Document:

exv10w2

 

Exhibit 10.2

INVESTMENT AGREEMENT

by and among

BALLY TOTAL FITNESS HOLDING CORPORATION, as debtor and debtor-in-possession,

and

HARBINGER CAPITAL PARTNERS MASTER FUND I, LTD., and

HARBINGER CAPITAL PARTNERS SPECIAL SITUATIONS FUND, L.P.,

as Investors

Dated as of August 15, 2007

 

 

TABLE OF CONTENTS

	 	 	 	 	 	 	 
	 	 	 	 	Page
	ARTICLE I
	 	 	 	 
	DEFINITIONS	 	 	2	 
	 
	 	 	 	 	 	 
	Section 1.1

	 	Definitions
	 	 	2	 
	 
	 	 	 	 	 	 
	ARTICLE II
	 	 	 	 
	PURCHASE AND SALE OF SHARES	 	 	10	 
	 
	 	 	 	 	 	 
	Section 2.1

	 	Issuance and Sale of New Investor Shares
	 	 	10	 
	Section 2.2

	 	Payment of the New Investor Share Purchase Price
	 	 	10	 
	Section 2.3

	 	Investor Share Notice
	 	 	10	 
	 
	 	 	 	 	 	 
	ARTICLE III
	 	 	 	 
	THE CLOSING	 	 	11	 
	 
	 	 	 	 	 	 
	Section 3.1

	 	The Closing
	 	 	11	 
	Section 3.2

	 	Deliveries
	 	 	11	 
	 
	 	 	 	 	 	 
	ARTICLE IV
	 	 	 	 
	REPRESENTATIONS AND WARRANTIES OF THE COMPANY	 	 	12	 
	 
	 	 	 	 	 	 
	Section 4.1

	 	Organization
	 	 	12	 
	Section 4.2

	 	Due Authorization, Execution and Delivery; Enforceability
	 	 	12	 
	Section 4.3

	 	Capitalization
	 	 	12	 
	Section 4.4

	 	Consents
	 	 	12	 
	Section 4.5

	 	No Conflicts
	 	 	12	 
	Section 4.6

	 	No Registration
	 	 	13	 
	Section 4.7

	 	Financial Statements
	 	 	13	 
	Section 4.8

	 	No Fiduciary Representation
	 	 	13	 
	Section 4.9

	 	Title to Property
	 	 	14	 
	Section 4.10

	 	Litigation
	 	 	14	 
	Section 4.11

	 	ERISA
	 	 	14	 
	Section 4.12

	 	Copyrights, Patents, Trademarks and
Licenses, etc.
	 	 	14	 
	Section 4.13

	 	Environmental
	 	 	14	 
	Section 4.14

	 	Compliance with Laws
	 	 	15	 
	 
	 	 	 	 	 	 
	ARTICLE V
	 	 	 	 
	REPRESENTATIONS AND WARRANTIES OF THE INVESTORS	 	 	15	 
	 
	 	 	 	 	 	 
	Section 5.1

	 	Organization
	 	 	15	 
	Section 5.2

	 	Due Authorization
	 	 	16	 
	Section 5.3

	 	Consents and Approvals
	 	 	16	 
	Section 5.4

	 	No Violations
	 	 	16	 
	Section 5.5

	 	Financing
	 	 	17	 
	Section 5.6

	 	Investment Representations
	 	 	17	 
	Section 5.7

	 	Dollar Revenues
	 	 	17	 

i

 

	 	 	 	 	 	 	 
	 	 	 	 	Page
	ARTICLE VI
	 	 	 	 
	COVENANTS	 	 	17	 
	 
	 	 	 	 	 	 
	Section 6.1

	 	Conduct of Business Pending the Closing
	 	 	17	 
	Section 6.2

	 	No Solicitation of Alternative Proposals
	 	 	20	 
	Section 6.3

	 	Cooperation; Access to Information
	 	 	23	 
	Section 6.4

	 	HSR Act
	 	 	23	 
	Section 6.5

	 	Further Actions; Reasonable Efforts
	 	 	24	 
	Section 6.6

	 	Use of Proceeds
	 	 	24	 
	Section 6.7

	 	Notification of Certain Matters
	 	 	24	 
	Section 6.8

	 	Compliance with Other Agreements
	 	 	25	 
	Section 6.9

	 	Information
	 	 	25	 
	 
	 	 	 	 	 	 
	ARTICLE VII
	 	 	 	 
	CONDITIONS	 	 	25	 
	 
	 	 	 	 	 	 
	Section 7.1

	 	Conditions to the Obligations of the Investors
	 	 	25	 
	Section 7.2

	 	Conditions to the Obligations of the Company
	 	 	26	 
	 
	 	 	 	 	 	 
	ARTICLE VIII
	 	 	 	 
	TERMINATION; BREAK-UP FEE; FEES AND EXPENSES	 	 	27	 
	 
	 	 	 	 	 	 
	Section 8.1

	 	Termination
	 	 	27	 
	Section 8.2

	 	Break-Up Fee; Fees and Expenses
	 	 	29	 
	 
	 	 	 	 	 	 
	ARTICLE IX
	 	 	 	 
	INDEMNIFICATION	 	 	30	 
	 
	 	 	 	 	 	 
	Section 9.1

	 	Indemnification
	 	 	30	 
	Section 9.2

	 	Notice; Assumed Defense
	 	 	31	 
	Section 9.3

	 	Settlements
	 	 	31	 
	Section 9.4

	 	Limitation on Liability
	 	 	32	 
	 
	 	 	 	 	 	 
	ARTICLE X
	 	 	 	 
	SUBSIDIARY GUARANTEE	 	 	32	 
	 
	 	 	 	 	 	 
	Section 10.1

	 	Guarantee
	 	 	32	 
	 
	 	 	 	 	 	 
	ARTICLE XI
	 	 	 	 
	MISCELLANEOUS	 	 	32	 
	 
	 	 	 	 	 	 
	Section 11.1

	 	Certain Matters
	 	 	32	 
	Section 11.2

	 	Governing Law
	 	 	32	 
	Section 11.3

	 	Jurisdiction; Forum; Service of Process; Waiver of Jury Trial
	 	 	32	 
	Section 11.4

	 	Successors and Assigns
	 	 	33	 
	Section 11.5

	 	Entire Agreement; Amendment
	 	 	33	 
	Section 11.6

	 	Notices
	 	 	33	 
	Section 11.7

	 	Delays or Omissions
	 	 	35	 
	Section 11.8

	 	Several Obligations of Investors
	 	 	35	 
	Section 11.9

	 	Counterparts
	 	 	35	 

ii

 

	 	 	 	 	 	 	 
	 	 	 	 	Page
	Section 11.10

	 	Severability
	 	 	35	 
	Section 11.11

	 	Construction
	 	 	35	 
	Section 11.12

	 	Headings
	 	 	35	 
	Section 11.13

	 	Public Announcement
	 	 	36	 
	Section 11.14

	 	Consummation; Specific Performance
	 	 	36	 
	Section 11.15

	 	Non-Survival of Representations and Warranties
	 	 	36	 
	Section 11.16

	 	Third Party Beneficiaries
	 	 	36	 

Exhibits

Exhibit I – Amended Plan of Reorganization

Exhibit II – Form of Investor Share Notice

Exhibit III – NAICS Industry Codes

Schedules

Schedule A – Litigation Schedule

iii

 

INVESTMENT AGREEMENT

     This INVESTMENT AGREEMENT (as it may be amended, restated, supplemented or otherwise modified
from time to time, this “Agreement”) is made as of August 15, 2007, by and among Bally
Total Fitness Holding Corporation, a Delaware corporation, in its capacity as debtor and debtor in
possession (the “Company”), the subsidiary guarantors set forth on the signature pages
hereto (the “Subsidiary Guarantors”), as guarantors, and Harbinger Capital Partners Master
Fund I, Ltd. and Harbinger Capital Partners Special Situations Fund, L.P. (collectively, including
any affiliates thereof, the “Investors”).

RECITALS

     WHEREAS, the Company and certain of its direct and indirect subsidiaries (as more particularly
defined in the Plan (as defined below), the “Debtors”) have filed chapter 11 petitions
under Chapter 11 of Title 11 of the United States Code, 11 U.S.C. §§ 101-1330 (as amended, the
“Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New
York (the “Bankruptcy Court”), Case No. 07-12395 (BRL) July 31, 2007) in order to
effectuate a financial and corporate restructuring of the Debtors through the Initial Plan (as
defined below) (such chapter 11 cases, as more particularly defined in the Plan, the “Chapter
11 Cases”);

     WHEREAS, the Company desires to undertake the Restructuring (as hereinafter defined) in
accordance with the Plan (as hereinafter defined);

     WHEREAS, in connection with the Restructuring, the Investors desire to make a significant new
investment in Reorganized Bally (as hereinafter defined) in exchange for newly issued equity of
Reorganized Bally;

     WHEREAS, to implement such investment, the Investors desire to acquire from the Reorganized
Bally, and the Company desires to issue to the Investors, upon the terms and subject to the
conditions set forth herein, the New Investor Shares (as hereinafter defined);

     WHEREAS, prior to the entry into this Agreement, the Company filed (i) a motion for an order
authorizing Company to enter into the Restructuring Support Agreement (as defined below) and this
Agreement, including, without limitation, the Break-Up Fee and Expenses set forth in Section 8.2
hereof (the “Approval Motion”), and (ii) a motion for an order authorizing the Company
pursuant to Section 1127(a) of the Bankruptcy Code and Bankruptcy Rule 3019 (the “Section
1127(a) Motion”) to modify their Initial Plan in the form of the Plan, without the need to
resolicit the votes of any creditor with respect to the Plan, and finding that the Plan does not
adversely affect any class of creditors whose votes were solicited for the Initial Plan and that
the Plan is deemed accepted by all creditors who have previously accepted the Initial Plan.

     NOW, THEREFORE, in consideration of the mutual covenants, agreements, representations and
warranties contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:

 

 

ARTICLE I

DEFINITIONS

     Section 1.1 Definitions. For the purposes of this Agreement, the following terms
shall have the following meanings:

     “Action” shall mean any litigation, suit, claim, action, administrative, arbitral or
other proceeding, inquiry, audit, hearing, petition, grievance, complaint, challenge or
governmental or regulatory investigation.

     “Affiliate” shall, with respect to any Person, mean any other Person that directly, or
indirectly through one or more intermediaries, controls, or is controlled by, or is under common
control with, the Person specified. For the purposes of this Agreement, (i) the Company and its
subsidiaries shall not be deemed to be Affiliates of either the Investors or the Excluded Parties,
and neither the Investors nor the Excluded Parties shall be deemed to be Affiliates of the Company
and its subsidiaries, and (ii) neither of the Investors shall be deemed to be Affiliates of the
Excluded Parties, and none of the Excluded Parties shall be deemed to be Affiliates of the
Investors.

     “Agreement” shall have the meaning ascribed thereto in the Preamble.

     “Alternative Proposal” shall have the meaning ascribed thereto in Section 6.2.

     “Assumed Contract” shall mean any contract of the Debtors that is not set forth on
Exhibit E to the Plan, as amended from time to time.

     “Assumption Orders” shall mean the order or orders entered by the Bankruptcy Court
(which may include the Confirmation Order) approving the assumption of the Assumed Contracts, in
form and substance reasonably satisfactory to the Investors.

     “Bankruptcy Code” shall have the meaning ascribed thereto in the Recitals.

     “Bankruptcy Court” shall have the meaning ascribed thereto in the Recitals.

     “Board of Directors” shall mean (i) the Board of Directors of the Company (or
Reorganized Bally, as the case may be) or (ii) to the extent the Board of Directors of the Company
determines in good faith (after consultation with its legal counsel) that it must constitute a
special committee consisting of only disinterested directors (as such term is used in Section 144
of the Delaware General Corporation Law) to consider a particular action with respect to which
certain of its members are interested directors (as such term is used in Section 144 of the
Delaware General Corporation Law), such duly constituted special committee of the Board of
Directors of the Company so long as it consists of all members of the Board of Directors of the
Company that are disinterested directors with respect to such action.

     “Break-Up Fee” shall have the meaning ascribed thereto in Section 8.2(a).

2

 

     “Business Day” shall mean any day excluding Saturday, Sunday, or any other day on
which banking institutions located in New York, New York are required or authorized to be closed.

     “Business Plan” shall mean that 2007-2011 business plan of the Company, dated June 27,
2007.

     “Cash Collateral Order” shall mean, collectively, (i) any and all cash collateral
orders entered by the Bankruptcy Court in any of the Chapter 11 Cases with respect to the use of
cash collateral pursuant the Old Credit Agreement or (ii) any other cash collateral order entered
by the Bankruptcy Court in any of the Chapter 11 Cases, which, with respect to each of (i) and
(ii), shall be reasonably acceptable to the Investors.

     “Chapter 11 Cases” shall have the meaning ascribed thereto in the Recitals.

     “Closing” shall have the meaning ascribed thereto in Section 3.1.

     “Closing Date” shall have the meaning ascribed thereto in Section 3.1.

     “Code” shall mean the Internal Revenue Code of 1986, as amended.

     “Company” shall have the meaning ascribed thereto in the Preamble.

     “Company Securities” shall mean (x) shares of capital stock or other voting securities
of the Company, (y) securities of the Company convertible into or exchangeable for shares of
capital stock or other voting securities of the Company or (z) options (including cash settlement
options), warrants or other rights to acquire shares of capital stock or other voting securities of
the Company.

     “Confirmation Order” shall have the meaning ascribed thereto in the Plan.

     “Consenting Noteholders” shall mean the Excluded Parties and the Other Consenting Noteholders.

     “Debtors” shall have the meaning ascribed thereto in the Recitals.

     “DIP Loan Facility” shall have the meaning ascribed thereto in the Plan, as it may be
amended, restated, supplemented and otherwise modified from time to time in accordance with the
terms thereof and, if such amendment, restatement, supplement or other modification would be
materially adverse to any of the Debtors, with the consent of the Investors and the Excluded
Parties, such consent not to be unreasonably withheld or delayed.

     “Effective Date” shall have the meaning ascribed thereto in the Plan.

     “Employee Benefit Plan” shall mean, at any date, any employee pension benefit plan (as
defined in Section 3(2) of ERISA) which is subject to Title IV of ERISA (other than a Multiemployer
Plan) and to which Borrower or any ERISA Affiliate may have any liability, including any liability
by reason of having been a substantial employer within the meaning of Section 4063 of ERISA at any
time during the preceding five years, or by reason of being deemed to be a contributing sponsor
under Section 4069 of ERISA

3

 

     “Encumbrance” shall mean any lien, encumbrance, security interest, option, pledge,
mortgage, deed of trust, hypothecation, conditional sale or restriction on transfer of title or
voting, whether imposed by agreement, understanding, law, equity or otherwise, except for any
restrictions on transfer generally arising under any applicable federal or state securities laws.

