the mean between the bid and the asked price thereof as of the close of trading averaged over a period of 30 trading days prior to the closing of the Sale of the Company, and (z) securities and/or other property for which there is no established trading market shall be as mutually agreed by the corporation and the holders of 60% of the outstanding shares of Series B Preferred Stock, or, in the absence of such agreement, as determined in accordance with clause (iv) below. For the purpose of this clause (i), the existence of limited or sporadic quotations shall not of itself be deemed to constitute an established trading market. (ii) In the event that all or a portion of the Sale Consideration involves installment or deferred payments, then the value of any portion of the Sale Consideration consisting of installment or deferred payments shall be the present value thereof (such present value to be based upon a discount rate equal to the rate of United States Treasury securities having a then-remaining maturity equal to (or if not equal to, closest to) the length of time remaining to the date of such deferred payment plus three percent). (iii) In the event that all or a portion of the Sale Consideration is subject to an escrow, "holdback", "earnout" or any other provision pursuant to which the payment of such consideration is subject to a contingency or is not payable to the corporation or its shareholders on or immediately following the closing of the Sale of the Company (other than ordinary installment or deferred payments), the value of any portion of the Sale Consideration subject to an escrow, "holdback", "earnout" or related provisions shall be the fair value thereof as mutually agreed by the corporation and the holders of 60% of the outstanding shares of Series B Preferred Stock, or, in the absence of such agreement, as determined in accordance with clause (iv) below. 16 (iv) In the event that the corporation and the holders of 60% of the outstanding shares of Series B Preferred Stock shall be unable to promptly agree upon any value or amount relating to Sale Consideration to be determined by their mutual agreement pursuant to this subparagraph 4(c)(8), or shall have any disagreement with respect to the computation of the Sale Consideration which they cannot promptly resolve, then the value or amount upon which they were unable to agree and/or the other specific matter or matters in dispute shall be determined (A) by such independent investment banker or other third party as is mutually agreeable to the corporation and the holders of 60% of the outstanding shares of Series B Preferred Stock, or (B) in the absence of such agreement, by a third party selected in accordance with the rules of arbitration of the American Arbitration Association. Any independent investment banker or other third party selected pursuant to this clause (iv) shall make a final and binding determination as to such value, amount or other matter or matters in dispute. (v) The fees and expenses of any independent investment banker or other third party selected pursuant to clause (iv) above for services rendered in connection with any determinations to be made pursuant thereto shall be paid one-half by the holders of all outstanding shares of Series B Preferred Stock and one-half by the corporation. (9) Upon any adjustment of the conversion price, then and in each case the corporation shall give written notice thereof, by first-class mail, postage prepaid, addressed to the registered holders of Series B Preferred Stock, at the addresses of such holders as shown on the books of the corporation, which notice shall state the conversion price resulting from such adjustment and the increase or decrease, if any, in the number of shares receivable at such price upon the conversion of Series B Preferred Stock, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (10) In case at any time: (i) the corporation shall declare any cash dividend on its Common Stock; (ii) the corporation shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of its Common Stock; (iii) the corporation shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; 17 (iv) there shall be any capital reorganization, or reclassification of the capital stock of the corporation, or consolidation or merger of the corporation with, or sale of all or substantially all of its assets to, another corporation; (v) there shall be a tender offer for any capital stock of the corporation; or (vi) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the corporation; then, in any one or more of said cases, the corporation shall give written notice, by first-class mail, postage prepaid, addressed to the registered holders of Series B Preferred Stock at the addresses of such holders as shown on the books of the corporation, of the date on which (a) the books of the corporation shall close or a record shall be taken for such dividend, distribution or subscription rights, or (b) such reorganization, reclassification, consolidation, tender offer, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, tender offer, merger, sale, dissolution, liquidation, or winding up, as the case may be. Such written notice must be received by the holders of Series B Preferred Stock at least 20 days prior to the action in question and not less than 20 days prior to the record date or the date on which the corporation's transfer books are closed in respect thereto. Such written notice shall be deemed received 3 days after deposited in the U.S. mail in the manner provided above. (11) If any event occurs as to which in the opinion of the Board of Directors of the corporation the other provisions of this paragraph 4(c) are not strictly applicable or if strictly applicable would not fairly protect the rights of the holders of Series B Preferred Stock in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such rights as aforesaid. (12) As used in this paragraph 4(c) the term "Common Stock" shall mean and include the corporation's currently authorized Common Stock and shall also include any capital stock of any class of the corporation hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the corporation; provided that the 18 shares receivable pursuant to conversion of shares of Series B Preferred Stock shall include shares designated as Common Stock of the corporation as of the date of issuance of such shares of Series B Preferred Stock, or, in case of any reclassification of the outstanding shares thereof, the stock, securities or assets provided for in subparagraph 4(c)(7) above. (13) No fractional shares of Common Stock shall be issued upon conversion, but, instead of any fraction of a share which would otherwise be issuable, the corporation shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the market price per share of Common Stock as of the close of business on the day of conversion. "Market price" shall mean if the Common Stock is traded on a securities exchange or on the NASDAQ National Market System, the closing price of the Common Stock on such exchange or the NASDAQ National Market System, or, if the Common Stock is otherwise traded in the over-the-counter market, the closing bid price, in each case averaged over a period of 20 consecutive business days prior to the date as of which "market price" is being determined. If at any time the Common Stock is not traded on an exchange or the NASDAQ National Market System, or otherwise traded in the over-the-counter market, the "market price" shall be deemed to be the fair value thereof determined in good faith by the Board of Directors of the corporation as of a date which is within 15 days of the date as of which the determination is to be made. (d) Mandatory Conversion. The Series B Preferred Stock shall automatically be converted into shares of Common Stock of the corporation, without any act by the corporation or the holders of the Series B Preferred Stock, concurrently with the closing of the first public offering by the corporation of shares of Common Stock of the corporation registered under the Securities Act of 1933, as amended, in which (1) the aggregate price to public of the securities sold for cash by the corporation in the offering is at least $40,000,000, or such lower amount as may be approved by the holders of at least 60% of the shares of Series B Preferred Stock then outstanding, and (2) the offering is underwritten on a firm commitment basis, and (3) the public offering price per share of Common Stock (as adjusted from time to time to reflect stock splits, dividends, recapitalizations, combinations or the like) is equal to at least $10 or such lower amount as may be approved by the holders of at least 60% of the shares of Series B Preferred Stock then outstanding. As used herein, the term "closing" shall mean the delivery by the corporation to the underwriters of certificates representing the shares of Common Stock of the corporation offered to the public against delivery to the corporation by such underwriters of payment therefor. The term "firm commitment basis" with respect to the underwriting of such public offering shall mean a commitment pursuant to a written underwriting agreement under which the nature of the underwriters' commitment is such that all securities will be purchased by such underwriters if any securities are purchased by such underwriters. Each holder of a share of Series B Preferred Stock so converted shall be entitled to receive the full number of shares of Common Stock into which such share of Series B Preferred Stock held by such holder could be converted if such holder had exercised its conversion right at the time of closing of such public offering together 19 with cash in lieu of any fractional shares. Shares of Series B Preferred Stock shall be deemed to have been converted concurrently with the closing of the offering described above and from such time the holder of such shares of Series B Preferred Stock shall be treated for all purposes as the record holder of those shares of Common Stock into which such shares of Series B Preferred Stock have been converted. Within a reasonable time and in no event later than 15 days after the conversion date, the corporation shall issue and deliver or cause to be issued and delivered at such office a certificate or certificates for the number of shares of Common Stock of the corporation issuable upon such conversion. (e) Replacement Certificates. Upon receipt of evidence reasonably satisfactory to the corporation of the loss, theft, destruction or mutilation of any certificates representing shares of Series B Preferred Stock, and, in the case of any such loss, theft or destruction, upon delivery of a bond of indemnity satisfactory to the corporation, or, in the case of any such mutilation, upon surrender and cancellation of the certificates representing shares of Series B Preferred Stock, the corporation will issue new certificates representing shares of Series B Preferred Stock of like tenor, in lieu of such lost, stolen, destroyed or mutilated certificates representing shares of Series B Preferred Stock. (5) Status of Series B Preferred Stock Upon Retirement. Shares of Series B Preferred Stock which are acquired or redeemed by the corporation or converted pursuant to paragraph 4(c) or paragraph 4(d) shall return to the status of authorized and unissued shares of stock of the corporation without designation as to class or series. Upon the acquisition or redemption by the corporation or conversion pursuant to paragraph 4(c) or paragraph 4(d) of all outstanding shares of Series B Preferred Stock, all provisions of this Certificate of Designation shall cease to be of further effect. IN WITNESS WHEREOF, the undersigned, the President and Chief Executive Officer of the corporation, being duly authorized on behalf of the corporation, has executed this document the 19th day of July, 2001. LIFE TIME FITNESS, INC. By: /s/ Bahram Akradi ------------------------------------- Bahram Akradi President and Chief Executive Officer 20 CERTIFICATE OF DESIGNATION OF SERIES OF PREFERRED STOCK LIFE TIME FITNESS, INC. AMENDMENT AND RESTATEMENT OF STATEMENT OF DESIGNATION OF RIGHTS, PREFERENCES AND LIMITATIONS OF SERIES C CONVERTIBLE PREFERRED STOCK The undersigned hereby certifies that the following resolutions establishing the rights, powers and preferences of the Series C Convertible Preferred Stock of LIFE TIME FITNESS, Inc., (formerly known as FCA, Ltd.) a Minnesota corporation (the "corporation"), pursuant to Minnesota Statutes, Section 302A.401 were duly adopted by the Board of Directors of the corporation (the "Board of Directors") and approved by the holders (acting together as a class) of a majority of the outstanding shares of Series C Preferred Stock. RESOLVED, that, subject to the filing of the Amendment and Restatement of Designation of Rights, Preferences and Limitations of the Series C Convertible Preferred Stock, the rights, powers and preferences of the series of preferred stock of this corporation known as Series C Convertible Preferred Stock are hereby amended and restated, and that such series shall hereafter have the following rights, powers and preferences: (1) Designation of Series of Preferred Stock. Of the 60,000,000 shares of capital stock which the corporation is authorized to issue under its Articles of Incorporation (as hereinafter defined), 4,500,000 of such shares shall be designated as shares of Series C Convertible Preferred Stock of the corporation (the "Series C Preferred Stock"), par value $.02 per share. Such shares of Series C Preferred Stock, together with the 479,243 shares of Series A Convertible Preferred Stock of the corporation (the "Series A Preferred Stock"), the 1,000,000 shares of Series B Convertible Preferred Stock of the corporation (the "Series B Preferred Stock"), the 2,000,000 shares of Series D Convertible Preferred Stock of the corporation (the "Series D Preferred Stock"), the 50,000,000 authorized shares of Common Stock of the corporation (the "Common Stock"), the balance of the undesignated shares of capital stock of the corporation and any other common stock or preferred stock that may hereafter be authorized in or pursuant to the Articles of Incorporation of the corporation, are sometimes hereinafter collectively referred to as the "capital stock." The shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are referred to herein collectively as the "Preferred Stock." 1 (2) Voting Privileges. (a) General. Each holder of Series C Preferred Stock shall have that number of votes on all matters submitted to the shareholders that is equal to the number of shares of Common Stock into which such holder's shares of Series C Preferred Stock are then convertible, as hereinafter provided. Except as otherwise provided herein, and except as otherwise required by agreement or law, the shares of capital stock of the corporation shall vote as a single class on all matters submitted to the shareholders. (b) Election of Directors: General. So long as any shares of Series C Preferred Stock or Series D Preferred Stock are outstanding, (i) the Board of Directors of the corporation shall consist of not more than seven members, (ii) the holders of the Series A Preferred Stock, exclusively and voting as a single class, shall be entitled, by a vote of a majority of the outstanding shares of Series A Preferred Stock held by such holders, to elect one of the directors of the corporation and to exercise any right of removal or replacement of such director, provided, that at such time as no shares of Series A Preferred Stock are outstanding, and so long as shares of Series B Preferred Stock and Series C Preferred Stock are both outstanding, and the director elected pursuant to this subparagraph (ii) is removed pursuant to Section 6 of the Amended and Restated Shareholders Agreement, dated as of July 19, 2001 (the "Shareholders Agreement") among the corporation, the Shareholders and Co-Sale Parties named therein, the holders of (A) at least sixty percent of the outstanding shares of Series B Stock and (B) a majority of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock, voting together as a class, exclusively, shall together be entitled to elect one of the directors of the corporation and to exercise any right of removal or replacement of such director, (iii) the holders of the Series B Preferred Stock, exclusively and voting as a single class, shall be entitled, by a vote of a majority of the outstanding shares of Series B Preferred Stock held by such holders, to elect one of the directors of the corporation and to exercise any right of removal or replacement of such director, (iv) the holders of Series C Preferred Stock and Series D Preferred Stock, exclusively and voting together as a class, shall be entitled, by a vote of a majority of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock held by such holders, to elect one of the directors of the corporation and to exercise any right of removal or replacement of such director, (v) subject to subparagraph 2(c) below, the holders of the Common Stock, exclusively and voting as a single class, shall be entitled, by a vote of a majority of the outstanding shares of Common Stock held by such holders, to elect one of the directors of the corporation and, subject to subparagraph (2)(c) hereof, to exercise any right of removal or replacement of such director, and (vi) subject to subparagraph 2(c) below, the holders of the Common Stock, the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and Series D Preferred Stock, exclusively and voting together as a single class, shall be entitled, by a vote of a majority of the total votes to which such holders are entitled as set forth in subparagraph (a) above, to elect the remaining directors of the corporation, and, subject to subparagraph (2)(c) hereof, to exercise any right of removal or replacement of such directors. (c) Election of Directors: Certain Events of Default. Upon the occurrence of an Event of Default as defined in (i) the Stock Purchase Agreement dated May 7, 1996, 2 as amended by the First Amendment and Waiver dated as of December 8, 1998, by the Second Amendment and Waiver dated as of August 16, 2000 and by the Third Amendment and Waiver dated as of July 19, 2001 among the corporation and the Purchasers named therein, (ii) the Stock Purchase Agreement dated December 8, 1998, as amended by the First Amendment and Waiver dated as of August 16, 2000 and by the Second Amendment and Waiver dated as of July 19, 2001 (the "Second Purchase Agreement") among the corporation and the Purchasers named therein, (iii) the Stock Purchase Agreement dated as of August 16, 2000, as amended by the First Amendment and Waiver dated as of July 19, 2001 (the "Third Purchase Agreement") among the corporation and the Purchasers named therein, (iv) the Stock Purchase Agreement dated as of July 19, 2001, (the "Fourth Purchase Agreement") among the corporation and the Purchasers named therein, or (v) the Shareholders Agreement, and so long as such Event of Default continues unremedied, and unless such Event of Default shall have been waived by the holders of at least sixty percent of the outstanding shares of each of the Series A Preferred Stock and Series B Preferred Stock and by the holders of a majority of the outstanding shares of the Series C Preferred Stock and Series D Preferred Stock, voting together as a class, the holders of the outstanding shares of Preferred Stock, shall be entitled, at the same time as the removal of all directors not elected exclusively by the holders of Series A Preferred Stock (pursuant to subparagraph (2)(b)(ii) hereof), Series B Preferred Stock (pursuant to subparagraph (2)(b)(iii) hereof ) or Series C Preferred Stock and Series D Preferred Stock (pursuant to subparagraph (2)(b)(iv) hereof), in accordance with Section 5 of the Shareholders Agreement, to elect such number of additional directors of the corporation as shall be necessary in order for the Board of Directors of the corporation to be made up of an equal number of directors elected by (x) the holders of at least sixty percent of the outstanding shares of Series A Preferred Stock and Series B Preferred Stock, exclusively and voting together as a single class, on the one hand and (y) the holders of a majority of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock, exclusively and voting together as a class, on the other hand, and to exercise any right of removal or replacement of such directors. In the event the holders of the outstanding shares of Preferred Stock are entitled to elect the members of the Board of Directors of the corporation pursuant to the immediately preceding sentence, the corporation shall, immediately upon receiving written notice from the holders of at least sixty percent of the outstanding shares of each of the Series A Preferred Stock and Series B Preferred Stock or from the holders of a majority of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock, voting together as a class, call a special shareholders' meeting to be held as soon as possible, but in any event within five days of the date of the notice of such meeting. At such special shareholders' meeting the directors of the corporation shall be elected pursuant to this paragraph. Any right to continue to elect the members of the Board of Directors of the corporation pursuant to this paragraph shall expire, and a shareholders' meeting to elect new directors shall be called, three months after the later of (a) the curing of the Event of Default upon which the right was exercised, or (b) the curing of any Event of Default occurring after the Event of Default upon which such right was exercised. When, to its knowledge, any Event of Default described herein has occurred or exists, the corporation agrees to give written notice within three business days of obtaining such knowledge of such Event of Default to the holders of all outstanding shares of Preferred Stock. If the holder of any 3 shares of Preferred Stock shall give any notice or take any other actions in respect of a claimed Event of Default, the corporation will forthwith give written notice thereof to all other holders of Preferred Stock at the time outstanding, describing such notice or action and the nature of the claimed Event of Default. (d) Additional Class Votes by Series C Preferred Stock and Series D Preferred Stock. Without the affirmative vote or written consent of the holders (acting together as a class) of a majority of the shares of Series C Preferred Stock and Series D Preferred Stock at the time outstanding, the corporation shall not: (1) authorize any additional shares of Common Stock; or (2) authorize or issue any additional shares of Series C Preferred Stock, or any shares of stock having priority over Series C Preferred Stock or ranking on a parity therewith as to the payment or distribution of assets upon the liquidation or dissolution, voluntary or involuntary, of the corporation; or (3) amend the articles of incorporation of the corporation, including any certificate of designation for preferred stock of the corporation (the "Articles of Incorporation"), so as to materially and adversely alter any existing provision relating to Series C Preferred Stock or the holders thereof, whether such amendment is by merger, consolidation, recapitalization or otherwise, or waive any of the rights granted to the holders of the Series C Preferred Stock by the Articles of Incorporation; (4) sell, lease, license or otherwise dispose of all or substantially all of the assets of the corporation or of any subsidiary of the corporation, or any asset or assets which have a material effect upon the business or financial condition of the corporation or any subsidiary of the corporation, nor shall the corporation or any subsidiary of the corporation consolidate with or merge into any other corporation or entity, or permit any other corporation or entity to consolidate or merge into the corporation or any subsidiary of the corporation, or enter into a plan of exchange with any other corporation or entity, or otherwise acquire any other corporation or entity (other than a merger effected exclusively for the purpose of changing the state of incorporation of the corporation to the State of Delaware); or (5) take any action which would violate Section 9.3 of the Third Purchase Agreement. (3) Dividends. The holders of Series C Preferred Stock will be entitled to receive annual dividends of $0.80 per share, if, as and when declared by the Board of Directors on a non-cumulative basis. In the event any dividend or distribution is declared or made with respect to outstanding shares of Common Stock, a comparable dividend or distribution must be simultaneously declared or made with respect to the outstanding shares of the 4 Preferred Stock, minus any dividend paid pursuant to the first sentence of this paragraph. In the event any dividend or distribution is declared or made with respect to the Common Stock, each holder of shares of the Preferred Stock shall be paid such comparable dividend or receive such comparable distribution on the basis of the number of shares of Common Stock into which such holder's shares of the Preferred Stock are then convertible, as hereinafter provided. Dividends on shares of capital stock of the corporation shall be payable only out of funds legally available therefor. (4) Other Terms of the Series C Preferred Stock. (a) Liquidation Preference. In the event of an involuntary or voluntary liquidation or dissolution of the corporation at any time, the holders of shares of Series C Preferred Stock shall be entitled to receive out of the assets of the corporation a per share amount (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected) equal to the sum of (i) $10 and (ii) an amount (taking into account dividends actually paid) representing a per share annual rate of return of $0.80 (such amount to represent an 8% cumulative compound annual return on $10), plus all dividends declared but unpaid thereon, if any. In the event of either an involuntary or a voluntary liquidation or dissolution of the corporation, payment shall be made to the holders of shares of Series C Preferred Stock and Series D Preferred Stock in the amounts herein fixed before any payment shall be made or any assets distributed to the holders of Series A Preferred Stock, Series B Preferred Stock, Common Stock or any other class of shares of the corporation ranking junior to the Series C Preferred Stock and Series D Preferred Stock with respect to payment upon dissolution or liquidation of the corporation. If upon any liquidation or dissolution of the corporation, the assets available for distribution shall be insufficient to pay the holders of all outstanding shares of Series C Preferred Stock and Series D Preferred Stock the full amounts to which they respectively shall be entitled, the holders of such Series C Preferred Stock and Series D Preferred Stock shall share ratably in any distribution of assets of the corporation in proportion to the respective amounts which would be payable in respect of the shares of Series C Preferred Stock and Series D Preferred Stock held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. For purposes of this paragraph (4), at the option of the holders (acting together as a class) of a majority of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock, a liquidation of the corporation shall be deemed to occur upon the occurrence of any one of the following events: (i) a merger, consolidation, reorganization or other transaction involving the corporation (whether as a single transaction or a series of related transactions, a "Transaction") in which the holders of the outstanding shares of capital stock of the corporation immediately prior to such Transaction are not the holders of a majority of the outstanding shares of capital stock of the corporation, or of the entity or entities surviving the corporation, immediately after such Transaction or (ii) a sale of all, or substantially all, of the corporation's assets. 5 Within 30 days of the liquidation or dissolution of the corporation, the corporation shall mail to each holder of record of Series C Preferred Stock written notice thereof, specifying the amount, time and manner of payment to be made to such holder of record pursuant to this paragraph (4). Nothing hereinabove set forth shall affect in any way the right of each holder of shares of Series C Preferred Stock to convert such shares at any time and from time to time in accordance with subparagraph (c) below. (b) Redemption; Certain Events of Default. Upon the occurrence of (i) a Six-Year Right (as such term is defined below) or (ii) an Event of Default specified in Section 11.2 of the Third Purchase Agreement, and upon the written demand for redemption of the holders (acting together as a class) of a majority of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock, the corporation shall, to the extent that funds are legally available therefor, redeem all of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock at a redemption price, in cash, of a per share amount (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected) equal to the sum of (A) $10 and (B) an amount (taking into account dividends actually paid) representing a per share annual rate of return of $0.80 (such amount to represent an 8% cumulative compound annual return on $10), plus all dividends declared but unpaid thereon, if any. Notwithstanding any provision contained in the previous paragraph, the corporation shall not redeem any shares of the outstanding Series C Preferred Stock and Series D Preferred Stock without the prior consent of the holders of at least sixty percent of the outstanding shares of Series A Preferred Stock and Series B Preferred Stock (voting together as a class). A "Six-Year Right" shall be deemed to occur if, on or prior to the sixth anniversary of the closing of the Third Purchase Agreement, the corporation has not completed any one of the following events: (i) a Qualified IPO, (ii) a sale, liquidation or dissolution of the corporation or (iii) a sale of all, or substantially all, of the corporation's assets. For purposes of the previous sentence and of the first sentence of paragraph 4(d) hereof, a "Qualified IPO" is an initial public offering of the shares of the Common Stock (i) at an offering price per share of (A) not less than 2 times the purchase price per share of Series C Preferred Stock and Series D Preferred Stock (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected), if such initial public offering is consummated within a period of 30 months following the closing of the Third Purchase Agreement or (B) not less than 2.5 times the purchase price per share of the Series C Preferred Stock and the Series D Preferred Stock (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected), if such initial public offering is consummated after the period of 30 months following the closing of the Third Purchase Agreement and prior to expiration of the six-year period following the closing of the Third Purchase Agreement, (ii) with gross proceeds to the corporation of at least $50,000,000 (fifty million U.S. dollars) and (iii) underwritten on a firm commitment basis by an investment 6 banking firm of national standing approved by the holders (acting together as a class) of a majority of the outstanding shares of the Series C Preferred Stock and Series D Preferred Stock. In the event the corporation is required to redeem any shares of Preferred Stock, the corporation shall first, to the extent funds are legally available, redeem all shares of Series C Preferred Stock and Series D Preferred Stock before it redeems any shares of Series A Preferred Stock or Series B Preferred Stock. In the event of a redemption of less than all of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock pursuant to the first paragraph of this subparagraph (b), redemptions as among the holders of such shares of Series C Preferred Stock and Series D Preferred Stock shall be on a pro rata basis in proportion to the full amounts to which such holders would otherwise be entitled. Thereafter, as and to the extent legally available funds for the redemption thereof exist from time to time, the corporation shall redeem additional shares of Series C Preferred Stock and Series D Preferred Stock, pro rata as among the holders thereof, in proportion to each holders respective ownership of Series C Preferred Stock and Series D Preferred Stock, until all shares of Series C Preferred Stock and Series D Preferred Stock required to be redeemed have been redeemed. Optional redemptions of shares of Series C Preferred Stock by the corporation from any holder thereof in addition to the aforesaid required redemptions are not permitted without the consent of such holder. The corporation shall give notice by mail of redemptions to the holders of record of the shares of Series C Preferred Stock at least 30 days prior to the date of redemption. The notice (i) shall specify the date of redemption and the number of shares to be redeemed from each shareholder and (ii) shall be addressed to each shareholder at his post-office address as shown on the records of the corporation. On or after the date fixed for redemption, each holder of shares of Series C Preferred Stock called for redemption shall surrender the certificate or certificates evidencing such shares to the corporation at the place designated in such notice and shall thereupon be entitled to receive payment. If notice of redemption has been given under this paragraph, from and after the redemption date for the shares of Series C Preferred Stock called for redemption (unless default shall be made by the corporation in providing money for the payment of the redemption price of the shares so called for redemption), such shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as shareholders of the corporation (except the right to receive the redemption price without interest) shall cease. Upon surrender in accordance with such notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors or a duly authorized committee thereof shall so require and the notice shall so state), such shares shall be redeemed by the corporation at the redemption price aforesaid. If less than all of the shares represented by any such surrendered certificate or certificates are redeemed, the corporation shall issue a new certificate for the unredeemed shares. 7 (c) Conversion Right. At the option of the holders thereof, the shares of Series C Preferred Stock shall be convertible, at the office of the corporation (or at such other office or offices, if any, as the Board of Directors may designate), into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100th of a share) of Common Stock of the corporation, at the conversion price, determined as hereinafter provided, in effect at the time of conversion, each share of Series C Preferred Stock being deemed to have a value of $10 for the purpose of such conversion. The price at which shares of Common Stock shall be delivered upon conversion (herein called the "conversion price") shall be initially $10 per share of Common Stock (i.e., at an initial conversion rate of one share of Common Stock for each share of Series C Preferred Stock), provided, however, that such initial conversion price shall be subject to adjustment from time to time in certain instances as hereinafter provided. In the case of the call for redemption of any shares of Series C Preferred Stock, such right of conversion shall cease and terminate as to the shares designated for redemption from and after the date fixed for redemption, unless there shall have been a default by the corporation in providing money for the payment of the redemption price of the shares so called for redemption. The following provisions shall govern such right of conversion: (1) In order to convert shares of Series C Preferred Stock into shares of Common Stock of the corporation, the holder thereof shall surrender at any office hereinabove mentioned the certificate or certificates therefor, duly endorsed to the corporation or in blank, and give written notice to the corporation at such office that such holder elects to convert such shares. Shares of Series C Preferred Stock shall be deemed to have been converted immediately prior to the close of business on the day of the surrender of such shares for conversion as herein provided, and the person entitled to receive the shares of Common Stock of the corporation issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock at such time. As promptly as practicable on or after the conversion date, the corporation shall issue and deliver or cause to be issued and delivered at such office a certificate or certificates for the number of shares of Common Stock of the corporation issuable upon such conversion. (2) The conversion price shall be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the conversion price each holder of shares of Series C Preferred Stock shall thereafter be entitled to receive the number of shares of Common Stock of the corporation obtained by multiplying the conversion price in effect immediately prior to such adjustment by the number of shares issuable pursuant to conversion immediately prior to such adjustment and dividing the product thereof by the conversion price resulting from such adjustment. Not in limitation of the foregoing, any adjustment of the conversion price hereafter effected shall apply to shares of Series C Preferred Stock issued subsequent to the adjustment. 8 (3) Except for (a) options to purchase shares of Common Stock and the issuance of awards of Common Stock pursuant to key employee and consultant benefit plans adopted by the corporation and shares of Common Stock issued upon the exercise of such options granted pursuant to such plans (provided that the aggregate number of shares thus awarded and covered by unexercised options and thus issued pursuant to such options shall not be in excess of 1,242,000 (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected)), (b) warrants issued in connection with bona fide financing transactions (including, without limitation, equipment financing arrangements and bank lines of credit) with conventional institutional lenders entered into in the ordinary course of their business and shares of Common Stock issued upon exercise of such warrants (provided that the aggregate number of shares thus issued on exercise and covered by unexercised warrants shall not be in excess of 600,000 (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar change hereafter effected)), (c) dividends payable in Common Stock, (d) shares of Common Stock issued or issuable upon exercise of the Warrants (as defined in the Second Purchase Agreement), and (e) shares of Common Stock issued or issuable upon conversion of the currently outstanding shares of Preferred Stock, if and whenever the corporation shall issue or sell any shares of its Common Stock for a consideration per share less than the conversion price in effect immediately prior to the time of such issue or sale, then, forthwith upon such issue or sale, the conversion price shall be reduced to the price (calculated to the nearest cent) determined by dividing (A) an amount equal to the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the then existing conversion price and (2) the consideration, if any, received by the corporation upon such issue or sale, by (B) an amount equal to the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issue or sale and (2) the number of shares of Common Stock thus issued or sold. Solely for purposes of (A) and (B) above, the term "Common Stock outstanding" shall include those shares of Common Stock issuable upon conversion of outstanding shares of Preferred Stock but shall exclude shares of Common Stock issuable upon exercise of stock options and warrants. No adjustment of the conversion price, however, shall be made in an amount less than 2% of the conversion price in effect on the date of such adjustment, but any such lesser adjustment shall be carried forward and shall be made at the earlier of (i) the time and together with the next subsequent adjustment which, together with any such adjustment so carried forward, shall be an amount equal to or greater than 4% of the conversion price then in effect and (ii) conversion of the Series C Preferred Stock. 