     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended
from time to time, and any regulations promulgated thereunder.

     “ERISA Affiliate” means any corporation, trade or business that is, along with
Borrower, a member of a controlled group of corporations or a controlled group of trades or
businesses, as described in Section 414 of the Code or Section 4001 of ERISA.

     “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, or any
successor federal statute, and the rules and regulations of the SEC thereunder, all as the same
shall be in effect at the time. Reference to a particular section of the Exchange Act shall
include reference to the comparable section, if any, of such successor federal statute.

     “Excluded Parties” shall mean each of Anschutz Investment Company, Goldman, Sachs &
Co., Special Value Opportunities Fund, LLC, Special Value Expansion Fund, LLC, Special Value
Continuation Partners, LP, Tennenbaum Opportunities Partners V, LP. and Tennenbaum Capital
Partners, LLC.

     “Excluded Restructuring” shall mean (i) the financial and corporate restructuring of
the Debtors contemplated by the Plan or (ii) any other financial and corporate restructuring of the
Debtors funded by one or more of the Excluded Parties so long as such restructuring is not a
Superior Transaction.

     “Expenses” shall have the meaning ascribed thereto in Section 8.2(b).

     “Final Order” shall mean an order of the Bankruptcy Court as to which the time to
appeal, petition for certiorari, or move for reargument or rehearing has expired and as to which no
appeal, petition for certiorari, or other proceedings for reargument or rehearing shall then be
pending or as to which any right to appeal, petition for certiorari, reargument, or rehearing shall
have been waived in writing in form and substance satisfactory to the Investors, or, in the event
that an appeal, writ of certiorari or reargument, or rehearing thereof has been sought, such order
of the Bankruptcy Court shall have been determined by the highest court to which such order was
appealed, or certiorari, reargument or rehearing shall have been denied and the time to take any
further appeal, petition for certiorari, or move for reargument or rehearing shall have expired;
provided, however, that the possibility that a motion under Rule 60 of the Federal Rules of Civil
Procedure, or any analogous rule under the rules promulgated under the Bankruptcy Code, may be
filed with respect to such order shall not preclude such order from being a Final Order.

     “GAAP” shall mean generally accepted accounting principles in the United States, as in
effect from time to time, consistently applied.

     “Governmental Approvals” shall mean (i) the filing of a new or amended and restated
certificate of incorporation, or other applicable organizational filings, for one or more of

4

 

the Reorganized Debtors with the Secretary of State (or similar state authority) of such
Reorganized Debtor’s state of incorporation or organization, (ii) any required filings under the
HSR Act and the expiration or termination of the applicable waiting period (and any extension
thereof) under the HSR Act, (iii) the Confirmation Order, (iv) the Assumption Order, (v) an order
of the Bankruptcy Court approving this Agreement and the Restructuring Support Agreement, (vi) any
filings with, motions before, orders, approvals or other actions of the Bankruptcy Court as
contemplated by this Agreement, the Plan or the Restructuring Support Agreement, and (vii) any
authorization pursuant to Section 363 of the Bankruptcy Code in accordance with the Plan, the
Confirmation Order and/or the Assumption Order.

     “Governmental Entity” shall mean any supranational, national, foreign, federal, state
or local judicial, legislative, executive, administrative or regulatory body or authority.

     “Governmental Requirement” shall mean all consents, approvals, authorizations of,
declarations, filings, or registrations with, any Governmental Entity required to be made or
obtained by either the Company or any of its subsidiaries in connection with the execution,
delivery, and performance of this Agreement or any of the other Transaction Documents and the
transactions contemplated hereby and thereby, including, without limitation, the Governmental
Approvals.

     “Hazardous Materials” means any (i) “hazardous substance” or “toxic substances,” as
those terms are defined by the Comprehensive Environmental Response, Compensation, and Liability
Act (“CERCLA”), 42 U.S.C. § 9601 et seq. and the Hazardous Materials Transportation
Act, 49 U.S.C. § 1802, all as amended or hereafter amended; (ii) “hazardous waste”, as defined by
the Resource Conservation and Recovery Act (“RCRA”), 42 U.S.C. § 6901 et seq., as
amended or hereafter amended; (iii) pollutant or contaminant or hazardous, dangerous or toxic
chemical, material, or substance within the meaning of any other applicable federal, state or local
law, regulation, ordinance, or requirement (including consent decrees and administrative orders)
relating to protection of health, safety or the environment, as amended or hereafter amended; (iv)
crude oil or any fraction thereof which is liquid at standard conditions of temperature and
pressure (60 degrees Fahrenheit and 14.7 pounds per square inch absolute); (v) any radioactive
material, including any source, special nuclear or by-product material as defined at 42 U.S.C. §
2011 et seq., as amended or hereafter amended; (vi) asbestos or asbestos containing
material (“ACM”) in any form or condition and (vii) polychlorinated biphenyls (“PCBs”) or
substances or compounds containing PCBs.

     “Hazardous Materials Laws” means any federal, state or local statute, regulation,
ordinance or other legal requirement (including consent decrees and administrative orders) relating
to protection of health, safety or environment, including but not limited to the Comprehensive
Environmental Response, Compensation and Liability Act (“CERCLA”), 42 U.S.C. § 9601 et
seq.; the Resource Conservation and Recovery Act (“RCRA”), 42 U.S.C. § 6901 et
seq.; the Clean Air Act, 42 U.S.C. § 7401 et seq.; the Clean Water Act, 33
U.S.C. § 1251 et seq.; the Occupational Safety and Health Act (“OSHA”), 29 U.S.C. §
651 et seq.; the Toxic Substances Control Act (“TSCA”), 15 U.S.C. § 2601 et
seq.; any similar state or local laws; any regulations promulgated pursuant to any of the
foregoing; and all of the foregoing as amended or hereafter amended.

5

 

     “HSR Act” shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.

     “Initial Plan” shall mean the plan of reorganization of the Company previously filed
with the Bankruptcy Court on the Petition Date.

     “Intellectual Property” shall mean collectively, all rights, priorities and privileges
of the Company or any of its subsidiaries relating to intellectual property, whether arising under
United States, multinational or foreign laws or otherwise, including copyrights, copyright
licenses, patents, patent licenses, trademarks, trademark licenses and trade secrets and all rights
to sue at law or in equity or any infringement or other impairment thereof, including the right to
receive all proceeds and damages therefrom.

     “Investment” shall have the meaning ascribed thereto in Section 2.2.

     “Investors” shall have the meaning ascribed thereto in the Preamble.

     “Investor Share Notice” shall have the meaning ascribed thereto in Section 2.3.

     “Knowledge” of the Company shall mean the knowledge, after due inquiry, of Don R.
Kornstein and Marc D. Bassewitz.

     “Law” shall mean any law, statute, ordinance, rule, regulation, order, judgment,
decree or body of law of any Governmental Entity.

     “Liberation” shall mean Liberation Investments, L.P. and Liberation Investments, Ltd.

     “Material Adverse Effect” shall mean a change, effect, event, occurrence, development,
circumstance or state of facts that, either alone or in combination, has had or would reasonably be
expected to have a materially adverse effect on the business, properties, operations, financial
condition, prospects or results of operations of the Debtors or Reorganized Bally (as the case may
be) and their subsidiaries (including foreign subsidiaries and their respective businesses) taken
as a whole, or which would or would reasonably be expected to materially impair its ability to
perform its obligations under this Agreement or have a materially adverse effect on or prevent or
materially delay the consummation of the transactions contemplated by the Plan; provided, that in
no event shall (i) any effect directly resulting from the public announcement of this Agreement or
the Plan or the commencement of the Chapter 11 Cases or (ii) any changes in financial condition
reflected in the Updated Financial Information be taken into account in determining whether there
has been, or would reasonably likely be, a Material Adverse Effect for purposes of this Agreement.

     “Material Contract” shall mean any of the following, other than in connection with the
purchase of inventory in the Ordinary Course of Business: (i) any (x) lease for real property, or
(y) lease for personal property, in each case, which requires aggregate payments by the Debtors of
$500,000 or more in any calendar year; (ii) any contract for the purchase of materials, supplies,
goods, services, equipment or other assets that has a term of at least one year following the
Closing and which requires aggregate payments by the Debtors of $2,000,000 or

6

 

more in any calendar year; (iii) any contract that requires annual aggregate payments by the
Debtors after Closing of $2,000,000 or more; (iv) any sales, distribution or other similar
contracts not entered into in the Ordinary Course of Business providing for the sale by the Debtors
of materials, supplies, goods, services, equipment or other assets that requires annual aggregate
payments after Closing of $2,000,000 or more; (v) any partnership, joint venture or other similar
contract to which any of the Debtors is a party; (vi) any employment agreements or amendments to
employment agreements pursuant to which any employee will receive over $750,000 in either cash or
securities; or (vii) any other contract, the loss of which would be reasonably likely to result in
a Material Adverse Effect.

     “Multiemployer Plan” has the meaning ascribed to it in Section 3(37) of ERISA.

     “New Common Shares” shall mean shares of New Common Stock.

     “New Common Stock” shall have the meaning ascribed thereto in the Plan.

     “New Credit Agreement” shall have the meaning ascribed thereto in the Plan.

     “New Investor Purchase Price” shall have the meaning ascribed thereto in Section 2.2.

     “New Investor Shares” shall mean New Common Shares to be issued by Reorganized Bally
to the Investors under the Plan and as provided in Article II hereto.

     “Old Credit Agreement” shall mean that certain Amended and Restated Credit Agreement,
dated as of October 16, 2006, by and among, Bally Total Fitness Holding Corporation, as Borrower,
the several banks and other financial institutions parties thereto, JPMorgan Chase Bank, N.A., as
Agent, and Morgan Stanley Senior Funding, Inc., as Syndication Agent (as amended).

     “Ordinary Course of Business” shall mean the ordinary course of business of the
Debtors consistent with past custom and practice as of August 1, 2007 (including with respect to
frequency and amount).

     “Other Consenting Noteholders” shall mean those Persons, other than the Excluded
Parties, set forth on Exhibit A and Exhibit B to the Restructuring Support Agreement.

     “Outside Date” shall mean (i) if the Section 1127(a) Order is entered and remains in
full force and effect, October 15, 2007, and (ii) if the Section 1127(a) Order has not been entered
or otherwise is not in full force and effect, November 30, 2007.

     “Permitted Encumbrances” shall mean any Encumbrance (i) permitted under the DIP Loan
Facility or the Old Credit Agreement, as the case may be; (ii) included in the definition of
“Permitted Encumbrance” in the Old Credit Agreement; or (iii) arising in the Ordinary Course of
Business that are not incurred in connection with the borrowing of money and that would not
materially interfere with the conduct of the business of the Company or any of its subsidiaries.

7

 

     “Person” shall mean any individual, firm, corporation, limited liability company,
partnership, company, trust or other entity, and shall include any successor (by merger or
otherwise) of such entity.

     “Petition Date” shall mean July 31, 2007.

     “Plan” shall mean the amended plan of reorganization in substantially the form
attached hereto as Exhibit I and with such further changes as may be reasonably acceptable to the
Debtors, the Investors and the Excluded Parties, together with all schedules and exhibits thereto.

     “Prepetition Management Incentive Plan” shall have the meaning ascribed thereto in the
Plan.

     “Reorganized Bally” shall mean the Reorganized Debtor whose New Common Shares will be
issued pursuant to the Plan.

     “Reorganized Debtors” shall mean the entities, which may include one or more new
holding companies and operating companies to be formed pursuant to the Plan, that will carry out
the business of the Company and its subsidiaries upon emergence from bankruptcy under chapter 11 of
the Bankruptcy Code.

     “Representatives” shall, with respect to any Person, mean the directors, officers,
employees, representatives, agents and advisors (including any investment banker, financial
advisor, attorney, accountant or other representative retained by any of them or acting on their
behalf) of such Person.

     “Required Consent” shall mean any consent under an Assumed Contract required so that
the execution, delivery and/or performance by the Company of this Agreement, the consummation of
the transactions contemplated by this Agreement, and the assumption and/or continued enforcement
thereof by the Company or a subsidiary or any of the Reorganized Debtors will not result in any
breach of or constitute a default (or an event which with or without notice or lapse of time or
both would become a default) under, or give to others any right of termination, amendment,
acceleration or cancellation of, such Assumed Contract, or result in the creation of an
Encumbrance, other than a Permitted Encumbrance, on any property or asset of the Company or any
subsidiary except where the failure to obtain any such consent or consents would not, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect. For all purposes of
this Agreement, the Company or any subsidiary shall be deemed to have obtained a Required Consent
if, and to the extent that, pursuant to the Plan, the Confirmation Order and/or the Assumption
Orders the Company (or the applicable subsidiary) is authorized to assume the Assumed Contracts
pursuant to section 365 of the Bankruptcy Code.

     “Restructuring” shall mean the consummation of the financial and corporate
restructuring of the Company and its subsidiaries contemplated under the Plan to occur on the
Effective Date.

8

 

     “Restructuring Support
Agreement” shall mean (i) that certain Restructuring Support
Agreement, dated as of the date hereof, by and among the Debtors, the
Investors and the Consenting Noteholders and (ii) that certain
Restructuring Support Agreement, dated as of the date hereof, by and
among the Debtors and Liberation.

     “SEC” shall mean the United States Securities and Exchange Commission and any
successor Governmental Entity.

     “SEC Reports” shall mean any and all proxy statements, annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and any other documents filed by the
Company under the Exchange Act.

     “Section 1127(a) Order” shall mean an order of the Bankruptcy Court, in form and
substance reasonably acceptable to Harbinger and the Company, granting the Section 1127(a) Motion.

     “Section 1127(a) Motion” shall have the meaning ascribed thereto in the Recitals.

     “Securities Act” shall mean the Securities Act of 1933, as amended, or any successor
federal statute, and the rules and regulations of the SEC thereunder, all as the same shall be in
effect at the time. Reference to a particular section of the Securities Act shall include
reference to the comparable section, if any, of such successor federal statute.

     “Significant Subsidiary” shall have the meaning assigned to it under Rule 1-02 of
Regulation S-X promulgated under the Exchange Act.

     “Subscription Payment Date” shall have the meaning ascribed thereto in the Plan.

     “subsidiary” of any Person means, on any date, any Person (i) the accounts of which
would be consolidated with and into those of the applicable Person in such Person’s consolidated
financial statements if such financial statements were prepared in accordance with GAAP as of such
date or (ii) of which securities or other ownership interests representing more than fifty percent
of the equity or more than fifty percent of the ordinary voting power or, in the case of a
partnership, more than fifty percent of the general partnership interests or more than fifty
percent of the profits or losses of which are, as of such date, owned, controlled or held by the
applicable Person or one or more subsidiaries of such Person.

     “Subsidiary Guarantors” shall have the meaning ascribed thereto in the Preamble.

     “Superior Proposal” shall have the meaning ascribed thereto in Section 6.2.

     “Tax” shall mean all taxes of any kind, charges, fees, customs, duties, imposts,
levies or other assessments, including, without limitation, all net income, gross receipts, ad
valorem, value added, transfer, gains, franchise, profits, inventory, net worth, capital stock,
asset, sales, use, license, estimated withholding, payroll, transaction, capital, employment,
social security, workers compensation, unemployment, excise, any interest and any penalties,
additions to tax or additional amounts, imposed by any taxing authority (domestic or foreign) and
shall include any transferee liability in respect of Taxes.

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     “Tax Return” shall mean all returns, declarations, reports, forms, estimates,
information returns and statements required to be filed in respect of any Taxes or to be supplied
to a taxing authority in connection with any Taxes.

     “Transaction Documents” shall mean this Agreement, the Restructuring Support Agreement
and such other contracts, agreements, schedules, certificates, orders and other documents as the
parties mutually agree in writing.

     “Trigger Event” shall mean any of Sections 8.1(b)(i), 8.1(b)(ii), 8.1(b)(iii),
8.1(b)(v)(C), 8.1(b)(vii) or 8.1(c)(ii).

     “Updated Financial Information” shall mean the updated financial information of the
Company dated May 3, 2007 or June 13, 2007, which has previously been delivered to representatives
of the Investors.

     “WARN Act” shall mean the Worker Adjustment and Retraining Notification Act of 1988,
as amended from time to time.

ARTICLE II

PURCHASE AND SALE OF SHARES

     Section 2.1 Issuance and Sale of New Investor Shares. Upon the terms and subject to
the conditions set forth herein, including that the Effective Date of the Plan will occur
contemporaneously with the Closing Date, Reorganized Bally agrees to issue, sell and deliver to the
Investors and the Investors agree, severally and not jointly, to acquire from Reorganized Bally the
number of New Investor Shares to be set forth in the Investor Share Notice, the total number of
such New Investor Shares to equal 100% of the New Common Shares (subject only to dilution with
respect to the Prepetition Management Incentive Plan), to be authorized, issued and outstanding by
Reorganized Bally on the Closing Date in exchange for the payment of the New Investor Purchase
Price.

     Section 2.2 Payment of the New Investor Share Purchase Price. The aggregate purchase
price for the New Investor Shares will be $233.6 million (the “New Investor Share Purchase
Price”). At the Closing, in consideration of the issuance of the New Investor Shares to the
Investors pursuant to Section 2.1, each Investor shall pay to Reorganized Bally the portion of the
New Investor Share Purchase Price set forth in the Investor Share Notice, payable in cash by wire
transfer of immediately available funds to an account designated in writing by the Debtors at least
three (3) Business Days prior to the Closing Date. The payment of the consideration set forth in
this Section 2.2, in whole or in part, shall sometimes be referred to herein as the
“Investment.”

     Section 2.3 Investor Share Notice. No later than two (2) Business Days prior to the
Closing, the Investors shall deliver a written notice to the Company specifying the number of New
Investor Shares to be issued to each Investors, substantially in the form attached hereto as
Exhibit II (the “Investor Share Notice”).

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ARTICLE III

THE CLOSING

     Section 3.1 The Closing. The closing of the purchase and sale of the New Investor
Shares hereunder and the other transactions contemplated hereby (the “Closing”) shall take
place on the Effective Date (such date, the “Closing Date”). The Closing shall take place
at the offices of Latham & Watkins LLP, located at 885 Third Avenue, New York, New York 10022, at
10:00 a.m. (EST) on the Closing Date, or at such other place or on such other date and time as may
be mutually agreed upon by the Company and the Investors. At the Closing and subject to the terms
and conditions hereof, the acquisition of equity contemplated by Article II hereof shall be deemed
to have occurred.

     Section 3.2 Deliveries. At the Closing:

     (a) Reorganized Bally shall deliver certificates to each Investor, evidencing the aggregate
number of New Investor Shares (as set forth in the Investor Share Notice) being indefeasibly issued
to each such Investor herewith and registered in the name of such Investor or, to the extent
designated by such Investor to the Debtors at least three (3) Business Days prior to the Closing
Date, to an Affiliate thereof, as its nominee or designee (with the individual certificates in such
amounts as the each Investor shall specify to Debtors at least three (3) Business Days prior to the
Closing Date);

     (b) The Investors shall pay to Reorganized Bally the New Investor Purchase Price;

     (c) To the extent not previously executed and/or delivered, the Company (and/or Reorganized
Bally, as the case may be) shall execute and/or deliver, or cause to be executed and/or delivered,
to the Investors (i) each of the Transaction Documents and any other document, certificate or other
instrument required to be executed and/or delivered by the Company (and/or Reorganized Bally, as
the case may be) under this Agreement, and (ii) a certificate, dated as of the Closing Date and
signed by the Chief Restructuring Officer or, in the event of the Chief Restructuring Officer’s
unavailability, the Senior Vice President, Secretary and General Counsel of the Company, certifying
as to the matters set forth in Section 7.1(f).

     (d) To the extent not previously executed and/or delivered, each Investor shall execute and/or
deliver, or cause to be executed and/or delivered, to the Company (or Reorganized Bally, as the
case may be) (i) each of the Transaction Documents and any other document, certificate or other
instrument required to be executed and/or delivered by such Investor under this Agreement, and (ii)
a certificate, dated as of the Closing Date and signed by such Investor, certifying as to the
matters set forth in Section 7.2(e).

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ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

     The Company represents and warrants to each Investor that all of the statements contained in
this Article IV are true and correct as of the date of this Agreement (or, if made as of a
specified date, as of such date).

     Section 4.1 Organization.

     (a) Each of the Company and its Significant Subsidiaries is duly organized, validly existing
and in good standing under the laws of the jurisdiction of its organization.

     (b) Each of the Company and its subsidiaries (i) is duly qualified or licensed to do business
as a foreign corporation and is in good standing under the laws of each jurisdiction where the
nature of the property owned or leased by it or the nature of the business conducted by it makes
such qualification or license necessary, except where any such failure to be so qualified or
licensed, individually in the aggregate, would not result in a Material Adverse Effect; and (ii)
has all corporate power and authority to own and operate its properties, to lease the property it
operates under lease and to conduct its business, except where any such failure to own and/or
operate, individually in the aggregate, would not result in a Material Adverse Effect.

     Section 4.2 Due Authorization, Execution and Delivery; Enforceability. The Company
has the requisite corporate power and authority to enter into, execute and deliver this Agreement
and the other Transaction Documents and, subject to the Governmental Approvals, to perform its
obligations hereunder, including the issuance of the New Investor Shares, and has taken all
necessary corporate action required for the due authorization, execution, delivery and, subject to
the Governmental Approvals, performance by it of this Agreement and the other Transaction
Documents. Subject to the Governmental Approvals, this Agreement constitutes the legally valid and
binding obligation of the Company, enforceable against it in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the
enforcement of creditors’ rights generally or by equitable principles relating to enforceability.

     Section 4.3 Capitalization. Except as disclosed in the SEC Reports, all issued and
outstanding shares of capital stock or other ownership interests of each subsidiary are owned by
the Company or a wholly-owned subsidiary free and clear of any Encumbrance other than Permitted
Encumbrances. At the Closing, all of the outstanding shares of capital stock each of the Company’s
subsidiaries will be duly authorized and validly issued, fully paid and non-assessable.

     Section 4.4 Consents. Subject to, and after giving effect to, the Governmental
Approvals, none of the execution, delivery or performance of this Agreement and the other
Transaction Documents by the Company, including the issuance of the New Investor Shares by it, will
require any consent of, authorization by, exemption from, filing with, or notice to any
Governmental Entity or any other Person.

     Section 4.5 No Conflicts. Except for, and after giving effect to, the Governmental
Approvals, and subject to the occurrence of the Effective Date, the execution,

12

 

delivery and performance of this Agreement by the Company, including the issuance of the New
Investor Shares, and the consummation of the transactions contemplated hereby, does not and will
not (a) conflict with or result in any breach of any provision of its certificate of incorporation
or bylaws as in effect on the Effective Date, (b) conflict with or result in the breach of the
terms, conditions or provisions of or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give rise to any right of termination,
acceleration or cancellation under, any material agreement, lease, mortgage, license, indenture,
instrument or other contract to which it or any of its subsidiaries is a party or by which any of
its or any of its subsidiaries’ properties or assets are bound as in effect on the Effective Date,
or (c) result in a violation of any law, rule, regulation, order, judgment or decree (including,
without limitation, federal and state securities laws and regulations) applicable to it or any of
its subsidiaries or by which any of its or its subsidiaries’ properties or assets are bound or
affected as in effect on the Effective Date, except in the case of clauses (b) and (c), as would
not, individually or in the aggregate, result in a Material Adverse Effect.

     Section 4.6 No Registration. Assuming the accuracy of the representations and
warranties of the Investors set forth in this Agreement, no registration of the New Investor Shares
under the Securities Act is required for the purchase of the New Investor Shares by the Investors
in the manner contemplated by this Agreement.

     Section 4.7 Financial Statements. The Company has heretofore delivered to the
Investors an unaudited consolidated balance sheet as of March 31, 2007 (the “First Quarter 2007
Balance Sheet”). The First Quarter 2007 Balance Sheet was prepared in conformity with GAAP
(except as provided below in this Section 4.7), is complete and correct in all material respects
and fairly presents in all material respects the assets and liabilities of the Company and its
subsidiaries as of March 31, 2007; provided, however, that the Investors acknowledge that (i) the
Company’s method of recognition of deferred revenue is uncertain as of the date hereof and may not
have been conducted in accordance with GAAP and (ii) the Company’s reserves in respect of worker’s
compensation, general liability and health insurance as reflected on the First Quarter 2007 Balance
Sheet do not include the Company’s estimates of potential recoveries for such liabilities. Except
as described in this Section 4.7, neither the Company nor any of its subsidiaries has any
contingent obligation, contingent liability, or liability for taxes, long term lease or unusual
forward of long term commitment or other material liability, liquidated or unliquidated, that could
reasonably be expected to have a Material Adverse Effect and is not reflected on the First Quarter
2007 Balance Sheet.

     Section 4.8 No Fiduciary Representation. Notwithstanding anything herein to the
contrary, the Company acknowledges and agrees that (a) the transactions contemplated hereby are
arm’s length commercial transactions between the Company, on the one hand, and the Investors, on
the other, (b) in connection therewith and with the processes leading to such transactions, each
Investor is acting solely as a principal and not the agent or fiduciary of the Company or its
debtor estate, (c) no Investor has assumed an advisory or fiduciary responsibility in favor of the
Company or its debtor estate with respect to any legal, tax, investment, accounting, regulatory or
other matters involving the transactions contemplated herein or the processes leading thereto
(irrespective of whether such Investor has advised or is currently advising the Company on other
matters), and (d) the Company has consulted its own legal and financial advisors to the extent it
deemed appropriate. The Company agrees that it will not claim

13

 

that any Investor has rendered advisory services of any nature or respect, or owes a fiduciary
or similar duty to the Company or its shareholders or estate, in connection with the transactions
contemplated herein or the processes leading thereto.

     Section 4.9 Title to Property. The Company and its subsidiaries have good title to
their respective owned personal properties and assets, and good and marketable title to their
respective owned real properties which, in each case are necessary to the conduct of its business,
free and clear of all Encumbrances, except for Permitted Encumbrances on such properties and
assets, except where the failure to have such title does not, or would not reasonably to, have a
Material Adverse Effect. Except as created hereby, the execution, delivery or performance of this
Agreement and the other Transaction Documents does not and will not result in the creation of any
Encumbrances other than Permitted Encumbrances.

     Section 4.10 Litigation. Except as disclosed in the SEC Reports or as set forth on
Schedule A hereto, there are no suits, proceedings, claims or disputes pending or, to the Knowledge
of the Company, threatened in writing against or affecting the Company or any subsidiary or their
respective property, which have a reasonable likelihood of adverse determination and such
determination could reasonably be expected to have a Material Adverse Effect.

     Section 4.11 ERISA. Except as would not have, or reasonably be expected to have, a
Material Adverse Effect, (i) each Employee Benefit Plan is in compliance in all respects with the
applicable provisions of ERISA, the Code and any other applicable federal or state law, and (ii) no
event or condition is occurring nor is there any present intent to cause any such event or
condition to occur with respect to any Employee Benefit Plan. The Company is not a party to any
Multiemployer Plan.

     Section 4.12 Copyrights, Patents, Trademarks and Licenses, etc. The Company and its
subsidiaries own or are licensed or otherwise have the right to use all of the Intellectual
Property that is reasonably necessary for the operations of their respective businesses as
currently conducted, without material conflict with the rights of any other Person with respect
thereto, except where the failure to be in compliance with this sentence would not have a Material
Adverse Effect. To the Knowledge of the Company, except as would not have a Material Adverse
Effect, (i) no slogan or other advertising device, product, process, method, substance, part or
other material now employed, or now contemplated to be employed, by the Company or any of its
Subsidiaries infringes upon any rights obtained by any other Person, and (ii) no claim or
litigation regarding any of the foregoing is pending or threatened in writing.

     Section 4.13 Environmental.

     (a) The property, assets and operations of the Company and its subsidiaries comply in all
material respects with all applicable Hazardous Materials Laws and all governmental permits
required thereunder relating to the use and/or operation thereof (except in each case to the extent
that failure to comply with such Hazardous Materials Laws or applicable permits would not
reasonably be expected to have a Material Adverse Effect).