9 For the purposes of this subparagraph (3), the following provisions (i) to (v), inclusive, shall also be applicable: (i) In case at any time the corporation shall grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, (a) Common Stock or (b) any obligations or any shares of stock of the corporation which are convertible into, or exchangeable for, Common Stock (any of such obligations or shares of stock being hereinafter called "Convertible Securities") whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined by dividing (x) the total amount, if any, received or receivable by the corporation as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the corporation upon the exercise of such rights or options, plus, in the case of such rights or options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue of such Convertible Securities and upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options) shall be less than the conversion price in effect immediately prior to the time of the granting of such rights or options, then the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date of granting of such rights or options) be deemed to have been issued for such price per share. Except as provided in subparagraph 4(c)(6) below, no further adjustments of the conversion price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such rights or options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. (ii) In case the corporation shall issue or sell (whether directly or by assumption in a merger or otherwise) any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (x) the total amount received or receivable by the corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the corporation upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the 10 conversion or exchange of all such Convertible Securities) shall be less than the conversion price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, provided that (a) except as provided in subparagraph 4(c)(6) below, no further adjustments of the conversion price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and (b) if any such issue or sale of such Convertible Securities is made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the conversion price have been or are to be made pursuant to other provisions of this subparagraph 4(c)(3), no further adjustment of the conversion price shall be made by reason of such issue or sale. (iii) In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the corporation therefor, without deducting therefrom any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed to third parties by the corporation in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the corporation shall be deemed to be the fair value of such consideration as determined in good faith by the Board of Directors of the corporation, without deducting therefrom any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed to third parties by the corporation in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase such Common Stock or Convertible Securities shall be issued in connection with any merger or consolidation in which the corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value as determined in good faith by the Board of Directors of the corporation of such portion of the assets and business of the non-surviving corporation or corporations as such Board shall determine in good faith to be attributable to such Common Stock, Convertible Securities, rights or options, as the case may be. In the event of any consolidation or merger of the corporation in which the corporation is not the surviving corporation or in the event of any sale of all or substantially all of the assets of the corporation for stock or other securities of any other corporation, the corporation shall be deemed to have issued a number of shares of its Common Stock for stock or securities of the other corporation 11 computed on the basis of the actual exchange ratio on which the transaction was predicated and for a consideration equal to the fair market value on the date of such transaction of such stock or securities of the other corporation, and if any such calculation results in adjustment of the conversion price, the determination of the number of shares of Common Stock issuable upon conversion immediately prior to such merger, conversion or sale, for purposes of subparagraph 4(c)(7) below, shall be made after giving effect to such adjustment of the conversion price. (iv) In case the corporation shall take a record of the holders of its Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock or in Convertible Securities, or in any rights or options to purchase any Common Stock or Convertible Securities, or (b) to subscribe for or purchase Common Stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such rights of subscription or purchase, as the case may be. (v) The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the corporation, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purpose of this subparagraph 4(c)(3). (4) In case the corporation shall (i) declare a dividend upon the Common Stock payable in Common Stock (other than a dividend declared to effect a subdivision of the outstanding shares of Common Stock, as described in subparagraph 4(c)(5) below) or Convertible Securities, or in any rights or options to purchase Common Stock or Convertible Securities, or (ii) declare any other dividend or make any other distribution upon the Common Stock, then thereafter each holder of shares of Series C Preferred Stock upon the conversion thereof will be entitled to receive the number of shares of Common Stock into which such shares of Series C Preferred Stock have been converted, and, in addition and without payment therefor, each dividend described in clause (i) above and each dividend or distribution described in clause (ii) above (except to the extent previously received pursuant to the provisions of paragraph (3) hereof) which such holder would have received by way of dividends or distributions if continuously since such holder became the record holder of such shares of Series C Preferred Stock such holder (i) had been the record holder of the number of shares of Common Stock then received, and (ii) had retained all dividends or distributions in stock or securities (including Common Stock or Convertible Securities, and any rights or options to purchase any Common Stock or Convertible Securities) payable in respect of such Common Stock or in respect of any stock or securities paid as 12 dividends or distributions and originating directly or indirectly from such Common Stock. (5) In case the corporation shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares, the conversion price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the corporation shall be combined into a smaller number of shares, the conversion price in effect immediately prior to such combination shall be proportionately increased. (6) If (i) the purchase price provided for in any right or option referred to in clause (i) of subparagraph 4(c)(3), or (ii) the additional consideration, if any, payable upon the conversion or exchange of Convertible Securities referred to in clause (i) or clause (ii) of subparagraph 4(c)(3), or (iii) the rate at which any Convertible Securities referred to in clause (i) or clause (ii) of subparagraph 4(c)(3) are convertible into or exchangeable for Common Stock, shall change at any time (other than under or by reason of provisions designed to protect against dilution), the conversion price then in effect hereunder shall forthwith be decreased to such conversion price as would have obtained had the adjustments made upon the issuance of such rights, options or Convertible Securities been made upon the basis of (a) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exercise of such options or rights or upon the conversion or exchange of such Convertible Securities, and the total consideration received therefor, and (b) the issuance at the time of such change of any such options, rights, or Convertible Securities then still outstanding for the total consideration, if any, received by the corporation therefor and to be received on the basis of such changed price; and on the expiration of any such option or right or the termination of any such right to convert or exchange such Convertible Securities, the conversion price then in effect hereunder shall forthwith be increased to such conversion price as would have obtained had the adjustments made only upon the issuance of such rights or options or Convertible Securities been made upon the basis of the issuance of the shares of Common Stock theretofore actually delivered (and the total consideration received therefor) upon the exercise of such rights or options or upon the conversion or exchange of such Convertible Securities. If the purchase price provided for in any right or option referred to in clause (i) of subparagraph 4(c)(3), or the rate at which any Convertible Securities referred to in clause (i) or clause (ii) of subparagraph 4(c)(3) are convertible into or exchangeable for Common Stock, shall decrease at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of Common Stock upon the exercise of any such right or option or upon conversion or exchange of any such Convertible Security, the conversion price then in effect hereunder shall forthwith be decreased to such conversion price as would have obtained had the adjustments made 13 upon the issuance of such right, option or Convertible Security been made upon the basis of the issuance of (and the total consideration received for) the shares of Common Stock delivered as aforesaid. (7) If any capital reorganization or reclassification of the capital stock of the corporation, or consolidation or merger of the corporation with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, and subject to subparagraph 4(a) above, lawful and adequate provision shall be made whereby the holders of Series C Preferred Stock shall thereafter have the right to receive upon the basis and upon the terms and conditions specified herein and in lieu of the shares of the Common Stock of the corporation immediately theretofore receivable upon the conversion of Series C Preferred Stock such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore receivable upon the conversion of Series C Preferred Stock had such reorganization, reclassification, consolidation, merger or sale not taken place, plus all dividends declared but unpaid thereon to the date of such reorganization, reclassification, consolidation, merger or sale, and in any such case appropriate provision shall be made with respect to the rights and interests of the holders of Series C Preferred Stock to the end that the provisions hereof (including without limitation provisions for adjustments of the conversion price and of the number of shares receivable upon the conversion of Series C Preferred Stock) shall thereafter be applicable, as nearly as may be in relation to any shares of stock, securities or assets thereafter receivable upon the conversion of Series C Preferred Stock. The corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the corporation) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument executed and mailed to the registered holders of Series C Preferred Stock, at the last addresses of such holders appearing on the books of the corporation, the obligation to deliver to such holders such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to receive. (8) The conversion price shall automatically be reduced by twenty percent (20%) upon the occurrence of an Adjustment Event. For purposes of the previous sentence, an "Adjustment Event" shall have occurred (A) upon the closing of either (i) an initial public offering of the shares of the Common Stock by the corporation, (ii) a sale of all, or substantially all, of the corporation's assets or (iii) a sale of all, or substantially all, of the corporation's outstanding shares of capital stock, including a merger, 14 consolidation or other capital reorganization which results in the holders of capital stock after such reorganization holding less than fifty percent (50%) of the voting power of the corporation; if (B) the offering price of the initial public offering or the consideration per share received in connection with the sale of assets or Common Stock is less than: (x) $30.00 per share (appropriately adjusted to reflect stock splits, stock combinations, stock dividends, reorganizations, consolidations and similar changes hereafter effected) and (y) an amount, which on a per share basis, represents a thirty percent (30%) Internal Rate of Return (as defined below) based on the initial purchase price per share of the Series C Preferred Stock. The conversion price shall be deemed to have been adjusted concurrently with the closing of the Adjustment Event described above and from such time the conversion price of such shares of Series C Preferred Stock shall be calculated in accordance with such adjusted conversion price. "Internal Rate of Return" shall mean the discount rate which, when applied to the purchase price of the shares paid by the holder thereof, as adjusted from time to time, and all amounts payable by the corporation to the holders of Series C Preferred Stock and Series D Preferred Stock upon an Adjustment Event with respect to such shares on a pre-tax basis, yields a net present value of zero. For purposes of this paragraph 4(e), if a sale of Common Stock, including a merger, consolidation or other capital reorganization of the corporation, or if the sale of its assets shall be effected in such a way that holders of Series C Preferred Stock shall be entitled to receive securities of another entity (the "New Securities") in exchange for shares of Series C Preferred Stock, then the consideration to be received by the holders of Series C Preferred Stock shall be valued for purposes of the preceding paragraph based upon the arithmetic average of the daily closing sale price on the Nasdaq Stock Market or on the national securities exchange on which the New Securities are then listed for the thirty (30) trading days preceding the Adjustment Event. If the New Securities are not traded on the Nasdaq Stock Market or on a national securities exchange, the value thereof shall be determined in good faith by the Board of Directors of the corporation. In the event that a majority of the holders of Series C Preferred Stock and Series D Preferred Stock shall object to the Board of Director's determination, within 30 days of the Adjustment Event, the corporation and the holders of a majority of the outstanding Series C Preferred Stock and Series D Preferred Stock, shall mutually agree upon and select a nationally recognized investment bank (the "Investment Bank") to conduct a valuation of the New Securities. The Investment Bank shall not have a direct or indirect interest in any of the parties. The Investment Bank shall have 30 days in which to independently determine the fair market value of the New Securities. Such Investment Bank shall be briefed at a meeting of all parties interested in the valuation and shall receive written materials and access to information. The Investment Bank shall submit a written valuation to the corporation. The cost of the valuation shall be borne by the corporation. 15 (9) Upon any adjustment of the conversion price, then and in each case the corporation shall give written notice thereof, by first-class mail, postage prepaid, addressed to the registered holders of Series C Preferred Stock, at the addresses of such holders as shown on the books of the corporation, which notice shall state the conversion price resulting from such adjustment and the increase or decrease, if any, in the number of shares receivable at such price upon the conversion of Series C Preferred Stock, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (10) In case at any time: (i) the corporation shall declare any cash dividend on its Common Stock; (ii) the corporation shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of its Common Stock; (iii) the corporation shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (iv) there shall be any capital reorganization, or reclassification of the capital stock of the corporation, or consolidation or merger of the corporation with, or sale of all or substantially all of its assets to, another corporation; (v) there shall be a tender offer for any capital stock of the corporation; or (vi) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the corporation; then, in any one or more of said cases, the corporation shall give written notice, by first-class mail, postage prepaid, addressed to the registered holders of Series C Preferred Stock at the addresses of such holders as shown on the books of the corporation, of the date on which (a) the books of the corporation shall close or a record shall be taken for such dividend, distribution or subscription rights, or (b) such reorganization, reclassification, consolidation, tender offer, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, tender offer, merger, sale, dissolution, liquidation, or winding up, as the case may be. Such written notice must be received by 16 the holders of Series C Preferred Stock at least 20 days prior to the action in question and not less than 20 days prior to the record date or the date on which the corporation's transfer books are closed in respect thereto. Such written notice shall be deemed received 3 days after deposited in the U.S. mail in the manner provided above. (11) If any event occurs as to which in the opinion of the Board of Directors of the corporation the other provisions of this paragraph 4(c) are not strictly applicable or if strictly applicable would not fairly protect the rights of the holders of Series C Preferred Stock in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such rights as aforesaid. (12) As used in this paragraph 4(c) the term "Common Stock" shall mean and include the corporation's currently authorized Common Stock and shall also include any capital stock of any class of the corporation hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the corporation; provided that the shares receivable pursuant to conversion of shares of Series C Preferred Stock shall include shares designated as Common Stock of the corporation as of the date of issuance of such shares of Series C Preferred Stock, or, in case of any reclassification of the outstanding shares thereof, the stock, securities or assets provided for in subparagraph 4(c)(7) above. (13) No fractional shares of Common Stock shall be issued upon conversion, but, instead of any fraction of a share which would otherwise be issuable, the corporation shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the market price per share of Common Stock as of the close of business on the day of conversion. "Market price" shall mean if the Common Stock is traded on a securities exchange or on the NASDAQ National Market System, the closing price of the Common Stock on such exchange or the NASDAQ National Market System, or, if the Common Stock is otherwise traded in the over-the-counter market, the closing bid price, in each case averaged over a period of 20 consecutive business days prior to the date as of which "market price" is being determined. If at any time the Common Stock is not traded on an exchange or the NASDAQ National Market System, or otherwise traded in the over-the-counter market, the "market price" shall be deemed to be the fair value thereof determined in good faith by the Board of Directors of the corporation as of a date which is within 15 days of the date as of which the determination is to be made. 17 (d) Mandatory Conversion. The Series C Preferred Stock shall automatically be converted into shares of Common Stock of the corporation, without any act by the corporation or the holders of the Series C Preferred Stock, (i) concurrently with the closing of a Qualified IPO by the corporation or (ii) upon the affirmative vote to so convert the shares of the Series C Preferred Stock by the holders (acting together as a class) of a majority of shares of Series C Preferred Stock and Series D Preferred Stock then outstanding. Each holder of a share of Series C Preferred Stock so converted shall be entitled to receive the full number of shares of Common Stock into which such share of Series C Preferred Stock held by such holder could be converted if such holder had exercised its conversion right at the time of closing of such Qualified IPO together with cash in lieu of any fractional shares. Shares of Series C Preferred Stock shall be deemed to have been converted concurrently with the closing of the Qualified IPO described above and from such time the holder of such shares of Series C Preferred Stock shall be treated for all purposes as the record holder of those shares of Common Stock into which such shares of Series C Preferred Stock have been converted. Within a reasonable time and in no event later than 15 days after the conversion date, the corporation shall issue and deliver or cause to be issued and delivered at such office a certificate or certificates for the number of shares of Common Stock of the corporation issuable upon such conversion. (e) Replacement Certificates. Upon receipt of evidence reasonably satisfactory to the corporation of the loss, theft, destruction or mutilation of any certificates representing shares of Series C Preferred Stock, and, in the case of any such loss, theft or destruction, upon delivery of a bond of indemnity satisfactory to the corporation, or, in the case of any such mutilation, upon surrender and cancellation of the certificates representing shares of Series C Preferred Stock, the corporation will issue new certificates representing shares of Series C Preferred Stock of like tenor, in lieu of such lost, stolen, destroyed or mutilated certificates representing shares of Series C Preferred Stock. (5) Status of Series C Preferred Stock Upon Retirement. Shares of Series C Preferred Stock which are acquired or redeemed by the corporation or converted pursuant to paragraph 4(c) or paragraph 4(d) shall return to the status of authorized and unissued shares of stock of the corporation without designation as to class or series. Upon the acquisition or redemption by the corporation or conversion pursuant to paragraph 4(c) or paragraph 4(d) of all outstanding shares of Series C Preferred Stock, all provisions of this Certificate of Designation shall cease to be of further effect. 18 IN WITNESS WHEREOF, the undersigned, the President and Chief Executive Officer of the corporation, being duly authorized on behalf of the corporation, has executed this document the 19th day of July, 2001. LIFE TIME FITNESS, INC. By: /s/ Bahram Akradi --------------------------------------- Bahram Akradi President and Chief Executive Officer 19 CERTIFICATE OF DESIGNATION OF SERIES OF PREFERRED STOCK LIFE TIME FITNESS, INC. STATEMENT OF DESIGNATION OF RIGHTS, PREFERENCES AND LIMITATIONS OF SERIES D CONVERTIBLE PREFERRED STOCK The undersigned hereby certifies that the following resolutions establishing the rights, powers and preferences of the Series D Convertible Preferred Stock of LIFE TIME FITNESS, Inc., (formerly known as FCA, Ltd.) a Minnesota corporation (the "corporation"), pursuant to Minnesota Statutes, Section 302A.401 were duly adopted by the Board of Directors of the corporation (the "Board of Directors") and approved by the holders of at least sixty percent of the outstanding shares of Series A Preferred Stock, by the holders of at least sixty percent of the outstanding shares of Series B Preferred Stock and by the holders of a majority of the outstanding shares of Series C Preferred Stock. RESOLVED, that, subject to the filing of the Statement of Designation of Rights, Preferences and Limitations of the Series D Convertible Preferred Stock, the rights, powers and preferences of the series of preferred stock of this corporation known as Series D Convertible Preferred Stock shall have the following rights, powers and preferences: (1) Designation of Series of Preferred Stock. Of the 60,000,000 shares of capital stock which the corporation is authorized to issue under its Articles of Incorporation (as hereinafter defined), 2,000,000 of such shares shall be designated as shares of Series D Convertible Preferred Stock of the corporation (the "Series D Preferred Stock"), par value $.02 per share. Such shares of Series D Preferred Stock, together with the 479,243 shares of Series A Convertible Preferred Stock of the corporation (the "Series A Preferred Stock"), the 1,000,000 shares of Series B Convertible Preferred Stock of the corporation (the "Series B Preferred Stock"), the 4,500,000 shares of Series C Convertible Preferred Stock of the corporation (the "Series C Preferred Stock"), the 50,000,000 authorized shares of Common Stock of the corporation (the "Common Stock"), the balance of the undesignated shares of capital stock of the corporation and any other common stock or preferred stock that may hereafter be authorized in or pursuant to the Articles of Incorporation of the corporation, are sometimes hereinafter collectively referred to as the "capital stock." The shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are referred to herein collectively as the "Preferred Stock." 1 (2) Voting Privileges. (a) General. Each holder of Series D Preferred Stock shall have that number of votes on all matters submitted to the shareholders that is equal to the number of shares of Common Stock into which such holder's shares of Series D Preferred Stock are then convertible, as hereinafter provided. Except as otherwise provided herein, and except as otherwise required by agreement or law, the shares of capital stock of the corporation shall vote as a single class on all matters submitted to the shareholders. (b) Election of Directors: General. So long as any shares of Series C Preferred Stock or Series D Preferred Stock are outstanding, (i) the Board of Directors of the corporation shall consist of not more than seven members, (ii) the holders of the Series A Preferred Stock, exclusively and voting as a single class, shall be entitled, by a vote of a majority of the outstanding shares of Series A Preferred Stock held by such holders, to elect one of the directors of the corporation and to exercise any right of removal or replacement of such director, provided, that at such time as no shares of Series A Preferred Stock are outstanding, and so long as shares of Series B Preferred Stock and Series C Preferred Stock are both outstanding, and the director elected pursuant to this subparagraph (ii) is removed pursuant to Section 6 of the Amended and Restated Shareholders Agreement, dated as of July 19, 2001 (the "Shareholders Agreement") among the corporation, the Shareholders and Co-Sale Parties named therein, the holders of (A) at least sixty percent of the outstanding shares of Series B Stock and (B) a majority of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock, voting together as a class, exclusively, shall together be entitled to elect one of the directors of the corporation and to exercise any right of removal or replacement of such director, (iii) the holders of the Series B Preferred Stock, exclusively and voting as a single class, shall be entitled, by a vote of a majority of the outstanding shares of Series B Preferred Stock held by such holders, to elect one of the directors of the corporation and to exercise any right of removal or replacement of such director, (iv) the holders of Series C Preferred Stock and Series D Preferred Stock, exclusively and voting together as a class, shall be entitled, by a vote of a majority of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock held by such holders, to elect one of the directors of the corporation and to exercise any right of removal or replacement of such director, (v) subject to subparagraph 2(c) below, the holders of the Common Stock, exclusively and voting as a single class, shall be entitled, by a vote of a majority of the outstanding shares of Common Stock held by such holders, to elect one of the directors of the corporation and, subject to subparagraph (2)(c) hereof, to exercise any right of removal or replacement of such director, and (vi) subject to subparagraph 2(c) below, the holders of the Common Stock, the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and Series D Preferred Stock, exclusively and voting together as a class, shall be entitled, by a vote of a majority of the total votes to which such holders are entitled as set forth in subparagraph (a) above, to elect the remaining directors of the corporation, and, subject to subparagraph (2)(c) hereof, to exercise any right of removal or replacement of such directors. (c) Election of Directors: Certain Events of Default. Upon the occurrence of an Event of Default as defined in (i) the Stock Purchase Agreement dated May 7, 1996, as amended by the First Amendment and Waiver dated as of December 8, 1998, by the Second Amendment and Waiver dated as of August 16, 2000 and by the Third Amendment and Waiver dated as of July 19, 2001 among the corporation and the Purchasers named therein, 2 (ii) the Stock Purchase Agreement dated December 8, 1998, as amended by the First Amendment and Waiver dated as of August 16, 2000 and by the Second Amendment and Waiver dated as of July 19, 2001 (the "Second Purchase Agreement") among the corporation and the Purchasers named therein, (iii) the Stock Purchase Agreement dated as of August 16, 2000, as amended by the First Amendment and Waiver dated as of July 19, 2001 (the "Third Purchase Agreement") among the corporation and the Purchasers named therein, (iv) the Stock Purchase Agreement dated as of July 19, 2001, (the "Fourth Purchase Agreement") among the corporation and the Purchasers named therein, or (v) the Shareholders Agreement, and so long as such Event of Default continues unremedied, and unless such Event of Default shall have been waived by the holders of at least sixty percent of the outstanding shares of each of the Series A Preferred Stock and Series B Preferred Stock and by the holders of a majority of the outstanding shares of the Series C Preferred Stock and Series D Preferred Stock, voting together as a class, the holders of the outstanding shares of Preferred Stock, shall be entitled, at the same time as the removal of all directors not elected exclusively by the holders of Series A Preferred Stock (pursuant to subparagraph (2)(b)(ii) hereof), Series B Preferred Stock (pursuant to subparagraph (2)(b)(iii) hereof ) or Series C Preferred Stock and Series D Preferred Stock (pursuant to subparagraph (2)(b)(iv) hereof), in accordance with Section 5 of the Shareholders Agreement, to elect such number of additional directors of the corporation as shall be necessary in order for the Board of Directors of the corporation to be made up of an equal number of directors elected by (x) the holders of at least sixty percent of the outstanding shares of Series A Preferred Stock and Series B Preferred Stock, exclusively and voting together as a single class, on the one hand and (y) the holders of a majority of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock, exclusively and voting together as a class, on the other hand, and to exercise any right of removal or replacement of such directors. In the event the holders of the outstanding shares of Preferred Stock are entitled to elect the members of the Board of Directors of the corporation pursuant to the immediately preceding sentence, the corporation shall, immediately upon receiving written notice from the holders of at least sixty percent of the outstanding shares of each of the Series A Preferred Stock and Series B Preferred Stock or from the holders of a majority of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock, voting together as a class, call a special shareholders' meeting to be held as soon as possible, but in any event within five days of the date of the notice of such meeting. At such special shareholders' meeting the directors of the corporation shall be elected pursuant to this paragraph. Any right to continue to elect the members of the Board of Directors of the corporation pursuant to this paragraph shall expire, and a shareholders' meeting to elect new directors shall be called, three months after the later of (a) the curing of the Event of Default upon which the right was exercised, or (b) the curing of any Event of Default occurring after the Event of Default upon which such right was exercised. When, to its knowledge, any Event of Default described herein has occurred or exists, the corporation agrees to give written notice within three business days of obtaining such knowledge of such Event of Default to the holders of all outstanding shares of Preferred Stock. If the holder of any shares of Preferred Stock shall give any notice or take any other actions in respect of a claimed Event of Default, the corporation will forthwith give written notice thereof to all other holders of Preferred Stock at the time outstanding, describing such notice or action and the nature of the claimed Event of Default. (d) Additional Class Votes by Series C Preferred Stock and Series D Preferred Stock. Without the affirmative vote or written consent of the holders (acting together 3 as a class) of a majority of the shares of Series C Preferred Stock and Series D Preferred Stock at the time outstanding, the corporation shall not: (1) authorize any additional shares of Common Stock; or (2) authorize or issue any additional shares of Series D Preferred Stock, or any shares of stock having priority over Series D Preferred Stock or ranking on a parity therewith as to the payment or distribution of assets upon the liquidation or dissolution, voluntary or involuntary, of the corporation; or (3) amend the articles of incorporation of the corporation, including any certificate of designation for preferred stock of the corporation (the "Articles of Incorporation"), so as to materially and adversely alter any existing provision relating to Series D Preferred Stock or the holders thereof, whether such amendment is by merger, consolidation, recapitalization or otherwise, or waive any of the rights granted to the holders of the Series D Preferred Stock by the Articles of Incorporation; (4) sell, lease, license or otherwise dispose of all or substantially all of the assets of the corporation or of any subsidiary of the corporation, or any asset or assets which have a material effect upon the business or financial condition of the corporation or any subsidiary of the corporation, nor shall the corporation or any subsidiary of the corporation consolidate with or merge into any other corporation or entity, or permit any other corporation or entity to consolidate or merge into the corporation or any subsidiary of the corporation, or enter into a plan of exchange with any other corporation or entity, or otherwise acquire any other corporation or entity (other than a merger effected exclusively for the purpose of changing the state of incorporation of the corporation to the State of Delaware); or (5) take any action which would violate Section 9.3 of the Fourth Purchase Agreement. (3) Dividends. The holders of Series D Preferred Stock will be entitled to receive annual dividends of $0.80 per share, if, as and when declared by the Board of Directors on a non-cumulative basis. In the event any dividend or distribution is declared or made with respect to outstanding shares of Common Stock, a comparable dividend or distribution must be simultaneously declared or made with respect to the outstanding shares of the Preferred Stock, minus any dividend paid pursuant to the first sentence of this paragraph. In the event any dividend or distribution is declared or made with respect to the Common Stock, each holder of shares of the Preferred Stock shall be paid such comparable dividend or receive such comparable distribution on the basis of the number of shares of Common Stock into which such holder's shares of the Preferred Stock are then convertible, as hereinafter provided. Dividends on shares of capital stock of the corporation shall be payable only out of funds legally available therefor. 4 (4) Other Terms of the Series D Preferred Stock. (a) Liquidation Preference. In the event of an involuntary or voluntary liquidation or dissolution of the corporation at any time, the holders of shares of Series D Preferred Stock shall be entitled to receive out of the assets of the corporation a per share amount (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected) equal to the sum of (i) $10 and (ii) an amount (taking into account dividends actually paid) representing a per share annual rate of return of $0.80 (such amount to represent an 8% cumulative compound annual return on $10), plus all dividends declared but unpaid thereon, if any. In the event of either an involuntary or a voluntary liquidation or dissolution of the corporation, payment shall be made to the holders of shares of Series C Preferred Stock and Series D Preferred Stock in the amounts herein fixed before any payment shall be made or any assets distributed to the holders of Series A Preferred Stock, Series B Preferred Stock, Common Stock or any other class of shares of the corporation ranking junior to the Series C Preferred Stock and Series D Preferred Stock with respect to payment upon dissolution or liquidation of the corporation. If upon any liquidation or dissolution of the corporation, the assets available for distribution shall be insufficient to pay the holders of all outstanding shares of Series C Preferred Stock and Series D Preferred Stock the full amounts to which they respectively shall be entitled, the holders of such Series C Preferred Stock and Series D Preferred Stock shall share ratably in any distribution of assets of the corporation in proportion to the respective amounts which would be payable in respect of the shares of Series C Preferred Stock and Series D Preferred Stock held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. For purposes of this paragraph (4), at the option of the holders (acting together as a class) of a majority of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock, a liquidation of the corporation shall be deemed to occur upon the occurrence of any one of the following events: (i) a merger, consolidation, reorganization or other transaction involving the corporation (whether as a single transaction or a series of related transactions, a "Transaction") in which the holders of the outstanding shares of capital stock of the corporation immediately prior to such Transaction are not the holders of a majority of the outstanding shares of capital stock of the corporation, or of the entity or entities surviving the corporation, immediately after such Transaction or (ii) a sale of all, or substantially all, of the corporation's assets. Within 30 days of the liquidation or dissolution of the corporation, the corporation shall mail to each holder of record of Series D Preferred Stock written notice thereof, specifying the amount, time and manner of payment to be made to such holder of record pursuant to this paragraph (4). Nothing hereinabove set forth shall affect in any way the right of each holder of shares of Series D Preferred Stock to convert such shares at any time and from time to time in accordance with subparagraph (c) below. (b) Redemption; Certain Events of Default. Upon the occurrence of (i) a Six-Year Right (as such term is defined below) or (ii) an Event of Default specified in Section 5 11.2 of the Fourth Purchase Agreement, and upon the written demand for redemption of the holders (acting together as a class) of a majority of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock, the corporation shall, to the extent that funds are legally available therefor, redeem all of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock at a redemption price, in cash, of a per share amount (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected) equal to the sum of (A) $10 and (B) an amount (taking into account dividends actually paid) representing a per share annual rate of return of $0.80 (such amount to represent an 8% cumulative compound annual return on $10), plus all dividends declared but unpaid thereon, if any. Notwithstanding any provision contained in the previous paragraph, the corporation shall not redeem any shares of the outstanding Series C Preferred Stock and Series D Preferred Stock without the prior consent of the holders of at least sixty percent of the outstanding shares of Series A Preferred Stock and Series B Preferred Stock (voting together as a class). A "Six-Year Right" shall be deemed to occur if, on or prior to the sixth anniversary of the closing of the Third Purchase Agreement, the corporation has not completed any one of the following events: (i) a Qualified IPO, (ii) a sale, liquidation or dissolution of the corporation or (iii) a sale of all, or substantially all, of the corporation's assets. For purposes of the previous sentence and of the first sentence of paragraph 4(d) hereof, a "Qualified IPO" is an initial public offering of the shares of the Common Stock (i) at an offering price per share of (A) not less than 2 times the purchase price per share of Series C Preferred Stock and Series D Preferred Stock (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected), if such initial public offering is consummated within a period of 30 months following the closing of the Third Purchase Agreement or (B) not less than 2.5 times the purchase price per share of the Series C Preferred Stock and the Series D Preferred Stock (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected), if such initial public offering is consummated after the period of 30 months following the closing of the Third Purchase Agreement and prior to expiration of the six-year period following the closing of the Third Purchase Agreement, (ii) with gross proceeds to the corporation of at least $50,000,000 (fifty million U.S. dollars) and (iii) underwritten on a firm commitment basis by an investment banking firm of national standing approved by the holders (acting together as a class) of a majority of the outstanding shares of the Series C Preferred Stock and Series D Preferred Stock. In the event the corporation is required to redeem any shares of Preferred Stock, the corporation shall first, to the extent funds are legally available, redeem all shares of Series C Preferred Stock and Series D Preferred Stock before it redeems any shares of Series A Preferred Stock or Series B Preferred Stock. In the event of a redemption of less than all of the outstanding shares of Series C Preferred Stock and Series D Preferred Stock pursuant to the first paragraph of this subparagraph (b), redemptions as among the holders of such shares of Series C Preferred Stock and Series D Preferred Stock shall be on a pro rata basis in proportion to the full 6 amounts to which such holders would otherwise be entitled. Thereafter, as and to the extent legally available funds for the redemption thereof exist from time to time, the corporation shall redeem additional shares of Series C Preferred Stock and Series D Preferred Stock, pro rata as among the holders thereof, in proportion to each holders respective ownership of Series C Preferred Stock and Series D Preferred Stock, until all shares of Series C Preferred Stock and Series D Preferred Stock required to be redeemed have been redeemed. Optional redemptions of shares of Series D Preferred Stock by the corporation from any holder thereof in addition to the aforesaid required redemptions are not permitted without the consent of such holder. The corporation shall give notice by mail of redemptions to the holders of record of the shares of Series D Preferred Stock at least 30 days prior to the date of redemption. The notice (i) shall specify the date of redemption and the number of shares to be redeemed from each shareholder and (ii) shall be addressed to each shareholder at his post-office address as shown on the records of the corporation. On or after the date fixed for redemption, each holder of shares of Series D Preferred Stock called for redemption shall surrender the certificate or certificates evidencing such shares to the corporation at the place designated in such notice and shall thereupon be entitled to receive payment. If notice of redemption has been given under this paragraph, from and after the redemption date for the shares of Series D Preferred Stock called for redemption (unless default shall be made by the corporation in providing money for the payment of the redemption price of the shares so called for redemption), such shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as shareholders of the corporation (except the right to receive the redemption price without interest) shall cease. Upon surrender in accordance with such notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors or a duly authorized committee thereof shall so require and the notice shall so state), such shares shall be redeemed by the corporation at the redemption price aforesaid. If less than all of the shares represented by any such surrendered certificate or certificates are redeemed, the corporation shall issue a new certificate for the unredeemed