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     (b) To the Knowledge of the Company, (i) none of the real properties currently or formerly
owned, leased or operated by the Company or any subsidiary (including groundwater under such real
properties) (the “Properties”) of the Company and its subsidiaries related thereto, is the
subject of federal or state investigation mandating any remedial action, involving expenditures,
which is needed to respond to a release of any Hazardous Materials into the environment where such
expenditures could reasonably be expected to have a Material Adverse Effect, (ii) there are no
underground storage tanks present on or under any of the Properties the presence of which could
reasonably be expected to have a Material Adverse Effect, and (iii) there are no pending or
threatened in writing: (A) actions or proceedings from any governmental agency or any other person
or entity regarding the disposal of Hazardous Materials, or regarding any Hazardous Materials Laws
or evaluation, or (B) liens or governmental actions, notices of violations, notices of
noncompliance or other proceedings of any kind relating to any of the Hazardous Materials Laws with
respect to the Properties where such actions, proceedings or liens could reasonably be expected to
have a Material Adverse Effect.

     (c) Neither the Company nor any of its subsidiaries has any liability in connection with any
release of any Hazardous Materials into the environment, except where such liability would not
have, or reasonably be expected to have, a Material Adverse Effect.

     Section 4.14 Compliance with Laws. Except as disclosed in the SEC Reports, the
Company and its subsidiaries are in compliance in all material respects with all Laws, and neither
the Company nor any of its subsidiaries has received any notice of any such alleged material
violation of Law, in each case, except where such failures to comply or violations would not,
individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The
Company and its subsidiaries hold all licenses, franchises, permits, consents, registrations,
certificates, and other material governmental or regulatory permits, authorizations or approvals
necessary or required for the operation of the business as presently conducted and for the
ownership, lease or operation of the assets of the Company and its subsidiaries (“Material
Licenses and Permits”), except for failures to hold or have such Material Licenses and Permits
would not, individually or in the aggregate, reasonably be expected to have a Material Adverse
Effect.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF THE INVESTORS

     Each Investor, severally and not jointly, hereby represents and warrants to the Company that
all of the statements contained in this Article V are true and correct with respect to itself as of
the date of this Agreement (or, if made as of a specified date, as of such date) and shall be true
and correct with respect to itself as of the Closing Date (or, if made as of a specified date, as
of such date).

     Section 5.1 Organization. Such Investor is a corporation or other legal entity duly
organized, validly existing and (in the jurisdictions recognizing the concept) in good standing
under the laws of the jurisdiction in which it is organized and has the requisite corporate

15

 

or other power and authority to own, lease and operate its properties and to conduct its
business as it is now being conducted.

     Section 5.2 Due Authorization.

     (a) Such Investor has all right, power and authority to execute and deliver this Agreement and
the other Transaction Documents to which it is a party, to consummate the transactions contemplated
hereby and thereby and to comply with the terms, conditions and provisions hereof and thereof
applicable to such Investor.

     (b) The execution, delivery and performance by such Investor of this Agreement and each of the
other Transaction Documents to which it is a party, the compliance by such Investor with each of
the provisions of this Agreement and each of the Transaction Documents and the consummation of the
transactions contemplated hereby and thereby, are within the power and authority of such Investor,
have been duly authorized and approved by the requisite actions of such Investor and do not require
any further authorization or consent of such Investor or its beneficial owners. This Agreement is
the legal, valid and binding agreement of such Investor, enforceable against such Investor in
accordance with its terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws from time to time affecting the
enforcement of creditors’ rights generally.

     Section 5.3 Consents and Approvals. To the knowledge of such Investor, no consent,
approval, or authorization of, declaration, filing, or registration with, any Governmental Entity
is required to be made or obtained by it in connection with the execution, delivery, and
performance of this Agreement or any of the other Transaction Documents contemplated hereby, except
for the Governmental Approvals.

     Section 5.4 No Violations. Assuming that the Governmental Approvals and Required
Consents will be satisfied, made or obtained and will remain in full force and effect and the
conditions set forth in Article VII will be satisfied, neither the execution, delivery or
performance by such Investor of this Agreement or any of the other Transaction Documents to which
it is a party and the consummation of the transactions contemplated hereby and thereby, will: (i)
conflict with, or result in a breach or a violation of, any provision of the certificate of
incorporation or bylaws or other organizational documents of such Investor or (ii) constitute, with
or without notice or the passage of time or both, a breach, violation or default, create an
Encumbrance (other than any Permitted Encumbrance) or give rise to any right of termination,
modification, cancellation, prepayment, suspension, limitation, revocation or acceleration, under
any Law or any provision of any agreement or other instrument to which such Investor is a party or
pursuant to which such Investor or any of its respective assets or properties is subject, except
for breaches, violations, defaults, Encumbrances (other than Permitted Encumbrances), or rights of
termination, modification, cancellation, prepayment, suspension, limitation, revocation or
acceleration which, individually or in the aggregate, are not material and would not materially
adversely affect the ability of such Investor to perform its obligations under this Agreement or
any of the Transaction Documents.

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     Section 5.5 Financing. Such Investor has, and at the Closing will have, available to
it funds in amounts sufficient to pay its portion of the New Investor Share Purchase Price.

     Section 5.6 Investment Representations.

     (a) Such Investor understands that the New Investor Shares have not been registered under the
Securities Act.

     (b) Such Investor has substantial experience in evaluating and investing in private placement
transactions of securities so that it is capable of evaluating the merits and risks of its
investment in Reorganized Bally and has the capacity to protect its own interests, and can afford
the loss of its investment in the New Investor Shares.

     (c) Such Investor is acquiring its portion of the New Investor Shares for its own account for
investment only, and not with a view towards their distribution. Such Investors agree that New
Investor Shares may not be sold or transferred unless such New Investor Shares have subsequently
been registered under the Securities Act or an exemption from registration is available and such
shares are sold or otherwise transferred in accordance therewith.

     (d) Such Investor represents that it is an accredited investor within the meaning of
Regulation D under the Securities Act.

     Section 5.7 Dollar Revenues. None of the entities included within such Investor’s
ultimate parent entity (as such term is understood under the HSR Act) derives any dollar revenues
from operations in industries within any 6-digit NAICS industry code set forth on Exhibit III
hereto.

ARTICLE VI

COVENANTS

     Section 6.1 Conduct of Business Pending the Closing. Except as otherwise expressly
contemplated by this Agreement and the Plan or any of the other Transaction Documents or as
consented to by the Investors in writing, such consent not to be unreasonably withheld or delayed,
or as required by the Bankruptcy Code, during the period from the date of this Agreement through
and including the Closing Date, the Company shall, and shall cause each of its subsidiaries and
Affiliates to, (a) conduct its operations and business in the Ordinary Course of Business,
including, without limitation, paying its vendors, trade creditors and other creditors, in a manner
consistent with the Business Plan; (b) use commercially reasonable efforts to preserve intact its
business relationships with third parties; and (c) confer with the Investors on operational matters
of a material nature. The Company shall give the Investors prompt notice of any event, condition
or circumstance occurring from the date hereof through the Closing Date that would constitute a
violation or breach of (i) any representation or warranty, whether made as of the date hereof or as
of the Closing Date or (ii) any covenant of the Company in either case contained in this Agreement
or any other Transaction Document. Without limiting the generality of the foregoing, except as
otherwise expressly contemplated by this Agreement and the Plan or any of the other Transaction
Documents or as consented to by the Investors, such consent not to

17

 

be unreasonably withheld or delayed, the Company shall not, and shall not permit any of its
subsidiaries or Affiliates, to:

     (a) amend its charter, bylaws or other comparable organizational documents other than in
accordance with this Agreement or as contemplated by the Plan;

     (b) acquire any “business”, as defined in Rule 3-05(a)(2) of Regulation S-X (whether by
merger, consolidation, purchase of assets or otherwise) or acquire any, or increase any existing,
equity interest in any Person not a subsidiary (whether through a purchase of stock or other
ownership interest, establishment of a joint venture or otherwise);

     (c) after the Petition Date, (i) assume pursuant to Section 365 of the Bankruptcy Code any
contract set forth in Exhibit E to the Plan, or (ii) fail to promptly file and diligently prosecute
a motion to reject pursuant to Section 365 of the Bankruptcy Code any contract designated in
writing by any Investor for rejection, provided that such written designation is agreed upon by the
parties hereto and the Excluded Parties no less than 10 days prior to the Debtors’ scheduled
confirmation hearing or any other deadline provided in the Plan or set by the Bankruptcy Court with
respect to the rejection of executory contracts or unexpired leases, and provided further that
unless the parties hereto and the Excluded Parties otherwise agree, any such rejection shall be
subject to, and effective upon, the occurrence of the Effective Date of the Plan;

     (d) other than in the Ordinary Course of Business, enter into, amend or terminate any Material
Contract;

     (e) adopt a plan of complete or partial liquidation, dissolution, merger (except for mergers
between or among the Company and/or its subsidiaries), consolidation, restructuring,
recapitalization or other reorganization of the Company or any of its subsidiaries;

     (f) change any material Tax, pension, regulatory or, except in accordance with GAAP or the
suggestion of the Company’s independent registered public accounting firm, financial accounting
policies, procedures, practices, methods or principles used by it;

     (g) make, change or rescind any material Tax election; fail to duly and timely file any
material Tax Return or other documents required to be filed with any Governmental Entity, subject
to timely extensions permitted by applicable Law;

     (h) other than in the Ordinary Course of Business, extend the statute of limitations with
respect to any Tax or settle or compromise any material federal, state, local or foreign Tax
liability or audit;

     (i) (A) enter into any waiver, release, assignment, settlement or compromise of any pending or
threatened Action (i) that requires the payment by the Company or Reorganized Bally, as the case
may be, of any monetary amount in excess of $37,500 individually or $750,000 in the aggregate, (ii)
which is reasonably likely to have the effect of materially delaying the Effective Date or
materially impairing the Company’s ability to consummate the transactions contemplated by this
Agreement or the Plan, or (iii) is brought by any current, former or purported holder of any
Company Securities in such capacity and such

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agreement, settlement or consent to judgment requires the payment by the Company or
Reorganized Bally, as the case may be, of any monetary amount in excess of $100,000 in the
aggregate, (B) enter into any waiver, release, assignment, settlement or compromise of any pending
or threatened Action that (i) does not include an unconditional release of the Company, Reorganized
Bally and/or any subsidiaries of either of them (as applicable) from all liability arising out of
such proceeding, (ii) includes any admission of fault or guilt by the Company, Reorganized Bally
and/or any subsidiaries of either of them (as applicable) with respect to the subject matter of
such Action, or (iii) includes any operational covenants, or (C) enter into any deferred
prosecution agreement;

     (j) enter into any agreement, settlement or consent to judgment with any Governmental Entity
relating to any Action (i) that requires the payment by the Company or Reorganized Bally, as the
case may be, of any monetary amount in excess of $100,000 in the aggregate, or (ii) that admits any
fault or guilt;

     (k) take any action that would give rise to a claim under the WARN Act or any similar state
law or regulation because of a “plant closing” or “mass layoff” (each as defined in the WARN Act);

     (l) other than as set forth in the Plan, (i) establish, modify or increase, in any material
respect, the benefits under, or promise to establish, modify or increase in any material respect
the benefits under, any bonus, insurance, severance, deferred compensation, pension, retirement,
profit sharing, stock option (including without limitation, the granting of stock options, stock
appreciation rights, performance awards, or restricted stock awards), stock purchase or other
employee benefit plan; (ii) enter into any severance agreement outside of the Ordinary Course of
Business; (iii) enter into any employment agreement outside of the Ordinary Course of Business
where the dollar amount per annum payable under any such agreement exceeds $100,000 individually or
$1,000,000 in the aggregate; (iv) otherwise increase, in any material respect, the compensation
payable to any directors, or officers, or employees of the Company; or (v) establish, adopt or
enter into any collective bargaining agreement; provided that, with respect to clauses (i) and
(iii) hereof, any such increase in compensation or benefits is (A) pursuant to an existing
agreement or plan, is in amount or value of benefits consistent with the past practices of the
Company and does not exceed $50,000 per annum in each case, or (B) required by applicable Law;

     (m) other than in the Ordinary Course of Business, (i) sell, exchange, license or otherwise
dispose of any of its real properties or other material assets, (ii) enter into any new joint
ventures or similar projects or (iii) mortgage any of its real property or grant any security
interest in any of its other assets except for Permitted Encumbrances;

     (n) (i) incur any additional indebtedness for borrowed money or in connection with capital
leases or sale-leaseback transactions, in each case other than as permitted by the DIP Loan
Facility, the Old Credit Agreement, the Cash Collateral Order or the Plan, (ii) other than in the
Ordinary Course of Business, incur any indemnification obligations or other material liabilities,
except as permitted by the DIP Loan Facility, the Old Credit Agreement or the Cash Collateral Order
or as contemplated by the Plan, (iii) other than in the Ordinary Course of Business, make any
loans, advances, restricted payments or capital contributions to, or

19

 

investments in, any Person (excluding any subsidiary), except as permitted by the DIP Loan
Facility, the Old Credit Agreement or the Cash Collateral Order or as contemplated by the Plan;
(iv) other than in the Ordinary Course of Business, pay any pre-Petition Date liabilities, claims,
obligations, costs or expenses except for the repayment of indebtedness under the Old Credit
Agreement or as may otherwise be permitted to be paid by a Bankruptcy Court order entered (or
pursuant to a motion made, so long as the amount provided for in any pending motion is not
materially in excess of the amounts reflected in the Business Plan), (v) pay any post-Petition Date
liabilities, claims, obligations, costs or expenses, other than those incurred in the Ordinary
Course of Business or permitted to be paid by any covenant contained herein or pursuant to a
Bankruptcy Court order, in each case so long as such amounts are not materially in excess of the
amounts reflected in the Business Plan, or (vi) amend or otherwise modify any agreements or
instruments governing the Debtors’ financing arrangements in any material respect other than as
contemplated by the Plan;

     (o) enter into any new agreement or amend any existing agreement containing a non-competition,
geographical restriction or similar covenant, in each case in a manner materially adverse to the
Investors or Reorganized Bally;

     (p) fail to maintain in full force and effect insurance policies covering the Company and/or
any of its subsidiaries and their respective properties, assets and businesses in a form and amount
consistent with the current insurance program applicable to the Company and/or any of its
subsidiaries (except in the Ordinary Course of Business to the extent any such policies expire in
accordance with their terms and they are replaced with policies consistent with good practice for
multi-site fitness club companies, subject to insurance market conditions);

     (q) enter into any new consulting, retention or executive employment agreements or
arrangements that individually exceed $35,000 per month, or terminate or replace any member of the
Company’s senior management; or

     (r) agree to take any of the foregoing actions.

     Section 6.2 No Solicitation of Alternative Proposals.

     (a) Commencing on the date hereof, the Company shall (and shall cause its subsidiaries,
Affiliates, Representatives, and subsidiaries’ and Affiliates’ Representatives to) (i) immediately
cease and terminate all existing discussions or negotiations, if any, with any Persons conducted
prior to the date of this Agreement with respect to or that could reasonably be expected to lead to
an Alternative Transaction (as hereinafter defined), (ii) use its commercially reasonable to obtain
the destruction of, in accordance with the terms of any applicable confidentiality agreement, any
nonpublic information previously furnished by the Company, its subsidiaries or Affiliates, or any
of their respective Representatives to any third-party (other than the Excluded Parties) in
connection with any Alternative Proposal or any discussions, correspondence or negotiations
relating to a potential Alternative Transaction, and prevent any such third-party (other than the
Excluded Parties) from accessing any online data rooms containing nonpublic information regarding
the Company, and (iii) comply with this Section 6.2.

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     (b) During the period commencing on the date of this Agreement and continuing until the
earlier of (x) the Closing Date and (y) the termination of this Agreement in accordance with
Section 8.1 (the “No-Shop Period”), the Company shall not (and shall cause its
subsidiaries, Affiliates, Representatives, and subsidiaries’ and Affiliates’ Representatives not
to) directly or indirectly (i) solicit, initiate, encourage or take any other action designed to
solicit an Alternative Transaction, (ii) participate in any written correspondence, discussions or
negotiations regarding any Alternative Transaction, (iii) enter into any letter of intent,
agreement in principle, acquisition agreement or other similar agreement related to any Alternative
Transaction or (iv) furnish any nonpublic information to any third parties (other than the Excluded
Parties).

     (c) Notwithstanding anything to the contrary that may be set forth in Section 6.2(b), if,
during the No-Shop Period, the Board of Directors determines in good faith that it is required to
authorize such actions to comply with its fiduciary duties under any applicable Law, including the
Bankruptcy Code, the Company or any of its Representatives may take any of the actions referred to
in clauses (ii) and (iv) of Section 6.2(b) with respect to any Person that during the No-Shop
Period delivered a written, unsolicited bona fide Alternative Proposal so long as (A) the Company
and its Representatives are not in material violation of this Section 6.2, and (B) the Board of
Directors has concluded that such Alternative Proposal is a Superior Proposal or is reasonably
likely to lead to a Superior Proposal. In addition, at any time during the No-Shop Period, so long
as the Company and its Representatives are not in violation of this Section 6.2, the Company, its
subsidiaries or any of their respective Representatives will be permitted to execute an agreement
providing for a Superior Proposal or recommend any such Superior Proposal to the creditors or
interest holders of the Company only if (i) the Company shall have delivered such Superior Proposal
to the Investors pursuant to Section 6.2(d); (ii) the Investors do not, within five (5) Business
Days of receipt of such Superior Proposal, make an offer to revise the transactions contemplated by
this Agreement and the Plan, such that in the good faith opinion of the Board of Directors (in
consultation with its financial advisors and legal counsel) such revised transaction provides an
equal or higher transaction value or is otherwise more favorable to the Company and its creditors
and interest holders than the Superior Proposal; (iii) the Company pays the fees and expenses of
the Investors as provided in Section 8.2 including, without limitation, the Break-Up Fee. For the
avoidance of doubt, in determining whether a revised transaction proposed by the Investors in
accordance with clause (ii) of the immediately preceding sentence “provides an equal or higher
transaction value,” the Investors shall be given a dollar-for-dollar credit of $15 million
(representing the total amount of the Break-Up Fee and Expenses potentially payable by the Company
to the Investors pursuant to Section 8.2 hereof), such that, for example, if the Company were to
receive a Superior Proposal with a transaction value of $250 million, the Investors’ revised
proposal would be “equal” to such Superior Proposal if it had a transaction value of $235 million.

     (d) From the date hereof until the earlier of (x) the Closing Date and (y) the termination of
this Agreement in accordance with Section 8.1, the Company shall promptly (and in no event later
than two (2) days) deliver to the Investors and the Excluded Parties all written communications
delivered to or received by the Company or its Representatives making or materially modifying any
Alternative Proposal, including without limitation copies of all expressions of interest, term
sheets, letters of intent, offers, proposed agreements or otherwise, and shall regularly update
(not less than once every week) the Investors and the Excluded Parties

21

 

concerning such matters. No Person who has made an Alternative Proposal shall be provided
non-public information by the Company unless such Person has executed a customary confidentiality
agreement; provided that such confidentiality agreement shall (a) be on no more favorable terms to
the third-party than the terms of any confidentiality agreement then in effect between the Company
and any of the Investors, and (b) not prohibit the Company from delivering any notice required by
this Section 6.2(d). In addition, the Company and its Representatives shall provide the Investors
and the Excluded Parties two (2) days prior written notice before initially delivering any
non-public information in connection with an Alternative Proposal or the granting of access by the
Company or its Representatives to the properties, books or records of the Company to any Person
that informs the Company or its Representatives that it is considering making, or has made an
Alternative Proposal. The Company agrees that it shall not, and shall cause the Company’s
subsidiaries not to, enter into any confidentiality agreement or other agreement with any person
subsequent to the date of this Agreement which prohibits the Company from providing such
information to the Investors and the Excluded Parties. The Company agrees that neither it nor any
of its subsidiaries shall terminate, waive, amend or modify any provision or any existing
standstill or confidentiality agreement to which it or any of its subsidiaries is a party and that
it and its subsidiaries shall enforce the provisions of any such agreement, except to the extent
that the Board of Directors determines (after consultation with its financial advisors and legal
counsel) that acting in such manner would be inconsistent with its fiduciary duties under
applicable Law.

     (e) As used in this Agreement, “Alternative Transaction” shall mean any actual or
proposed transaction or offer for a transaction, other than as contemplated by the Plan, involving
any or all of (i) a plan of reorganization or other financial and/or corporate restructuring of any
or all of the Debtors (other than an Excluded Restructuring), (ii) the issuance, sale, transfer,
exchange or other disposition by the Debtors of any equity or debt interests (other than common
stock issued in respect of any employee stock options), or any material assets, of the Debtors,
(iii) a merger, consolidation, business combination, liquidation, recapitalization or refinancing,
(iv) any similar transaction involving any or all of the Debtors, or (v) any transaction through
which the Debtors exit bankruptcy. “Alternative Proposal” shall mean a proposal relating
to an Alternative Transaction.

     (f) As used in this Agreement, “Superior Transaction” shall mean an Alternative
Transaction that the Board of Directors (after consultation with its financial advisors and legal
counsel) has determined in its good faith opinion, in comparison with the transactions contemplated
by this Agreement and the Plan: (i) constitutes a higher and better offer for each class of
creditors and stockholders of the Company, taking into account the monetary obligations of the
Company under this Agreement (provided, that such offer shall not treat the claims or interests of
any class of creditors or stockholders of the Company in a manner that violates any provision of
the Bankruptcy Code), (ii) contemplates the payment of at least $31.5 million, in cash, to the
holders of Old Common Stock (as defined in the Plan), (iii) has at least the same certainty and
timing of closing, and (iv) is fully financed or has a commitment for full financing that is no
more conditional than the financing contemplated by the Plan. “Superior Proposal” shall
mean a proposal relating to a Superior Transaction.

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     Section 6.3 Cooperation; Access to Information.

     (a) From the date hereof through the earlier of termination hereof and the Closing Date, the
Company shall, and shall cause each of its subsidiaries and, to the extent any other Person is
controlled directly or indirectly by the Company, each such other Person to, give each Investor and
its Representatives, reasonable, non-exclusive access, during normal business hours upon reasonable
notice, to the books, contracts, records and other documents, and personnel of the Company, its
subsidiaries and such other Persons; provided, however, that none of the foregoing shall
unreasonably interfere with the conduct of business of the Debtors, their subsidiaries, or such
other Persons.

     (b) The Company and each Investor agrees to cooperate fully in facilitating the access
provided for under this Agreement in accordance with mutually acceptable procedures, which
procedures shall require, among other things, that all requests for such access: (i) be made to the
Chief Restructuring Officer of the Company or such other person as the Company may designate in
writing to the Investors, and (ii) specify the representatives of each Investor to whom such access
is to be provided and the scope and nature of the access requested. Further, the Company shall be
permitted to have any of its representatives present during any requested meetings or discussions.

     (c) The preceding subsections of this Section 6.3 shall not require the disclosure of any
information if, in the Company’s reasonable determination (after consultation with counsel), such
information is reasonably believed to be (i) subject to an attorney-client or work product
privileges and disclosure would result in the loss of such privileges or (ii) subject to a binding
confidentiality agreement entered into as of the date hereof and disclosure would cause a breach of
such confidentiality agreement. The Company will use its commercially reasonable efforts,
including commercially reasonable efforts to obtain appropriate consents or waivers under any
confidentiality agreement, to disclose all such information requested by each Investor and to
provide a privilege log for any information not so provided. In the case that attorney-client or
work product privileges apply, the parties shall use their commercially reasonable efforts to make
appropriate substitute disclosure arrangements.

     (d) Any information acquired by the Investors pursuant to the preceding subsections of this
Section 6.3 shall not diminish or obviate any of the representations, warranties, covenants or
agreements of the Company contained in this Agreement.

     Section 6.4 HSR Act. No later than ten (10) Business Days after the date of the
execution hereof, at the Company’s expense, the Investors and the Company will each make any
filings required under the HSR Act in connection with the transactions contemplated hereby. Each
party hereto will cooperate with the other party hereto in accomplishing such filings and will keep
the other party apprised of the status of any inquires made by any Governmental Entity with respect
to this Agreement or the transactions contemplated hereby. Unless otherwise agreed by the
Investors, the Closing of the transactions contemplated hereby is expressly conditioned upon the
waiting period relating to any such filings having duly expired or been duly terminated by the
appropriate Governmental Entities without the commencement of any action by any such Governmental
Entities to restrain or postpone the transactions contemplated hereby. Each of the parties hereto
shall use its commercially reasonable to cause the waiting period under the HSR

23

 

Act to expire or be terminated, and to otherwise obtain all regulatory approvals in connection
with any other antitrust approvals, as promptly as possible after the execution of this Agreement.
Until such time as the waiting period relating to any such filings has duly expired or been duly
terminated by the appropriate Governmental Entities without the commencement of any action relating
to any such filings by any such Governmental Entities to restrain or postpone the transactions
contemplated hereby, each Investor agrees, and agrees to cause any entities included within such
Investor’s ultimate parent entity (as such term is understood under the HSR Act), to refrain from
acquiring any interest in any entity other than the Company and its subsidiaries that derives any
dollar revenues from operations in industries within any 6-digit NAICS industry code set forth on
Exhibit III hereto.

     Section 6.5 Further Actions; Reasonable Efforts. Without waiving any right to
terminate this Agreement under Section 8.1, upon the terms and subject to the conditions hereof,
the Company and each of the Investors, as the case may be, agree to use its commercially reasonable
efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist
and cooperate with other parties-in-interest in doing, all things necessary, proper or advisable to
consummate and make effective, in the most expeditious manner practicable, the transactions
contemplated by hereby, including without limitation (w) obtaining all Governmental Requirements,
(x) obtaining all Required Consents, (y) defending any lawsuits or other legal proceedings, whether
judicial or administrative, challenging the consummation of the transactions contemplated hereby,
including seeking to have any stay or temporary restraining order entered by any court or other
Governmental Entity or any restraint vacated or reversed, and (z) executing and delivering any
additional instruments necessary to consummate the transactions contemplated by, and to fully carry
out the purposes of, the Transaction Documents. In addition, as promptly as practical, the Company
shall (i) make appropriate amendments or modifications to the Plan as permitted by the Plan, which
amendments and modifications shall be in form and substance reasonably acceptable to the Investors
and the Excluded Parties, and (ii) seek to obtain approval of the Confirmation Order with respect
to the Plan by September 20, 2007, which Confirmation Order shall provide, among other things, that
the issue and sale of the New Common Shares pursuant to this Agreement shall at the time of their
issuance be duly authorized and validly issued and outstanding, fully paid and non-assessable,
exempt from registration and free and clear of any Encumbrances of any kind.

     Section 6.6 Use of Proceeds. The proceeds received by Reorganized Bally in respect of
the Investment shall be used by the Reorganized Debtors in accordance with the Plan and for
general corporate purposes.

     Section 6.7 Notification of Certain Matters. From the date hereof through the earlier
of termination and the Closing Date, each party hereto shall give prompt notice to the other party
hereto of the occurrence, or failure to occur, of any event that has caused any of such party’s
representations or warranties contained in this Agreement to be untrue or inaccurate in any
material respect or of any failure to comply with or satisfy any covenant, condition or agreement
in any material respect to be complied with or satisfied by it hereunder; provided, however, that
no such notification shall be deemed for any purpose under this Agreement to permit such party to
alter or amend such party’s representations and warranties contained herein.

24

 

     Section 6.8 Compliance with Other Agreements. Each of the parties hereto shall comply
with its obligations under the Restructuring Support Agreement.

     Section 6.9 Information.

     (a) Between the date hereof and the earlier of the termination and the Closing Date, the
Investors shall comply with reasonable requests from the Company for information concerning the
Investors to the extent necessary in connection with the Company’s efforts to obtain the
confirmation of, and consummate, the Plan.

     (b) The Company shall promptly provide the Investors with copies of proposed final drafts
(which shall be full, complete and accurate) of all documents, motions, orders, filings or
pleadings that the Company proposes to file with the Bankruptcy Court which relate to the
confirmation of the Plan or any provision therein or the consummation of the transactions
contemplated hereby or thereby and will provide the Investors with reasonable opportunity to review
such filings before made.