shares. (c) Conversion Right. At the option of the holders thereof, the shares of Series D Preferred Stock shall be convertible, at the office of the corporation (or at such other office or offices, if any, as the Board of Directors may designate), into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100th of a share) of Common Stock of the corporation, at the conversion price, determined as hereinafter provided, in effect at the time of conversion, each share of Series D Preferred Stock being deemed to have a value of $10 for the purpose of such conversion. The price at which shares of Common Stock shall be delivered upon conversion (herein called the "conversion price") shall be initially $10 per share of Common Stock (i.e., at an initial conversion rate of one share of Common Stock for each share of Series D Preferred Stock), provided, however, that such initial conversion price shall be subject to adjustment from time to time in certain instances as hereinafter provided. In the case of the call for redemption of any shares of Series D Preferred Stock, such right of conversion shall cease and terminate as to the shares designated for redemption from and after the date fixed for redemption, unless there shall have been a default by the corporation in providing money for the payment of the redemption price of the shares so called for redemption. The following provisions shall govern such right of conversion: 7 (1) In order to convert shares of Series D Preferred Stock into shares of Common Stock of the corporation, the holder thereof shall surrender at any office hereinabove mentioned the certificate or certificates therefor, duly endorsed to the corporation or in blank, and give written notice to the corporation at such office that such holder elects to convert such shares. Shares of Series D Preferred Stock shall be deemed to have been converted immediately prior to the close of business on the day of the surrender of such shares for conversion as herein provided, and the person entitled to receive the shares of Common Stock of the corporation issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock at such time. As promptly as practicable on or after the conversion date, the corporation shall issue and deliver or cause to be issued and delivered at such office a certificate or certificates for the number of shares of Common Stock of the corporation issuable upon such conversion. (2) The conversion price shall be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the conversion price each holder of shares of Series D Preferred Stock shall thereafter be entitled to receive the number of shares of Common Stock of the corporation obtained by multiplying the conversion price in effect immediately prior to such adjustment by the number of shares issuable pursuant to conversion immediately prior to such adjustment and dividing the product thereof by the conversion price resulting from such adjustment. Not in limitation of the foregoing, any adjustment of the conversion price hereafter effected shall apply to shares of Series D Preferred Stock issued subsequent to the adjustment. (3) Except for (a) options to purchase shares of Common Stock and the issuance of awards of Common Stock pursuant to key employee and consultant benefit plans adopted by the corporation and shares of Common Stock issued upon the exercise of such options granted pursuant to such plans (provided that the aggregate number of shares thus awarded and covered by unexercised options and thus issued pursuant to such options shall not be in excess of 1,242,000 (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected)), (b) warrants issued in connection with bona fide financing transactions (including, without limitation, equipment financing arrangements and bank lines of credit) with conventional institutional lenders entered into in the ordinary course of their business and shares of Common Stock issued upon exercise of such warrants (provided that the aggregate number of shares thus issued on exercise and covered by unexercised warrants shall not be in excess of 600,000 (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar change hereafter effected)), (c) dividends payable in Common Stock, (d) shares of Common Stock issued or issuable upon exercise of the Warrants (as defined in the Second Purchase Agreement), and (e) shares of Common Stock issued or issuable upon conversion of the currently outstanding shares of Preferred Stock, if and whenever the corporation shall issue or sell any shares of its 8 Common Stock for a consideration per share less than the conversion price in effect immediately prior to the time of such issue or sale, then, forthwith upon such issue or sale, the conversion price shall be reduced to the price (calculated to the nearest cent) determined by dividing (A) an amount equal to the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the then existing conversion price and (2) the consideration, if any, received by the corporation upon such issue or sale, by (B) an amount equal to the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issue or sale and (2) the number of shares of Common Stock thus issued or sold. Solely for purposes of (A) and (B) above, the term "Common Stock outstanding" shall include those shares of Common Stock issuable upon conversion of outstanding shares of Preferred Stock but shall exclude shares of Common Stock issuable upon exercise of stock options and warrants. No adjustment of the conversion price, however, shall be made in an amount less than 2% of the conversion price in effect on the date of such adjustment, but any such lesser adjustment shall be carried forward and shall be made at the earlier of (i) the time and together with the next subsequent adjustment which, together with any such adjustment so carried forward, shall be an amount equal to or greater than 4% of the conversion price then in effect and (ii) conversion of the Series D Preferred Stock. For the purposes of this subparagraph (3), the following provisions (i) to (v), inclusive, shall also be applicable: (i) In case at any time the corporation shall grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, (a) Common Stock or (b) any obligations or any shares of stock of the corporation which are convertible into, or exchangeable for, Common Stock (any of such obligations or shares of stock being hereinafter called "Convertible Securities") whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities (determined by dividing (x) the total amount, if any, received or receivable by the corporation as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the corporation upon the exercise of such rights or options, plus, in the case of such rights or options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue of such Convertible Securities and upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options) shall be less than the conversion price in effect immediately prior to the time of the granting of such rights or options, then the total maximum 9 number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date of granting of such rights or options) be deemed to have been issued for such price per share. Except as provided in subparagraph 4(c)(6) below, no further adjustments of the conversion price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such rights or options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. (ii) In case the corporation shall issue or sell (whether directly or by assumption in a merger or otherwise) any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (x) the total amount received or receivable by the corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the corporation upon the conversion or exchange thereof, by (y) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the conversion price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issued for such price per share, provided that (a) except as provided in subparagraph 4(c)(6) below, no further adjustments of the conversion price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and (b) if any such issue or sale of such Convertible Securities is made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments of the conversion price have been or are to be made pursuant to other provisions of this subparagraph 4(c)(3), no further adjustment of the conversion price shall be made by reason of such issue or sale. (iii) In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the corporation therefor, without deducting therefrom any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed to third parties by the corporation in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the corporation shall be deemed to be the fair value of such consideration as 10 determined in good faith by the Board of Directors of the corporation, without deducting therefrom any expenses incurred or any underwriting commissions, discounts or concessions paid or allowed to third parties by the corporation in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase such Common Stock or Convertible Securities shall be issued in connection with any merger or consolidation in which the corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value as determined in good faith by the Board of Directors of the corporation of such portion of the assets and business of the non-surviving corporation or corporations as such Board shall determine in good faith to be attributable to such Common Stock, Convertible Securities, rights or options, as the case may be. In the event of any consolidation or merger of the corporation in which the corporation is not the surviving corporation or in the event of any sale of all or substantially all of the assets of the corporation for stock or other securities of any other corporation, the corporation shall be deemed to have issued a number of shares of its Common Stock for stock or securities of the other corporation computed on the basis of the actual exchange ratio on which the transaction was predicated and for a consideration equal to the fair market value on the date of such transaction of such stock or securities of the other corporation, and if any such calculation results in adjustment of the conversion price, the determination of the number of shares of Common Stock issuable upon conversion immediately prior to such merger, conversion or sale, for purposes of subparagraph 4(c)(7) below, shall be made after giving effect to such adjustment of the conversion price. (iv) In case the corporation shall take a record of the holders of its Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock or in Convertible Securities, or in any rights or options to purchase any Common Stock or Convertible Securities, or (b) to subscribe for or purchase Common Stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such rights of subscription or purchase, as the case may be. (v) The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the corporation, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purpose of this subparagraph 4(c)(3). (4) In case the corporation shall (i) declare a dividend upon the Common Stock payable in Common Stock (other than a dividend declared to effect a subdivision of the outstanding shares of Common Stock, as described in subparagraph 4(c)(5) below) or Convertible Securities, or in any rights or options to purchase Common Stock or Convertible Securities, or (ii) declare any other dividend or make any other distribution upon the Common Stock, 11 then thereafter each holder of shares of Series D Preferred Stock upon the conversion thereof will be entitled to receive the number of shares of Common Stock into which such shares of Series D Preferred Stock have been converted, and, in addition and without payment therefor, each dividend described in clause (i) above and each dividend or distribution described in clause (ii) above (except to the extent previously received pursuant to the provisions of paragraph (3) hereof) which such holder would have received by way of dividends or distributions if continuously since such holder became the record holder of such shares of Series D Preferred Stock such holder (i) had been the record holder of the number of shares of Common Stock then received, and (ii) had retained all dividends or distributions in stock or securities (including Common Stock or Convertible Securities, and any rights or options to purchase any Common Stock or Convertible Securities) payable in respect of such Common Stock or in respect of any stock or securities paid as dividends or distributions and originating directly or indirectly from such Common Stock. (5) In case the corporation shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares, the conversion price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the corporation shall be combined into a smaller number of shares, the conversion price in effect immediately prior to such combination shall be proportionately increased. (6) If (i) the purchase price provided for in any right or option referred to in clause (i) of subparagraph 4(c)(3), or (ii) the additional consideration, if any, payable upon the conversion or exchange of Convertible Securities referred to in clause (i) or clause (ii) of subparagraph 4(c)(3), or (iii) the rate at which any Convertible Securities referred to in clause (i) or clause (ii) of subparagraph 4(c)(3) are convertible into or exchangeable for Common Stock, shall change at any time (other than under or by reason of provisions designed to protect against dilution), the conversion price then in effect hereunder shall forthwith be decreased to such conversion price as would have obtained had the adjustments made upon the issuance of such rights, options or Convertible Securities been made upon the basis of (a) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exercise of such options or rights or upon the conversion or exchange of such Convertible Securities, and the total consideration received therefor, and (b) the issuance at the time of such change of any such options, rights, or Convertible Securities then still outstanding for the total consideration, if any, received by the corporation therefor and to be received on the basis of such changed price; and on the expiration of any such option or right or the termination of any such right to convert or exchange such Convertible Securities, the conversion price then in effect hereunder shall forthwith be increased to such conversion price as would have obtained had the adjustments made only upon the issuance of such rights or options or Convertible Securities been made upon the basis of the issuance of the shares of Common Stock theretofore actually 12 delivered (and the total consideration received therefor) upon the exercise of such rights or options or upon the conversion or exchange of such Convertible Securities. If the purchase price provided for in any right or option referred to in clause (i) of subparagraph 4(c)(3), or the rate at which any Convertible Securities referred to in clause (i) or clause (ii) of subparagraph 4(c)(3) are convertible into or exchangeable for Common Stock, shall decrease at any time under or by reason of provisions with respect thereto designed to protect against dilution, then in case of the delivery of Common Stock upon the exercise of any such right or option or upon conversion or exchange of any such Convertible Security, the conversion price then in effect hereunder shall forthwith be decreased to such conversion price as would have obtained had the adjustments made upon the issuance of such right, option or Convertible Security been made upon the basis of the issuance of (and the total consideration received for) the shares of Common Stock delivered as aforesaid. (7) If any capital reorganization or reclassification of the capital stock of the corporation, or consolidation or merger of the corporation with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, and subject to subparagraph 4(a) above, lawful and adequate provision shall be made whereby the holders of Series D Preferred Stock shall thereafter have the right to receive upon the basis and upon the terms and conditions specified herein and in lieu of the shares of the Common Stock of the corporation immediately theretofore receivable upon the conversion of Series D Preferred Stock such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore receivable upon the conversion of Series D Preferred Stock had such reorganization, reclassification, consolidation, merger or sale not taken place, plus all dividends declared but unpaid thereon to the date of such reorganization, reclassification, consolidation, merger or sale, and in any such case appropriate provision shall be made with respect to the rights and interests of the holders of Series D Preferred Stock to the end that the provisions hereof (including without limitation provisions for adjustments of the conversion price and of the number of shares receivable upon the conversion of Series D Preferred Stock) shall thereafter be applicable, as nearly as may be in relation to any shares of stock, securities or assets thereafter receivable upon the conversion of Series D Preferred Stock. The corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the corporation) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument executed and mailed to the registered holders of Series D Preferred Stock, at the last addresses of such holders appearing on the books of the corporation, the obligation to deliver to such holders such 13 shares of stock, securities or assets as, in accordance with the foregoing provisions, such holders may be entitled to receive. (8) The conversion price shall automatically be reduced by twenty percent (20%) upon the occurrence of an Adjustment Event. For purposes of the previous sentence, an "Adjustment Event" shall have occurred (A) upon the closing of either (i) an initial public offering of the shares of the Common Stock by the corporation, (ii) a sale of all, or substantially all, of the corporation's assets or (iii) a sale of all, or substantially all, of the corporation's outstanding shares of capital stock, including a merger, consolidation or other capital reorganization which results in the holders of capital stock after such reorganization holding less than fifty percent (50%) of the voting power of the corporation; if (B) the offering price of the initial public offering or the consideration per share received in connection with the sale of assets or Common Stock is less than: (x) $30.00 per share (appropriately adjusted to reflect stock splits, stock combinations, stock dividends, reorganizations, consolidations and similar changes hereafter effected) and (y) an amount, which on a per share basis, represents a thirty percent (30%) Internal Rate of Return (as defined below) based on the initial purchase price per share of the Series D Preferred Stock. The conversion price shall be deemed to have been adjusted concurrently with the closing of the Adjustment Event described above and from such time the conversion price of such shares of Series D Preferred Stock shall be calculated in accordance with such adjusted conversion price. "Internal Rate of Return" shall mean the discount rate which, when applied to the purchase price of the shares paid by the holder thereof, as adjusted from time to time, and all amounts payable by the corporation to the holders of Series C Preferred Stock and Series D Preferred Stock upon an Adjustment Event with respect to such shares on a pre-tax basis, yields a net present value of zero. For purposes of this paragraph 4(e), if a sale of Common Stock, including a merger, consolidation or other capital reorganization of the corporation, or if the sale of its assets shall be effected in such a way that holders of Series D Preferred Stock shall be entitled to receive securities of another entity (the "New Securities") in exchange for shares of Series D Preferred Stock, then the consideration to be received by the holders of Series D Preferred Stock shall be valued for purposes of the preceding paragraph based upon the arithmetic average of the daily closing sale price on the Nasdaq Stock Market or on the national securities exchange on which the New Securities are then listed for the thirty (30) trading days preceding the Adjustment Event. If the New Securities are not traded on the Nasdaq Stock Market or on a national securities exchange, the value thereof shall be determined in good faith by the Board of Directors of the corporation. In the event that a majority of the holders of Series C Preferred Stock and Series D Preferred Stock shall object to the Board of Director's determination, within 30 days of the Adjustment Event, the corporation and the holders of a majority of the outstanding Series C Preferred Stock and Series D Preferred Stock, shall mutually agree upon and select a nationally recognized investment bank (the "Investment Bank") to conduct a valuation of the New Securities. The Investment Bank shall not have a direct or indirect interest in any of the 14 parties. The Investment Bank shall have 30 days in which to independently determine the fair market value of the New Securities. Such Investment Bank shall be briefed at a meeting of all parties interested in the valuation and shall receive written materials and access to information. The Investment Bank shall submit a written valuation to the corporation. The cost of the valuation shall be borne by the corporation. (9) Upon any adjustment of the conversion price, then and in each case the corporation shall give written notice thereof, by first-class mail, postage prepaid, addressed to the registered holders of Series D Preferred Stock, at the addresses of such holders as shown on the books of the corporation, which notice shall state the conversion price resulting from such adjustment and the increase or decrease, if any, in the number of shares receivable at such price upon the conversion of Series D Preferred Stock, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. (10) In case at any time: (i) the corporation shall declare any cash dividend on its Common Stock; (ii) the corporation shall pay any dividend payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of its Common Stock; (iii) the corporation shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (iv) there shall be any capital reorganization, or reclassification of the capital stock of the corporation, or consolidation or merger of the corporation with, or sale of all or substantially all of its assets to, another corporation; (v) there shall be a tender offer for any capital stock of the corporation; or (vi) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the corporation; then, in any one or more of said cases, the corporation shall give written notice, by first-class mail, postage prepaid, addressed to the registered holders of Series D Preferred Stock at the addresses of such holders as shown on the books of the corporation, of the date on which (a) the books of the corporation shall close or a record shall be taken for such dividend, distribution or subscription rights, or (b) such reorganization, reclassification, consolidation, tender offer, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date 15 as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, tender offer, merger, sale, dissolution, liquidation, or winding up, as the case may be. Such written notice must be received by the holders of Series D Preferred Stock at least 20 days prior to the action in question and not less than 20 days prior to the record date or the date on which the corporation's transfer books are closed in respect thereto. Such written notice shall be deemed received 3 days after deposited in the U.S. mail in the manner provided above. (11) If any event occurs as to which in the opinion of the Board of Directors of the corporation the other provisions of this paragraph 4(c) are not strictly applicable or if strictly applicable would not fairly protect the rights of the holders of Series D Preferred Stock in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such rights as aforesaid. (12) As used in this paragraph 4(c) the term "Common Stock" shall mean and include the corporation's currently authorized Common Stock and shall also include any capital stock of any class of the corporation hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the corporation; provided that the shares receivable pursuant to conversion of shares of Series D Preferred Stock shall include shares designated as Common Stock of the corporation as of the date of issuance of such shares of Series D Preferred Stock, or, in case of any reclassification of the outstanding shares thereof, the stock, securities or assets provided for in subparagraph 4(c)(7) above. (13) No fractional shares of Common Stock shall be issued upon conversion, but, instead of any fraction of a share which would otherwise be issuable, the corporation shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the market price per share of Common Stock as of the close of business on the day of conversion. "Market price" shall mean if the Common Stock is traded on a securities exchange or on the NASDAQ National Market System, the closing price of the Common Stock on such exchange or the NASDAQ National Market System, or, if the Common Stock is otherwise traded in the over-the-counter market, the closing bid price, in each case averaged over a period of 20 consecutive business days prior to the date as of which "market price" is being determined. If at any time the Common Stock is not traded on an exchange or the NASDAQ National Market System, or otherwise traded in the over-the-counter market, the "market price" shall be deemed to be the fair value thereof determined in good faith by the Board of Directors of the corporation as of a 16 date which is within 15 days of the date as of which the determination is to be made. (d) Mandatory Conversion. The Series D Preferred Stock shall automatically be converted into shares of Common Stock of the corporation, without any act by the corporation or the holders of the Series D Preferred Stock, (i) concurrently with the closing of a Qualified IPO by the corporation or (ii) upon the affirmative vote to so convert the shares of the Series D Preferred Stock by the holders (acting together as a class) of a majority of shares of Series C Preferred Stock and Series D Preferred Stock then outstanding. Each holder of a share of Series D Preferred Stock so converted shall be entitled to receive the full number of shares of Common Stock into which such share of Series D Preferred Stock held by such holder could be converted if such holder had exercised its conversion right at the time of closing of such Qualified IPO together with cash in lieu of any fractional shares. Shares of Series D Preferred Stock shall be deemed to have been converted concurrently with the closing of the Qualified IPO described above and from such time the holder of such shares of Series D Preferred Stock shall be treated for all purposes as the record holder of those shares of Common Stock into which such shares of Series D Preferred Stock have been converted. Within a reasonable time and in no event later than 15 days after the conversion date, the corporation shall issue and deliver or cause to be issued and delivered at such office a certificate or certificates for the number of shares of Common Stock of the corporation issuable upon such conversion. (e) Replacement Certificates. Upon receipt of evidence reasonably satisfactory to the corporation of the loss, theft, destruction or mutilation of any certificates representing shares of Series D Preferred Stock, and, in the case of any such loss, theft or destruction, upon delivery of a bond of indemnity satisfactory to the corporation, or, in the case of any such mutilation, upon surrender and cancellation of the certificates representing shares of Series D Preferred Stock, the corporation will issue new certificates representing shares of Series D Preferred Stock of like tenor, in lieu of such lost, stolen, destroyed or mutilated certificates representing shares of Series D Preferred Stock. (5) Status of Series D Preferred Stock Upon Retirement. Shares of Series D Preferred Stock which are acquired or redeemed by the corporation or converted pursuant to paragraph 4(c) or paragraph 4(d) shall return to the status of authorized and unissued shares of stock of the corporation without designation as to class or series. Upon the acquisition or redemption by the corporation or conversion pursuant to paragraph 4(c) or paragraph 4(d) of all outstanding shares of Series D Preferred Stock, all provisions of this Certificate of Designation shall cease to be of further effect. 17 IN WITNESS WHEREOF, the undersigned, the President and Chief Executive Officer of the corporation, being duly authorized on behalf of the corporation, has executed this document the 19th day of July, 2001. LIFE TIME FITNESS, INC. By: /s/ Bahram Akradi ------------------------------------------ Bahram Akradi President and Chief Executive Officer 18 LIFE TIME FITNESS, INC. ARTICLES OF AMENDMENT TO AMENDMENT AND RESTATEMENT OF STATEMENT OF DESIGNATION OF RIGHTS, PREFERENCES AND LIMITATIONS OF SERIES C CONVERTIBLE PREFERRED STOCK The undersigned, Eric J. Buss, Secretary of LIFE TIME FITNESS, Inc., a Minnesota corporation (the "Company"), hereby certifies: (i) That the Certificate of Designation of the Company establishing a series of shares of Preferred Stock designated as Series C Convertible Preferred Stock (the "Certificate"), has been and hereby is amended in the following respect: The second sentence of the third paragraph of Section 4(b) of Certificate is hereby deleted in its entirety and replaced with and superseded by the text set forth below: "For purposes of the previous sentence and of the first sentence of paragraph 4(d) hereof, a "Qualified IPO" is (i) an initial public offering of the shares of the Common Stock occurring on or prior to August 30, 2004 (A) at an offering price per share of at least $15, (B) with gross proceeds to the corporation of at least $50,000,000 (fifty million U.S. dollars) and (C) underwritten on a firm commitment basis by an investment banking firm of national standing approved by the holders (acting together as a class) of a majority of the outstanding shares of the Series C Preferred Stock and Series D Preferred Stock, and (ii) an initial public offering of the shares of the Common Stock occurring after August 30, 2004 (X) at an offering price per share of not less than $25 (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected), (Y) with gross proceeds to the corporation of at least $50,000,000 (fifty million U.S. dollars) and (Z) underwritten on a firm commitment basis by an investment banking firm of national standing approved by the holders (acting together as a class) of a majority of the outstanding shares of the Series C Preferred Stock and Series D Preferred Stock." (ii) That such amendment has been adopted in accordance with the requirements of, and pursuant to, Chapter 302A of the Minnesota Statutes. IN WITNESS WHEREOF, I have subscribed my name this 20th day of May, 2004. ----------------------------------- Eric J. Buss, Secretary LIFE TIME FITNESS, INC. ARTICLES OF AMENDMENT TO AMENDMENT AND RESTATEMENT OF STATEMENT OF DESIGNATION OF RIGHTS, PREFERENCES AND LIMITATIONS OF SERIES D CONVERTIBLE PREFERRED STOCK The undersigned, Eric J. Buss, Secretary of LIFE TIME FITNESS, Inc., a Minnesota corporation (the "Company"), hereby certifies: (i) That the Certificate of Designation of the Company establishing a series of shares of Preferred Stock designated as Series D Convertible Preferred Stock (the "Certificate"), has been and hereby is amended in the following respect: The second sentence of the third paragraph of Section 4(b) of Certificate is hereby deleted in its entirety and replaced with and superseded by the text set forth below: "For purposes of the previous sentence and of the first sentence of paragraph 4(d) hereof, a "Qualified IPO" is (i) an initial public offering of the shares of the Common Stock occurring on or prior to August 30, 2004 (A) at an offering price per share of at least $15, (B) with gross proceeds to the corporation of at least $50,000,000 (fifty million U.S. dollars) and (C) underwritten on a firm commitment basis by an investment banking firm of national standing approved by the holders (acting together as a class) of a majority of the outstanding shares of the Series C Preferred Stock and Series D Preferred Stock, and (ii) an initial public offering of the shares of the Common Stock occurring after August 30, 2004 (X) at an offering price per share of not less than $25 (appropriately adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes hereafter effected), (Y) with gross proceeds to the corporation of at least $50,000,000 (fifty million U.S. dollars) and (Z) underwritten on a firm commitment basis by an investment banking firm of national standing approved by the holders (acting together as a class) of a majority of the outstanding shares of the Series C Preferred Stock and Series D Preferred Stock." (ii) That such amendment has been adopted in accordance with the requirements of, and pursuant to, Chapter 302A of the Minnesota Statutes. IN WITNESS WHEREOF, I have subscribed my name this 20th day of May, 2004. ----------------------------------- Eric J. Buss, Secretary EX-3.2 4 n82215a2exv3w2.txt FORM OF AMENDED/RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.2 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF LIFE TIME FITNESS, INC. The undersigned, Eric J. Buss, Secretary of LIFE TIME FITNESS, Inc., a Minnesota corporation (the "Corporation"), hereby certifies that: (1) The name of the Corporation is LIFE TIME FITNESS, Inc. (2) The Corporation's Articles of Incorporation have been Amended and Restated to read in their entirety as follows: ARTICLE I NAME The name of the Corporation is Life Time Fitness, Inc. ARTICLE II ADDRESS The registered office of the Corporation is located at 6442 City West Parkway, Eden Prairie, Minnesota 55344. ARTICLE III CAPITAL STOCK (a) General. The aggregate number of shares of stock that the Corporation is authorized to issue is 60,000,000 shares, par value $.01 per share, of which 50,000,000 shares are designated as common stock (the "Common Stock"), and 10,000,000 shares are undesignated (the "Undesignated Capital Stock"). The shares of Common Stock and Undesignated Capital Stock are referred to collectively as the "capital stock." (b) Authority Relative to Undesignated Capital Stock. Authority is hereby expressly vested in the Board of Directors of the Corporation, subject to limitations prescribed by law, to authorize the issuance from time to time of one or more classes or series of Undesignated Capital Stock and, with respect to each such class or series, to determine or fix the voting powers, full or limited, if any, of the shares of such class or series and the designations, preferences and relative, participating, optional or other special rights and the qualifications, limitations or restrictions thereof, including, without limitation, the determination or fixing of the rates of and terms and conditions upon which any dividends shall be payable on such class or series, any terms under or conditions on which the shares of such class or series may be redeemed, any provision made for the conversion or exchange of the shares of such class or series for shares of any other class or classes or of any other series of the same or any other class or classes of the Corporation's capital stock, and any rights of the holders of the shares of such class or series upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation. ARTICLE IV NO CUMULATIVE VOTING No holder of shares of capital stock of the Corporation shall have any cumulative voting rights. ARTICLE V NO PREEMPTIVE RIGHTS No holder of shares of capital stock of the Corporation shall be entitled as such, as a matter of right, to subscribe for, purchase or receive any part of any new or additional issue of stock of any class or series whatsoever or other securities, or of securities convertible into or exchangeable for or carrying any other right to acquire any stock of any class or series whatsoever or other securities, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend. The Corporation shall have the power, however, in its discretion to grant such rights by agreement or other instrument to any person or persons (whether or not they are shareholders). ARTICLE VI CONTROL SHARE ACQUISITION STATUTE NOT APPLICABLE Neither Section 302A.671 of the Minnesota Statutes nor any successor statute thereto shall apply to, or govern in any manner, the Corporation or any control share acquisition of shares of capital stock of the Corporation or limit in any respect the voting or other rights of any existing or future shareholder of the Corporation or entitle the Corporation or its shareholders to any redemption or other rights with respect to outstanding capital stock of the Corporation that the Corporation or its shareholders would not have in the absence of Section 302A.671 of the Minnesota Statutes or any successor statute thereto. ARTICLE VII DISSENTERS' RIGHTS To the extent permitted by Chapter 302A of the Minnesota Statutes, no action set forth in paragraph (a) of Section 302A.471, subdivision 1, of the Minnesota Statutes (including any amendment or successor statute thereto) shall create any right of any shareholder of the Corporation to dissent from, and obtain the fair value of the shareholder's shares in the event of, any such action. ARTICLE VIII WRITTEN ACTION OF THE BOARD OF DIRECTORS Any action required or permitted to be taken at a meeting of the Board of Directors of the Corporation not needing approval by the shareholders under Chapter 302A of the 2 Minnesota Statutes may be taken by written action signed by the number of directors that would be required to take such action at a meeting of the Board of Directors at which all directors are present. ARTICLE IX To the full extent that Chapter 302A of the Minnesota Statutes, as it exists on the effective date of this Article IX or may hereafter be amended, permits the limitation or elimination of the liability of directors, a director of the Corporation shall not be liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. Any amendment to or repeal of this Article IX shall not adversely affect any right or protection as a director of the Corporation for or with respect to any acts or omission of such director occurring prior to such amendment or repeal. * * * (3) The foregoing amendment and restatement has been adopted pursuant to Chapter 302A of the Minnesota Statutes. IN WITNESS WHEREOF, I have hereunto set my hand this ______ day of ____________, 2004. ----------------------------- Eric J. Buss Secretary 3 EX-3.4 5 n82215a2exv3w4.txt FORM OF AMENDED/RESTATED BYLAWS EXHIBIT 3.4 AMENDED AND RESTATED BY-LAWS OF LIFE TIME FITNESS, INC. TABLE OF CONTENTS SHAREHOLDERS .....................................................................................................1 Section 1.01 Place of Meetings.............................................................................1 Section 1.02 Regular Meetings..............................................................................1 Section 1.03 Special Meetings..............................................................................1 Section 1.04 Meetings Held Upon Shareholder Demand.........................................................1 Section 1.05 Adjournments..................................................................................2 Section 1.06 Notice of Meetings............................................................................2 Section 1.07 Waiver of Notice..............................................................................2 Section 1.08 Voting Rights.................................................................................2 Section 1.09 Proxies.......................................................................................3 Section 1.10 Quorum........................................................................................3 Section 1.11 Acts of Shareholders..........................................................................3 Section 1.12 Action Without a Meeting......................................................................3 Section 1.13 Nomination of Director Candidates.............................................................3 Section 1.14 Advance Notice of Shareholder Proposals.......................................................5 DIRECTORS.........................................................................................................6 Section 2.01 Number; Qualifications........................................................................6 Section 2.02 Term..........................................................................................6 Section 2.03 Vacancies.....................................................................................6 Section 2.04 Place of Meetings.............................................................................6 Section 2.05 Regular Meetings..............................................................................7 Section 2.06 Special Meetings..............................................................................7 Section 2.07 Waiver of Notice; Previously Scheduled Meetings...............................................7 Section 2.08 Quorum........................................................................................7 Section 2.09 Acts of Board.................................................................................7 Section 2.10 Participation by Remote Communication.........................................................7 Section 2.11 Absent Directors..............................................................................8 Section 2.12 Action Without a Meeting......................................................................8 Section 2.13 Committees....................................................................................8 Section 2.14 Special Litigation Committee..................................................................8 Section 2.15 Compensation..................................................................................9 OFFICERS..........................................................................................................9 Section 3.01 Number and Designation........................................................................9 Section 3.02 Chief Executive Officer.......................................................................9 Section 3.03 Chief Financial Officer.......................................................................9