ARTICLE VII

CONDITIONS

     Section 7.1 Conditions to the Obligations of the Investors. The obligation of the
Investors to consummate the transactions contemplated hereby shall be subject to the satisfaction
at or prior to the Closing of each of the following conditions; provided, however, that the
Investors may, in their sole and absolute discretion, waive any or all of the following conditions:

     (a) Restructuring Support Agreement. The Restructuring Support Agreement shall not
have terminated, and no material default thereunder by the Company or
any of the Consenting Noteholders shall have occurred, unless waived by the Investors or cured within the time period
specified in, and otherwise in accordance with, the Restructuring Support Agreement;

     (b) Consents and Approvals. All Required Consents and material Governmental
Requirements shall have been obtained or deemed obtained by operation of the Plan, the Confirmation
Order and/or the Assumption Orders and shall be in full force and effect;

     (c) Final Orders Approving the Plan. The Confirmation Order and any Assumption
Orders, each in form and substance reasonably satisfactory to the Investors, approving the Plan and
the assumption of the Assumed Contracts shall have been entered by the Bankruptcy Court and shall
have become Final Orders;

     (d) Plan Effectiveness. All conditions precedent to the effectiveness of the Plan
(other than those relating to the Closing hereunder) shall have been fully satisfied or waived in
accordance with the Plan and the Plan shall not have been amended or modified in any material
respect without the consent of the Investors;

     (e) Material Adverse Effect. No Material Adverse Effect shall have occurred and be
continuing since August 1, 2007;

25

 

     (f) Other Conditions. (i) The Debtors shall have performed in all material respects
their obligations hereunder (or cured any default thereof within the period specified herein or as
extended by waiver or consent) required to be performed by them at or prior to the Closing, and
(ii) the representations and warranties of the Debtors contained in this Agreement shall be true
and correct in all material respects, in each case, at and as of the Closing Date (except, if made
as of a specified date, then only as of such date);

     (g) No Injunction. No temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction (each, a
“Restraint”) preventing consummation of any of the transactions contemplated hereby shall
be in effect; and

     (h) Financing. The New Credit Agreement shall be in full force and effect and there
shall exist no material breach of or default under the New Credit Agreement by any party thereto
that has not been waived or consented to by the requisite lenders or the Company (as applicable)
thereunder, provided that the Investors are provided with evidence reasonably satisfactory to them
of such waiver or consent.

     Section 7.2 Conditions to the Obligations of the Company. The obligation of the
Company to consummate the transactions contemplated hereby shall be subject to the satisfaction at
or prior to the Closing of each of the following conditions:

     (a) Restructuring Support Agreement. The Restructuring Support Agreement shall not
have been terminated;

     (b) Consents and Approvals. All Required Consents and material Governmental
Requirements shall have been obtained or deemed obtained by operation of the Plan, the Confirmation
Order and/or the Assumption Orders and shall be in full force and effect;

     (c) Orders Approving the Plan. The Confirmation Order and any Assumption Orders, each
in form and substance reasonably satisfactory to the Investors, approving the Plan and the
assumption of the Assumed Contracts shall have been entered by the Bankruptcy Court;

     (d) Plan Effectiveness. All conditions precedent to the effectiveness of the Plan
(other than those relating to the Closing hereunder) shall have been fully satisfied or waived in
accordance with the Plan;

     (e) Other Conditions. (i) Each Investor shall have performed in all material respects
its obligations hereunder (or cured any default thereof within the period specified herein or as
extended by waiver or consent) required to be performed by it at or prior to the Payment Date, and
(ii) the representations and warranties of each Investor contained in this Agreement shall be true
and correct in all material respects at and as of the Closing Date (except, if made as of a
specified date, then only as of such date); and

     (f) No Injunction. No Restraint preventing consummation of any of the transactions
contemplated hereby shall be in effect.

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ARTICLE VIII

TERMINATION; BREAK-UP FEE; FEES AND EXPENSES

     Section 8.1 Termination. This Agreement may be terminated and the transactions
contemplated hereby may be abandoned at any time prior to the Closing Date notwithstanding the fact
that any requisite authorization and approval of the transactions contemplated hereby shall have
been received and, other than as provided in Section 8.2, no party hereto shall have any liability
to any other party hereto as a result of its invoking its rights to terminate this Agreement
pursuant to this Section 8.1 (provided that any such termination shall not relieve any party from
liability for a breach of any provision hereof prior to such termination):

     (a) by the mutual written consent of the Investors and the Company;

     (b) by the Investors:

          (i) if the Company or any of its Representatives (A) executes and delivers a written
agreement, letter of intent or agreement in principle (whether or not binding) providing for any
Alternative Transaction or publicly announces its intention to enter into an Alternative
Transaction, or (B) takes any action in the Bankruptcy Court for the purposes of obtaining approval
of any Alternative Proposal;

          (ii) if the Board of Directors withdraws or changes its recommendation of this Agreement in a
manner materially adverse to the Investors or recommends an Alternative Proposal;

          (iii) if (A) the Debtors unilaterally withdraw the Plan, move to voluntarily dismiss any of
the Chapter 11 Cases, move for conversion of any of the Chapter 11 Cases to Chapter 7 of the
Bankruptcy Code, or move for appointment of an examiner with expanded powers pursuant to Section
1104 of the Bankruptcy Code in any of the Chapter 11 Cases (except as permitted under the
Restructuring Support Agreement), (B) any of the Chapter 11 Cases shall have been dismissed or
converted to a case under Chapter 7 of the Bankruptcy Code, (C) an interim or permanent trustee
shall be appointed in any of the Chapter 11 Cases, or a responsible officer or an examiner with
powers beyond the duty to investigate and report (as set forth in Sections 1106(a)(3) and (4) of
the Bankruptcy Code) shall be appointed in any of the Chapter 11 Cases, or (D) the Debtors’
exclusive right to file a Chapter 11 Plan pursuant to Section 1121 of the Bankruptcy Code shall
have terminated;

          (iv) if the Effective Date of the Plan has not occurred by 11:59 p.m. prevailing Eastern Time
on the Outside Date;

          (v) if the Company shall be (A) in breach of any representation or warranty made by it
hereunder that is qualified by materiality (taking into account such materiality), (B) in material
breach of any of any representation or warranty made by it hereunder that is not qualified by
materiality, or (C) in material breach of any of its obligations hereunder, and such breach cannot
be or has not been cured or waived by the Investors on or before the earlier of (x) the fifth
(5th) Business Day after the giving of written notice to the Company or (y) the Outside
Date;

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          (vi) if there shall be any Law that makes consummation of the transactions contemplated by
this Agreement or the other Transaction Documents illegal or otherwise prohibited or if any court
of competent jurisdiction or Governmental Entity shall have issued an order, decree or ruling or
taken any other action restraining, enjoining or otherwise prohibiting the consummation of any of
the transactions contemplated hereby or by the other Transaction Documents and such order, decree,
ruling or other action shall have become final and non-appealable;

          (vii) if any Debtor breaches the Restructuring Support Agreement in any material respect and
such breach is not cured on or before the fifth (5th) Business Day after delivery of notice of such
breach or, if the Chapter 11 Cases are then pending, on or before the fifth (5th) Business Day
after the filing of a motion for relief from the automatic stay to permit the delivery of such
notice (in which case this Agreement shall automatically terminate on the fifth (5th) Business Day
after the filing of such motion unless such breach has been cured by such time);

          (viii) if the order of the Bankruptcy Court approving the provisions governing the Investors’
right to receive the Break-Up Fee or the Expenses as set forth in Section 8.2 hereof does not
become a Final Order by 11:59 p.m. prevailing Eastern Time on September 3, 2007 (provided that the
Investors shall have the right to terminate this Agreement pursuant to this Section 8.1(b)(viii)
until 11:59 p.m. prevailing Eastern Time on September 16, 2007); or

          (ix) if, on or after the date hereof, there occurs or is continuing a change, event or
occurrence which, individually or in the aggregate, has or would reasonably expected to have a
Material Adverse Effect and such Material Adverse Effect cannot be cured by the Outside Date.

     (c) by the Company:

          (i) if any Investor shall be in material breach of its representations, warranties and
obligations hereunder or under the Restructuring Support Agreement, and such breach cannot be or
has not been cured or waived by the Company on or before the (x) the fifth (5th)
Business Day after the giving of written notice to the Investors or (y) the Outside Date;

          (ii) if (A) the Board of Directors determines in good faith that termination of this Agreement
is necessary in order for the Company to accept any Superior Transaction, or (B) the Bankruptcy
Court on its own accord and not at the request of (or by the acquiescence of) the Company has
ordered the Company to terminate this Agreement in favor of any Superior Transaction; provided that
the Company shall have the right to terminate this Agreement pursuant to clause (A) above only if
it has complied in all material respects with the provisions of Section 6.2;

          (iii) if the Effective Date of the Plan has not occurred by 11:59 p.m. prevailing Eastern Time
on the Outside Date; or

          (iv) if there shall be any Law that makes consummation of the transactions contemplated by
this Agreement or the other Transaction Documents illegal or otherwise prohibited or if any court
of competent jurisdiction or Governmental Entity shall have

28

 

issued an order, decree or ruling or taken any other action restraining, enjoining or
otherwise prohibiting the consummation of any of the transactions contemplated hereby or by the
other Transaction Documents and such order, decree, ruling or other action shall have become final
and non-appealable.

     Section 8.2 Break-Up Fee; Fees and Expenses. 

     (a) The Company shall pay to the Investors a fee, in cash, equal to $10 million (the
“Break-Up Fee”) if (X) the Company is not entitled to terminate this Agreement pursuant to
Section 8.1(c)(i) and (Y) either (A) the Investors terminate this Agreement pursuant to Sections
8.1(b)(i), 8.1(b)(ii), 8.1(b)(iii), 8.1(b)(v)(C) or 8.1(b)(vii) in connection with the Company’s
pursuit of a Superior Transaction and the Company consummates such Superior Transaction or (B) the
Company terminates this Agreement pursuant to Section 8.1(c)(ii) and the Company consummates any
Superior Transaction. Any payment required to be made pursuant to this Section 8.2(a) shall be
made to the Investors, in accordance with the percentage set forth in the Investor Share Notice, by
wire transfer of immediately available same day funds to an account designated by each Investor
upon the consummation of such Superior Transaction.

     (b) In addition to any other rights or remedies available to the Investors (subject to Section
8.2(d) hereof), upon the Closing or, so long as the Company is not entitled to terminate this
Agreement pursuant to Section 8.1(c)(i) hereof, the earlier termination of this Agreement pursuant
to any Trigger Event, the Company agrees to reimburse or pay, as the case may be, the reasonable
out-of-pocket costs, fees and expenses incurred by each Investor or its Affiliates, including
reasonable fees, costs and expenses of any professionals (including financial advisors, outside
legal counsel, accountants, experts and consultants) retained by any of the Investors or their
respective Affiliates in connection with or related to the authorization, preparation,
investigation, negotiation, execution and performance of this Agreement, the transactions
contemplated hereby and the Chapter 11 Cases and other judicial and regulatory proceedings related
to such transactions and the Chapter 11 Cases (collectively, the “Expenses”) to the extent
incurred from and after May 1, 2007 through the Effective Date (and reasonable post-Closing costs
and expenses related to the Closing) or the earlier termination of this Agreement, as set forth in
the following sentence. The Company shall provide payment to the Investors of the Expenses as
follows: (i) if the Company consummates the transactions contemplated hereby, the Company shall
provide payment to the Investors of all Expenses upon the Closing Date; (ii) if this Agreement is
terminated pursuant to any of the Trigger Events, the Company shall provide payment to the
Investors of all Expenses upon the earliest to occur of (x) October 15, 2007 and (y) the date on
which the Company consummates any Superior Transaction, provided that such Expenses shall be capped
at an aggregate amount of (A) $3,000,000 if the Company consummates an Excluded Restructuring, or
(B) $5,000,000 in any other case. Notwithstanding the foregoing, the Company shall not reimburse
or pay any fees, costs or expenses incurred by the Investors or their Affiliates (the “Investor
Parties”) in bringing any Action against the Debtors or the Excluded Parties except for fees,
costs or expenses incurred in connection with any Action brought by any Investor Party relating to
(x) the willful or intentional breach of this Agreement by the Company or any of the Subsidiary
Guarantors, or (y) the enforcement of the Investors’ rights hereunder, provided that such Investor
Party is the prevailing party in such Action and provided further that the reimbursement of such
fees, costs and expenses shall be capped at an aggregate amount of $1 million. For the avoidance
of doubt,

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the fees, costs or expenses reimbursable or payable by the Company to the Investors in
accordance with the immediately preceding sentence shall be in addition to the payment or
reimbursement of Expenses provided for in this Section 8.2(b), and nothing in this Section 8.2(b)
shall limit the Investors’ right to receive the Break-Up Fee pursuant to Section 8.2(a) hereof.

     (c) The Investors shall reimburse or pay any fees, costs or expenses incurred by the Company
in bringing any Action against either Investor relating to the willful or intentional breach of
this Agreement by either Investor, provided that the Company is the prevailing party in such Action
and provided further that the reimbursement of such fees, costs or expenses shall be capped at an
aggregate amount of $1 million. Such fees, costs or expenses shall be borne by the Investors in
accordance with the percentages set forth in the Investor Share Notice.

     (d) The provisions of this Section 8.2 shall survive termination of this Agreement. The
provision for the payment of the Break-Up Fee and the Expenses set forth in this Section 8.2 is an
integral part of the transactions contemplated by this Agreement and without this provision the
Investors would not have entered into this Agreement and such Break-Up Fee and Expenses shall
constitute an allowed administrative expense of the Company under Section 503(b)(1) and 507(a)(1)
of the Bankruptcy Code.

     (e) Except as otherwise provided in Article IX or Section 11.14 hereof, to the extent that all
amounts due in respect of the Break-Up Fee and Expenses pursuant to this Section 8.2 have actually
been paid in full by the Company to the Investors, no Investor shall have any additional recourse
against any Debtor for any Losses relating to or arising from this Agreement. Further, in
connection with the payment in full of all amounts due in respect of the Break-Up Fee and Expenses
pursuant to this Section 8.2, each of the Investors, on one hand, and the Company, the Debtors
and/or Reorganized Bally (as the case may be) and their subsidiaries, on the other, shall execute
and deliver to the other a general release, which shall fully discharge and release the other from
any further obligation or liability in respect of this Agreement and the transactions contemplated
hereby.

ARTICLE IX

INDEMNIFICATION

     Section 9.1 Indemnification. Whether or not the this Agreement is terminated or the
transactions contemplated by this Agreement or the Plan are consummated, the Company (in such
capacity, the “Indemnifying Party”) shall indemnify and hold harmless each Investor, their
respective Affiliates and their respective officers, directors, employees, agents and controlling
persons (each, an “Indemnified Person”) from and against any and all losses, claims,
damages, liabilities and reasonable expenses (“Losses”), joint or several, to which any
such Indemnified Person may become subject arising out of or in connection with any Action
instituted by a third party with respect to this Agreement or the Restructuring Support Agreement,
or the transactions contemplated by any of the foregoing and shall reimburse such Indemnified
Persons for any reasonable legal or other reasonable out-of-pocket expenses as they are incurred in
connection with investigating, responding to or defending any of the foregoing; provided that the
foregoing indemnification will not apply to Losses (i) arising out of or in connection with the
failure of any Indemnified Person to comply with the covenants and

30

 

agreements contained in this Agreement or the Restructuring Support Agreement; or (ii) to the
extent that they resulted from (a) any breach by such Indemnified Person of this Agreement or the
Restructuring Support Agreement, or (b) gross negligence, bad faith or willful misconduct on the
part of such Indemnified Person. The indemnity, reimbursement and contribution obligations of the
Indemnifying Party under this Article IX shall be in addition to any liability that the
Indemnifying Party may otherwise have to an Indemnified Person and shall bind and inure to the
benefit of any successors, assigns, heirs and personal representatives of the Indemnifying Party
and any Indemnified Person.