i Section 3.04 President.....................................................................................9 Section 3.05 Vice Presidents...............................................................................9 Section 3.06 Secretary....................................................................................10 Section 3.07 Treasurer....................................................................................10 Section 3.08 Authority and Duties.........................................................................10 Section 3.09 Term.........................................................................................10 Section 3.10 Salaries.....................................................................................11 INDEMNIFICATION..................................................................................................11 Section 4.01 Indemnification..............................................................................11 Section 4.02 Insurance....................................................................................11 SHARES...........................................................................................................11 Section 5.01 Certificated and Uncertificated Shares.......................................................11 Section 5.02 Declaration of Dividends and Other Distributions.............................................12 Section 5.03 Transfer of Shares...........................................................................12 Section 5.04 Record Date..................................................................................12 MISCELLANEOUS....................................................................................................12 Section 6.01 Execution of Instruments.....................................................................12 Section 6.02 Advances.....................................................................................12 Section 6.03 Corporate Seal...............................................................................12 Section 6.04 Fiscal Year..................................................................................12 Section 6.05 Amendments...................................................................................12

This Table of Contents is not part of the By-Laws of the Corporation. It is intended merely to aid in the utilization of the By-Laws. ii AMENDED AND RESTATED BY-LAWS OF LIFE TIME FITNESS, INC. SHAREHOLDERS Section 1.01 Place of Meetings. Each meeting of the shareholders shall be held at the principal executive office of the Corporation or at such other place as may be designated by the Board of Directors or the Chief Executive Officer. But any meeting called by or at the demand of a shareholder or shareholders shall be held in the county where the principal executive office of the Corporation is located. The Board of Directors may determine that a meeting of the shareholders shall not be held at a physical place, but instead solely by means of remote communication. Participation by remote communication constitutes presence at the meeting. Section 1.02 Regular Meetings. Regular meetings of the shareholders may be held on an annual or other less frequent basis as determined by the Board of Directors; provided, however, that if a regular meeting has not been held during the immediately preceding 15 months, a shareholder or shareholders holding 3% or more of the voting power of all shares entitled to vote may demand a regular meeting of shareholders by written demand given to the Chief Executive Officer or Chief Financial Officer of the Corporation. At each regular meeting the shareholders shall elect qualified successors for directors who serve for an indefinite term or whose terms have expired or are due to expire within six months after the date of the meeting, subject to the provisions of Section 1.13, and may transact any other business, provided, however, that no business with respect to which special notice is required by law shall be transacted unless such notice shall have been given. Section 1.03 Special Meetings. A special meeting of the shareholders may be called for any purpose or purposes at any time by the Chief Executive Officer; by the Chief Financial Officer; by the Board of Directors or any two or more members thereof; or by one or more shareholders holding not less than ten percent of the voting power of all shares of the Corporation entitled to vote (except that a special meeting for the purpose of considering any action to directly or indirectly facilitate or effect a business combination, including any action to change or otherwise affect the composition of the Board for that purpose, must be called by shareholders holding not less than 25% of the voting power of all shares of the Corporation entitled to vote), who shall demand such special meeting by written notice given to the Chief Executive Officer or the Chief Financial Officer of the Corporation specifying the purposes of such meeting. Section 1.04 Meetings Held Upon Shareholder Demand. Within 30 days after receipt of a demand by the Chief Executive Officer or the Chief Financial Officer from any shareholder or shareholders entitled to call a meeting of the shareholders, it shall be the duty of the Board of Directors of the Corporation to cause a special or regular meeting of shareholders, as the case may be, to be duly called and held on notice no later than 90 days after receipt of such demand. If the Board fails to cause such a meeting to be called and held as required by this Section, the shareholder or shareholders making the demand may call the meeting by giving notice as provided in Section 1.06 hereof at the expense of the Corporation. Section 1.05 Adjournments. Any meeting of the shareholders may be adjourned from time to time to another date, time and place. If any meeting of the shareholders is so adjourned, no notice as to such adjourned meeting need be given if the adjourned meeting is to be held not more than 120 days after the date fixed for the original meeting and the date, time and place at which the meeting will be reconvened are announced at the time of adjournment. Section 1.06 Notice of Meetings. Unless otherwise required by law, written notice of each meeting of the shareholders, stating the date, time, and place and, in the case of a special meeting, the purpose or purposes, shall be given at least 10 days and not more than 60 days before the meeting to every holder of shares entitled to vote at such meeting except as specified in Section 1.05 or as otherwise permitted by law. Notice may be given to a shareholder by means of electronic communication if the requirements of Minnesota Statutes Section 302A.436, Subdivision 5, as amended from time to time, are met. Notice to a shareholder is also effectively given if the notice is addressed to the shareholder or a group of shareholders in a manner permitted by the rules and regulations under the Securities Exchange Act of 1934, so long as the Corporation has first received the written or implied consent required by those rules and regulations. The business transacted at a special meeting of shareholders is limited to the purposes stated in the notice of the meeting. Section 1.07 Waiver of Notice. A shareholder may waive notice of the date, time, place, or purpose of a meeting of shareholders. A waiver of notice by a shareholder entitled to notice is effective whether given before, at, or after the meeting, and whether given in writing, orally, by authenticated electronic communication, or by attendance. Attendance by a shareholder at a meeting, including attendance by means of remote communication, is a waiver of notice of that meeting, unless the shareholder objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened, or objects before a vote on an item of business because the item may not lawfully be considered at that meeting and does not participate in the consideration of the item at that meeting. Section 1.08 Voting Rights. Subdivision 1. A shareholder shall have one vote for each share held which is entitled to vote. Except as otherwise required by law, a holder of shares entitled to vote may vote any portion of the shares in any way the shareholder chooses. If a shareholder votes without designating the proportion or number of shares voted in a particular way, the shareholder is deemed to have voted all of the shares in that way. Subdivision 2. The Board of Directors may fix, or authorize an officer to fix, a date not more than 60 days before the date of a meeting of shareholders as the date for the determination of the holders of shares entitled to notice of and entitled to vote at the meeting. 2 When a date is so fixed, only shareholders on that date are entitled to notice of and permitted to vote at that meeting of shareholders. Section 1.09 Proxies. A shareholder may cast or authorize the casting of a vote by (a) filing a written appointment of a proxy, signed by the shareholder, with an officer of the Corporation at or before the meeting at which the appointment is to be effective, or (b) by telephonic transmission or authenticated electronic communication, whether or not accompanied by written instructions of the shareholder, of an appointment of a proxy with the Corporation or the Corporation's duly authorized agent at or before the meeting at which the appointment is to be effective. The telephonic transmission or authenticated electronic communication must set forth or be submitted with information from which it can be determined that the appointment was authorized by the shareholder. Any copy, facsimile telecommunication, or other reproduction of the original of either the writing or transmission may be used in lieu of the original, provided that it is a complete and legible reproduction of the entire original. Section 1.10 Quorum. The holders of a majority of the voting power of the shares entitled to vote at a shareholders meeting are a quorum for the transaction of business. If a quorum is present when a duly called or held meeting is convened, the shareholders present may continue to transact business until adjournment, even though the withdrawal of a number of the shareholders originally present leaves less than the proportion or number otherwise required for a quorum. Section 1.11 Acts of Shareholders. Subdivision 1. Except as otherwise required by law or specified in the Articles of Incorporation of the Corporation, the shareholders shall take action by the affirmative vote of the holders of the greater of (a) a majority of the voting power of the shares present and entitled to vote on that item of business or (b) a majority of the voting power of the minimum number of shares entitled to vote that would constitute a quorum for the transaction of business at a duly held meeting of shareholders. Subdivision 2. A shareholder voting by proxy authorized to vote on less than all items of business considered at the meeting shall be considered to be present and entitled to vote only with respect to those items of business for which the proxy has authority to vote. A proxy who is given authority by a shareholder who abstains with respect to an item of business shall be considered to have authority to vote on that item of business. Section 1.12 Action Without a Meeting. Any action required or permitted to be taken at a meeting of the shareholders of the Corporation may be taken without a meeting by written action signed, or consented to by authenticated electronic communication, by all of the shareholders entitled to vote on that action. The written action is effective when it has been signed, or consented to by authenticated electronic communication, by all of those shareholders, unless a different effective time is provided in the written action. Section 1.13 Nomination of Director Candidates. Only persons who are nominated in accordance with the procedures set forth in this Section 1.13 shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of shareholders (i) by or at the direction of the Board of 3 Directors, or (ii) by any shareholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures hereinafter set forth in this Section. Subdivision 1. Timing of Notice. Nominations by shareholders shall be made pursuant to timely notice in writing to the secretary of the Corporation. To be timely, a shareholder's notice of nominations to be made at an annual meeting of shareholders must be delivered to the secretary of the Corporation, or mailed and received at the principal executive office of the Corporation, not less than 90 days before the first anniversary of the date of the preceding year's annual meeting of shareholders. If, however, the date of the annual meeting of shareholders is more than 30 days before or after such anniversary date, notice by a shareholder shall be timely only if so delivered or so mailed and received not less than 90 days before such annual meeting or, if later, within 10 days after the first public announcement of the date of such annual meeting. If a special meeting of shareholders of the Corporation is called in accordance with Section 1.03 for the purpose of electing one or more directors to the Board of Directors or if a regular meeting other than an annual meeting is held, for a shareholder's notice of nominations to be timely it must be delivered to the secretary of the Corporation, or mailed and received at the principal executive office of the Corporation, not less than 90 days before such special meeting or such regular meeting or, if later, within 10 days after the first public announcement of the date of such special meeting or such regular meeting. Except to the extent otherwise required by law, the adjournment of a regular or special meeting of shareholders shall not commence a new time period for the giving of a shareholder's notice as described above. Subdivision 2. Content of Notice. A shareholder's notice to the Corporation of nominations for a regular or special meeting of shareholders shall set forth (A) as to each person whom the shareholder proposes to nominate for election or re-election as a director: (i) such person's name, age, business address and residence address and principal occupation or employment, (ii) all other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or that is otherwise required, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and (iii) such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; and (B) as to the shareholder giving the notice: (i) the name and address, as they appear on the Corporation's books, of such shareholder, (ii) the class or series (if any) and number of shares of the Corporation that are beneficially owned by such shareholder, and (iii) a representation that the shareholder is a holder of record of shares of the Corporation entitled to vote for the election of directors and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the secretary of the Corporation the information required to be set forth in a shareholder's notice of nomination that pertains to a nominee. Subdivision 3. Consequences of Failure to Give Timely Notice. Notwithstanding anything in these By-Laws to the contrary, no person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section. The officer of the Corporation chairing the meeting shall, if the facts 4 warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed in this Section and, if such officer should so determine, such officer shall so declare to the meeting, and the defective nomination shall be disregarded. Subdivision 4. Public Announcement. For purposes of this Section and Section 1.14, "public announcement" means disclosure (i) when made in a press release reported by the Dow Jones News Service, Associated Press, or comparable national news service, (ii) when filed in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14, or 15(d) of the Securities Exchange Act of 1934, as amended, or (iii) when mailed as the notice of the meeting pursuant to Section 1.06. Section 1.14 Advance Notice of Shareholder Proposals. As provided in Section 1.03, the business conducted at any special meeting of shareholders of the Corporation shall be limited to the purposes stated in the notice of the special meeting pursuant to Section 1.06. At any regular meeting of shareholders of the Corporation, only such business (other than the nomination and election of directors, which shall be subject to Section 1.13) may be conducted as shall be appropriate for consideration at the meeting of shareholders and as shall have been brought before the meeting (i) by or at the direction of the Board of Directors, or (ii) by any shareholder of the Corporation entitled to vote at the meeting who complies with the notice procedures hereinafter set forth in this Section. Subdivision 1. Timing of Notice. For such business to be properly brought before any regular meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the secretary of the Corporation. To be timely, a shareholder's notice of any such business to be conducted at an annual meeting must be delivered to the secretary of the Corporation, or mailed and received at the principal executive office of the Corporation, not less than 90 days before the first anniversary of the date of the preceding year's annual meeting of shareholders. If, however, the date of the annual meeting of shareholders is more than 30 days before or after such anniversary date, notice by a shareholder shall be timely only if so delivered or so mailed and received not less than 90 days before such annual meeting or, if later, within 10 days after the first public announcement of the date of such annual meeting. To be timely, a shareholder's notice of any such business to be conducted at a regular meeting other than an annual meeting must be delivered to the secretary of the Corporation, or mailed and received at the principal executive office of the Corporation, not less than 90 days before such regular meeting or, if later, within 10 days after the first public announcement of the date of such regular meeting. Except to the extent otherwise required by law, the adjournment of a regular meeting of shareholders shall not commence a new time period for the giving of a shareholder's notice as required above. Subdivision 2. Content of Notice. A shareholder's notice to the Corporation shall set forth as to each matter the shareholder proposes to bring before the regular meeting (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, (iii) the class or series (if any) and number of shares of the Corporation that are beneficially owned by the shareholder, (iv) any 5 material interest of the shareholder in such business, and (v) a representation that the shareholder is a holder of record of shares entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to make the proposal. Subdivision 3. Consequences of Failure to Give Timely Notice. Notwithstanding anything in these By-Laws to the contrary, no business (other than the nomination and election of directors) shall be conducted at any regular meeting except in accordance with the procedures set forth in this Section. The officer of the Corporation chairing the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the procedures described in this Section and, if such officer should so determine, such officer shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted. Nothing in this Section shall be deemed to preclude discussion by any shareholder of any business properly brought before the meeting in accordance with these By-Laws. Subdivision 4. Compliance with Law. Notwithstanding the foregoing provisions of this Section, a shareholder shall also comply with all applicable requirements of Minnesota law and the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section. DIRECTORS Section 2.01 Number; Qualifications. Except as authorized by the shareholders pursuant to a shareholder control agreement or unanimous affirmative vote, the business and affairs of the Corporation shall be managed by or under the direction of a Board of one or more directors. Directors shall be natural persons. The number of directors to constitute the Board shall be determined from time to time by resolution of the Board. Directors need not be shareholders. Section 2.02 Term. Each director shall serve for an indefinite term that expires at the next regular meeting of the shareholders. A director shall hold office until a successor is elected and has qualified or until the earlier death, resignation, removal or disqualification of the director. Section 2.03 Vacancies. Vacancies on the Board of Directors resulting from the death, resignation, removal or disqualification of a director may be filled by the affirmative vote of a majority of the remaining members of the Board, though less than a quorum. Vacancies on the Board resulting from newly created directorships may be filled by the affirmative vote of a majority of the directors serving at the time such directorships are created. Each person elected to fill a vacancy shall hold office until a qualified successor is elected by the shareholders at the next regular meeting or at any special meeting duly called for that purpose. Section 2.04 Place of Meetings. Each meeting of the Board of Directors shall be held at the principal executive office of the Corporation or at such other place as may be designated from time to time by a majority of the members of the Board or by the Chief Executive Officer. The Board of Directors may determine that a meeting of the Board not be held at a physical place, 6 but instead solely by means of remote communication through which the directors may participate with each other during the meeting. Section 2.05 Regular Meetings. Regular meetings of the Board of Directors for the election of officers and the transaction of any other business shall be held without notice at the place of and immediately after each regular meeting of the shareholders. Section 2.06 Special Meetings. A special meeting of the Board of Directors may be called for any purpose or purposes at any time by any member of the Board by giving not less than two days' notice to all directors of the date, time and place of the meeting, provided that when notice is mailed, at least four days' notice shall be given. The notice need not state the purpose of the meeting. Section 2.07 Waiver of Notice; Previously Scheduled Meetings. Subdivision 1. A director of the Corporation may waive notice of the date, time and place of a meeting of the Board. A waiver of notice by a director entitled to notice is effective whether given before, at or after the meeting, and whether given in writing, orally or by attendance. Attendance by a director at a meeting is a waiver of notice of that meeting, unless the director objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and thereafter does not participate in the meeting. Subdivision 2. If the day or date, time and place of a Board meeting have been provided herein or announced at a previous meeting of the Board, no notice is required. Notice of an adjourned meeting need not be given other than by announcement at the meeting at which adjournment is taken of the date, time and place at which the meeting will be reconvened. Section 2.08 Quorum. The presence in person of a majority of the directors currently holding office shall be necessary to constitute a quorum for the transaction of business. In the absence of a quorum, a majority of the directors present may adjourn a meeting from time to time without further notice until a quorum is present. If a quorum is present when a duly called or held meeting is convened, the directors present may continue to transact business until adjournment, even though the withdrawal of a number of the directors originally present leaves less than the proportion or number otherwise required for a quorum. Section 2.09 Acts of Board. Except as otherwise required by law or specified in the Articles of Incorporation of the Corporation, the Board shall take action by the affirmative vote of the greater of (a) a majority of the directors present at a duly held meeting at the time the action is taken or (b) a majority of the minimum proportion or number of directors that would constitute a quorum for the transaction of business at the meeting. Section 2.10 Participation by Remote Communication. A director may participate in a Board meeting by conference telephone, or, if authorized by the Board, by any other means of remote communication through which the director, other directors so participating, and all directors physically present at the meeting may participate with each other during the meeting. A director so participating is deemed present at the meeting. 7 Section 2.11 Absent Directors. A director of the Corporation may give advance written consent or opposition to a proposal to be acted on at a Board meeting. If the director is not present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but consent or opposition shall be counted as the vote of a director present at the meeting in favor of or against the proposal and shall be entered in the minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected. Section 2.12 Action Without a Meeting. An action required or permitted to be taken at a Board meeting may be taken without a meeting by written action signed, or consented to by authenticated electronic communication, by all of the directors. Any action, other than an action requiring shareholder approval, if the Articles of Incorporation so provide, may be taken by written action signed, or consented to by authenticated electronic communication, by the number of directors that would be required to take the same action at a meeting of the Board at which all directors were present. The written action is effective when signed, or consented to by authenticated electronic communication, by the required number of directors, unless a different effective time is provided in the written action. When written action is permitted to be taken by less than all directors, all directors shall be notified immediately of its text and effective date. Section 2.13 Committees. Subdivision 1. A resolution approved by the affirmative vote of a majority of the Board may establish committees having the authority of the Board in the management of the business of the Corporation only to the extent provided in the resolution. Committees shall be subject at all times to the direction and control of the Board, except as provided in Section 2.14 or otherwise provided by law. Subdivision 2. A committee shall consist of one or more natural persons, who need not be directors, appointed by affirmative vote of a majority of the directors present at a duly held Board meeting. Subdivision 3. Section 2.04 and Sections 2.06 to 2.12 hereof shall apply to committees and members of committees to the same extent as those sections apply to the Board and directors. Subdivision 4. Minutes, if any, of committee meetings shall be made available upon request to members of the committee and to any director. Section 2.14 Special Litigation Committee. Pursuant to the procedure set forth in Section 2.13, the Board may establish a committee composed of one or more independent directors or other independent persons to determine whether it is in the best interests of the Corporation to consider legal rights or remedies of the Corporation and whether those rights and remedies should be pursued. The committee, once established, is not subject to the direction or control of, or (unless required by law) termination by, the Board. To the extent permitted by law, a vacancy on the committee may be filled by a majority vote of the remaining committee members. The good faith determinations of the committee are binding upon the Corporation 8 and its directors, officers and shareholders to the extent permitted by law. The committee terminates when it issues a written report of its determinations to the Board. Section 2.15 Compensation. The Board may fix the compensation, if any, of directors. OFFICERS Section 3.01 Number and Designation. The Corporation shall have one or more natural persons exercising the functions of the offices of Chief Executive Officer and Chief Financial Officer. The Board of Directors may elect or appoint such other officers or agents as it deems necessary for the operation and management of the Corporation, with such powers, rights, duties and responsibilities as may be determined by the Board, including, without limitation, a President, one or more Vice Presidents, a Secretary and a Treasurer, each of whom shall have the powers, rights, duties and responsibilities set forth in these By-Laws unless otherwise determined by the Board. Any of the offices or functions of those offices may be held by the same person. Section 3.02 Chief Executive Officer. Unless provided otherwise by a resolution adopted by the Board of Directors, the Chief Executive Officer (a) shall have general active management of the business of the Corporation; (b) shall, when present, preside at all meetings of the shareholders and Board; (c) shall see that all orders and resolutions of the Board are carried into effect; (d) may maintain records of and certify proceedings of the Board and shareholders; and (e) shall perform such other duties as may from time to time be assigned by the Board. Section 3.03 Chief Financial Officer. Unless provided otherwise by a resolution adopted by the Board of Directors, the Chief Financial Officer (a) shall keep accurate financial records for the Corporation; (b) shall deposit all monies, drafts and checks in the name of and to the credit of the Corporation in such banks and depositories as the Board shall designate from time to time; (c) shall endorse for deposit all notes, checks and drafts received by the Corporation as ordered by the Board, making proper vouchers therefor; (d) shall disburse corporate funds and issue checks and drafts in the name of the Corporation, as ordered by the Board; (e) shall render to the Chief Executive Officer and the Board, whenever requested, an account of all of such officer's transactions as Chief Financial Officer and of the financial condition of the Corporation; and (f) shall perform such other duties as may be prescribed by the Board or the Chief Executive Officer from time to time. Section 3.04 President. Unless otherwise determined by the Board of Directors, the President shall be the Chief Executive Officer of the Corporation. If an officer other than the President is designated Chief Executive Officer, the President shall perform such duties as may from time to time be assigned by the Board. Section 3.05 Vice Presidents. Any one or more Vice Presidents, if any, may be designated by the Board of Directors as Executive Vice Presidents or Senior Vice Presidents. During the absence or disability of the President, it shall be the duty of the highest ranking 9 Executive Vice President, and, in the absence of any such Vice President, it shall be the duty of the highest ranking Senior Vice President or other Vice President, who shall be present at the time and able to act, to perform the duties of the President. The determination of who is the highest ranking of two or more persons holding the same office shall, in the absence of specific designation of order of rank by the Board, be made on the basis of the earliest date of appointment or election, or, in the event of simultaneous appointment or election, on the basis of the longest continuous employment by the Corporation. Section 3.06 Secretary. The Secretary, unless otherwise determined by the Board of Directors, shall attend all meetings of the shareholders and all meetings of the Board, shall record or cause to be recorded all proceedings thereof in a book to be kept for that purpose, and may certify such proceedings. Except as otherwise required or permitted by law or by these By-Laws, the Secretary shall give or cause to be given notice of all meetings of the shareholders and all meetings of the Board. Section 3.07 Treasurer. Unless otherwise determined by the Board of Directors, the Treasurer shall be the Chief Financial Officer of the Corporation. If an officer other than the Treasurer is designated Chief Financial Officer, the Treasurer shall perform such duties as may from time to time be assigned by the Board. Section 3.08 Authority and Duties. In addition to the foregoing authority and duties, all officers of the Corporation shall respectively have such authority and perform such duties in the management of the business of the Corporation as may be designated from time to time by the Board of Directors. Unless prohibited by a resolution approved by the affirmative vote of a majority of the directors present, an officer elected or appointed by the Board may, without the approval of the Board, delegate some or all of the duties and powers of an office to other persons. Section 3.09 Term. Subdivision 1. All officers of the Corporation shall hold office until their respective successors are chosen and have qualified or until their earlier death, resignation or removal. Subdivision 2. An officer may resign at any time by giving written notice to the Corporation. The resignation is effective without acceptance when the notice is given to the Corporation, unless a later effective date is specified in the notice. Subdivision 3. An officer may be removed at any time, with or without cause, by a resolution approved by the affirmative vote of a majority of the directors present at a duly held Board meeting. Subdivision 4. A vacancy in an office because of death, resignation, removal, disqualification or other cause may, or in the case of a vacancy in the office of Chief Executive Officer or Chief Financial Officer shall, be filled for the unexpired portion of the term by the Board. 10 Section 3.10 Salaries. The salaries of all officers of the Corporation shall be fixed by the Board of Directors or by the Chief Executive Officer if authorized by the Board. INDEMNIFICATION Section 4.01 Indemnification. The Corporation shall indemnify its officers and directors for such expenses and liabilities, in such manner, under such circumstances, and to such extent, as required or permitted by Minnesota Statutes, Section 302A.521, as amended from time to time, or as required or permitted by other provisions of law. Section 4.02 Insurance. The Corporation may purchase and maintain insurance on behalf of any person in such person's official capacity against any liability asserted against and incurred by such person in or arising from that capacity, whether or not the Corporation would otherwise be required to indemnify the person against the liability. SHARES Section 5.01 Certificated and Uncertificated Shares. Subdivision 1. The shares of the Corporation shall be either certificated shares or uncertificated shares. Each holder of duly issued certificated shares is entitled to a certificate of shares. Subdivision 2. Each certificate of shares of the Corporation shall bear the corporate seal, if any, and shall be signed by the Chief Executive Officer, or the President or any Vice President, and the Chief Financial Officer, or the Secretary or any Assistant Secretary, but when a certificate is signed by a transfer agent or a registrar, the signature of any such officer and the corporate seal upon such certificate may be facsimiles, engraved or printed. If a person signs or has a facsimile signature placed upon a certificate while an officer, transfer agent or registrar of the Corporation, the certificate may be issued by the Corporation, even if the person has ceased to serve in that capacity before the certificate is issued, with the same effect as if the person had that capacity at the date of its issue. Subdivision 3. A certificate representing shares issued by the Corporation shall, if the Corporation is authorized to issue shares of more than one class or series, set forth upon the face or back of the certificate, or shall state that the Corporation will furnish to any shareholder upon request and without charge, a full statement of the designations, preferences, limitations and relative rights of the shares of each class or series authorized to be issued, so far as they have been determined, and the authority of the Board to determine the relative rights and preferences of subsequent classes or series. Subdivision 4. A resolution approved by the affirmative vote of a majority of the directors present at a duly held meeting of the Board may provide that some or all of any or all classes and series of the shares of the Corporation will be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until the certificate is surrendered to the Corporation. 11 Section 5.02 Declaration of Dividends and Other Distributions. The Board of Directors shall have the authority to declare dividends and other distributions upon the shares of the Corporation to the extent permitted by law. Section 5.03 Transfer of Shares. Shares of the Corporation may be transferred only on the books of the Corporation by the holder thereof, in person or by such person's attorney. In the case of certificated shares, shares shall be transferred only upon surrender and cancellation of certificates for a like number of shares. The Board of Directors, however, may appoint one or more transfer agents and registrars to maintain the share records of the Corporation and to effect transfers of shares. Section 5.04 Record Date. The Board of Directors may fix a time, not exceeding 60 days preceding the date fixed for the payment of any dividend or other distribution, as a record date for the determination of the shareholders entitled to receive payment of such dividend or other distribution, and in such case only shareholders of record on the date so fixed shall be entitled to receive payment of such dividend or other distribution, notwithstanding any transfer of any shares on the books of the Corporation after any record date so fixed. MISCELLANEOUS Section 6.01 Execution of Instruments. Subdivision 1. All deeds, mortgages, bonds, checks, contracts and other instruments pertaining to the business and affairs of the Corporation shall be signed on behalf of the Corporation by the Chief Executive Officer, or the President, or any Vice President, or the Secretary, or by such other person or persons as may be designated from time to time by the Board of Directors. Subdivision 2. If a document must be executed by persons holding different offices or functions and one person holds such offices or exercises such functions, that person may execute the document in more than one capacity if the document indicates each such capacity. Section 6.02 Advances. The Corporation may, without a vote of the directors, advance money to its directors, officers or employees to cover expenses that can reasonably be anticipated to be incurred by them in the performance of their duties and for which they would be entitled to reimbursement in the absence of an advance. Section 6.03 Corporate Seal. The Corporation shall have no seal. Section 6.04 Fiscal Year. The fiscal year of the Corporation shall be determined by the Board of Directors. Section 6.05 Amendments. The Board of Directors shall have the power to adopt, amend or repeal the By-Laws of the Corporation, subject to the power of the shareholders to change or repeal the same, provided, however, that the Board shall not adopt, amend or repeal any By-Law fixing a quorum for meetings of shareholders, prescribing 12 procedures for removing directors or filling vacancies in the Board, or fixing the number of directors or their classifications, qualifications or terms of office, but may adopt or amend a By-Law that increases the number of directors. 13 EX-10.29 6 n82215a2exv10w29.txt OPERATING AGREEMENT Exhibit 10.29 OPERATING AGREEMENT OF LIFE TIME, BSC LAND, DUPAGE HEALTH SERVICES FITNESS CENTER--BLOOMINGDALE, L.L.C. This operating agreement (the "Agreement") is entered into this 1st day of December, 1999, by and between LIFE TIME FITNESS, Inc., a Minnesota corporation doing business as LIFE TIME FITNESS of Illinois ("LIFE TIME"), Bloomingdale Sports Center Land Company, an Illinois corporation ("BSCLand") and Central DuPage Health, an Illinois not for profit corporation or its wholly-owned Affiliate as nominee ("CD Health"). LIFE TIME, BSC Land and CD Health are sometimes hereafter collectively referred to as the "Parties" or singularly as a "Party". The Parties desire to set forth the terms and conditions of their Membership and the operations of the limited liability company and therefore agree as follows: RECITALS The Parties or their Affiliates have entered into a Letter of Intent dated May 7, 1999, setting forth the essential terms of their agreement to form a limited liability company. The limited liability company will be formed to develop, own and operate facilities that offer sports and fitness activities, along with all ancillary purposes thereto. Pursuant to the provisions of the Illinois Limited Company Act (the "Act") (805 ILCS 180/1-1 through 180/60-1), the Parties will cause Articles of Organization to be filed with the Illinois Secretary of State (the "Articles") establishing a limited liability company by the name of "LIFE TIME, BSC Land, Central DuPage Health Fitness Center--Bloomingdale, L.L.C." (the "Company"). These recitals are incorporated as a material part of this Agreement. SECTION 1 THE LIMITED LIABILITY COMPANY 1.1 Principal Place of Business. The principal place of business of the Company will be the Property's address in Bloomingdale, Illinois. All records of the Company will be maintained at its principal place of business or such other office as the Managers may designate. 1.2 Term. The term of the Company will have begun on December 1, 1999 and will continue until the winding up and liquidation of the Company and its business is completed following a Liquidating Event, as provided in Section 11 hereof, or December 1, 2039, whichever is earlier. 1.3 Purpose. The purpose of the Company is to be engaged in the business of developing, owning and operating facilities that offer sports and fitness activities, as well as all other purposes for which a limited liability company may be organized under the Act. 1.4 Filings; Agent for Service of Process. 1.4.1 The Parties will cause the Articles to be filed in the office of the Secretary of State of Illinois in accordance with the provisions of the Act. The Managers will cause amendments to the Articles to be filed whenever required by the Act or by this Agreement. All such amendments must be authorized by Members owning two thirds or more of the Company's outstanding Units. The Managers will cause a certified copy of the Articles and any amendments thereto to be filed and recorded in the appropriate state or county offices of the state or states in which the Company does business. 1.4.2 The Managers will execute and cause to be filed an original or amended Articles and will take any and all other actions as may be reasonably necessary to perfect and maintain the status of the Company as a limited liability company or similar type of entity under the laws of any other states or jurisdictions in which the Company does business. 1.4.3 The Illinois registered agent will be Joseph C. Fenech, Esq., One Lincoln Centre, Suite 840, Oakbrook Terrace, Illinois 60181. 1.4.4 Upon the dissolution of the Company, the Managers (or, in the event there is no Manager, any Person elected pursuant to Section 11.2 hereof) will promptly execute and cause to be filed articles of dissolution in accordance with the Act and the laws of any other states or jurisdictions in which the Company does business. 1.5 Definitions. Capitalized words and phrases used in this Agreement have the following meanings: (a) "Act" means the Illinois Limited Liability Company Act, as amended from time to time (or any corresponding provisions of succeeding law). (b) "Adjusted Capital Account Deficit" means, with respect to Members or any Member, the deficit balance, if any, in the Member's Capital Account as of the end of the relevant fiscal year, after giving effect to the following adjustments: (i) Credit to such Capital Account (1) any amounts which such Member is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulation Sections 1.704-2(g) and 1.704-2(i)(5) or any other provision of the Regulations, (2) the Member's share of Company Minimum Gain, if any, and (3) the Member's share of Member Minimum Gain, if any; and (ii) Debit to such Capital Account the items described in Sections 1.704-1 (b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6) of the Regulations. The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and will be interpreted consistently therewith. (c) "Adjusted Capital Contributions" means, as of any day, with respect to a Member, the Capital Contributions of such Member adjusted as follows: 2 (i) Increased by the amount of any Company liabilities which are assumed by such Member or are secured by any Company Property distributed to such Member; (ii) Increased by any amounts actually paid by such Member to any Company lender; and (iii) Reduced by the amount of cash and the Gross Asset Value of any Company Property distributed to such Member and the amount of liabilities of such Member assumed by the Company or which are secured by any property contributed by such Member to the Company. In the event any Member transfers all or any portion of its Interest in accordance with the terms of this Agreement, its transferee will succeed to the Adjusted Capital Contribution of the transferor to the extent it relates to the transferred Interest. (d) "Affiliate" means, with respect to any Person, (i) any Person directly or indirectly controlling, controlled by or under common control with such Person, (ii) any Person owning or controlling eighty percent (80%) or more of the profits or loss interests or the outstanding voting interests of such Person, (iii) any officer, director, general partner, manager or trustee of such Person, (iv) any Person who is an officer, director, general partner, manager, trustee, or holder of eighty percent (80%) or more of the profits or loss interests or the voting interests of any Person described in clauses (i) through (iii) of this sentence, or (v) any Person who is an Affiliate of a Person described in clauses (i) through (iv) of this sentence. (e) "Agreement" or "Operating Agreement" means this Operating Agreement, as amended from time to time. Words such as "herein," "hereinafter" "hereof " "hereto," and "hereunder" refer to this Operating Agreement as a whole, unless the context otherwise requires. (f) "Capital Account" means, with respect to a Member, the Capital Account maintained for such Person in accordance with the following provisions: (i) To each Person's Capital Account there will be credited such Person's Capital Contributions, such Person's distributive share of Profits and any items in the nature of income or gain which are specially allocated pursuant to Section 3.3 or Section 3.4 hereof, and the amount of any Company liabilities assumed by such Person or which are secured by any Property distributed to such Person. (ii) To each Person's Capital Account there will be debited the amount of cash and the Gross Asset Value of any Property distributed to such Person pursuant to any provision of this Agreement, such Person's distributive share of Losses and any items in the nature of expenses or losses which are specially allocated pursuant to Section 3.3 or Section 3.4 hereof, and the amount of any liabilities of such Person assumed by the Company or which are secured by any property contributed by such Person to the Company. (iii) In the event all or a portion of an Interest in the Company is transferred in accordance with the terms of this Agreement, the transferee will succeed to the Capital Account of the transferor to the extent it relates to the transferred Interest. 3 (iv) In determining the amount of any liability for purposes of Sections 1.5(c)(i), 1.5(c)(iii), 1.5(f)(i), and 1.5(f)(ii) hereof, there will be taken into account Code Section 752(c) and any other applicable provisions of the Code and Regulations. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b)(2)(iv), and will be interpreted and applied in a manner consistent with such Regulations. In the event the Managers will determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Company or the Members), are computed in order to comply with such Regulations, the Managers may make such modification, provided that it is not likely to have a material effect on the amounts distributable to any Person pursuant to Section 12 hereof upon the dissolution of the Company. The Managers also will (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Members and the amount of Company capital reflected on the Company's balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-1 (b)(2)(iv)(g), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b). (g) "Capital Contributions" means, with respect to any Member, the amount of money and the Gross Asset Value of Property contributed to the Company with respect to the Interest in the Company held by such Person. (h) "Code" means the Internal Revenue Code of 1986, as amended from time to time (or any corresponding provisions of succeeding law). (i) "Company" means this limited liability company formed pursuant to this Agreement and the limited liability company continuing the business of the Company in the event of dissolution as herein provided. (j) "Company Minimum Gain" has the meaning of partnership minimum gain as set forth in Sections 1.704-2(b)(2) and 1.704-2(d) of the Regulations. (k) "Depreciation" means, for each fiscal year or other period, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation will be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation will be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Managers. (1) "Grand Opening Date" means the date that the Company first makes its Bloomingdale sports fitness facility available to the public. 4 (m) "Gross Asset Value" means, with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (i) The Gross Asset Values of all Company assets will be adjusted to equal their respective gross fair market values, as determined by the Managers, as of the following times: (1) the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (2) the distribution by the Company to a Member of more than a de minimis amount of Property as consideration for an Interest in the Company; and (3) the liquidation of the Company within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); provided, however, that adjustments pursuant to clauses (1) and (2) above will be made only if the Managers reasonably determine that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the Company; (ii) The Gross Asset Value of any Company asset distributed to any Member will be the gross fair market value of such asset on the date of distribution; (iii) The Gross Asset Values of Company assets will be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and Section 3.3.7 hereof, provided, however, that Gross Asset Values will not be adjusted pursuant to this Section 1.5(k)(iii) to the extent the Managers determine that an adjustment pursuant to Section 1.5(k)(i) hereof is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this Section 1.5(k)(iii); and (iv) The initial Gross Asset Value of any asset contributed by a Member to the Company will be the fair market value of such asset as reasonably determined by the Managers. If the Gross Asset Value of an asset has been determined or adjusted pursuant to Section 1.5(k)(i) or Section 1.5(k)(iii) hereof, such Gross Asset Value will thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses. (n) "Interest" means an ownership interest in the Company, including any and all benefits to which the holder of such an Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. (o) "Managers" will mean the persons elected by the Members to serve as Company managers on the Management Committee (as defined in Section 6.1.5), or their successors in interest (as the case may be), as well as any additional person(s) admitted to the Company in the capacity of a Manager. (p) "Members" will mean those Parties signing this Agreement as Members and such other persons as may become Members from time to time by purchasing Units as Members or as successors in interest to an exiting Member subject to the restrictions and limitations set forth below. 5 (q) "Member Minimum Gain" has the meaning ascribed to "partner nonrecourse debt minimum gain" as set forth in Section 1.704-2(i)(2) of the Regulations. (r) "Member Nonrecourse Debt" has the meaning ascribed to "partner nonrecourse debt" as set forth in Section 1.704-2(b)(4) of the Regulations. (s) "Member Nonrecourse Deductions" has the meaning ascribed to "partner nonrecourse deductions" as set forth in Section 1.704-2(i)(2) of the Regulations. (t) "Net Cash Flow" means the gross cash proceeds received from Company operations, from a sale or other disposition of Company Property, or from a refinancing of Company Property, including liquidation proceeds, less the portion thereof used to pay or establish cash reserves for all Company expenses, debt payments, capital improvements, replacements, and contingencies, all as determined by the Managers in accordance with Generally Accepted Accounting Principles ("GAAP"). "Net Cash Flow" will not be reduced by depreciation, amortization, cost recovery deductions, or similar non-cash charges or allowances, or the Minimum Guaranteed Payments payable to BSC Land and CD Health as set forth herein, but will be increased by any reductions of cash reserves previously established. (u) "Nonrecourse Deductions" has the meaning set forth in Section 1.704-2(b)(1) of the Regulations. The amount of Nonrecourse Deductions for a Company fiscal year will be determined in accordance with the provisions of Section 1.704-2(c) of the Regulations. (v) "Nonrecourse Liability" has the meaning set forth in Section 1.704-2(b)(3) of the Regulations. (w) "Person" means any individual, partnership, corporation, trust, limited liability company or other entity. (x) "Profits and Losses" means, for each fiscal year or other period, an amount equal to the Company's taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) will be included in taxable income or loss), with the following adjustments: (i) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.5(w) will be added to such taxable income or loss; (ii) Any expenditures of the Company described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.5(w) will be subtracted from such taxable income or loss; (iii) In the event the Gross Asset Value of any Company asset is adjusted pursuant to Section 1.5(k)(i) or Section 1.5(k)(iii) hereof, the amount of such adjustment will be taken into account as gain or loss from the disposition of such asset for purposes of computing Profits or Losses; 6 (iv) Gain or loss resulting from any disposition of Property with respect to which gain or loss is recognized for federal income tax purposes will be computed by reference to the Gross Asset Value of the Property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; (v) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there will be taken into account Depreciation for such fiscal year or other period, computed in accordance with Section 1.5(k) hereof; and (vi) Notwithstanding any other provision of this Section 1.5(w), any items which are specially allocated pursuant to Section 3.3 or Section 3.4 hereof will not be taken into account in computing Profits or Losses. (y) "Property" means any real or personal property and will include both tangible and intangible property. Company Property will mean Property acquired by the Company. (z) "Regulations" means the Federal Income Tax Regulations, including Temporary Regulations, promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). (aa) "Transfer" means, as a noun, any voluntary or involuntary transfer, sale, pledge, hypothecation, or other disposition and, as a verb, voluntarily or involuntarily to transfer, sell, pledge, hypothecate, or otherwise dispose of. (bb) "Units" means, with respect to each Member or permitted assignee, the interest of such Member or assignee in the Profits and Losses of the Company, expressed as a number of Units. SECTION 2 MEMBERS' CAPITAL CONTRIBUTIONS 2.1 Capital Contributions; Issuance of Units. Each Party subscribes to contribute land and/or money to the Company as follows: 2.1.1 Land. BSC Land and CD Health each own an undivided fifty percent (50%) interest in approximately fifteen (15) acres of undivided land on Gary Avenue in Bloomingdale, Illinois (the "Land"), as more fully described in Exhibit A made a part hereof. The Land is valued at Three Million Three Hundred Nineteen Thousand One Hundred Forty-One 00/100 only Dollars ($3,319,141.00), which is compromised of Two Million Nine Hundred Twenty-Eight Thousand Three Hundred Eight 00/100 only Dollars ($2,928,308.00) for the purchase of the Land, and Three Hundred Ninety Thousand Eight Hundred Thirty-Three 00/100 only Dollars ($390,833.00) for carrying costs associated with the Land since its purchase in September, 1997, based on a 6% carrying factor (through 10/31/99). In addition, BSC Land and CD Health have sunk costs in the project of Three Hundred Forty-Eight Thousand Seven Hundred Fifty-Nine 00/100 only Dollars ($348,759.00) which is part of their capital contributions to the Company. 7 Therefore, the capital contribution of BSC Land is One Million Eight Hundred Thirty-Three Thousand Nine Hundred Fifty 00/100 only Dollars ($1,833,950.00), and the capital contribution of CD Health is One Million Eight Hundred Thirty-three Thousand Nine Hundred Fifty 00/100 only Dollars ($1,833,950.00). Provided, however, that based upon the Binding Letter of Intent executed by the Parties, BSC Land and CD Health may be credited with sunk costs in the project of up to Four Hundred Thousand Dollars ($400,000.00). Accordingly, BSC Land and CD Health will be credited, in equal shares, for contributions to their capital accounts for any further sunk costs in the project above $348,759.00, but not to exceed $400,000.00 in any event. The Parties understand that such Land may require excavation and reclamation and they hereby agree to share equally in the costs of making the Land suitable for construction of the fitness facility. 2.1.2 Money. BSC Land will contribute money in an amount that equals two million dollars ($2,000,000) less the value of BSC Land's contribution of the Land. CD Health will contribute money in an amount that equals two million dollars ($2,000,000) less the value of CD Health' contribution of the Land. LIFE TIME will contribute money in an amount that equals two million dollars ($2,000,000) less one hundred sixty thousand dollars ($160,000) already paid by LIFE TIME for the facility architectural design. Each of the Parties has previously contributed Two Hundred Thousand Dollars ($200,000.00) to an escrow trust fund at Chicago Title and Trust Company, such amounts being a part of the monetary capital contribution as required herein. The Parties expressly understand and agree that all activities of LIFE TIME's personnel and all of LIFE TIME's corporate resources utilized in development of the project contemplated by this Agreement (with the exception of any construction contract which may be negotiated between the Parties) are included in the "overhead cost recovery charge" in the Management Agreement (as defined in Section 6.1.6 hereof) between the Parties and not otherwise credited to LIFE TIME's financial contribution to capitalization of the project. 2.1.3 Issuance of Units. In exchange for the foregoing capital contributions, the Company will issue one million two hundred thousand (1,200,000) Member Units as follows:
Member Units ------ ~~BSC Land 400,000 CD Health 400,000 LIFE TIME 400,000~~
2.2 Liability for Contributions. Except as otherwise provided by this Agreement, no Member will be liable for the debts, liabilities, contracts or any other obligations of the Company. Except as otherwise provided by this Agreement, any other agreements among the Members, or applicable state law, a Member will be liable only to make its Capital Contributions 8 and will not be required to lend any funds to the Company or, after its Capital Contributions have been paid, to make any additional contributions to the Company. No Manager will have any personal liability for the payment or repayment of any Capital Contributions of any Member. SECTION 3 ALLOCATIONS 3.1 Allocation of Profits and Losses. 3.1.1 Profits. Subject to Section 3.2 below and after giving effect to the special allocations set forth in Sections 3.3 and 3.4 hereof, Profits will be allocated in an amount up to the Net Cash Flow for the year in proportion to the Net Cash Flow distributed to each Member for such year. Any remaining profits will be allocated to the Members in proportion to their Units. 3.1.2 Losses. Losses in an amount up to the amount of Nonrecourse Deductions for the year will be allocated among the Members in proportion to their Units. Any remaining losses will be allocated to those Members providing capital, guaranteeing Company debt or lending funds to the Company first in proportion to the capital provided, to the extent such amounts have not previously been offset by losses allocated pursuant to this provision, and then in proportion to such debt guaranteed or loans made. Losses shall not be allocated to a Member if the allocation creates a deficient Capital Account unless no member has a positive Capital Account. 3.2 Allocation of Liquidating Profits or Losses. Any Profits or Losses from a Liquidating Event (as defined in Section 12) will be allocated among each Member in a manner so that the Capital Account of each such Member is in proportion to their Units. 3.3 Special Allocations. The following special allocations will be made in the following order: 3.3.1 Minimum Gain Chargeback. Notwithstanding any other provision of this Section 3, if there is a net decrease in Company Minimum Gain during any Company fiscal year, each Member will be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in accordance with Section 1.704-2(f) of the Regulations. This Section 3.3.1 is intended to comply with the minimum gain chargeback requirement in such Section of the Regulations and will be interpreted consistently therewith. To the extent permitted by such Section of the Regulations and for purposes of this Section 3.3.1 only, each Person's Adjusted Capital Account Deficit will be determined prior to any other allocations pursuant to this Section 3.3.1 with respect to such fiscal year and without regard to any net decrease in Member Minimum Gain during such fiscal year. 3.3.2 Member Minimum Gain Chargeback. Notwithstanding any other provision of this Section 3 except Section 3.3.1, if there is a net decrease in Member Minimum Gain attributable to a Member Nonrecourse Debt during any Company fiscal year, each Member who has a share of the Member Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Regulations, will be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) 9 in accordance with Section 1.704-2(i)(4) of the Regulations. This Section 3.3.2 is intended to comply with the minimum gain chargeback requirement in such Section of the Regulations and will be interpreted consistently therewith. Solely for purposes of this Section 3.3.2, each Person's Adjusted Capital Account Deficit will be determined prior to any other allocations pursuant to this Section 3 with respect to such fiscal year, other than allocations pursuant to Section 3.4 hereof. 3.3.3 Gross Income Allocation. In the event any Member has a deficit Capital Account at the end of any Company fiscal year which is in excess of the sum of (i) the amount such Member is obligated to restore pursuant to any provision of this Agreement and (ii) the amount such Member is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g) and 1.704-2(i)(5), each such Member will be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 3.3.3 will be made only if and to the extent that such Member would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Section 3 have been made as if Section 3.3.4 hereof and this Section 3.3.3 were not in the Agreement. 3.3.4 Qualified Income Offset. In the event any Member unexpectedly receives any adjustments, allocations, or distributions described in Section 1.704-1(b)(2)(ii)(d)(4), Section 1.704-1(b)(2)(ii)(d)(5), or Section 1.704-1(b)(2)(ii)(d)(6) of the Regulations, items of Company income and gain will be specially allocated to each such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Member as quickly as possible, provided that an allocation pursuant to this Section 3.3.4 will be made only if and to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Section 3 have been tentatively made as if this Section 3.3.4 were not in the Agreement. This provision is intended to comply with the qualified income offset requirement contained in Section 1.704-1(b)(2)(ii)(d)(3) of the Regulations and will be construed in accordance with the provisions thereof. 3.3.5 Nonrecourse Deductions. Nonrecourse Deductions for any fiscal year or other period will be specially allocated to the Members in proportion to their respective Units. 3.3.6 Member Nonrecourse Deductions. Any Member Nonrecourse Deductions for any fiscal year or other period will be specially allocated to the Member, if any, who bears the economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i). 3.3.7 Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts will be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss will be specially allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations. 10 3.3.8 Disallowed Deductions. In the event that any amounts paid or payable to any Member or any Affiliate which the Company deducted or intended to deduct are disallowed as deductions for Federal income tax purposes (or it is determined that such amounts are no longer allowable as deductions), (i) the amounts thus disallowed or no longer allowable will be allocated to the Member which received them (or whose Affiliate received them) as income, and (ii) notwithstanding any provision herein to the contrary, the balance of the redetermined income or loss of the Company for the taxable year in question will, to the extent permitted by law, be allocated among the Members to obtain the same allocation of Company income or loss (after giving effect to the income allocated pursuant to clause (i) hereof) as would have been obtained for such taxable year if the amounts thus disallowed or no longer allowable had been proper deductions by the Company. In particular, but not by way of limitation, this subsection will apply to any fees and interest (including contingent interest) payable by the Company, all of which the Members intend to be expenses of the Company rather than distributions to Members. 3.4 Curative Allocations. The allocations set forth in Sections 3.3.1, 3.3.2, 3.3.3, 3.3.4, 3.3.5 and 3.3.6 (the "Regulatory Allocations") are intended to comply with certain requirements of the Regulations promulgated under Section 704(b)(2) of the Code. Notwithstanding any other provision of Section 3.1 or Section 3.3 (other than the Regulatory Allocations), all remaining items of income, gain, loss and deduction will be allocated among the Members so that, when combined with the Regulatory Allocations, the net allocations of Profit and Loss will, to the greatest extent possible, be equal to the net allocations that would have been made pursuant to Section 3.1 and Section 3.3 hereof had no such Regulatory Allocations been required. Notwithstanding the preceding sentence, the special allocation of Member Nonrecourse Deductions pursuant to Section 3.3.6. will not be taken into account until and only to the extent that there is a net decrease in Member Minimum Gain. 3.5 Other Allocation Rules. 3.5.1 For purposes of determining the Profits, Losses, or any other items allocable to any period, Profits, Losses, and any such other items will be determined on a daily, monthly, or other basis, as determined by the Managers using any permissible method under Code Section 706 and the Regulations thereunder. 3.5.2 All allocations of Profits to the Members pursuant to this Section 3 will, except as otherwise provided, be made in proportion to the Net Cash Flow distributed to such Members pursuant to Section 4. 3.5.3 Except as otherwise provided in this Agreement, all items of Company income, gain, loss, deduction, and any other allocations not otherwise provided for will be divided among the Members in the same proportions as they share Profits or Losses, as the case may be, for the fiscal year. 3.5.4 Solely for purposes of determining a Member's proportionate share of the "excess nonrecourse liabilities" of the Company within the meaning of Regulations Section 1.752-3(a)(3), the Members' interests in Company profits are in proportion to their respective Units. 11 3.5.5 To the extent permitted by Sections 1.704-2(h) and 1.704-2(i)(6) of the Regulations, the Managers will endeavor to treat distributions of Net Cash Flow as having been made from the proceeds of a Nonrecourse Liability or a Member Nonrecourse Debt only to the extent that such distributions would cause or increase an Adjusted Capital Account Deficit for any Member. 3.6 Tax Allocations: Code Section 704(c). In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of the Company will, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its initial Gross Asset Value. 3.6.1 In the event the Gross Asset Value of any Company asset is adjusted pursuant to Section 1.5(k)(i) hereof, subsequent allocations of income, gain, loss, and deduction with respect to such asset will take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder. 3.6.2 Any elections or other decisions relating to such allocations will be made by the Managers in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section 3.6 are solely for purposes of federal, state, and local taxes and will not affect, or in any way be taken into account in computing, any Person's Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provision of this Agreement. SECTION 4 DISTRIBUTIONS 4.1 Net Cash Flow. Subject to Section 12 hereof, Net Cash Flow will be distributed, if at all, at least annually within ninety (90) days following the end of each fiscal year, to the Members in proportion to their Units; provided, however, that prior to distributing the Net Cash Flow to all Members for the year most recently ended, LIFE TIME shall be entitled to distributions of such Net Cash Flow, to the extent such Net Cash Flow exists to make such distributions, in the following amounts: (i) an amount equal to one-half (1/2) of the aggregate guaranteed payments received by each of BSC Land and CD Health, pursuant to Section 5.1, during such year; (ii) to the extent that in any prior year, or years as the case may be, Net Cash Flow for such year(s) was not sufficient to satisfy the obligation of the Company to LIFE TIME for item (i) above for such year(s), an amount sufficient to satisfy the accumulated obligations of the Company to LIFE TIME for such distributions; and (iii) an amount sufficient to satisfy any "truing up" payments due to LIFE TIME pursuant to Section 5.3. To the extent that LIFE TIME is due and receives any "truing up" distributions pursuant to item (iii) above, such distributions shall not act to reduce the Capital Account of LIFE TIME. 4.2 Tax Distributions. Subject to the Company having cash available (excluding cash reserves which the Managers deem reasonably necessary in the circumstances) the Managers will distribute, not later than thirty (30) days after the end of each of the Company's fiscal quarters, Net Cash Flow to the Members in an amount equal to the estimated amount of taxable income or 12 gain that is allocated to such Member for federal income tax purposes for such quarter (or portion thereof) net of accrued losses available to such Member multiplied by a rate reasonably selected by the Managers as the effective combined rate of federal and state income tax applicable to such income or gain in the hands of a corporate taxpayer. 4.3 Amounts Withheld. All amounts withheld pursuant to the Code or any provision of any state or local tax law with respect to any payment or distribution to the Company or the Members will be treated as amounts distributed to the Members pursuant to this Section 4 for all purposes under this Agreement. The Managers may allocate any such amounts among the Members in any manner that is in accordance with applicable law. 4.4 Dispositions. Whenever this Agreement will refer to Property which has been sold, it will be deemed to include the sale, exchange, condemnation, casualty proceeds in excess of those needed to rehabilitate, reconstruct or repair the Property, or other disposition (whether voluntary or involuntary) of all or any part of such Property. SECTION 5 GUARANTEED MINIMUM MONTHLY CASH PAYMENTS 5.1 The Company will provide guaranteed minimum monthly cash payments to BSC Land and CD Health. Beginning on the first day of the 13th month after the Grand Opening date and continuing through the last day of the 24th month, the guaranteed minimum monthly cash payments to BSC Land will be twenty eight thousand one hundred fourteen dollars ($28,114) and to CD Health will be twenty eight thousand one hundred fourteen dollars ($28,114). Beginning on the first day of the 25th month and continuing as long as the Company owns the Bloomingdale facility and operates it as a health club or similar facility, the guaranteed minimum monthly cash payment to BSC Land will be fifty five thousand seven hundred eighty four dollars ($55,784) and to CD Health will be fifty five thousand seven hundred eighty four dollars ($55,784). The guaranteed minimum monthly cash payments, or a portion of those payments, will be considered distributions of Net Cash Flow to the extent that those payments, or a portion of those payments, equals the pro-rata portion of the Net Cash Flow for BSC Land and CD Health. 5.2 All guaranteed minimum monthly cash payments will be due on the first business day of the following month. 5.3 "Truing Up". On an annual basis, in connection with the distribution of any Net Cash Flow to the Members pursuant to Section 4.1, the Company will first determine whether or not a "truing up" must occur. A "truing up" will occur if the cumulative guaranteed payments made by LIFE TIME pursuant to Section 5.4 exceed the cumulative Net Cash Flow distributions received by LIFE TIME pursuant to Section 4.1. In such case, LIFE TIME shall be entitled to receive a distribution of the Net Cash Flow until the point at which the cumulative Net Cash Flow received by LIFE TIME equals or exceeds the cumulative guaranteed payments made by LIFE TIME. If, at any time after two (2) years from the date of this Agreement, the cumulative Net Cash Flow received by LIFE TIME equals or exceeds the cumulative guaranteed payments made by LIFE TIME pursuant to Section 5.4, "truing up" payments shall no longer be made. Language in this Section 5.3 notwithstanding, the guaranteed minimum monthly cash payment 13 obligation of LIFE TIME shall not be offset by any previous financial performance of the property above anticipated results. 5.4 LIFE TIME guarantees the minimum monthly cash payments due to BSC Land and CD Health under this Section 5. In the event that the Company fails to make the guaranteed minimum monthly cash payments to BSC Land or CD Health as required by this Section 5, LIFE TIME will make those payments. In the event that the Company fails to make the guaranteed minimum monthly cash payments to BSC Land or CD Health in the amounts required by this section, LIFE TIME will make payments to BSC Land and CD Health that are equal to the difference in the amounts that should have been paid and the amounts that were actually paid to BSC Land and CD Health, respectively. 5.5 LIFE TIME agrees to pledge its units in the Company to BSC Land and CD Health as security for satisfaction of the guaranteed minimum monthly cash payments to BSC Land and CD Health. LIFE TIME will grant BSC Land and CD Health security interests in LIFE TIME's Units in and distributions from the Company. The security interests in LIFE TIME's Units in and distributions from the Company will be subject to the following terms and conditions: (a) the security interest will be subject to reasonable notice, cure and redemption provisions, not to exceed 60 days, but these provisions will not apply where LIFE TIME files or is forced into bankruptcy or makes an assignment for the benefit of creditors; (b) the security interest will not preclude LIFE TIME from receiving distributions from the Company under Section 4 of this Agreement so long as LIFE TIME is not in default of any provision of this Agreement; and (c) the security interest will be released on sale of the Bloomingdale facility by the Company. 5.6 Any guarantee payments made by LIFE TIME to BSC Land and CD Health hereunder shall not be considered as contributions to capital by LIFE TIME, nor as a debt due from the Company to LIFE TIME, nor as adjustments under subparagraph 1.5(f)(ii) herein. SECTION 6 MANAGEMENT 6.1 Management and Control of the Business of the Company. 6.1.1 Subject to the limitations set forth in this Agreement, including but not limited to Section 6.2 and 6.3 hereof, the Managers have the authority to manage the operations and affairs of the Company and to make decisions regarding the business of the Company. Pursuant to the foregoing, and except as otherwise provided in this Agreement, it is understood and agreed that the Managers will have all of the rights and powers of managers as provided in the Act (or any successor act) and as otherwise provided by law, and any action taken by a Manager will constitute the act of and serve to bind the Company. It is further understood and agreed that, subject to the limitations set forth in this Agreement and unless otherwise specified in writing by the Managers, any authorized member, manager or officer of the Managers may act 14 for and in the name of such Manager in the exercise by such Manager of any of its rights and powers hereunder. 6.1.2 The Managers will be solely responsible for the management of Company operations and performing or overseeing the performance of all acts needed to carry on the Company's business. Their responsibilities will include, without limitation, oversight of the Company's acquisition, operation and maintenance of the Company property and management of Company operations, development approval and adjustments to the Company's budget, the maintenance of financial and tax accounting records, preparation and filing of tax and securities laws reports, dissemination and receipt of communications with the Members, dissemination of distributions, and establishment, management and investment of working capital and other cash reserves. The Managers will have the power and authority to execute, without the joinder of any other Member, instruments evidencing matters approved of in accordance with the terms of this Agreement. 6.1.3 Subject to the approvals, limitations and any specific delegation of authority to the contrary set forth in this Agreement, the Managers are hereby granted the right, power and authority to do on behalf of the Company all things which, in its sole judgment, are necessary, proper or desirable to carry out the aforementioned duties and responsibilities. Such right, power and authority will include, but not be limited to, the right, power and authority to: (a) care for and distribute funds to the Members by way of cash, income, return of capital, or otherwise, all in accordance with the provisions of this Agreement; (b) contract on behalf of the Company for the employment and services of employees and/or independent contractors, and delegate to such Persons the duty to manage or supervise any of the assets or operations of the Company; provided, however, such delegation will not in any way relieve the Managers of their duties and obligations hereunder; (c) execute any and all contracts, documents, certifications and instruments necessary or convenient in connection with the day to day management, maintenance, and operation of Company Property, or in connection with managing the affairs of the Company; (d) pursuant to advice by tax counsel to the Company, make any and all elections for federal, state, and local tax purposes including, without limitation, any election, if permitted by applicable law: (i) to adjust the basis of Property pursuant to Code Section 754, 734(b), and 743(b), comparable provisions of state or local law, in connection with transfers of Company interests and Company distributions; (ii) to extend the statute of limitations for assessment of tax deficiencies against the Members with respect to adjustments to the Company's federal, state, or local tax returns; and (iii) to represent the Company and the Members before taxing authorities or courts of competent jurisdiction in tax matters affecting the Company and the Members in their capacities as Members, and to execute any agreements or other documents relating to or affecting such tax matters, excluding agreements or other documents that irrevocably bind the Members with respect to such tax matters or otherwise affect the rights of the Company and the Members (which agreements or documents will be 15 subject to the provisions of Section 5.2 below). LIFE TIME will act as the "Tax Matters Member" under the Code and in any similar capacity under state or local law. 6.1.4 The specification in this Section 6.1 of actions which the Managers are authorized to take will in no way be construed as a limitation on the authority of the Managers to manage the Company and to take all actions necessary therefor (including the execution of the Management Agreement specified in Section 6.1.6), and the Managers may take such other actions as they deem necessary, other than those actions specified in Section 6.2 or Section 6.3 requiring specific approval of the Members, as the Managers deem appropriate without the approval of such other Members. 6.1.5 The Members will establish a Management Committee that will consist of six (6) Managers. Each Member will each elect two (2) Managers to serve on the Management Committee. Each member of the Management Committee will serve for a two (2) year term but may be re-elected without limitation. Each Member will have the sole and exclusive power to remove and replace the Managers it elects to the Management Committee. To the extent that a Member shall transfer all or a portion of its interest in accordance with this Agreement successors to the Member's interest shall vote as a class to elect the two (2) Managers associated with the interest. The Management Committee will be responsible for managing the Company's day to day affairs and may reasonably delegate the performance of necessary duties to LIFE TIME FITNESS as Manager by means of a Management Agreement (as defined in Section 6.1.6), including but not limited to writing checks, hiring employees, entering into contracts, reviewing and approving the Company's annual operating and capital budgets, reviewing and approving all significant leases, reviewing and approving membership products and sales practices, and other routine matters, with the signature authority and within the dollar limitations set forth by the Managers from time to time. Such Management Agreement will be substantially in the form as attached hereto as Exhibit A and made a part hereof. The Management Committee will meet at least once per year and more often if requested by Members owning one-third (1/3) or more of the Company's outstanding Units. At an annual meeting, the Management Committee will review the performance of key management staff and will decide whether to continue their employment. For specific and egregious cause, any Member may call a special meeting of the Management Committee to discuss a serious performance issue involving a key management staff member. In the event of a deadlock between the Managers on the Management Committee, the Management Committee will submit the matter in dispute to binding arbitration pursuant to the rules of the American Arbitration Association. If the Management Committee cannot agree upon an arbitrator, the dispute resolution firm Endispute will act as arbitrator. If the Management Committee submits more than two (2) matters to binding arbitration in any twelve (12) month period, the Managers together will select one (1) additional person (which person will be independent and unrelated to each Member, each Manager, the Company and their Affiliates) to serve on the Management Committee for one (1) year (and such additional terms as the Managers may determine) for the purposes of avoiding all future Management Committee deadlocks. Removal of the mutually selected committee person will require the consent of all 16 Managers. If the mutually selected person withdraws or fails to serve on the Management Committee for any reason, the Managers together will mutually select his or her replacement. 6.1.6 LIFE TIME will render management, administrative and related services to the Company under a management agreement (the "Management Agreement") entered into simultaneously with this Agreement. The Company will not pay a management fee to LIFE TIME. Under the terms of the Management Agreement, the Company will pay LIFE TIME an overhead cost recovery charge not to exceed nine percent (9%) of net revenues and equal to the lowest rate charged to any LIFE TIME FITNESS facility; it being acknowledged and agreed that Manager will use its best efforts to minimize general and administrative overhead expenses and will not treat such expenses as a profit center. Upon request by any Member, LIFE TIME will provide detailed information about the costs included in the overhead calculation and will make that information available for audit. LIFE TIME will provide its goods, merchandise, programs and services to the Company at the lesser of: (a) the acquisition cost of goods and services; or (b) the most favorable terms as it provides them to other LIFE TIME FITNESS facilities. The Company may review LIFE TIME's performance from time to time and make recommendations for changes in the manner in which such management, administrative and related are being provided. If LIFE TIME's interest in the Company is transferred under Section 10.2 of this Agreement, the contract described in this Section 6.1.6 will be suspended unless all of the Members agree to reinstate the contract. 6.2 Member Approval Required. Notwithstanding any provisions in Section 6.1 above to the contrary, the following actions or activities must be approved by all of the Members: 6.2.1 purchase, finance, improve, construct, own, grant options with respect to, sell, convey, assign, mortgage, and lease any Property (said Property with a fair market value of fifty thousand dollars ($50,000) or more) necessary, convenient, or incidental to the accomplishment of the purposes of the Company. For purposes of this Section, the fifty thousand dollar ($50,000) amount set forth above will change in January of each year by a percentage equal to the percentage change in the CPI, U.S. city average for all urban consumers, published each January by the Bureau of Labor Statistics, U.S. Department of Labor, utilizing the January, 1999 CPI as the base year; 6.2.2 borrow money in excess of fifty thousand dollars ($50,000.00) and issue evidences of indebtedness necessary, convenient, or incidental to the accomplishment of the purposes of the Company; 6.2.3 execute, in furtherance of any or all of the purposes of the Company, any deed, lease, mortgage, deed of trust, mortgage note, promissory note, bill of sale, contract, or other instrument purporting to convey or encumber all or substantially all of the Company Property; 6.2.4 prepay in whole or in part, refinance, recast, increase, modify, or extend any liabilities affecting the Company Property and in connection therewith execute any extensions or renewals of encumbrances on any or all of the Company Property; 17 6.2.5 institute, prosecute, defend, settle, compromise, and dismiss lawsuits or other judicial or administrative proceedings brought on or in behalf of, or against, the Company or the Members in connection with activities arising out of, connected with, or incidental to this Agreement, and to engage counsel or others in connection therewith, if said lawsuit or other judicial or administrative proceeding has a proposed award or damage claim of fifty thousand dollars ($50,000) or more. For purposes of this Section, the fifty thousand dollar ($50,000) amount will change in January of each year by a percentage equal to the percentage change in the CPI, U.S. city average for all urban consumers, published each January by the Bureau of Labor Statistics, U.S. Department of Labor, utilizing the January, 1999 CPI as the base year; 6.2.6 approve the Company's annual strategic plan; 6.2.7 negotiate, approve and execute any and all managed care plans, provider agreements or similar contracts; 6.2.8 issue any Units, Interests or other interests in the Company that would in any way reduce, dilute or alter the existing Members' Interests in the Company; 6.2.9 adopt any Assumed Name under which the Company will do business; and 6.2.10 change the amount of the guaranteed minimum monthly cash payment as set forth in Section 5 herein. 6.3 Restrictions on Authority. 6.3.1 Without the unanimous consent of all Parties, no Manager or Member will have the authority to: (a) do any act in contravention of this Agreement; (b) do any act which would make it impossible to carry on the ordinary business of the Company, except as otherwise provided in this Agreement; (c) confess a judgment against the Company; (d) possess Company Property, or assign rights in specific Company Property, for other than a Company purpose; or (e) knowingly perform any act that would subject any Members or Member to personal liability beyond their Capital Contributions in any jurisdiction. 6.3.2 Any Member or Manager who acts beyond the scope of the authority granted by this Agreement will, in addition to any other remedy available to the Company or the other Members, be liable in damages to the Company and each other Member for any loss or damages that they may incur or suffer as a consequence of such act. 18 6.4 Right to Rely on the Managers. Persons dealing with the Company are entitled to rely conclusively on the power and authority of the Managers and the limitations thereon as set forth in this Agreement. In no event will any Person dealing with the Managers with respect to any business or property of the Company be obligated to ascertain that the terms of this Agreement have been complied with, or be obligated to inquire into the necessity or expedience of any act of the Managers. Every contract, agreement, lease, deed, promissory note, deed of trust, mortgage, security agreement, financing statement, or other instrument or document executed by the Managers with respect to any business or property of the Company will be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that: (i) at the time of the execution and delivery thereof, this Agreement was in full force and effect, (ii) such instrument or document was duly executed in accordance with the terms and provisions of this Agreement and is binding upon the Company, and (iii) the Managers were duly authorized and empowered to execute and deliver any and every such instrument or document for and on behalf of the Company. 6.5 Time Devoted to Company. The Managers will be under a fiduciary duty to conduct the affairs of the Company in the best interests of the Company and of the Members, including the safekeeping and use of all Company Property and the use thereof for the exclusive benefit of the Company, and shall devote reasonable time to that end. 6.6 Indemnification of the Managers. 6.6.1 The Company, its receiver, or its trustee will indemnify to the maximum extent permitted by law, save harmless, and pay all judgments, claims and expense, including attorneys' fees (which will be paid as incurred), a Manager incurs relating to any (1) liability or damage incurred by reason of any act performed or omitted to be performed by the Manager in connection with the Company's business; (2) liability under federal and state securities laws (including the Securities Act of 1933, as amended); (3) liability resulting from an action by a Member against the Manager, including a Company derivative suit, and (4) liability of the Manager who, for the benefit of the Company, makes any deposit, acquires any option, or makes any other similar payment or assumes any obligation in connection with any Property proposed to be acquired by the Company and who suffers any financial loss as the result of such action. 6.6.2 Notwithstanding the provisions of Section 6.6.1 above, (a) the indemnification of a Manager will be limited to the assets of the Company, and (b) the Manager will not be indemnified from any liability for fraud, bad faith, willful misconduct, or gross negligence if such liability has been determined by a court of competent jurisdiction. 6.6.3 For purposes of this Section 6.6 only, the reference to "Managers" will also refer to the Managers' managers, members, Members, directors, officers, employees, agents and any Person who controls a Manager. 6.7 Loans to the Company. Any Person may, with the consent of the Managers, lend or advance money to the Company. If any Member will make any loan or loans to the Company or advance money on its behalf, the amount of any such loan or advance will not be treated as a Capital Contribution but will be a debt due from the Company. The amount of any such loan or 19 advance by a lending Member will be repayable out of the Company's cash flow and will bear interest at such a rate as the Managers and the lending Member will agree. However, the rate of interest will be determined by the Managers taking into consideration, without limitation, prevailing interest rates and the interest rates the Company would be required to pay in the event the Company had borrowed funds from a third-party lender (the "Prevailing Rates"); provided, however, such rate of interest will not exceed an annual rate of two percent (2%) plus the so called prime rate. For purposes of this Section, the prime rate will be the prime rate or reference rate announced quarterly by Bank One, Chicago, Illinois (or its successor as the case may be). If the prime rate is not announced or is unavailable, the prime rate of Harris Bank & Trust, Chicago, Illinois as announced quarterly, will be the prime rate. Nothing in this Section 6.7 will prohibit a Member or Affiliate from lending funds to the Company at an interest rate less than the prime rate or Prevailing Rates. In the event that a Manager is the lending Member, then the Manager will notify the Members who will have a period of ten (10) days after such notice in which to elect to make such loans in lieu of the Manager or to participate with the Manager in the making of any such loans. None of the Members will be obligated to make any loan or advance to the Company. 6.8 Operating Capital. All Company Property in the form of cash will be deposited in one or more accounts maintained in such financial institutions as the Managers will determine or will be invested in short term liquid securities including, but not limited to, short term U.S. Treasury obligations and short term certificates of deposit and similar investment vehicles offered by a United States bank or banks which are "adequately capitalized" (as defined by regulations adopted by the Federal Reserve), or will be left in escrow and withdrawals will be made only in the regular course of Company business on such signature or signatures as the Managers may determine from time to time. 6.9 Transactions with the Managers or the Managers' Affiliates. The Company will not enter into any transaction or contract with a Manager or an Affiliate of a Manager unless such transaction is in the ordinary course of business and on terms and conditions that would apply in an arm's length, similar transaction or contract with a Person who is not a Manager or its Affiliate. 6.10 Insurance. The Company will obtain insurance in the following coverages (or such greater amounts as the Managers may decide) and amounts which insurance will (1) include coverage for the Managers' directors, officers, employees and other agents rendering services to or involved in any way in Company business, and (2) name the Members and the Partnership as additional insureds: 6.10.1 general liability - not less than $10,000,000 combined single limit per occurrence for bodily injury, personal injury and property damage. The general aggregate will be twice the required occurrence limit. 6.10.2 workers' compensation and employers' liability - not less than the limits required by the labor code of the state of Illinois and employer's liability limits of $5,000,000 per accident. 20 6.10.3 automobile liability - not less than $5,000,000 combined single limit per accident for bodily injury and property damage. 6.11 Construction of the Bloomingdale Sports Fitness Facility. The Company's construction of the Bloomingdale sports fitness facility at the HealthTrack site on Gary Avenue will be subject to the following additional terms and conditions: 6.11.1 The construction of the Bloomingdale sports fitness facility will conform to the elevations and interior layouts that have already been reviewed and approved by all of the Parties, and: (a) Subject to timely execution of the pertinent agreements and resolution of the soil contamination problem on the Land, construction will start on the facility as soon as reasonably possible, but in no event later that March 1, 2000; and (b) Construction of the facility will be completed as expediently as possible, but in no event later than December 31, 2001. 6.11.2 Any Member may request that the Company solicit competitive bids for the construction of a sports fitness facility. In such case, the Company will award the construction contract to the most reasonable bidder, taking into account all factors. 6.11.3 All Members will provide full disclosure to the other Members of any potential conflict of interest with respect to the construction of the Bloomingdale sports fitness facility. 6.11.4 The construction of the Bloomingdale sports fitness facility will include rehabilitation space that the Company will lease to CD Health's Affiliate on favorable terms. The design of the rehabilitation space will be subject to CD Health's Affiliate's approval. The Company will offer reasonable discounted membership rates to patients of CD Health's Affiliate's rehabilitation services. There will be no entry or admission fee to the facility for patients wishing to use the rehabilitation services only. The layout of the rehabilitation space is attached hereto as Exhibit B and made a part hereof. 6.11.5 The Property shall be identified as a LIFE TIME FITNESS Club. Suitable signage shall be made available to CD Health with respect to its rehabilitation services on the Property. 6.11.6 All activities of LIFE TIME personnel and corporate resources utilized in development of the fitness facility contemplated by the Parties, except as may be set forth in a construction contract between the Parties, are a part of the "overhead cost recovery" as set forth in the Company Management Agreement. 21 SECTION 7 ROLE OF MEMBERS 7.1 General. Except as otherwise provided by this Agreement, each Member will have all of the rights, and be afforded the status of a Member as set forth in the Act. Except as otherwise provided by this Agreement, a Member may not grant a security interest in its Company Interest or in any distributions made or to be made hereunder to or on behalf of such Member. The Company may provide a security interest to its lenders, allocated, at the Members' option, to their respective ownership interests individually (a trifurcated "stand alone" security interest protocol) and LIFE TIME may also provide a security interest in LIFE TIME's ownership in the Company to LIFE TIME's lenders which shall be subordinate to the security interest granted to the Company's lenders and to CDHealth and BSC Land. 7.2 Limitation on Liability. Anything to the contrary herein expressed or implied notwithstanding, no Member, as such, will be personally liable for any of the debts or obligations of the Company or any of the losses thereof in excess of such Member's share of Company assets, the Capital Contribution which such Member has made or is obligated to make to the Company, such Member's share of the Company's undistributed income and gains; and the amount of any portion of such Capital Contribution returned to it, and for wrongful distributions received by it, to the extent set forth in the Act. The liability of any assignee of a Member will be the same as that of a Member as provided above. 