     Section 9.2 Notice; Assumed Defense. Promptly after receipt by an Indemnified Person
of notice of the commencement of any Actions with respect to which the Indemnified Person may be
entitled to indemnification hereunder, such Indemnified Person will, if a claim is to be made
hereunder against the Indemnifying Party in respect thereof, notify the Indemnifying Party in
writing of the commencement thereof; provided that (i) the omission so to notify the Indemnifying
Party will not relieve the Indemnifying Party from any liability that it may have hereunder except
to the extent it has been materially prejudiced by such failure and (ii) the omission so to notify
the Indemnifying Party will not relieve it from any liability that it may have to an Indemnified
Person otherwise than on account of this Article IX. In case any such Actions are brought against
any Indemnified Person and it notifies the Indemnifying Party of the commencement thereof, the
Indemnifying Party will be entitled to participate therein, and, to the extent that it may elect by
written notice delivered to such Indemnified Person, to assume the defense thereof, with counsel
reasonably satisfactory to such Indemnified Person; provided that if the defendants in any such
Actions include both such Indemnified Person and the Indemnifying Party and such Indemnified Person
shall have concluded that there may be legal defenses available to it that are different from or
additional to those available to the Indemnifying Party, such Indemnified Person shall have the
right to select separate counsel to assert such legal defenses and to otherwise participate in the
defense of such Actions on behalf of such Indemnified Person. Upon receipt of notice from the
Indemnifying Party to such Indemnified Person of its election so to assume the defense of such
Actions and approval by such Indemnified Person of counsel, the Indemnifying Party shall not be
liable to such Indemnified Person for expenses incurred by such Indemnified Person in connection
with the defense thereof (other than reasonable costs of investigation) unless (i) such Indemnified
Person shall have employed separate counsel in connection with the assertion of legal defenses in
accordance with the proviso to the next preceding sentence (it being understood, however, that the
Indemnifying Party shall not be liable for the expenses of more than one separate counsel in any
jurisdiction, approved by the Investors, representing the Indemnified Persons who are parties to
such Actions), (ii) the Indemnifying Party shall not have employed counsel reasonably satisfactory
to such Indemnified Person to represent such Indemnified Person within a reasonable time after
notice of commencement of the Actions or (iii) the Indemnifying Party shall have authorized in
writing the employment of counsel for such Indemnified Person.

     Section 9.3 Settlements. The Indemnifying Party shall not be liable for any
settlement of any Actions effected without its written consent (which consent shall not be
unreasonably withheld). If any settlement of any Action is consummated with the written consent of
the Indemnifying Party or if there is a final judgment for the plaintiff in any such Actions, the
Indemnifying Party agrees to indemnify and hold harmless each Indemnified Person from and against
any and all Losses by reason of such settlement or judgment in accordance

31

 

with, and subject to the limitations of, the provisions of this Article IX. The Indemnifying
Party shall not, without the prior written consent of an Indemnified Person (which consent shall
not be unreasonably withheld), effect any settlement of any pending or threatened Actions in
respect of which indemnity has been sought hereunder by such Indemnified Person unless (i) such
settlement includes an unconditional release of such Indemnified Person in form and substance
satisfactory to such Indemnified Person from all liability on the claims that are the subject
matter of such Actions and (ii) such settlement does not include any statement as to or any
admission of fault, culpability or a failure to act by or on behalf of any Indemnified Person.

     Section 9.4 Limitation on Liability. If the Company terminates this Agreement
pursuant to Section 8.1(c)(i) hereof, the Investors shall not be liable to the Debtors for any
punitive or consequential damages as a result thereof, provided, that in no event shall the
Investors be liable for damages hereunder in excess of $50 million.

ARTICLE X

SUBSIDIARY GUARANTEE

     Section 10.1 Guarantee. Each of the Subsidiary Guarantors hereby unconditionally
guarantees the prompt and complete payment of all amounts payable by the Company hereunder and the
prompt and complete performance of all other obligations, contingent or otherwise, of the Company
hereunder. Notwithstanding anything to the contrary contained herein, the obligations of each
Subsidiary Guarantor pursuant to this Section 10.1 shall survive the Closing or earlier termination
of this Agreement.

ARTICLE XI

MISCELLANEOUS

     Section 11.1 Certain Matters.

     (a) If, at the time of their execution of this Agreement, the Investors had actual knowledge
of any breach by the Company of any representation or warranty contained herein, (i) the Investors
shall not have the right to terminate this Agreement pursuant to Section 8.1 based on such breach,
and (ii) the Investors shall have no claim against the Company for such breach.

     (b) If, at the time of their execution of this Agreement, the Debtors had actual knowledge of
any breach by the Investors of any representation or warranty contained herein, (i) the Debtors
shall not have the right to terminate this Agreement pursuant to Section 8.1 based on such breach,
and (ii) the Debtors shall have no claim against the Investors for such breach.

     Section 11.2 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the internal and substantive Laws of the State of New York.

     Section 11.3 Jurisdiction; Forum; Service of Process; Waiver of Jury Trial. With
respect to any Action arising out of or relating to this Agreement, the Company and the Investors
hereby irrevocably:

32

 

     (a) submit to (i) the exclusive jurisdiction of the Bankruptcy Court for so long as the
Chapter 11 Cases are open or (ii) the jurisdiction of any New York State court or any Federal court
of the United States sitting in New York for so long as the Chapter 11 Cases are not open, for any
Action arising out of or relating to this Agreement or the other Transaction Documents and the
transactions contemplated hereby and thereby (and the Company agrees not to commence any Action
relating hereto or thereto except in such Court) and waives any objection to venue being laid in
the Bankruptcy Court whether based on the grounds of forum non conveniens
or otherwise;

     (b) consent to service of process in any Action by the mailing of copies thereof by registered
or certified mail, postage prepaid, or by recognized international express carrier or delivery
service, to the Company or each Investor at their respective addresses referred to in Section 11.6
hereof; provided, however, that nothing herein shall affect the right of any party
hereto to serve process in any other manner permitted by law; and

     (c) waive, to the fullest extent permitted by law, any right it may have to a trial by jury in
any Action directly, or indirectly arising out of, under or in connection with this Agreement or
the other Transaction Documents.

     Section 11.4 Successors and Assigns. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the successors by operation
of law of the parties hereto. No assignment of this Agreement (other than assignments by any
Investor to any of its Affiliates) may be made by any party at any time, whether or not by
operation of law, without the other parties’ prior written consent. Only the parties to this
Agreement or their successors shall have rights under this Agreement.

     Section 11.5 Entire Agreement; Amendment. This Agreement (including the Exhibits,
Schedules and Annexes attached hereto), the other Transaction Documents and the Plan constitute the
full and entire understanding and agreement between the parties with regard to the subjects hereof
and supersedes all prior agreements relating to the subject matter hereof. Except as expressly
provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the Company and by the Investors. No
waiver of any of the provisions of this Agreement shall be deemed to or shall constitute a waiver
of any other provision hereof (whether or not similar). No delay on the part of any party in
exercising any right, power or privilege hereunder shall operate as a waiver thereof. For periods
prior to the Effective Date, the parties agree that to the extent any provision of the Plan
relating to the Investors conflicts with any provision of this Agreement, the provisions of this
Agreement shall control. After the Effective Date, in the event that any terms of this Agreement
conflict with any terms of the Plan, the terms of the Plan shall control.

     Section 11.6 Notices. All notices, requests, consents and other communications
hereunder to any party shall be deemed to be sufficient and effective if contained in a written
instrument (i) delivered in person, when such delivery is made at the address specified at the
address specified in this Section 11.5, (ii) sent by telecopy, when such telecopy is transmitted to
the telecopy number specified in this Section 11.6 and appropriate confirmation is received, (iii)
nationally recognized overnight courier, the next day or (iv) first class registered or certified
mail, return receipt requested, postage prepaid, 5 days after deposit, in each case, addressed to

33

 

such party at the address set forth below or such other address as may hereafter be designated
in writing by such party to the other parties:

	 	(i)	 	If to the Company or to any subsidiary that is a Debtor:

Bally Total Fitness Holding Corporation

8700 West Bryn Mawr Avenue

Chicago, IL 60631

Fax: (773) 399-0126

Attn: Marc D. Bassewitz

With a copy to:

Latham & Watkins LLP

Sears Tower, Suite 5800

233 South Wacker Drive

Chicago, IL 60606

Fax: (312) 993-9767

Attn: David S. Heller, Esq.

          Mark D. Gerstein, Esq.

	 	(ii)	 	If to either Investor:

Harbinger Capital Partners Master Fund I, Ltd. or

Harbinger Capital Partners Special Situations Fund, L.P.

c/o Harbinger Capital Partners

555 Madison Avenue

16th Floor

New York, New York 10022

Fax: (212) 508-3721

Attn: Howard Kagan

With a copy to:

Kramer Levin Naftalis & Frankel LLP

1177 Avenue of the Americas

New York, New York 10036

Fax: 212-715-8000

Attn: Shari K. Krouner, Esq.

And:

Kasowitz, Benson, Torres & Friedman LLP

1633 Broadway

New York, New York 10019

Fax: (212) 506-1800

Attn: Andrew K. Glenn, Esq.

34

 

     Section 11.7 Delays or Omissions. Except as expressly provided herein, no delay or
omission to exercise any right, power or remedy accruing to the Company or the Investors upon any
breach or default of any party under this Agreement, shall impair any such right, power or remedy
of the Company or the Investors nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of
any kind or character on the part of the Company or the Investors of any breach or default under
this Agreement, or any waiver on the part of any such party of any provisions or conditions of this
Agreement, must be in writing and shall be effective only to the extent specifically set forth in
such writing. All remedies, either under this Agreement or by law or otherwise afforded to the
Company or the Investors shall be cumulative and not alternative.

     Section 11.8 Several Obligations of Investors. The parties agree that all obligations
of the Investors hereunder shall be several and not joint.

     Section 11.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which may be executed by only one of the parties hereto, each of which shall
be enforceable against the party actually executing such counterpart, and all of which together
shall constitute one instrument. Any signature delivered by facsimile or electronic mail shall
have the same effect as an original hereto.

     Section 11.10 Severability. In the event that any provision of this Agreement becomes
or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this
Agreement shall continue in full force and effect without said provisions; provided that no such
severability shall be effective if it materially changes the economic benefit of this Agreement to
any party.

     Section 11.11 Construction. All references in this Agreement to Exhibits, Schedules,
Articles, Sections, subsections, clauses and other subdivisions refer to the corresponding
Exhibits, Schedules, Articles, Sections, subsections, clauses and other subdivisions of this
Agreement unless expressly provided otherwise. The words “this Agreement,” “herein,” “hereby,”
“hereunder” and “hereof” and words of similar import, refer to this Agreement as a whole and not to
any particular subdivision unless expressly so limited. The words “this Section,” “this
subsection” and words of similar import, refer only to the Sections or subsections hereof in which
such words occur. The word “including” (in its various forms) means “including, without
limitation.” Pronouns in masculine, feminine or neuter genders shall be construed to state and
include any other gender, and words, terms and titles (including terms defined herein) in the
singular form shall be construed to include the plural and vice versa, unless the context otherwise
expressly requires. Unless the context otherwise requires, all defined terms contained herein
shall include the singular and plural and the conjunctive and disjunctive forms of such defined
terms.

     Section 11.12 Headings. The table of contents and headings used in this Agreement are
used for convenience only, do not constitute a part of this Agreement and are not to be considered
in construing or interpreting this Agreement.

35

 

     Section 11.13 Public Announcement. The Company and the Investors shall, to the extent
reasonably practicable, consult with the other regarding the content of any press releases, public
announcements or filings with Governmental Entities concerning the transactions contemplated by the
Transaction Documents.

     Section 11.14 Consummation; Specific Performance. In the event that, on or before the
Outside Date, the Investors are ready, willing and able to consummate the transactions contemplated
hereby and all conditions precedent to the obligations of each of the Investors and the Company (as
applicable) hereunder have been satisfied or waived by the Investors or the Company (as applicable)
in accordance herewith, the Company shall be compelled to consummate the transactions contemplated
hereby upon the Investors’ demand. The Company specifically acknowledges that monetary damages are
not an adequate remedy for violations of this Section 11.14 and that the Investors may, in their
sole discretion, apply to the Bankruptcy Court or any other court of competent jurisdiction for
specific performance or injunctive relief as such court may deem just and proper in order to
enforce or prevent any violation of this Section 11.14 and, to the extent permitted by applicable
Law and to the extent the Investors seek such relief, would be entitled on the merits to obtain
such relief, the Company hereby waives any objection to the imposition of such relief or the
submission by the Investors of any bond.

     Section 11.15 Non-Survival of Representations and Warranties. The representations and
warranties made in this Agreement will not survive the Closing Date.

     Section 11.16 Third Party Beneficiaries. The Excluded Parties shall be third party
beneficiaries of the obligations of the Company to the Excluded Parties under Section 6.2(d)
hereof. Except as set forth in the immediately preceding sentence, there are no third party
beneficiaries of this Agreement.

     Section 11.17 Effectiveness of Agreement. This Agreement shall be effective as of the
date on which the Bankruptcy Court enters one or more orders, in form and substance reasonably
satisfactory to the Investors and the Company, approving the Approval Motion, which shall occur on
or before August 28, 2007.

[SIGNATURE PAGES TO FOLLOW]

36

 

     IN WITNESS WHEREOF, each of the undersigned has caused the foregoing Agreement to be executed
as of the date first above written.