7.3 No Management Responsibility. No Member, in such capacity, will: (i) take part in the control or management of the business of, or transact any business of, the Company or act as agent for the Company; or (ii) have the power to sign documents for or otherwise bind the Company. Except as otherwise specifically provided herein, all authority to act on behalf of the Company is vested in the Managers. 7.4 Rights and Powers. The Members (and their Affiliates) may, notwithstanding this Agreement, engage in whatever activities they choose, unless the same is competitive with the Company, without having or incurring any obligation to offer any interest in such activities to the Company. However, except as otherwise set forth in Section 6 and this Section 7 and the Management Agreement, no Member will have any right or power to take part in the management or control of the Company or its business and affairs or to act for or bind the Company in any way. 7.5 Confidential Information; Non-disclosure. During the term of this Agreement and thereafter, no Member will, without the prior written consent of the Company's Members owning at least eighty percent (80%) of the outstanding Units of the Company (other than the Units owned by the requesting Member), directly or indirectly disclose to any individual, corporation or other entity (other than the Company, or any Affiliate thereof, or its Members, managers or agents entitled to such information) or use for its own or another's benefit, any Confidential Information, whether or not reduced to writing or other tangible form. For purposes of this Agreement, Confidential Information will mean that information which (i) is not generally known to the public or in the industry, (ii) has been treated by the Company as confidential or proprietary, (iii) is of competitive advantage to the Company, the confidentiality of which the Company has a legally protectable interest, and (iv) which information was generated by and at 22 the cost of the Company. Provided, a Member may disclose Confidential Information to third parties which agree to be bound by this Confidentiality provision and are not competitors of any of the Members. 7.6 Non-Compete Restrictive Covenant. Except as otherwise provided in this Section 7.6, during the term of this Agreement and for five (5) years following a termination of a Member's Interest in the Company for any reason (other than the Company's dissolution pursuant to Section 12) (the "Restrictive Period") no Member (or its Affiliates) or former Member (or its Affiliates) will directly or indirectly within a 5-mile radius of: (1) the Company's Bloomingdale facility, (2) existing BSC Land facilities, (3) the Healthtrack facility in Glen Ellyn, Illinois, and (4) LIFE TIME Fitness facilities, located at Algonquin, IL - - intersection of Algonquin and Randall, Burr Ridge, IL - intersection of Interstate 55 and County Line Road, Cantera/Warrenville, IL - intersection of Diehl and Winfield, Orland Park, IL - intersection of LaGrange and 163'd St., and Schaumburg, IL - intersection of Higgins and National: 7.6.1 own, manage, operate, join, control or participate in the ownership, management, operation or control of any business entity engaged in the business of providing sports fitness or related services; or 7.6.2 be connected in any way as an officer, member, employee, partner, manager, consultant or otherwise with any business entity engaged in the business of providing sports fitness or related services; Notwithstanding anything in this Section 7.6 to the contrary, 7.6.3 this restrictive covenant will not apply to Central DuPage Health-owned rehabilitation facilities nor to the existing Sports Med Fitness facility located in a physician's office in Carol Stream, IL, nor to the BSC Land Hickory Ridge, Lisle Telecordia Conference Center facilities. Further, this non-compete shall not prohibit LIFE TIME FITNESS' proposed facility for Cantera in Warrenville, Illinois or any LIFE TIME FITNESS' facility located south of I-88, as long as LIFE TIME shall have commenced construction on either the Cantera or the South of I-88 facilities by September 1, 2002. Nothing herein shall be construed to restrict any Party from establishing a fitness facility which competes with another facility owned by it; 7.6.4 on the basis of LIFE TIME's expressed intention to develop a fitness club in the Cantera area of Warrenville, LIFE TIME agrees to consider offering an ownership interest to CD Health and BSC Land not to exceed 5% each in this facility; 7.6.5 as an alternative to such potential ownership interest expressed in 7.6.4 above, BSC Land and CD Health agree to forego any minority ownership interest in the LIFE TIME FITNESS club developed South of 1-88 in the event that the facility is built south of Ogden Avenue; 7.6.6 in recognition of CD Health's (or its Affiliate's) decision to build medical office which include a rehab program at Cantera, LIFE TIME agrees that it shall neither develop nor lease rehab space within its Cantera facility. This non-compete shall not apply to the development of a LIFE TIME FITNESS facility constructed south of Ogden Avenue; 23 7.7 Use of Proprietary Property. LIFE TIME hereby grants the Company a limited license for the life of this Agreement to use LIFE TIME's Operating Platform, servicemarks, trademarks and marketing materials for operation of the Facility at the Property. 7.8 Remedies. The Members agree that a Member's skills and abilities, and the Confidential Information, are unique and irreplaceable. They also agree that the loss of a Member's services, or the use of a Member's services or of the Confidential Information by a competitor would cause irreparable harm to the Company. Further, any breach or threatened breach by a Member of any provision of this Agreement cannot be remedied solely by the recovery of money damages. Therefore, in the event of a breach or threatened breach by a Member of any of the provisions of this Agreement, the Company will be entitled to injunctive relief restraining such Member and any person or entity participating in such breach or threatened breach. Nothing herein will be construed as prohibiting the Company from pursuing any other remedies available at law or in equity for such breach or threatened breach, including the recovery of damages. If at the time of enforcement of any provision of this Agreement, it is finally determined by a court of competent jurisdiction that the period, scope or geographical area of the restrictions set forth in this Agreement are unreasonable under the circumstances then existing, the Members agree that the period, scope or geographical area that is reasonable under such circumstances will be substituted for the stated period, scope or geographical area. SECTION 8 BOOKS AND RECORDS 8.1 Books and Records. The Company will keep adequate books and records at its principal place of business, setting forth a true and accurate account of all business transactions arising out of and in connection with the activities of the Company. Any Member or its designated representative will have the right, at any reasonable time, to have access to and inspect and copy the contents of such books or records. The Company shall provide on line access to the extent practicable to all financial information for the Members and shall otherwise make all such data accessible to Members. 8.2 Financial Statements and Other Information. The Managers will deliver to each Member within thirty (30) days after the end of each month, unaudited statements of operations of the Company for such month and for the year to date, and balance sheets of the Company as of the end of such month, all prepared from the books of account and records of the Company in accordance with generally accepted accounting principles in a manner consistently applied. 8.3 Tax Information. Necessary tax information for the Company will be delivered to each Member after the end of each fiscal year of the Company. Every effort will be made to furnish such information by March 31 of the year following the close of the fiscal year. The Company will deliver to each Member not later than April 25, June 25, September 25, and January 25 of each year of the Company, such tax information as is necessary for each Member to estimate its quarterly tax liability. 24 SECTION 9 AMENDMENTS; MEETINGS 9.1 Amendments. 9.1.1 Amendments to this Agreement or the Articles may be proposed by the Managers or by Members who own thirty three percent (33%) or more of the Company's outstanding Units. Following such proposal, the Managers will submit to the Members a verbatim statement of any proposed amendment, provided that counsel for the Company will have approved of the same in writing as to form, and the Managers will include in any such submission a recommendation as to the proposed amendment. The Managers will seek the written vote of the Members on the proposed amendment or will call a meeting to vote thereon and to transact any other business that it may deem appropriate. For purposes of obtaining a written vote, the Managers may require a response within a reasonable specified time, but not less than fifteen (15) days, and failure to respond in such time period will constitute a vote which is consistent with the Managers' recommendation with respect to the proposal. A proposed amendment will be adopted and be effective as an amendment hereto if it receives the affirmative vote of the holders of at least sixty six (66.00%) of the Company's outstanding Units. 9.1.2 Notwithstanding Section 9.1.1 hereof, neither this Agreement nor the Articles will be amended without the consent of each Member or Manager adversely affected if such amendment would (i) modify the limited liability of a Member, (ii) alter the interest of a Member in Profits, Losses, or items thereof, or any Company distributions, (iii) alter or amend the rights of holders of Units as set forth in Section 6, (iv) cause the removal of the Managers or the dilution of their authority for any reason other than as set forth in Section 11.2; (v) reduce the Managers' expense reimbursement; or (vi) impose increased obligations upon such Member or Manager. 9.2 Meetings of the Members. 9.2.1 Meetings of the Members may be called by a Manager and will be called upon the written request of Members holding thirty three percent (33%) or more of the Members' Units. The request will state the nature of the business to be transacted. Notice of any such meeting will be given to all Members not less than seven (7) days nor more than thirty (30) days prior to the date of such meeting. Members may vote in person or by proxy at such meeting. SECTION 10 TRANSFERS BY MEMBERS 10.1 Transfer of Interest by Members. Except as provided in this Section 10, no Member will Transfer all or any part of its Units (including any beneficial interest therein), without the prior written consent of Members (other than the transferring Member) owning at least sixty six percent (66%) of the remaining outstanding Units of the Company, and any attempt to do so without such consent and approval will be null and void. Notwithstanding anything in this Section 10 to the contrary, the merger or other combination in which the Member is the surviving entity following such merger or other combination will not be 25 considered a Transfer of a Member's Units as described in this Section 10; provided, however, that any such transferee of Units will be subject to the restrictions set forth in Section 10.5 below. A Member may Transfer all or any part of its Units (including any beneficial interest therein) without the other Members' consent if (i) such Transfer is with or to an Affiliate, and (ii) such Transfer does not in any way affect any contract, covenant, representation, warranty or other agreement to which the Company or a non-transferring Member is a party. 10.2 Dissolution, Insolvency or Bankruptcy of a Member. In the event of the dissolution, insolvency or bankruptcy (if the petition for bankruptcy is not dismissed within ninety (90) days of filing) of a Member (such dissolution, insolvency or bankruptcy being hereafter referred to as a "Triggering Event"), the Company will purchase from such Member, and such Member will sell to the Company, all of such Member's Units. The Units' purchase price will be the Units' fair market value less set-off for expenses directly related to such legal action as may be necessary to protect the Company's interests as a result of the Triggering Event. Fair market value will be determined by good faith negotiation and agreement between the Members owning eighty percent (80%) of the Company's Units (other than the Units of the affected Member) and the affected Member (or representative), taking into account the fair market value of the Company's assets (including goodwill) and/or a market multiple of the Company's Net Cash Flow or Profits and Losses. If no agreement can be reached within ninety (90) days following the Triggering Event, then fair market value will be determined by appraisal. Such appraisal will be performed by a "big six" accounting firm mutually agreed upon between the Managers and the affected Member (or representative). The costs of said appraisal will be equally divided between the Company and the affected Member (or the Member's estate), as the case may be. The purchase price will be paid in a lump sum at closing. 10.2.1 The following events will also be considered Triggering Events as to LifeTime for purposes of this Section 10.2: 10.2.1.1 the resignation or termination of Bahram Akradi as Chief Executive Officer of LIFE TIME; 10.2.1.2 any executive management of LIFE TIME is convicted of a felony for fraud or other objectionable act; 10.2.1.3 there is negligent management or willful misconduct of by LIFE TIME under the Management Agreement described in Section 6.1.6 of this Agreement and such mismanagement or misconduct is not cured as provided in such Management Agreement. 10.2.1.4 In the unlikely event that CD Health is required to terminate its ownership participation for regulatory reasons, the Parties agree that CD Health shall have the right to lease space at reasonable rates for the purpose of providing rehabilitation services in the facility. 10.3 Allocation of Purchased Units. The Units acquired pursuant to this Section 10 will be allocated proportionately among the existing Members, maintaining the then-current ratio of ownership as between them. 26 10.4 Right of First Refusal. 10.4.1 In the event either BSC Land or CD Health decides to exit the Company, the other shall have the exclusive right to buy the exiting party's ownership share at a mutually agreeable price arrived at after good faith negotiation. If the parties cannot agree, the fair market value of the offered interest will be determined in the manner described in Section 10.2 of this Agreement. If neither party agrees to buy out the other, then LIFE TIME FITNESS shall have the right to buy out the exiting partner at fair market value for a period of sixty (60) days following written notice of termination of negotiations between BSC Land and CD Health. If LIFE TIME shall not exercise its purchase right, the exiting party shall be free to seek a third party purchaser. 10.4.2 In the event LIFE TIME elects to exit the Company, BSC Land and CD Health shall each have the right to purchase one half (1/2) of LIFE TIME's interest at fair market value for a period of sixty (60) days following LIFE TIME's written notice of its intention to leaves the Company. The fair market value of the offered interest will be determined in a manner described in Section 10.2 of this Agreement. In the event either BSC Land or CD Health elects not to purchase one-half (1/2) of LIFE TIME's interest, then the other of them may purchase the entire LIFE TIME ownership interest. If neither BSC Land nor CD Health shall exercise its purchase right, LIFE TIME shall be free to seek a third party purchaser. 10.5 Effect of Transfer of Interests. No Transfer of Units will be effective unless and until the Company has been furnished with sufficient information to enable counsel to the Company to determine that the proposed Transfer (i) does not violate any applicable federal or state securities laws or other applicable laws or regulations, (ii) will not affect the continuity of the Company for purposes of Section 708 of the Code and (iii) would not result in the Company being taxed as a corporation for federal income tax purposes. Any transferee of a Units pursuant to this Section 10 will be an assignee in accordance with Section 10.6 hereof unless and until such person has (a) furnished the information described in this Section 10.5, (b) paid to the Company the estimated costs and expenses (including attorney's fees and filing costs) incurred in effecting the Transfer and (c) has agreed to be bound by the terms and conditions of this Agreement (in writing). 10.6 Rights of Assignees; Admission to Company. An assignee of Units who has not become a substituted or additional Member will be subject to and bound by the provisions of this Agreement, but will only have the right to receive the distributions and allocations of the Company to which the assigning Member would be entitled and to make a further assignment of the Units, which assignment will be subject to all the terms of this Section 10. An assignment of a Units will not dissolve the Company or entitle the assignee to become or exercise any rights or powers of a Member. Upon admission to the Company, an assignee will assume Member status, the Units and the capital account that was held by the assigning Member. 27 SECTION 11 THE MANAGERS 11.1 Covenant Not to Withdraw, Transfer, or Dissolve. Except as otherwise permitted by this Agreement, the Managers will not to (a) exercise any power under the Act to dissolve the Company or (b) transfer all or any portion of their interests in the Company as Managers. 11.2 Termination of Status as a Manager. 11.2.1 A Manager will cease to be a Manager upon the first to occur of (1) the election of a replacement manager by the Member or its successor that first elected the Manager, (2) the death, permanent disability, or mental incompetence of the Manager, (3) the Manager being adjudged bankrupt, entering into proceedings for reorganization or into an assignment for the benefit of creditors, having a receiver appointed to administer its assets or its interest in the Company, being the subject of a voluntary of involuntary petition for bankruptcy (which involuntary petition is not dismissed within ninety (90) days), applying to any court for protection from its creditors, dissolving and liquidating, or having such interest seized by a judgment creditor, (4) the vote of a majority of the Members (excluding the removed Manager) to approve a request by such Manager to retire, and (5) the vote of Members owning eighty percent (80%) or more of the Company's outstanding Units (excluding the removed Manager) to remove such Manager after such Manager has, (a) committed willful misfeasance, commission of a felony or gross negligence, or (b) committed any other act or suffered any other condition that would justify a decree of dissolution of the Company under the laws of the State of Illinois. 11.2.2 If all Managers cease to be the Managers pursuant to this Section 11 or the Managers fail to carry on the business of the Company, the Company will be dissolved, terminated, and liquidated pursuant to the provisions of Section 12 unless, within ninety (90) days after such event, all of the remaining Members agree in writing to continue the business of the Company and to the appointment of one or more new Managers. Should a new Manager be appointed, the Manager will have all powers, duties and obligations of the withdrawing Manager. The withdrawing Manager (or its personal representative) will not take any part in the management or operation of the Company's business. 11.2.3 New Managers (whether an additional Manager or substituted Manager pursuant to an assignment of a Company Interest or otherwise) may be admitted to the Company only upon the consent of the Managers, which consent may be granted or withheld in the discretion of such Managers. SECTION 12 DISSOLUTION AND WINDING UP 12.1 Liquidating Events. The Company will dissolve and commence winding up and liquidating upon the first to occur of any of the following ("Liquidating Events"): 28 12.1.1 December 1, 2039; 12.1.2 The sale of substantially all of the Company Property; 12.1.3 The vote by Members holding at least eighty percent (80%) of the Members' Units to dissolve, wind up, and liquidate the Company; 12.1.4 The happening of any other event that makes it unlawful, impossible, or impractical to carry on the business of the Company; or 12.1.5 The withdrawal of a Member from the Company. The Members hereby agree that, notwithstanding any provision of the Act, the Company will not dissolve prior to the occurrence of a Liquidating Event. Furthermore, if an event specified in Section 11.1 hereof occurs, the Members may, within ninety (90) days of the date such event occurs, by a vote of all the Members, appoint a new Manager (if necessary) and continue the Company business, in which case the Company will not dissolve, so long as there are at least two Members of the Company. If it is determined, by a court of competent jurisdiction, that the Company has dissolved (i) prior to the occurrence of a Liquidating Event, or (ii) upon the occurrence of an event specified in Section 12.1 hereof, following which the Members elect a successor Manager (if necessary) pursuant to the previous sentence, the Members hereby agree to continue the business of the Company without a winding up or liquidation. 12.2 Winding Up. Upon the occurrence of a Liquidating Event, the Company will continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Members. No Member will take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Company's business and affairs. The Managers (or, in the event there is no Manager, any Person elected by all the Members) will be responsible for overseeing the winding up and liquidation of the Company and will take full account of the Company's liabilities and Company Property. The Company Property will be liquidated as promptly as is consistent with obtaining the fair value thereof, and the liquidation proceeds, to the extent sufficient, will be applied and distributed in the following order: 12.2.1 First, to the payment and discharge of all of the Company's debts and liabilities to creditors other than the Members; 12.2.2 Second, to the payment and discharge of all of the Company's debts and liabilities to the Managers other than for loans pursuant to Section 6.7; 12.2.3 Third, pro rata to the payment and discharge of loans made by a Members pursuant to Section 6.7; 12.2.4 Fourth, to BSC Land and CD Health any guaranteed minimum monthly cash payments owing to such Members in accordance with Section 5 hereof. 12.2.5 The balance, if any, to the Member's in proportion to their Capital Accounts. 29 12.3 Compliance With Timing Requirements of Regulations. If any Member has a deficit balance in its Capital Account (after giving effect to all contributions, distributions and allocations for all taxable years, including the year during which such liquidation occurs), such Member will have no obligation to make any contribution to the capital of the Company with respect to such deficit, and such deficit will not be considered a debt owed to the Company or to any other Person for any purpose whatsoever. In the discretion of the Managers, a pro rata portion of the distributions that would otherwise be made to the Managers and the Members pursuant to this Section 12 may be: 12.3.1 distributed to a trust established for the benefit of the Members for the purposes of liquidating Company assets, collecting amounts owed to the Company, and paying any contingent or unforeseen liabilities or obligations of the Company or of the Managers arising out of or in connection with the Company's business. The assets of any such trust will be distributed to the Members from time to time, in the reasonable discretion of the Managers, in the same proportions as the amount distributed to such trust by the Company would otherwise have been distributed to the Members pursuant to this Agreement; or 12.3.2 withheld to provide a reasonable reserve for Company liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Company, provided that such withheld amounts will be distributed to the Members as soon as practicable. 12.4 Rights of Members. Except as otherwise provided in this Agreement, (a) each Member will look solely to the assets of the Company for the return of its Capital Contribution and will have no right or power to demand or receive property other than cash from the Company, and (b) no Member will have priority over any other Member as to the return of its Capital Contributions, distributions, or allocations. 12.5 Notice of Dissolution. In the event a Liquidating Event occurs or an event occurs that would result in a dissolution of the Company, the Managers will, within thirty (30) days thereafter, (1) provide written notice thereof to each of the Members and to all other Parties with whom the Company regularly conducts business, and (2) will publish notice thereof in a newspaper of general circulation in each place in which the Company regularly conducts business. SECTION 13 MISCELLANEOUS 13.1 Notices. Any notice, payment, demand, or communication required or permitted to be given by any provision of this Agreement will be in writing and will be delivered personally to the Person or to an officer of the Person to whom the same is directed, or sent by registered or certified mail to the addresses set forth on the signature page of this Agreement, or to such other address as such Person may from time to time specify by notice to the Company and the Members. Any such notice will be deemed to be delivered, given, and received for all purposes as of the date so delivered, if delivered personally, or as of the sixth (6th) day following the date on which 30 the same was deposited in a regularly maintained receptacle for the deposit of United States mail, if sent by registered or certified mail, postage and charges prepaid. Copies of all such notices to CD Health are to be sent to Joseph C. Fenech, Esq., Fenech & Pachulski, P.C., One Lincoln Centre, Suite 840, Oakbrook Terrace, Illinois 60181. Copies of all such notices to BSC Land are to be sent to: Christopher R. Manning Burke, Warner, MacKay & Serritella, P.C. 22nd Floor, IBM Plaza 330 North Wabash Avenue Chicago, IL 60611-3607. Copies of all such notices to LifeTime are to be sent to: Shawn P. Nugent Executive Vice President CFO 6442 City West Parkway Suite 375 Eden Prairie, MN 55344 13.2 Binding Effect. Except as otherwise provided in this Agreement, every covenant, term, and provision of this Agreement will be binding upon and inure to the benefit of the Members and their respective heirs, legatees, legal representatives, successors, transferees, and assigns. 13.3 Construction. Every covenant, term, and provision of this Agreement will be construed simply according to its fair meaning and not strictly for or against any Member. 13.4 Time. Time is of the essence with respect to this Agreement. 13.5 Headings. Section and other headings contained in this Agreement are for reference purposes only and are not intended to describe, interpret, define, or limit the scope, extent, or intent of this Agreement or any provision hereof. 13.6 Severability. Every provision of this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality or invalidity will not affect the validity or legality of the remainder of this Agreement. 13.7 Further Action. Each Member agrees to perform all further acts and execute, acknowledge, and deliver any documents that may be reasonably necessary, appropriate, or desirable to carry out the provisions of this Agreement. 13.8 Variation of Pronouns. All pronouns and any variations thereof will be deemed to refer to masculine, feminine, or neuter, singular or plural, as the identity of the Person or Persons may require. 31 13.9 Governing Law. The laws of the State of Illinois will govern this Agreement and all disputes arising out of this Agreements shall be resolved in the courts of the State of Illinois. 13.10 Community Benefit. The Parties acknowledge CD Health's status as a tax-exempt entity organized to promote the health of a broad cross section of the community it serves. The Parties agree that, notwithstanding anything contained in this Agreement to the contrary, CD Health shall have the right, exercised at its reasonable discretion, to require that the other Members take such action (other than with respect to the setting of membership fees) to ensure that the facilities owned and operated by the Company are operated in a manner offering services for the benefit of a broad segment of the community served by the Company, including, but not limited to, initiating programs relating to fitness and health needs and implementing policies in furtherance of the health needs of the community CD Health serves and its charitable purposes. With respect to any programs of a charitable nature, including health care services and community education, the costs for same shall be borne by CD Health as part of its mission to the community. The Parties further agree that, with respect to the setting of membership fees, one of the factors to be considered by the Manager, or, to the extent required by this Agreement, the Members, shall be ensuring the availability of the facilities owned and operated by the Company to a broad segment of the community served by the Company. 13.11 Waiver of Action for Partition. The Members irrevocably waive any right that they may have to maintain any action for partition with respect to any of the Company Property. 13.12 Counterpart Execution. This Agreement may be executed in any number of counterparts with the same effect as if all of the Members had signed the same document. All counterparts will be construed together and will constitute one agreement. 13.13 Assignment. Any Party may assign its rights and the performance of its obligations hereunder to any of its Affiliates upon notice to the other Parties. 13.14 Entire Agreement. This Agreement supersedes all prior agreements (including specifically, but not limited to the Letter of Intent dated on or about May 17, 1999) with respect to the subject matter hereof. IN WITNESS WHEREOF, the Parties have entered into this Operating Agreement as of the day and year first above set forth. 32
UNITS PERCENTAGE ----- ---------- MEMBERS: LIFE TIME FITNESS, INC., a Minnesota 400,000 33 1/3% corporation doing business as LIFE TIME Fitness of Illinois, Inc. By:____________________________________ Its:___________________________________ BLOOMINGDALE SPORTS CENTER LAND COMPANY 400,000 33 1/3% By:____________________________________ Its:___________________________________ CENTRAL DUPAGE HEALTH 400,000 33 1/3% By:____________________________________ Its:___________________________________
33 EXHIBIT A MANAGEMENT AGREEMENT OF LIFE TIME, BSC LAND, CENTRAL DUPAGE HEALTH FITNESS CENTER -- BLOOMINGDALE, L.L.C. THIS MANAGEMENT AGREEMENT ("Agreement") is made and entered into with effect as of the 1st day of December, 1999, by and between LIFE TIME FITNESS, Inc., Bloomingdale Sport Center Land Company, an Illinois Corporation ("BSC Land"), Central DuPage Health Fitness Center -- Bloomingdale, L.L.C., an Illinois limited liability company (the "Company") and LIFE TIME FITNESS, Inc., a Minnesota corporation doing business in Illinois as LIFE TIME FITNESS, Inc. of Illinois (the "Manager"). The Company and the Manager are sometimes referred to hereafter collectively as the "Parties" and singularly as a "Party." Recitals The Company was formed on 12/1, 1999, to develop, own and operate facilities that offer sports and fitness activities, along with all ancillary purposes thereto. Pursuant to Section 6.1.6 of the Operating Agreement Of LIFE TIME, BSC Land, DuPage Health Service Fitness Center-Bloomingdale, L.L.C., the Company is directed to contract with LIFE TIME to render management, administrative and related services for the Company's Bloomingdale facility (the "Property"). The Company wishes to retain the services of the Manager to manage the Property and the Manager wishes to manage the Property. These recitals are incorporated as a material part of this Agreement. NOW, THEREFORE, in exchange for the promises and covenants set forth herein and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the Company and the Manager agree as follows: 1A. Intent to Use LTF Operating Platform. It is the intent of the Parties that: (a) The Manager shall operate the Property as a "LIFE TIME FITNESS Club" using the LIFE TIME FITNESS Operating Platform. For purposes of this Agreement, "LIFE TIME FITNESS Operating Platform" means the standard operating procedures, protocols and customary practices found in LIFE TIME FITNESS clubs in the United States; and (b) All employees of the Property shall be Manager's employees; and (c) Management and day-to-day operations shall be in the control of Manager, subject to the terms of this Agreement and overall supervision by the Management Committee; and (d) Manager may offer reciprocity with other LIFE TIME FITNESS clubs; and (e) For so long as adequate tenant space remains at the Property for rehabilitation services to be provided by Central DuPage Health, Manager may lease out portions of the Property for restaurant and day spa/hair salon purposes, provided that none of such uses exceed 2,500 r.s.f.; and (f) Manager may change the logo and signage of the Property without the consent of the Management Committee for so long as the signage provisions of the Company's Operating Agreement are observed; and (g) Manager shall initiate all press releases on behalf of the Property. 1B. Acceptance of Engagement. The Manager hereby accepts the engagement to perform the management, administrative and related services for the Property as described herein including, but not limited to sales, marketing, fitness services, maintenance, repair and replacement, administration and operation, preparation of budgets, personnel matters, and such other duties as are set forth in this Agreement or as the Company and Manager agree to in writing from time to time. It is the intention of the Parties that Manager shall provide a "turnkey" operation and be generally responsible for running the Property and facility. 2. Manager's Pre-Opening Duties. From the effective date of this Agreement until the date when, as publicly announced by the Company, the Property shall be formally opened to the public (the "Opening Date"), the Manager shall perform the following services: (a) The Manager shall prepare and submit to the Management Committee of the Owner (the "Management Committee") for approval, a budget for designing, furnishing and equipping the Property (the "Budget"). The Manager shall work with all design and construction contractors in designing, furnishing, and equipping the Property and its facilities to the end that the Property is built in accordance with its design criteria, on time, and within the Budget. The Manager shall make available to the Management Committee all information which the Manager has or develops with respect to the costs of designing, constructing, furnishing and equipping the Property. The Manager shall conform to the Budget, and shall make contracts and purchases at the best prices available to the Manager. Purchases by the Manager may be either in its name or in the name of the Company, but, in the event of any purchase in the name of the Manager, the title of such purchase shall immediately be transferred to the Company, whereupon the Company shall pay the actual net purchase price for such equipment, furnishings, and personal property. Any material changes to the cost of developing the Property in accordance with the Budget must be submitted to and approved in writing by the Management Committee prior to the implementation of any such charges. (b) The Manager shall prepare and submit to the Management Committee for the Management Committee's approval, and thereafter put into effect as soon as possible, a plan for the organization of the business operations and programs of the Property (the "Plan"). (c) Prior to the Opening Date the Manager shall hire and train such number of personnel as shall be, in the opinion of the Manager, adequate to furnish the services necessary to implement the Plan and to operate the Property effectively. (d) The Parties shall keep proprietary information with respect to construction plans and specifications and the management plan confidential. 3. Manager's Duties During Operating Period. During the period commencing with the Opening Date and continuing thereafter on an annual basis during the term of this Agreement (each such annual period being referred to as an "Operating Period"), the Manager shall use its best efforts in the management and operation of the business and services for the Property. In pursuance of the foregoing, the Manager shall perform the following services, so that the Property and its services will be operated and maintained so as to both maximize profits and ensure that the Property shall remain a first class fitness center. (a) Submit at least two months before the beginning of each Operating Period an estimated profit and loss statement for the ensuing Operating Period, a schedule of projected membership fees (which schedule shall be subject to the Management Committee's approval) and budget estimates in detail for repairs, maintenance, replacements, operating reserves, capital reserves and capital expenditures for such ensuing year (collectively the "Annual Plan"). The Annual Plan shall be submitted to the Management Committee which shall have the right to propose any change thereto it deems appropriate. The Management Committee shall inform the Manager of any such proposed change before the commencement of the period covered by such Annual Plan and the Management Committee and the Manager shall each, in good faith, endeavor to reconcile any differences prior to the beginning of the next Operating Period. The Manager shall comply with the Annual Plan, as the same may be jointly modified, and shall not deviate substantially therefrom as to any item, incur additional expense greater than $20,000.00 (other than marketing expenses which may be increased but by no more than twenty-five percent (25%) of the amount set forth in the Annual Plan), or substantially change the manner of operation of the Property, without the Management Committee's written consent, except in case of an emergency or where failure to take a particular action would expose the Company to imminent danger of criminal liability other than the payment of fines. (b) The Manager shall hire, promote, discharge, and supervise the work of all fitness and service employees performing services in or about the Property. All of such employees shall be solely the employees of, and on the payroll of Manager and no entity having any ownership interest in the Company other than the Manager shall be responsible for any act or omission on the part of such employees or exercise any authority over any such employees. Each of Manager, CDHealth and BSC Land (collectively the "Parties"), for itself and its affiliates, consents and agrees that they will notify all current and future employees that they are free to obtain employment with any of the other Parties provided they have first been approved for such employment ("Approved Employee") by the Management Committee of the Company. In addition, each of the Parties, for itself and its affiliates, covenants and agrees that it will not hire any person who is or was an employee of the other Parties, other than Approved Employees, while such individual is in the employment of the Manager, CDHealth or BSC Land, or within a period of twelve (12) months after such person leaves the employ of the Manager, CDHealth or BSC Land, except by the mutual consent of the Parties. The Manager, on behalf of the Company, shall procure and maintain adequate and required insurance to cover the Property and its employees. (c) Central DuPage Health ("CDHealth"), an affiliate of DuPage Health Services, Inc. shall administer and manage all rehabilitation services at the Property. Manager shall cooperate with CDHealth in this regard as may be necessary. (d) Arrange that the Company's expense, for compliance with all statutes, ordinances, laws, rules, regulations, orders and determinations affecting or issued in connection with the Property by any governmental authority having jurisdiction thereof. With the Management Committee's prior consent, the manager may, at the Company's expense, protest or litigate to final decision in any appropriate court or form any violation, order, rule or regulation affecting the Property. 4. Fees. The Company will not pay a management fee to Manager. The Company will pay Manager an overhead cost recovery charge not to exceed nine percent (9%) of net revenues and equal to the lowest rate charged to any LIFE TIME FITNESS facility; it being acknowledged and agreed that Manager will use its best efforts to minimize general and administrative overhead expenses and will not treat such expenses as a profit center. Upon request by any member of the Company, Manager will provide detailed information about the costs included in the overhead calculation and will make that information available for audit. For purposes of this Agreement, all activities of Manager's Personnel and all of Manager's corporate resources utilized in development of the project contemplated under the Parties' Agreement (but for services which may be covered in a separate construction contract) are included in the overhead cost recovery charge it being acknowledged that any services that LIFE TIME is providing to other fitness clubs which it owns and operates are included in the overhead of such clubs shall also be included in the overhead of the Property. 5. LIFE TIME Products. LIFE TIME will provide its goods, merchandise, programs and services to the Company at the lesser of: (a) the acquisition cost of such goods and merchandise; or (b) the most favorable terms as it provides them to other LIFE TIME FITNESS facilities. 6. Expenses. The Company shall reimburse the Manager for any and all reasonable extraordinary out-of-pocket expenses incurred by the Manager and not covered by the overhead cost recovery charge in performing its management duties and obligations under this Agreement. The Manager shall invoice the Company for such extraordinary expenses and the Company shall pay such invoices within fifteen (15) days thereafter. Such expenses shall not exceed $5,000.00 without the prior consent of the Company. 7. Term. This Agreement shall begin on December 1, 1999 and shall continue unless terminated under the provisions of paragraph 8 or 11 hereunder, but not to exceed the legal term of the Company. 8. Termination Under Certain Circumstances. This Agreement may be terminated by majority vote of the Management Committee if (a) Bahram Akradi terminates his position as Chief Executive Officer of LIFE TIME FITNESS; or (b) LIFE TIME FITNESS is placed in bankruptcy; or (c) Any member of the executive management of LIFE TIME FITNESS is convicted of felonies for fraud or other objectionable acts; or (d) There is negligent management or willful misconduct in the operating of the Property and facility which is not cured within sixty (60) days' written notice by one of the owners and confirmed by two-thirds of the owners. 9. Termination: Transfer of LIFE TIME's Interest. If LIFE TIME's interest in the Company is transferred under Section 10.2 of the Operating Agreement Of LIFE TIME, BSC Land, DuPage Health Service Fitness Center--Bloomingdale, L.L.C. ("Operating Agreement"), this Management Agreement will be terminated. This provision does not apply to a transfer by LIFE TIME of its interest to any affiliate or merger partner. 10. Assignment. Neither Party may assign this Agreement nor any interest herein, without the other Party's written consent. Otherwise, this Agreement shall be binding upon and shall inure to the benefit of the Parties successors and permitted assigns. 11. Default. The following events shall constitute a Party's default under this Agreement: (a) The Manager becomes insolvent, or makes any transfer or assignment for the benefit of its creditors. (b) The Manager files any petition under any section or chapter of the federal bankruptcy act or any under similar law or statute of the United States or any state thereof, or if Manager is adjudged bankrupt or insolvent in proceedings filed against the Manager thereunder. (c) A receiver or trustee is appointed for the Manager or for all or substantially all of Manager's assets, and such appointment is not vacated or set aside within sixty (60) days. If either Party defaults under the terms of this Agreement, the other Party shall have the right to terminate this Agreement upon the date of such default (following any periods to cure the default). The non-defaulting Party shall have such remedies, both at law and in equity, as may be allowed by Illinois law. 12. Operating Account. Manager shall establish a separate account known as the "Bloomingdale Fitness Operating Account" ("Operating Account") separate and apart from Manager's corporate accounts, for the deposit of receipts collected as described herein, in a bank or other institution whose deposits are insured by the federal government. Funds in the Operating Account remain the property of the Company subject to disbursement of expenses by Manager as described herein and as directed by the Company in writing. Manager shall also provide for separate financial reporting for the facility and such data transfer capabilities (including via internet) or overnight mail to the other Parties as is practicable. 13. Fidelity Bond. Manager shall cause all personnel who handle or are responsible for the safekeeping of any monies of Company to be covered by a fidelity bond in the amount equal to two hundred thousand dollars ($200,000.00). 14. Save Harmless. Company shall indemnify, defend, and save Manager harmless from all loss, damage, cost, expense (including attorneys' fees), liability, or claims for personal injury or property damage incurred or occurring in, on, or about the Property. 15. Liability Insurance. Company shall obtain and keep in force adequate insurance, and name each Member as an Additional Insured as required by the Operating Agreement against physical damage and against liability for loss, damage, or injury to property or persons which might arise out of the occupancy, management, operation, or maintenance of the Property. Manager shall be covered as an additional insured on all liability insurance maintained with respect to the Property. Company agrees to furnish Manager with certificates evidencing such insurance within five (5) business days of a written request by the Manager. At the written direction of the Company, Manager may purchase said policies or pay the premiums with funds from the Operating Account. The policies shall provide that notice of default or cancellation shall be sent to Manager as well as Company. 16. Notices. Any notice, payment, demand or communication required or permitted to be given by any provision of this Agreement shall be in writing and shall be delivered personally to the Party to whom the same is directed, or sent by registered or certified mail to: If to the Company: ____________________________________ ____________________________________ ____________________________________ ____________________________________ If to the Manager: ____________________________________ ____________________________________ ____________________________________ ____________________________________ or to such other address as such Party may from time to time specify by notice to the other Party. Any such notice shall be deemed to be delivered, given and received for all purposes as of the date so delivered if delivered personally, or as of the sixth (6th) day following the date on which the same was deposited in a regularly maintained receptacle for the deposit of United States mail, if sent by registered or certified mail, postage and charges prepaid. Copies of all such notices shall be sent to Joseph C. Fenech, Esq., Fenech & Pachulski, P.C. One Lincoln Centre, Suite 840, Oakbrook Terrace, Illinois 60181. 17. Governing Law; Severability. This Agreement shall be governed by the laws of Illinois, without regard to the conflicts of laws thereof. All actions must be brought in state or federal courts located in DuPage County or the Northern District of Illinois. If any provision of this Agreement shall be held to be invalid or unenforceable, the validity and enforceability of the remaining provisions of this Agreement shall not be affected thereby. 18. Entire Agreement. This Agreement contains the entire agreement between the Parties with respect to the subject matter hereof, and no agreement shall be effective to change, modify or terminate this Agreement unless such agreement is in writing and duly signed by the Parties. IN WITNESS WHEREOF, the Company and the Manager have signed this Agreement on the date first above written. THE MANAGER: THE COMPANY: LIFE TIME FITNESS, Inc. LIFE TIME, BSC Land, Central DuPage Health a Minnesota Corporation Fitness Center--Bloomingdale, L.L.C., an doing business in Illinois as Illinois limited liability company LIFE TIME FITNESS of Illinois By: By: --------------------------------- ----------------------------------- Its: Its: -------------------------------- ----------------------------------

EX-10.30 7 n82215a2exv10w30.txt 2004 LONG-TERM INCENTIVE PLAN EXHIBIT 10.30 LIFE TIME FITNESS, INC. 2004 LONG-TERM INCENTIVE PLAN (EFFECTIVE AS OF APRIL 30, 2004) 1. PURPOSES. The purposes of this Plan are to provide long-term incentives to those persons with responsibility for the success and growth of Life Time Fitness, Inc. (the "Company") and its subsidiaries, divisions and affiliated businesses, to associate the interests of such persons with those of the Company's shareholders, to assist the Company in recruiting, retaining and motivating a diverse group of employees, consultants, advisors and non-employee directors on a competitive basis, and to ensure a pay-for-performance linkage for such employees and outside directors. 2. DEFINITIONS For purposes of this Plan: (a) "Affiliate" means any corporation that is a "parent corporation" or "subsidiary corporation" of the Company, as those terms are defined in Code Sections 424(e) and 424(f), or any successor provisions, and, for purposes other than the grant of Incentive Stock Options, any joint venture in which the Company or such "parent corporation" or "subsidiary corporation" owns an equity interest. (b) "Award" or "Awards" means a grant under this Plan in the form of Options, Stock Appreciation Rights, Restricted Shares, Restricted Share Units, Performance Awards, or any or all of them. (c) "Award Agreement" means any written or electronic agreement contract or other instrument or document evidencing the grant of an Award, which may but is not required to be signed by a Participant, in such form and including such terms as the Committee in its sole discretion shall determine. (d) "Board" means the Board of Directors of the Company. (e) "Cause" means, unless otherwise defined in an Individual Agreement, (i) dishonesty or violation of any duty owed to the Company; (ii) conviction of a felony crime; (iii) any material act or omission involving willful malfeasance or gross negligence in the performance of duties to the Company; (iv) willful damage to the Company's business and/or relationships with customers or suppliers; and, (v) failure, refusal or inability to perform duties in accordance with the directions, policies, and practices of the Company. The Committee shall, unless otherwise provided in an Individual Agreement with the Participant have the sole discretion to determine whether "Cause" exists, and its determination shall be final. (f) "Change in Control" is defined in Section 11(b). (g) "Code" means the Internal Revenue Code of 1986, as amended. (h) "Committee" means the Compensation Committee of the Board. (i) "Common Stock" means the common stock, par value $.02 per share, of the Company. (j) "Effective Date" shall have the meaning set forth in Section 13. (k) "Eligible Participants" means any of the following individuals who is designated by the Committee as eligible to receive Awards, subject to the conditions set forth in this Plan: any officer, employee, non-employee director, consultant or advisor of the Company or its Affiliates. The term employee does not include any individual who is not, as of the grant date of an Award, classified by the Company or any Affiliate as an employee on its corporate books and records even if that individual is later reclassified (by the Company, such Affiliate, any court or any governmental or regulatory agency) as an employee as of the grant date. Except when referring to ISOs, all references in this Plan to "employee," "employment" or similar words shall, with respect to consultants or advisors, refer to the consulting or advisory services provided by such consultants or advisors to the Company and shall, with respect to Non-Employee Directors, refer to service as a member of the Board. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time and any successor thereto. (m) "Fair Market Value" on any date means: (i) the closing price of the stock as reported for composite transactions, if the Company's Common Stock is then traded on a national securities exchange; (ii) the average of the closing representative bid and asked prices of the Company's Common Stock as reported on NASDAQ on the date as of which fair market value is being determined; or (iii) if the Common Stock of the Company is not publicly traded on the date of grant of any Award under this Plan, the Committee shall make a good faith attempt to determine the fair market value of a share of Common Stock using such criteria as it shall determine, in its sole discretion, to be appropriate for valuation. (n) "Individual Agreement" means an employment, consulting or similar written agreement between a Participant and the Company or any one of its Affiliates. (o) "ISO" means an Option satisfying the requirements of Section 422 of the Code and designated by the Committee as an ISO. (p) "Non-Employee Director" means a member of the Board who is not an employee of the Company. (q) "NQSO" or "Non-Qualified Stock Option" means any Option that is not designated as an ISO or even if so designated does not qualify as an ISO on or subsequent to its grant date. (r) "Options" means the right to purchase shares of Common Stock at a specified price for a specified period of time. (s) "Option Exercise Price" means the purchase price per share of Common Stock covered by an Option granted pursuant to this Plan. (t) "Participant" means an individual who has received an Award under this Plan. (u) "Performance Awards" means an Award of Performance Shares or Performance Units based on the achievement of Performance Goals during a Performance Period. 2 (v) "Performance Based Exception" means the performance-based exception set forth in Code Section 162(m)(4)(C) from the deductibility limitations of Code Section 162(m). (w) "Performance Goals" means the goals established by the Committee under Section 7(d). (x) "Performance Measures" means the criteria set out in Section 7(d) that may be used by the Committee as the basis for a Performance Goal. (y) "Performance Period" means the period established by the Committee during which the achievement of Performance Goals is assessed in order to determine whether and to what extent a Performance Award has been earned. (z) "Performance Shares" means shares of Common Stock awarded to a Participant based on the achievement of Performance Goals during a Performance Period. (aa) "Performance Units" means an Award denominated in shares of Common Stock, cash or a combination thereof, as determined by the Committee, awarded to a Participant based on the achievement of Performance Goals during a Performance Period. (bb) "Plan" means the Life Time Fitness, Inc. 2004 Long-Term Incentive Plan, as amended and restated from time to time. (cc) "Restriction Period" means, with respect to Restricted Shares or Restricted Share Units, the period during which any restrictions set by the Committee remain in place. Restrictions remain in place until such time as they have lapsed under the terms and conditions of the Restricted Shares or Restricted Share Units or as otherwise determined by the Committee. (dd) "Restricted Shares" means shares of Common Stock that may not be traded or sold until the date that the restrictions on transferability imposed by the Committee with respect to such shares have lapsed. (ee) "Restricted Share Units" means the right, as described in Section 7(c), to receive an amount, payable in either cash or shares of Common Stock, equal to the value of a specified number of shares of Common Stock. (ff) "Retirement" with respect to a Non-Employee Director shall mean termination from the Board after such Non-Employee Director shall have attained at least age 70 or after such Non-Employee Director shall have satisfied the criteria for Retirement established by the Committee from time to time. (gg) "Stock Appreciation Rights" or "SARs" means the right to receive the difference between the Fair Market Value of a share of Common Stock on the grant date and the Fair Market Value of a share of Common Stock on the date the Stock Appreciation Right is exercised. (hh) "Total Disability" shall have the meaning set forth in the long-term disability program of the Company, unless otherwise defined in an Individual Agreement. 3. ADMINISTRATION OF THIS PLAN. (a) Authority of Committee. This Plan shall be administered by the Committee, which shall have all the powers vested in it by the terms of this Plan, such powers to include the authority (within the limitations described herein): 3 o to select the persons to be granted Awards under this Plan, o to determine the type, size and terms of Awards to be made to each person selected, o to determine the time when Awards are to be made and any conditions which must be satisfied before an Award is made, o to establish objectives and conditions for earning Awards, o to determine whether an Award shall be evidenced by an agreement and, if so, to determine the terms of such agreement (which shall not be inconsistent with this Plan) and who must sign such agreement, o to determine whether the conditions for earning an Award have been met and whether an Award will be paid at the end of the Performance Period, o to determine if and when an Award may be deferred, o to determine the guidelines and/or procedures for the payment or exercise of Awards, and o to determine whether an Award should qualify, regardless of its amount, as deductible in its entirety for federal income tax purposes, including whether any Awards granted under this Plan comply with the Performance Based Exception under Code Section 162(m). (b) Interpretation of Plan. The Committee shall have full power and authority to administer and interpret this Plan and to adopt or establish such rules, regulations, agreements, guidelines, procedures and instruments, which are not contrary to the terms of this Plan and which, in its opinion, may be necessary or advisable for the administration and operation of this Plan. The Committee's interpretations of this Plan, and all actions taken and determinations made by the Committee pursuant to the powers vested in it hereunder, shall be conclusive and binding on all parties concerned, including the Company, its shareholders and any person receiving an Award under this Plan. (c) Delegation of Authority. To the extent not prohibited by law, the Committee may (i) delegate its authority and administrative powers hereunder to a subcommittee, (ii) allocate all or any portion of its responsibilities and powers to any one or more of its members and, (iii) grant authority to employees or designate employees of the Company to execute documents on behalf of the Committee or to otherwise assist the Committee in the administration and operation of this Plan, provided that no such delegation may be made that would cause Awards or other transactions under this Plan to cease to be exempt from Section 16(b) of the Exchange Act or cause an Award intended to qualify for the Performance Based Exception to case to qualify for such exception. Any such allocation or delegation may be revoked by the Committee at any time. (d) Section 162(m) and Rule 16b-3 Compliance. In the case of any grants made to insiders or Awards that are intended to qualify for the Performance Based Exception, the Committee shall delegate its authority to a subcommittee composed solely of two or more directors who qualify as an "independent director" within the meaning of the applicable stock exchange, as an "outside director" within the meaning of Section 162(m) of the Code, and as a "non-employee director" within the meaning of Rule 16b-3. 4 4. ELIGIBILITY. Awards may be granted under this Plan to Eligible Participants. 5. SHARES OF COMMON STOCK SUBJECT TO THIS PLAN. (a) Authorized Number of Shares. Unless otherwise authorized by the Company's shareholders and subject to the provisions of this Section 5 and Section 10, the maximum aggregate number of shares of Common Stock available for issuance under this Plan shall be 3,500,000. Subject to the provisions of this Section 5 and Section 10, the maximum number of shares of Common Stock that may be issued pursuant to Options intended to be ISO's shall be 3,500,000 shares. (b) Share Counting. The following shall apply in determining the number of shares remaining available for grant under this Plan: (i) In connection with the granting of an Option or other Award (other than a Performance Unit denominated in dollars), the number of shares of Common Stock available for issuance under this Plan shall be reduced by the number of shares in respect of which the Option or Award is granted or denominated; provided, however, that, in the case of Stock Appreciation Rights granted in tandem with Options (so that only one may be exercised with the other terminating upon such exercise), the number of shares of Common Stock shall only be taken into account once (and not as to both Awards) for purposes of this Section 5 and the limitations hereunder; and provided further where a SAR is settled in shares of Common Stock, the number of shares of Common Stock available for issuance under this Plan shall be reduced only by the number of shares issued in such settlement. (ii) If any Option is exercised by tendering shares of Common Stock to the Company as full or partial payment of the exercise price, the number of shares available for issuance under this Plan shall be increased by the number of shares so tendered. (iii) Whenever any outstanding Option or other Award (or portion thereof) expires, is cancelled, is settled in cash or is otherwise terminated for any reason without having been exercised or payment having been made in respect of the entire Option or Award, the shares allocable to the expired, cancelled, settled or otherwise terminated portion of the Option or Award may again be the subject of Options or Awards granted under this Plan. (iv) Awards granted through the assumption of, or in substitution for, outstanding awards previously granted to individuals who become employees as a result of a merger, consolidation, acquisition or other corporate transaction involving the Company as a result of an acquisition will not count against the reserve of available shares under this Plan. The terms and conditions of the substitute or assumed Awards may vary from the terms and conditions set forth in this Plan to the extent the Committee at the time of the grant may deem appropriate to conform, in whole or in part, to the provisions of the Awards in substitution for which they are granted. (c) Shares to be Delivered. Shares of Common Stock to be delivered by the Company under this Plan shall be determined by the Committee and may consist in whole or in part of authorized but unissued shares or shares acquired on the open market. 5 (d) Fractional Shares. No fractional shares of Common Stock may be issued under this Plan; however, cash shall be paid in lieu of any fractional shares in settlement of an Award. 6. AWARD LIMITATIONS. The maximum number of Options, SARs and Restricted Shares that can be granted to any Eligible Participant during a single calendar year cannot exceed 750,000. The maximum per Eligible Participant, per calendar year amount of Awards other than Options, SARs and Restricted Shares shall not exceed two (2) times the Eligible Participant's base salary. The maximum Award that may be granted to any Eligible Participant for a Performance Period greater than one year shall not exceed the foregoing annual maximum multiplied by the number of full years in the Performance Period. 7. AWARDS TO ELIGIBLE PARTICIPANTS. (a) Options. (i) Grants. Subject to the terms and provisions of this Plan, Options may be granted to Eligible Participants. Options may consist of ISOs or NQSOs, as the Committee shall determine. Options may be granted alone or in tandem with SARs. With respect to Options granted in tandem with SARs, the exercise of either such Options or such SARs will result in the simultaneous cancellation of the same number of tandem SARs or Options, as the case may be. The grant of an Option shall occur on the date the Committee by resolution selects a Participant to receive a grant of an Option, determines the number of shares of Common Stock to be subject to such Option to be granted to such Participant and specifies the terms and provisions of the Option. The Company shall notify a Participant of any grant of an Option, and such Award shall be confirmed by, and subject to the terms of, an Award Agreement. (ii) Option Exercise Price. The Option Exercise Price shall be equal to or greater than the Fair Market Value on the date the Option is granted, unless the Option was granted through the assumption of, or in substitution for, outstanding awards previously granted to individuals who became employees of the Company or any Affiliate as a result of a merger, consolidation, acquisition or other corporate transaction involving the Company or such Affiliate. (iii) ISO Limits. ISOs may only be granted to employees of the Company and its Affiliates and may only be granted to an employee who, at the time the Option is granted, does not own stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Affiliate. The aggregate Fair Market Value of all shares with respect to which ISOs are exercisable by a Participant for the first time during any year shall not exceed $100,000; provided, however, that any Options or portions thereof that exceed such limit shall be treated as NQSOs notwithstanding any other provisions of the Award Agreement, but only to the extent of such excess. The aggregate Fair Market Value of such shares shall be determined at the time the Option is granted. (iv) No Repricing. Except for adjustments made pursuant to Section 10, the Option Exercise Price for any outstanding Option granted under this Plan may not be decreased after the date of grant nor may any outstanding Option granted under this Plan be surrendered to the Company as consideration for the grant of a new Option with a lower Option Exercise Price or otherwise be subject to any action that would be treated, for accounting purposes, as a "repricing" of such Option without the approval of the Company's shareholders. 6 (v) Buy Out of Option Gains. In the event of a Change of Control, the Committee shall have the right to elect, in its sole discretion and without the consent of the holder thereof, to cancel such Option and to cause the Company to pay to the Participant the excess of the Fair Market Value of the shares of Common Stock covered by such Option over the Option Exercise Price of such Option at the date the Committee provides written notice (the "Buy Out Notice") of its intention to exercise such right. Buyouts pursuant to this provision shall be effected by the Company as promptly as possible after the date of the Buy Out Notice. Payments of buy out amounts may be made in cash, in shares of Common Stock, or partly in cash and partly in Common Stock, as the Committee deems advisable. To the extent payment is made in shares of Common Stock, the number of shares shall be determined by dividing the amount of the payment to be made by the Fair Market Value of a share of Common Stock at the date of the Buy Out Notice. Notwithstanding the foregoing, the Committee shall have the right to elect, in its sole discretion and without the consent of the holder thereof, to cancel vested but unexercised Options and to cause the Company to pay to the Participant the excess of the Fair Market Value of the shares of Common Stock covered by such Options over the Option Exercise Price of such Options at the date the Committee provides the Buy Out Notice, so long as the Committee takes such action with respect to all vested but unexercised Options outstanding at the time the Committee elects to exercises such right. (b) Stock Appreciation Rights. (i) Grants. Subject to the terms and provisions of this Plan, SARs may be granted to Eligible Participants. SARs may be granted alone or in tandem with Options. With respect to SARs granted in tandem with Options, the exercise of either such Options or such SARs will result in the simultaneous cancellation of the same number of tandem SARs or Options, as the case may be. (ii) Purchase Price. The purchase price per share of Common Stock covered by a SAR granted pursuant to this Plan shall be equal to or greater than Fair Market Value on the date the SAR is granted, unless the SAR was granted through the assumption of, or in substitution for, outstanding awards previously granted to individuals who became employees of the Company of any Affiliate as a result of a merger, consolidation, acquisition or other corporate transaction involving the Company or such Affiliate. (iii) Form of Payment. The Committee may authorize payment of a SAR in the form of cash, Common Stock valued at its Fair Market Value on the date of the exercise, a combination thereof, or by any other method as the Committee may determine. (iv) No Repricing. Except for adjustments pursuant to Section 10, in no event may any Stock Appreciation Right granted under this Plan be amended to decrease the purchase price per share of Common Stock covered thereby, cancelled in conjunction with the grant of any new Stock Appreciation Right with a lower purchase price per share, or otherwise be subject to any action that would be treated, for accounting purposes, as a "repricing" of such Stock Appreciation Right, without the approval of the Company's shareholders. 7 (c) Restricted Shares / Restricted Share Units. (i) Grants. Subject to the terms and provisions of this Plan, Restricted Shares or Restricted Share Units may be granted to Eligible Participants. (ii) Restrictions. The Committee shall impose such terms, conditions and/or restrictions on any Restricted Shares or Restricted Share Units granted pursuant to this Plan as it may deem advisable including, without limitation: a requirement that Participants pay a stipulated purchase price for each Restricted Share or each Restricted Share Unit; restrictions based upon the achievement of specific performance goals (Company-wide, divisional, and/or individual); time-based restrictions on vesting; and/or restrictions under applicable Federal or state securities laws. Unless otherwise determined by the Committee at the time of grant, any time-based restriction period shall be for a minimum of three years. To the extent the Restricted Shares or Restricted Share Units are intended to be deductible under Code Section 162(m), the applicable restrictions shall be based on the achievement of Performance Goals over a Performance Period, as described in Section 7(d) below. (iii) Payment of Units. Restricted Share Units that become payable in accordance with their terms and conditions shall be settled in cash, shares of Common Stock, or a combination of cash and shares, as determined by the Committee. (iv) No Disposition During Restriction Period. During the Restriction Period, Restricted Shares may not be sold, assigned, transferred or otherwise disposed of, or mortgaged, pledged or otherwise encumbered. In order to enforce the limitations imposed upon the Restricted Shares, the Committee may (a) cause a legend or legends to be placed on any certificates relating to such Restricted Shares, and/or (b) issue "stop transfer" instructions, to its transfer agent as it deems necessary or appropriate. (v) Dividend and Voting Rights. Unless otherwise determined by the Committee, during the Restriction Period, Participants who hold Restricted Shares and Restricted Share Units shall have the right to receive dividends in cash or other property or other distribution or rights in respect of such shares, and Participants who hold Restricted Shares shall have the right to vote such shares as the record owner thereof. Unless otherwise determined by the Committee, any dividends payable to a Participant during the Restriction Period shall be distributed to the Participant only if and when the restrictions imposed on the applicable Restricted Shares or Restricted Share Units lapse. (vi) Share Certificates. Each certificate issued for Restricted Shares shall be registered in the name of the Participant and deposited with the Company or its designee. At the end of the Restriction Period, a certificate representing the number of shares to which the Participant is then entitled shall be delivered to the Participant free and clear of the restrictions. No certificate shall be issued with respect to a Restricted Share Unit unless and until such unit is paid in shares of Common Stock. 8 (d) Performance Awards. (i) Grants. Subject to the provisions of this Plan, Performance Awards consisting of Performance Shares or Performance Units may be granted to Eligible Participants. Performance Awards may be granted either alone or in addition to other Awards made under this Plan. (ii) Performance Goals. Unless otherwise determined by the Committee, Performance Awards shall be conditioned on the achievement of Performance Goals (which shall be based on one or more Performance Measures, as determined by the Committee) over a Performance Period. The Performance Period shall be one year, unless otherwise determined by the Committee. (iii) Performance Measures. The Performance Measure(s) to be used for purposes of Performance Awards may be described in terms of objectives that are related to the individual Participant or objectives that are Company-wide or related to a subsidiary, division, department, region, function, business unit or Affiliate of the Company in which the Participant is employed, and may consist of one or more or any combination of the following criteria: stock price, market share, sales revenue, cash flow, sales volume, earnings per share, EBITDA, pre-tax income, return on equity, return on assets, return on sales, return on invested capital, economic value added, net earnings, total shareholder return, gross margin, and/or costs. The Performance Goals based on these Performance Measures may be made relative to the performance of other corporations. The Performance Measures to be used for Performance Awards that are not intended to satisfy the conditions for the Performance Based Exception under Code Section 162(m) may consist of other criteria determined by the Committee. (iv) Extraordinary Events. At, or at any time after, the time an Award is granted, and to the extent permitted under Code Section 162(m) and the regulations thereunder without adversely affecting the treatment of the Award under the Performance Based Exception, the Committee may provide for the manner in which performance will be measured against the Performance Goals (or may adjust the Performance Goals) to reflect the impact of specific corporate transactions, accounting or tax law changes and other extraordinary and nonrecurring events. (v) Interpretation. With respect to any Award that is intended to satisfy the conditions for the Performance Based Exception under Code Section 162(m): (A) the Committee shall interpret this Plan and this Section 7 in light of Code Section 162(m) and the regulations thereunder; (B) the Committee shall have no discretion to amend the Award in any way that would adversely affect the treatment of the Award under Code Section 162(m) and the regulations thereunder; and (C) such Award shall not be paid until the Committee shall first have certified that the Performance Goals have been achieved. (e) Other Stock-Based Awards. The Committee is hereby authorized to grant to Eligible Participants, subject to the terms of this Plan, such other Awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, shares of Common Stock (including, without limitation, securities convertible into shares of Common Stock), as are deemed by the Committee to be consistent with the purpose of this Plan. Shares of Common Stock or other securities delivered pursuant to a purchase right granted under this Section 7(e) shall be purchased for such consideration, which may be 9 paid by such method or methods and in such form or forms (including, without limitation, cash, shares of Common Stock, other securities, other Awards or other property or any combination thereof), as the Committee shall determine, the value of which consideration, as established by the Committee, shall not be less than 100% of the Fair Market Value of such shares of Common Stock or other securities as of the date such purchase right is granted, unless otherwise determined by the Committee. (f) Dividend Equivalents. The Committee is hereby authorized to grant dividend equivalents to Eligible Participants under which the Participant shall be entitled to receive payments (in cash, shares of Common Stock, other securities, other Awards or other property as determined in the discretion of the Committee) equivalent to the amount of cash dividends paid by the Company to holders of shares of Common Stock with respect to a number of shares of Common Stock determined by the Committee. Subject to the terms of this Plan, such dividend equivalents may have such terms and conditions as the Committee shall determine. (g) Termination of Awards. Unless otherwise provided in an Award Agreement, Awards shall terminate in accordance with this Section 7(g). (i) Options and SARs Granted to Eligible Participants. Each Option and SAR granted to an Eligible Participant pursuant to this Section 7 shall terminate: If the Participant is then living, at the earliest of the following times: (A) ten (10) years after the date of grant of the Option or SAR, except in the event of death or Total Disability as provided below; (B) ninety (90) days after termination of employment with the Company or any Affiliate other than termination because of death or Total Disability or through discharge for Cause; provided, however, that if any Option or SAR is not fully exercisable at the time of such termination of employment, such Option or SAR shall expire on the date of such termination of employment to the extent not then exercisable; (C) immediately upon termination of Participant's employment through discharge for Cause; or (D) any other time set forth in the Award Agreement describing and setting the terms of the Award. In the event of death or Total Disability of the Participant while employed by the Company or any Affiliate, or if no longer so employed such Participant dies prior to termination of the entire Option or SAR under Section 7(g)(i)(B) or (D) hereof, the Participant's Option or SAR shall become exercisable in full on the date of such death or Total Disability and shall remain exercisable for a minimum period of one (1) year after the date of death or Total Disability, unless it terminates earlier pursuant to Section 7(g)(i)(A) or (D). To the extent an Option or SAR is exercisable after the death of the Participant, it may be exercised by the person or persons to whom the Participant's rights under the agreement have passed by will or by the applicable laws of descent and distribution and to the extent an Option or SAR is exercisable after the Total Disability of the Participant who is incompetent, it may be exercised by the Participant's legal representative. 10 (ii) Restricted Shares and Restricted Share Units. Unless otherwise provided in the related Award Agreement, in the case of a Participant's death or Total Disability, the Participant shall be entitled to receive a number of shares of Common Stock under outstanding Restricted Shares, or in the case of Restricted Share Units, an amount of cash or number of shares of Common Stock, that has been prorated for the portion of the term of the Award during which the Participant was employed by the Company or any Affiliate, and, with respect to any shares, all restrictions shall lapse. Any Restricted Shares or Restricted Share Units as to which the restrictions do not lapse under the preceding sentence shall terminate at the date of the Participant's termination of employment and such Restricted Shares or Restricted Share Units shall be forfeited to the Company; provided, however, that Awards of Restricted Shares or Restricted Share Units subject to Performance Measures shall be treated the same as Performance Awards according to Section 7(g)(iii). (iii) Performance Awards. If a Participant's employment or other relationship with the Company or any Affiliate terminates during a Performance Period applicable to a Performance Award because of death or Total Disability, or under other circumstances provided by the Committee in its discretion in the related Award Agreement or otherwise, the Participant, unless the Committee shall otherwise provide in the Award Agreement, shall be entitled to a payment with respect to such Performance Awards at the end of the Performance Period based upon the extent to which achievement of the Performance Measures was satisfied at the end of such period (as determined at the end of the Performance Period) and prorated for the portion of the Performance Period during which the Participant was employed by the Company or any Affiliate. Except as provided in this paragraph, if a Participant's employment with the Company or any Affiliate terminates during a Performance Period, then such Participant shall not be entitled to any payment with respect to that Performance Award. 8. AWARDS TO NON-EMPLOYEE DIRECTORS. (a) Awards. Non-Employee Directors are eligible to receive any and all types of Awards under this Plan other than ISOs. The Board must approve all Awards to Non-Employee Directors. Any Award to a Non-Employee Director shall be subject to the terms of Section 7 of this Plan, provided that to the extent the provisions of this Section 8 conflict with the terms of Section 7, this Section 8 shall prevail with respect to Awards to Non-Employee Directors. (b) Death, Total Disability and Retirement. In the event of the death, Total Disability or Retirement of a Non-Employee Director prior to the granting of an Award in respect of the fiscal year in which such event occurred, an Award may, in the discretion of the Board, be granted in respect of such fiscal year to the retired or disabled Non-Employee Director or his or her estate. If any Non-Employee Director ceases to be a member of the Board for any reason other than death, Total Disability or Retirement prior to the granting of an Award in respect of the fiscal year in which such event occurred, his or her rights to any Award in respect of the fiscal year during which such cessation occurred will terminate unless the Board determines otherwise. (c) Terms of Awards Granted to Non-Employee Directors. (i) Each Option granted to a Non-Employee Director shall have an Option Exercise Price equal to the Fair Market Value on the grant date. 11 (ii) Each Option granted to a Non-Employee Director shall vest in accordance with the terms of an Award Agreement and shall have a term of ten years. (iii) In the event a Non-Employee Director terminates membership on the Board prior to the vesting date, or lapsing of any restrictions, of an Award, then (A) if such termination is the result of such Non-Employee Director's death, Total Disability or Retirement, such Award shall immediately vest or, as applicable, the restrictions shall lapse, and, in the case of Options, be exercisable, and (B) if such termination is the result of an event other than death, Total Disability or Retirement, such Award shall immediately terminate and expire. (iv) No Options granted to a Non-Employee Director may be exercised after he or she ceases to be a member of the Board, except that: (A) if such cessation occurs by reason of death, the Options then held by the Non-Employee Director may be exercised by his or her designated beneficiary (or, if none, his or her legal representative) until the expiration of such Options in accordance with the terms hereof; (B) if such cessation occurs by reason of the Non-Employee Director incurring a Total Disability, the Options then held by the Non-Employee Director may be exercised by him or her until the expiration of such Options in accordance with its terms; and (C) if such cessation occurs by reason of the Non-Employee Director's Retirement, the Options then held by the Non-Employee Director may be exercised by him or her until the expiration of such Options in accordance with the terms hereof. (d) Exercise of Options Granted to Non-Employee Directors. (i) To exercise an Option, a Non-Employee Director must provide to the Company (A) a written notice specifying the number of Options to be exercised and (B) to the extent applicable, any required payments due upon exercise. (ii) Non-Employee Directors may exercise Options under either of the following methods: (A) Cashless Exercise. To the extent permitted by law, Non-Employee Directors may exercise Options through a registered broker-dealer pursuant to cashless exercise procedures that are, from time to time, approved by the Committee. Proceeds from any such exercise shall be used to pay the exercise costs, which include the Option Exercise Price, applicable taxes and brokerage commissions. Any remaining proceeds from the sale shall be delivered to the Non-Employee Director in cash or stock, as specified by the Non-Employee Director. (B) Standard Exercise. Non-Employee Directors may exercise Options by paying to the Company an amount in cash from his or her own funds equal to the Option Exercise Price and any taxes required at exercise. A certificate representing the shares of Common Stock that the Non-Employee Director purchased shall be delivered to him or her only after the Option Exercise Price and the applicable taxes have been paid. 9. DEFERRED PAYMENTS. Subject to the terms of this Plan, the Committee may determine that all or a portion of any Award to a Participant, whether it is to be paid in cash, shares of Common Stock or a combination thereof, shall be deferred or may, in its sole discretion, approve deferral elections made by Participants. Deferrals shall be for such periods and upon such terms as the Committee may determine in its sole discretion. 12 10. DILUTION AND OTHER ADJUSTMENTS. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, combination or exchange of shares or other change in corporate structure affecting any class of Common Stock, the Committee may, but shall not be required to, make such adjustments in the class and aggregate number of shares which may be delivered under this Plan as described in Section 5, the individual award maximums under Section 6, the class, number, and Option Exercise Price of outstanding Options and the class and number of shares subject to any other Awards granted under this Plan (provided the number of shares of any class subject to any Award shall always be a whole number), as may be determined to be appropriate by the Committee, and any such adjustment may, in the sole discretion of the Committee, take the form of Options covering more than one class of Common Stock. Such adjustment shall be conclusive and binding for all purposes of this Plan. 11. CHANGE IN CONTROL. (a) Impact of Change in Control. Notwithstanding any other provision of this Plan to the contrary, unless otherwise provided by the Committee in any Award Agreement, in the event of a Change in Control: (i) Any Options and SARs outstanding as of the date of such Change in Control, and which are not then exercisable and vested, shall become fully exercisable and vested. (ii) The restrictions and deferral limitations applicable to any Restricted Shares and Restricted Share Units shall lapse, and such Restricted Shares and Restricted Share Units shall become free of all restrictions and become fully vested. (iii) All Performance Awards shall be considered to be earned and payable in full, and any deferral or other restriction shall lapse and such Performance Awards shall be settled in cash or shares of Common Stock, as determined by the Committee, as promptly as is practicable. (iv) All restrictions on other Awards shall lapse and such Awards shall become free of all restrictions and become fully vested. (b) Definition. "Change in Control" means (i) a change in the composition of the Board such that the individuals who, as of the Effective Date (as defined below), constitute the Board (such Board shall be hereinafter referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this definition, that any individual who becomes a member of the Board subsequent to the Effective Date, whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; but, provided, further, that any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board shall not be so considered as a member of the Incumbent Board; (ii) consummation of a merger, tender offer or consolidation of 13 the Company with any other corporation, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 45% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iii) consummation of a sale of all or substantially all of the assets of the Company, other than in connection with the sale-leaseback of the Company's real estate. 12. MISCELLANEOUS PROVISIONS. (a) Misconduct. Except as otherwise provided in agreements covering Awards hereunder, a Participant shall forfeit all rights in his or her outstanding Awards under this Plan, whether or not such Awards have been earned or are vested or remain unearned or unvested, and all such outstanding Awards shall automatically terminate and lapse, if the Committee determines that such Participant has (i) used for profit or disclosed to unauthorized persons, confidential information or trade secrets of the Company, (ii) breached any contract with or violated any fiduciary obligation to the Company, including, without limitation, a violation of any Company code of conduct, (iii) engaged in unlawful trading in the securities of the Company or of another company based on information gained as a result of that Participant's employment or other relationship with the Company, or (iv) committed a felony or other serious crime. (b) Rights as Shareholder. Except as otherwise provided herein, a Participant shall have no rights as a holder of Common Stock with respect to Awards hereunder, unless and until certificates for shares of Common Stock are issued to the Participant. (c) No Loans. No loans from the Company to Participants shall be permitted under this Plan. (d) Assignment or Transfer. Unless the Committee shall specifically determine otherwise, no Award under this Plan or any rights or interests therein shall be transferable other than by will or the laws of descent and distribution and shall be exercisable, during the Participant's lifetime, only by the Participant. Once awarded, the shares of Common Stock received by Participants may be freely transferred, assigned, pledged or otherwise subjected to lien, subject to the restrictions imposed by the Securities Act of 1933, Section 16 of the Exchange Act and the Company's policy concerning insider trading, each as amended from time to time. (e) Withholding Taxes. The Company shall have the right to deduct from all Awards paid in cash (and any other payment hereunder) any federal, state, local or foreign taxes required by law to be withheld with respect to such Awards and, with respect to Awards paid in stock or upon exercise of Options, to require the payment (through withholding from the Participant's salary or otherwise) of any such taxes. The obligations of the Company to make delivery of Awards in cash or Common Stock shall be subject to currency or other restrictions imposed by any government. (f) No Rights to Awards. Neither this Plan nor any action taken hereunder shall be construed as giving any employee any right to be retained in the employ of the Company or any of its subsidiaries, divisions or Affiliates. Except as set forth herein, no employee or other person shall have any claim or right to be granted an Award under this Plan. By accepting an Award, the Participant acknowledges and agrees that (i) that the Award will be exclusively governed by the terms of this Plan, including the right reserved by the Company to amend or cancel this Plan at any time without the Company incurring liability to the Participant (except for Awards already granted under this Plan), (ii) Awards are not a constituent part of salary and that the Participant is not entitled, under 14 the terms and conditions of employment, or by accepting or being granted Awards under this Plan to require Awards to be granted to him or her in the future under this Plan, or any other plan, (iii) the value of Awards received under this Plan will be excluded from the calculation of termination indemnities or other severance payments, and (iv) the Participant will seek all necessary approval under, make all required notifications under and comply with all laws, rules and regulations applicable to the ownership of Options and stock and the exercise of Options, including, without limitation, currency and exchange laws, rules and regulations. (g) Beneficiary Designation. To the extent allowed by the Committee, each Participant under this Plan may, from time to time, name any beneficiary or beneficiaries (who may be named on a contingent or successive basis) to whom any benefit under this Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, and unless the Committee determines otherwise shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Company during the Participant's lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. (h) Costs and Expenses. The cost and expenses of administering this Plan shall be borne by the Company and not charged to any Award or to any Participant. (i) Fractional Shares. Fractional shares of Common Stock shall not be issued or transferred under an Award, but the Committee may pay cash in lieu of a fraction or round the fraction, in its discretion. (j) Funding of Plan. The Company shall not be required to establish or fund any special or separate account or to make any other segregation of assets to assure the payment of any Award under this Plan. (k) Indemnification. Provisions for the indemnification of officers and directors of the Company in connection with the administration of this Plan shall be as set forth in the Company's articles of incorporation and bylaws as in effect from time to time. (l) Successors. All obligations of the Company under this Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, by merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company. (m) Section 16 Compliance; Section 162(m) Administration. This Plan is intended to comply in all respects with Rule 16b-3 or any successor provision, as in effect from time to time, and in all events this Plan shall be construed in accordance with the requirements of Rule 16b-3. If any Plan provision does not comply with Rule 16b-3 as hereafter amended or interpreted, the provision shall be deemed inoperative. The Board, in its absolute discretion, may bifurcate this Plan so as to restrict, limit or condition the use of any provision of this Plan with respect to persons who are officers or directors subject to Section 16 of the Exchange Act without so restricting, limiting or conditioning this Plan with respect to other Eligible Participants. The Company intends that all Awards granted under this Plan to individuals who are or who the Committee believes will be "covered employees" (within the meaning of Section 162(m)(3) of the Code) will qualify for the Performance Based Exception. 15 13. EFFECTIVE DATE, GOVERNING LAW, AMENDMENTS AND TERMINATION. (a) Effective Date. This Plan shall be effective as of April 30, 2004 (the "Effective Date"), provided that it is approved by the shareholders of the Company in accordance with all applicable laws, regulations and stock exchange rules and listing standards. (b) Amendments. The Board may at any time terminate or from time to time amend this Plan in whole or in part, but no such action shall adversely affect any rights or obligations with respect to any Awards granted prior to the date of such termination or amendment. Notwithstanding the foregoing, unless the Company's shareholders shall have first approved the amendment, no amendment of this Plan shall be effective which would (i) increase the maximum number of shares of Common Stock which may be delivered under this Plan or to any one individual (except to the extent such amendment is made pursuant to Section 10 hereof), (ii) extend the maximum period during which Awards may be granted under this Plan, (iii) add to the types of awards that can be made under this Plan, (iv) change the Performance Measures pursuant to which Performance Awards are earned, (v) modify the requirements as to eligibility for participation in this Plan, or (vi) require shareholder approval pursuant to this Plan, applicable law or applicable stock exchange standards, to be effective. With the consent of the Participant affected, the Committee may amend outstanding agreements evidencing Awards under this Plan in a manner not inconsistent with the terms of this Plan. (c) Governing Law. All questions pertaining to the construction, interpretation, regulation, validity and effect of the provisions of this Plan shall be determined in accordance with the laws of the State of Minnesota without giving effect to conflict of laws principles. (d) Termination. No Awards shall be made under this Plan after the tenth anniversary of the Effective Date. 16 EX-10.31 8 n82215a2exv10w31.txt AMENDMENT NO. 7 TO AMENDED/RESTATED LOAN AGREEMENT EXHIBIT 10.31 AMENDMENT NO. 7 TO AMENDED AND RESTATED MASTER CONSTRUCTION AND TERM LOAN AGREEMENT THIS AMENDMENT NO. 7 TO AMENDED AND RESTATED MASTER CONSTRUCTION AND TERM LOAN AGREEMENT, dated April 28, 2004 (the "AMENDMENT"), among FCA Real Estate Holdings, LLC, a Delaware limited liability company ("Borrower"); U.S. Bank National Association, a national banking association, as agent and administrative bank (in such capacity, "ADMINISTRATIVE BANK") and as collateral agent (in such capacity, the "COLLATERAL AGENT") and the "Lender parties" to the Original Agreement described in this Amendment (each a "LENDER" and collectively the "LENDERS") and U.S. Bank National Association, a national banking association, as collateral agent (in such capacity, "COLLATERAL AGENT"). RECITALS: A. Borrower, Administrative Bank, Collateral Agent and the Lenders are parties to that certain Amended and Restated Master Construction and Term Loan Agreement dated as of July 17, 2000, as amended by Amendment No. 1 to Amended and Restated Master Construction and Term Loan Agreement dated June 14, 2001, Amendment No. 2 to Amended and Restated Master Construction and Term Loan Agreement dated July 19, 2001, Amendment No. 3 to Amended and Restated Master Construction and Term Loan Agreement dated August 21, 2001, Amendment No. 4 to Amended and Restated Master Construction and Term Loan Agreement dated February 28, 2002, Amendment No. 5 to Amended and Restated Master Construction and Term Loan Agreement dated May 31, 2002, and Amendment No. 6 to Amended and Restated Master Construction and Term Loan Agreement dated April 18, 2003 (as so amended and supplemented by the Supplements through the Series R Loan, the "ORIGINAL AGREEMENT"). B. Borrower has requested that Administrative Bank and the Lenders further amend the Original Agreement to extend the Termination Date from June 30, 2004 to January 1, 2006. C. Subject to the terms and conditions of this Amendment, Administrative Bank and the Lenders have agreed to Borrower's request. NOW, THEREFORE, the parties agree as follows: 1. DEFINED TERMS. All capitalized terms used in this Amendment shall, except where the context otherwise requires, have the meanings set forth in the Original Agreement as amended by this Amendment. 2. AMENDMENT. The definition of "Termination Date" in the DEFINITIONS Section of the Original Agreement is hereby amended by deleting the date "June 30, 2004" and replacing it with the date "January 1, 2006." 3. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective on the date (the "EFFECTIVE DATE") when, and only when, Administrative Bank shall have received: (a) Counterparts of this Amendment executed by Borrower, Administrative Bank, and all Lenders; (b) An extension fee, for the ratable benefit of each Primary Lender, in the amount of 0.25% of the $75,000,000 Aggregate Commitment with respect to the extension of the Maturity Date; and (c) Such other documents as Administrative Bank or any Lender may reasonably request. 4. REPRESENTATIONS AND WARRANTIES. To induce Administrative Bank and the Lenders to enter into this Amendment, Borrower represents and warrants to Administrative Bank and the Lenders and Collateral Agent as follows: (a) The execution, delivery and performance by Borrower of the Original Agreement, as amended by this Amendment, and any other documents to be executed and/or delivered by Borrower in connection with this Amendment have been duly authorized by all necessary company action, do not require any approval or consent of, or any registration, qualification or filing with, any government agency or authority or any approval or consent of any other person (including, without limitation, any member), do not and will not conflict with, result in any violation of or constitute any default under, any provision of Borrower's Articles of Organization, Member Control Agreement or Operating Agreement, any agreement binding on or applicable to Borrower or any of its property, or any law or governmental regulation or court decree or order, binding upon or applicable to Borrower or of any of its property and will not result in the creation or imposition of any security interest or other lien or encumbrance in or on any of its property pursuant to the provisions of any agreement applicable to Borrower or any of its property; (b) The representations and warranties contained in the Original Agreement are true and correct as of the date of this Amendment as though made on that date except to the extent that such representations and warranties relate solely to an earlier date and except that the representations and warranties set forth in Section IV.5 of the Original Agreement with respect to the audited or unaudited financial statements of Borrower or the Lessee, as the case may be, shall be deemed to be a reference to the most recent audited or unaudited financial statements of the relevant Person delivered to the Lenders pursuant to Section V.7 of the Original Agreement; (c) (i) No events have taken place and no circumstances exist at the date of this Amendment that would give Borrower the right to assert a defense, offset or counterclaim to any claim by Administrative Bank or any Lender for payment of any Note; and (ii) Borrower hereby releases and forever discharges Administrative Bank, each Lender and their respective successors, assigns, directors, officers, agents, employees and participants from any and all actions, causes of action, suits, proceedings, debts, sums of money, covenants, contracts, controversies, claims and demands, at law or in equity, that Borrower ever had or now has against such Person 2 by virtue of such Person's relationship to Borrower in connection with the Loan Documents and the transactions related to the Loan Documents; (d) The Original Agreement, as amended by this Amendment, is the legal, valid and binding obligation of Borrower, remains in full force and effect and is enforceable in accordance with its respective terms, subject only to bankruptcy, insolvency, reorganization, moratorium or similar laws, rulings or decisions at the time in effect affecting the enforceability of rights of creditors generally and to general equitable principles that may limit the right to obtain equitable remedies; and (e) No Default or Event of Default exists prior to or after giving effect to this Amendment. 5. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. (a) From and after the date of this Amendment, each reference in the Original Agreement to "this Agreement", "hereunder", "hereof', "herein" or words of like import referring to the Original Agreement, and each reference to the "Credit Agreement", "Loan Agreement", "thereunder", "thereof', "therein" or words of like import referring to the Original Agreement in any other Loan Document shall mean and be a reference to the Original Agreement as amended hereby. (b) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided in this Amendment, operate as a waiver of any right, power or remedy of Administrative Bank, any Lender or Collateral Agent under the Original Agreement or any other Loan Document, nor constitute a waiver of any provision of the Original Agreement or any such other Loan Document. 6. COSTS, EXPENSES AND TAXES. Borrower agrees to pay on demand all costs and expenses of Administrative Bank and each Lender in connection with the preparation, reproduction, execution and delivery of this Amendment, including their reasonable attorneys' fees and legal expenses. In addition, Borrower shall pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution and delivery, filing or recording of this Amendment and the other instruments and documents to be delivered under this Amendment, and agrees to save Administrative Bank and each Lender harmless from and against any and all liabilities with respect to, or resulting from, any delay in Borrower's paying or omission to pay, such taxes or fees. 7. GOVERNING LAW. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AMENDMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. 3 8. HEADINGS. Section headings in this Amendment are included in this Amendment for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 9. COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first written above. FCA REAL ESTATE HOLDINGS, LLC By: LIFE TIME FITNESS, Inc., its Manager By: -------------------------------- Name: -------------------------------- Title: -------------------------------- U.S. BANK NATIONAL ASSOCIATION, as Administrative Bank, Collateral Agent and a Lender By: ---------------------------------------- Karen E. Weathers, its Vice President BANK ONE, NA (Chicago Office), as a Lender By: ---------------------------------------- Winifred S. Pinet, its First Vice President MB FINANCIAL BANK, N.A., as a Lender By: ---------------------------------------- Thomas B. Marvinae, President -- South Region 4 EX-23.1 9 n82215a2exv23w1.txt CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement No. 333-113764 of LIFE TIME FITNESS, Inc. on Form S-1 of our report dated March 5, 2004, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Minneapolis, Minnesota May 20, 2004 GRAPHIC 11 n82215a2n8221500.gif GRAPHIC begin 644 n82215a2n8221500.gif M1TE&.#EAT@!-`*(``/___\S,S)F9F69F9C,S,P```````````"'Y!``````` M+`````#2`$T```/_*#3;_"#*.<=S;D1\.U^1)8YD*89FJIZ`YPF;^T%4,-^1 ML.X:H`L!`*%`+!J)E*3DR"P0(LUH$RJM%JG6[!60U02TQV`%O!V0IX*T3IA5 M*K-/[MD8'\Z+\7MU8_7>Q1("$DBV*0(M6C11PEH-RH:R7F'V:=ST2CV!!9J%IBAJV4:<3J:YS=9*1KUN^ M3'YSM*J,N96:`=1LIL!\5<=ZSY_#K]U&S&=Q$9O>@JV.C-C"E^%@\'?R!>/> M.?,M[TG*3-CTVXAETQ,0G#4I]LAX.H-KW[IKV/K1H;?GVRID1N@EO"4A_YI" M?>HF2,SXSUTK@QAA5=FHI=/!CQ[S/:S8SDK!)BH&(LSI0XV:F#A]JM&)4]8= ME]Q`KN0Y4\J_ETUN'BGG1MC30%D`)RU'>HM*L)PCG)F)I-AY;FC1E?J;9HH;="##+ MEI&AY?X7FCAD.$+5B&F9/,VIW4PP+V$]"[$64%6:.U=2_"PDBJG!?VX$_8CJ MS"N-SBHOG*";[FJ/%Q+S>KP;]D6D$UVFGMA=+?^QR6387A')IT"A;A;1=:-M\^\VE(&&] M40>)5^W=P6&+1\SV77!N:2C9?0M6)6,4_Z6V8)$6XDB2=U%(!1R/PW78HY`B MNL50C0)QE^0;&,Y!GX,O5J&?7D?\9H2)&6&Y"FXIOM?E&0B"25Z07%9)V(0C MEB$GFR>JN*,D<;HWIQ4@:M3?+V1H<&1(*/9)Y9]=F/!E'RF$>5F,=NY1'PQJ MXE2IEFV""BEI?C8I6%LP/DKDH5,@>2:4DZ"ZXU7PU3;JK*K:I]N4=2+$JC^N M7I$G$A)&2.N6<*U(JIO_RU9&)Y^K#CL)FK$NVFR!H4([WFVK7?N/B6,V:(JT M@<&*G5-LU5KJME%VBZNSA*[+G[04.:FGMX]EZZZIL-[8*+^G/3M@F;_F2";! 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Minnesota	7997	41-1689746
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)


		Underwriting	Proceeds to	Proceeds to
	Price to	Discounts and	Life Time	the Selling
	Public	Commissions	Fitness	Shareholders

Per Share	$	$	$	$
Total	$	$	$	$



				March 31, 2004

				Actual		As Adjusted


				(In thousands, except
				share data)
Cash and cash equivalents				$	2,307

Restricted cash(1)				$	12,459


Total debt				$	219,111

Redeemable preferred stock:
	Series B redeemable preferred stock, par value $.02 per share:
		1,000,000 shares authorized, 1,000,000 shares issued and outstanding, actual; none authorized or issued and outstanding, as adjusted			27,352
	Series C redeemable preferred stock, par value $.02 per share:
		4,500,000 shares authorized, 4,500,000 shares issued and outstanding, actual; none authorized or issued and outstanding, as adjusted			57,030
	Series D redeemable preferred stock, par value $.02 per share:
		2,000,000 shares authorized, 1,946,250 shares issued and outstanding, actual; none authorized or issued and outstanding, as adjusted			23,520

		Total redeemable preferred stock(2)			107,902

Shareholders’ equity:
	Undesignated preferred stock: 2,500,000 shares authorized, none issued and outstanding, actual; shares authorized, none issued and outstanding, as adjusted				—
	Common stock, par value $.02 per share: 50,000,000 shares authorized, 16,156,332 shares issued and outstanding, actual; shares authorized, shares issued and outstanding, as adjusted(3)				323
	Additional paid-in capital				17,823
	Retained earnings				18,665

		Total shareholders’ equity			36,811

			Total capitalization	$	363,824


Assumed initial public offering price per share			$

	Pro forma net tangible book value per share as of March 31, 2004	$

	Increase per share attributable to new investors

Pro forma net tangible book value per share after this offering

Dilution per share to new investors			$



		Shares Purchased				Total Consideration				Average
										Price Per
		Number	Percent			Amount	Percent			Share

Existing shareholders					%	$			%	$
New investors

	Total			100	%	$		100	%


Kris Sharpe, Esq. Faegre & Benson LLP 2200 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402-3901		Christopher T. Jensen, Esq. Jodi L. Lashin, Esq. Morgan, Lewis & Bockius LLP 101 Park Avenue New York, NY 10178-0060


	Page

PROSPECTUS SUMMARY		1
RISK FACTORS		9
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS		17
USE OF PROCEEDS		18
DIVIDEND POLICY		18
CAPITALIZATION		19
DILUTION		21
SELECTED CONSOLIDATED FINANCIAL DATA		22
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		26
BUSINESS		42
MANAGEMENT		56
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS		64
PRINCIPAL AND SELLING SHAREHOLDERS		66
DESCRIPTION OF CAPITAL STOCK		72
SHARES ELIGIBLE FOR FUTURE SALE		75
U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS		76
UNDERWRITING		80
NOTICE TO CANADIAN RESIDENTS		83
LEGAL MATTERS		84
EXPERTS		84
WHERE YOU CAN FIND MORE INFORMATION		84
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS		F-1



	•	shares of common stock issuable upon exercise of options outstanding under our stock option plans, at a weighted average exercise price of $ per share;



	•	shares of common stock reserved for future issuance under our stock incentive plans, of which options to purchase shares of common stock will be issued in connection with this offering at an exercise price per share equal to the price of shares sold in this offering.


	•	no exercise of the underwriters’ over-allotment option;

	•	all outstanding shares of our preferred stock have automatically converted into shares of common stock as a result of this offering; and

	•	no outstanding options have been exercised since , 2004.



	(1)	The statement of operations data for the year ended December 31, 2003 and the three months ended March 31, 2004 and the balance sheet data as of March 31, 2004 reflect the pro forma effect of the conversion of all the redeemable preferred stock into shares of common stock in connection with this offering.



	(2)	In-center revenue includes revenue generated at our centers from fees for personal training, group fitness training and other member activities, sales of products offered at our LifeCafe, sales of products and services offered at our LifeSpa and renting space in certain of our centers.



	(3)	For the year ended December 31, 2002 we recorded an asset impairment charge of $7.0 million related to our only executive facility, which is located in downtown Minneapolis, Minnesota, and a restaurant that we operate in the same building. The center is one of only two of our centers that are located in urban areas. This executive facility and restaurant differ significantly from our standard model and the initial cash flow results have not been as high as projected. Additionally, this facility and restaurant are located in a more costly geographic area of downtown Minneapolis. The charge represents the difference between the fair value of the assets as determined by discounted estimated future cash flows and the carrying amount of the assets.



	(4)	A loss on the extinguishment of debt of $2.9 million was recorded for the year ended December 31, 2001. The charge consisted of early extinguishment fees and the write-off of loan costs related to the original debt in connection with the refinancing of 10 of our centers.



	(5)	In 1999, we formed Bloomingdale LIFE TIME Fitness, L.L.C., referred to as Bloomingdale LLC, with two unrelated organizations for the purpose of constructing, owning and operating a sports, fitness and family recreation center in Bloomingdale, Illinois. Each member made an initial capital contribution of $2.0 million and owns a one-third interest in Bloomingdale LLC. The center



	(7)	Assumes the conversion of all preferred stock into shares of common stock upon completion of this offering and the sale by us of shares of common stock at an assumed initial public offering price of $ per share in this offering and the application of the estimated aggregate net proceeds to us of $ million after deducting underwriting discounts and commissions and estimated offering expenses payable by us of $ . We intend to use up to $15.0 million of the net proceeds to repay amounts outstanding under our revolving credit facility and, for purposes of this table, we have assumed that we will repay $15.0 million under our revolving credit facility. Amounts repaid under our revolving credit facility may, subject to the terms of the facility, be reborrowed by us. We also intend to use approximately $9.0 million to repay a loan under our construction facility. See “Use of Proceeds.” The as adjusted balance sheet data are presented as if this offering and the application of the net proceeds from this offering occurred on March 31, 2004.



	(8)	Membership dues, enrollment fees and in-center revenue for a center are included in comparable center revenue growth beginning on the first day of the thirteenth full calendar month of the center’s operation.



	(9)	Average revenue per membership is total center revenue for the period divided by an average number of memberships for the period, where average number of memberships for the period is derived from dividing the sum of the total memberships outstanding at the end of each month during the period by the total number of months in the period.


	*If we are unable to identify and acquire suitable sites for new sports, fitness and family recreation centers, our revenue growth rate and profits may be negatively impacted.*


	*We may be unable to attract and retain members, which could have a negative effect on our business.*


	*Delays in new sports, fitness and family recreation center openings could materially adversely affect our financial performance.*


	*Our continued growth could place strains on our management, employees, information systems and internal controls which may adversely impact our business and the value of your investment.*


Credit Suisse First Boston	Merrill Lynch & Co.


Banc of America Securities LLC	UBS Investment Bank


Piper Jaffray	William Blair & Company


	*The opening of new centers in existing locations may negatively impact our comparable revenue increases and our overall operating margins.*


	*Our debt levels may limit our flexibility in obtaining additional financing and in pursuing other business opportunities.*


	Because of the capital-intensive nature of our business, we may have to incur additional indebtedness or issue new equity securities and, if we are not able to access additional capital, our ability to operate or expand our business may be impaired and our operating results could be adversely affected.


	*The health club industry is highly competitive and our competitors may have greater resources and name recognition than we have.*


	*Competitors could copy our business model and erode our market share, brand recognition and profitability.*


	*We have significant operations concentrated in certain geographic areas, and any disruption in the operations of our centers in any of these areas could harm our operating results.*


	*If we cannot retain our key personnel and hire additional highly qualified personnel, we may not be able to successfully manage our operations and pursue our strategic objectives.*


	*If our founder and chief executive officer leaves our company for any reason, it could have a material adverse effect on us.*


	*We could be subject to claims related to health or safety risks at our sports, fitness and family recreation centers.*


	*We are subject to extensive government regulation, and changes in these regulations could have a negative effect on our financial condition and results of operations.*


	*We have introduced other business initiatives that may not be profitable.*


	If it becomes necessary to protect or defend our intellectual property rights or if we infringe on the intellectual property rights of others, we may be required to pay royalties or fees or become involved in costly litigation.


	*Our business could be affected by acts of war, terrorism or natural disasters.*


	*We will face new challenges and increased costs as a public company.*


	*We may use the proceeds of this offering in ways with which you may disagree.*


	*We cannot assure you that a market will develop for our common stock or what the market price of our common stock will be.*


	*If you purchase shares of common stock sold in this offering, you will experience significant and immediate dilution.*


	*Our principal shareholders, directors and executive officers may exercise significant control over our company.*


	*Our articles of incorporation, bylaws and Minnesota law may discourage takeovers and business combinations that our shareholders might consider in their best interests.*


	*We do not anticipate paying cash dividends on our shares of common stock in the foreseeable future.*