	 	 	 	 	 	 	 
	 	 	BALLY TOTAL FITNESS HOLDING CORPORATION
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Don R. Kornstein	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	Don R. Kornstein	 	 
	 

	 	Title:
	 	Interim Chairman and Chief Restructuring Officer	 	 

[Signature Page to Investment Agreement]

 

 

	 	 	 	 	 	 	 
	 	 	BALLY ARA CORPORATION
	 	 	BALLY FITNESS FRANCHISING, INC.
	 	 	BALLY FRANCHISE RSC, INC.
	 	 	BALLY FRANCHISING HOLDINGS, INC.
	 	 	BALLY REAL ESTATE I LLC
	 	 	BALLY REFS WEST HARTFORD, LLC
	 	 	BALLY SPORTS CLUBS, INC.
	 	 	BALLY TOTAL FITNESS CORPORATION
	 	 	BALLY TOTAL FITNESS FRANCHISING, INC.
	 	 	BALLY TOTAL FITNESS HOLDING CORPORATION
	 	 	BALLY TOTAL FITNESS INTERNATIONAL, INC.
	 	 	BALLY TOTAL FITNESS OF CALIFORNIA, INC.
	 	 	BALLY TOTAL FITNESS OF COLORADO, INC.
	 	 	BALLY TOTAL FITNESS OF CONNECTICUT COAST, INC.
	 	 	BALLY TOTAL FITNESS OF CONNECTICUT VALLEY, INC.
	 	 	BALLY TOTAL FITNESS OF GREATER NEW YORK, INC.
	 	 	BALLY TOTAL FITNESS OF MINNESOTA, INC.
	 	 	BALLY TOTAL FITNESS OF MISSOURI, INC.
	 	 	BALLY TOTAL FITNESS OF PHILADELPHIA, INC.
	 	 	BALLY TOTAL FITNESS OF RHODE ISLAND, INC.
	 	 	BALLY TOTAL FITNESS OF THE MID-ATLANTIC, INC.
	 	 	BALLY TOTAL FITNESS OF THE MIDWEST, INC.
	 	 	BALLY TOTAL FITNESS OF THE SOUTHEAST, INC.
	 	 	BALLY TOTAL FITNESS OF TOLEDO, INC.
	 	 	BALLY TOTAL FITNESS OF UPSTATE NEW YORK, INC.
	 	 	BTF CINCINNATI CORPORATION
	 	 	BTF EUROPE CORPORATION
	 	 	BTF INDIANAPOLIS CORPORATION
	 	 	BTF MINNEAPOLIS CORPORATION
	 	 	BTF/CFI, INC.
	 	 	BTFCC, INC.
	 	 	BTFF CORPORATION
	 	 	GREATER PHILLY NO. 1 HOLDING COMPANY
	 	 	GREATER PHILLY NO. 2 HOLDING COMPANY
	 	 	HEALTH & TENNIS CORPORATION OF NEW YORK
	 	 	HOLIDAY HEALTH CLUBS OF THE EAST COAST, INC.
	 	 	HOLIDAY/SOUTHEAST HOLDING CORP.
	 	 	JACK LALANNE HOLDING CORP.
	 	 	NEW FITNESS HOLDING CO., INC.
	 	 	NYCON HOLDING CO., INC.
	 	 	RHODE ISLAND HOLDING COMPANY
	 	 	TIDELANDS HOLIDAY HEALTH CLUBS, INC.
	 	 	U.S. HEALTH, INC.
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Marc Bassewitz	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	Marc Bassewitz	 	 
	 

	 	Title:
	 	Senior Vice President and General Counsel	 	 

[Signature Page to Investment Agreement]

 

 

	 	 	 	 	 	 	 
	 	 	HARBINGER CAPITAL PARTNERS MASTER FUND I, LTD.
	 
	 	 	 	 	 	 
	 

	 	By:	 	Harbinger Capital Partners Offshore	 	 
	 

	 	 	 	Manager, L.L.C., as investment manager	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ William R. Lucas, Jr.	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	William R. Lucas, Jr.	 	 
	 

	 	Title:
	 	Executive Vice President	 	 
	 
	 	 	 	 	 	 
	 	 	HARBINGER CAPITAL PARTNERS SPECIAL SITUATIONS FUND, L.P.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	Harbinger Capital Partners Special Situations	 	 
	 

	 	 	 	GP, LLC, as general partner	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ William R. Lucas, Jr.	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	William R. Lucas, Jr.	 	 
	 

	 	Title:
	 	Executive Vice President	 	 

[Signature Page to Investment Agreement]

 

 

EXHIBIT I

AMENDED PLAN OF REORGANIZATION

 

 

EXHIBIT II

FORM OF INVESTOR SHARE NOTICE

	 	 	 	 	 	 	 	 	 	 	 	 	 
	Name and Address	 	Number of New Investor	 	Percentage of Outstanding	 	Total Dollar Amount of
	of Investor	 	Shares Acquired	 	New Common Shares	 	Investment
	Harbinger Capital
Partners Master Fund
I, Ltd.
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Harbinger Capital
Partners Special
Situations Fund,
L.P.
	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Total
	 	 	 	 	 	 	 	 	 	 	 	 

 

 

EXHIBIT III

NAICS INDUSTRY CODES

713940 (Fitness and Recreational Sports Centers)

 

 

SCHEDULE A

LITIGATION

Harry Schwartz v. Jack La Lanne Fitness Centers, Inc., Health and Tennis Corporation of America,
n/k/a/ Bally Total Fitness Corporation

DATE FILED: 4/11/07 and 6/8/07

	 	 	 
	COURT & CASE NUMBER:

	 	Supreme Court of the State of New York, County of New York
	 

	 	Index No. 601939/07Ex-10.1

 

Exhibit 10.1

AMENDED AND RESTATED

CORRECTIONS CORPORATION OF AMERICA

NON-EMPLOYEE DIRECTOR

DEFERRED COMPENSATION PLAN

RECITALS:

     A. Corrections Corporation of America (the “Company”) has established and currently maintains
the Corrections Corporation of America Non-Employee Director Deferred Compensation Plan (the
“Plan”). The Plan is administered by the Committee (as herein defined), which has the right,
subject to certain limitations, to amend the Plan. The Committee desires to amend and restate the
Plan on the terms and conditions hereinafter set forth.

     B. The Plan was adopted and is maintained for purposes of providing benefits to certain
non-employee Directors of the Company.

ARTICLE I

GENERAL

     Section 1.1 Purpose of the Plan. The purpose of this Plan is to reward non-employee Directors
of the Company who have contributed to the Company’s success and are expected to continue to
contribute to such success in the future. The Plan generally provides such non-employee Directors
with the opportunity to defer a portion of their compensation on the terms and conditions set forth
herein.

     Section 1.2 Effective Date. The effective date of the Plan was originally June 1, 2002.
Except as set forth herein or as otherwise required by the context, the effective date of this
amendment and restatement of the Plan is January 1, 2005.

     Section 1.3 Gender and Number. For purposes of interpreting the provisions of this Plan, the
masculine gender shall be deemed to include the feminine, the feminine gender shall be deemed to
include the masculine, and the singular shall include the plural unless otherwise clearly required
by the context.

ARTICLE II

DEFINITIONS

     Section 2.1 Account. Account means, with respect to each Director, the account maintained by
the Company for each Participant in accordance with Article III hereof.

     Section 2.2 Beneficiary. Beneficiary means the person or persons designated by a Participant
as his or her beneficiary hereunder in accordance with the provisions of Article IV.

1

 

     Section 2.3 Board. Board means the Board of Directors of the Company.

     Section 2.4 Change in Control. Change in Control means the happening of any of the following:

     (a) any person or entity, including a “group” as defined in Section 13(d)(3) of the
Securities Exchange Act of 1934, other than the Company or a wholly-owned subsidiary thereof
or any employee benefit plan of the Company or any of its Subsidiaries, becomes the
beneficial owner of the Company’s securities having 50% or more of the combined voting power
of the then outstanding securities of the Company that may be cast for the election of
directors of the Company (other than as a result of an issuance of securities initiated by
the Company in the ordinary course of business); or

     (b) as the result of, or in connection with, any cash tender or exchange offer, merger
or other business combination, sale of assets or contested election, or any combination of
the foregoing transactions less than a majority of the combined voting power of the then
outstanding securities of the Company or any successor corporation or entity entitled to
vote generally in the election of the directors of the Company or such other corporation or
entity after such transaction are held in the aggregate by the holders of the Company’s
securities entitled to vote generally in the election of directors of the Company
immediately prior to such transaction; or

     (c) during any period of two consecutive years, individuals who at the beginning of any
such period constitute the Board cease for any reason to constitute at least a majority
thereof, unless the election, or the nomination for election by the Company’s stockholders,
of each director of the Company first elected during such period was approved by a vote of
at least two-thirds (2/3) of the directors of the Company then still in office who were
directors of the Company at the beginning of any such period.

     Section 2.5 Code. Code means the Internal Revenue Code of 1986, as the same may from time to
time be amended.

     Section 2.6 Committee. Committee means the Compensation Committee of the Board or, if none,
the Board or another committee designated by the Board to discharge the duties of the Committee
hereunder.

     Section 2.7 Company. Company means Corrections Corporation of America, a Maryland
corporation, or any successor thereto.

     Section 2.8 Deferrals. Deferrals has the meaning ascribed to it in Section 3.1(a) hereof.

2

 

     Section 2.9 Deferred Compensation Benefit. Deferred Compensation Benefit means, with respect
to each Participant as of any date, such Participant’s vested benefit as determined pursuant to
Article III hereof.

     Section 2.10 Director. Director means each member of the Company’s Board who is not also an
employee of the Company or a Subsidiary. Each Director shall be eligible to participate in the
Plan; provided, however, that the Committee may from time to time, in its sole discretion with or
without cause, revoke a Director’s eligibility to participate in the Plan upon ninety (90) days’
written notice. Any such revocation shall not, however, reduce any Deferred Compensation Benefits
to which the Director may be entitled at the time of such revocation. In addition, any such
revocation shall not be effective until the first day of the Plan Year following the Plan Year in
which such revocation occurs.

     Section 2.11 Director Fees. Director Fees means the fees a Director is entitled to receive as
compensation for his services as a Director and includes, without limitation, retainer fees,
Director meeting fees and committee meeting fees.

     Section 2.12 Disability. Disability means (i) a Participant’s inability to engage in any
substantial gainful activity by reason of any medically determinable physical or mental impairment
that can be expected to result in death or that has lasted or can be expected to last for a
continuous period of not less that twelve (12) months or (ii) by reason of any medically
determinable physical or mental impairment that can be expected to result in death or can be
expected to last for a continuous period of not less than twelve (12) months, the Participant is
receiving income replacement benefits for a period of not less than three (3) months under an
accident and health plan covering the Company’s employees.

     Section 2.13 Earnings. Earnings means the earnings credited to each Participant’s Account in
accordance with Section 3.1(b) hereof.

     Section 2.14 Participant. Participant means any Director who elects to participate in the
Plan by making Deferrals hereunder.

     Section 2.15 Payment Date(s). Payment Date(s) means, with respect to each Participant, the
commencement date(s) of the payment of such Participant’s Deferred Compensation Benefits as elected
in accordance with Section 3.2(a), as the same may be modified pursuant to Section 3.3(c)(iii).

     Section 2.16 Plan. Plan means the Corrections Corporation of America Non-Employee Director
Deferred Compensation Plan, as amended herein and as may from time to time be amended hereafter.

     Section 2.17 Plan Year. Plan Year means the calendar year, except that the first Plan Year
shall commence June 1, 2002 and end December 31, 2002.

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     Section 2.18 Separation from Service. Separation from Service shall mean a Participant’s
“separation from service” as such term is defined under Section 1.409A-1(h) of the U.S. Treasury
Regulations.

     Section 2.19 Subsidiary. Subsidiary means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the corporations (other than
the last corporation in the unbroken chain) owns stock possessing more than 50% of the total
combined voting power of all classes of stock in one of the other corporations in the chain.

     Section 2.20 Trust Agreement. Trust Agreement means any trust agreement entered into in
connection with the Plan, as the same may from time to time be amended.

     Section 2.21 Trust Fund. Trust Fund means the amounts contributed from time to time by the
Company to the Trustee in accordance with Section 6.3 hereof, plus any earnings thereon. The Trust
Fund shall be held, administered and distributed by the Trustee pursuant to the Trust Agreement.

     Section 2.22 Trustee. Trustee means the person or persons designated as trustee under the
Trust Agreement.

     Section 2.23 Unforeseeable Emergency. Unforeseeable Emergency means an event which results
(or will result) in severe financial hardship to the Participant as a consequence of an illness or
accident of the Participant, the Participant’s spouse, the Participant’s Beneficiary or the
Participant’s dependent (as determined under Section 152 of the Code, without regard to Sections
152(b)(1), (b)(2) and (d)(1)(B)) or loss of the Participant’s property due to casualty or other
similar extraordinary and unforeseen circumstances beyond the control of the Participant. Examples
of what is not considered to be an Unforeseeable Emergency include the need to send a Participant’s
child to college and the desire to purchase a house.

ARTICLE III

DEFERRED COMPENSATION BENEFITS

     Section 3.1 Deferred Compensation Benefits.

     (a) Deferrals. From time to time, each Participant may file a written election with
the Committee directing the Company to reduce his Director Fees and to credit the amount of any
such reduction (the “Deferrals”) to the Account established and maintained for such Participant
pursuant to Section 3.5. Written elections hereunder shall be made in accordance with rules
established by the Committee, subject to the limitations set forth in Section 3.3, and shall
include the information described in Section 3.2. Deferrals shall be credited to each
Participant’s Account as of such time or times determined by the Committee, but not later than
thirty (30) days after the date on which the related Director Fees otherwise would have been paid.

     (b) Earnings. From time to time, there shall be credited to the Account of each
Participant Earnings with respect to Deferrals and Earnings previously credited to such Account

4

 

in accordance herewith. The rate of Earnings shall be determined from time to time by the Committee
and may be commensurate with the rate of return (positive or negative) on securities (including
Company stock) selected by the Committee; provided, however, that after the occurrence of a Change
in Control, the rate of Earnings shall not be less than 8% per annum. Until such time as the
Committee determines otherwise, the rate of Earnings for any Plan Year
shall equal the actual rate of return earned by the Company on any investments held as part of the
Trust Fund and designated by the Committee as a funding mechanism for meeting the Company’s
obligations under this Plan. Earnings shall be credited to each Participant’s Account as of such
time or times determined by the Committee.

     (c) Vesting. Each Participant shall at all times be 100% vested in Deferrals and
Earnings credited to his Account.

     3.2 Payment of Deferred Compensation Benefits.

     (a) Payment Dates Generally. Each deferral election described in Section 3.1(a) shall
also contain the Participant’s election regarding the Payment Date for the portion of his Deferred
Compensation Benefits to which such election relates. The Payment Date may be any date or time
specified by the Participant and permitted by the Committee, subject to the following limitations:

     (i) Except as otherwise set forth in Section 3.4, a Participant shall not be
entitled to receive payment of any portion of his Deferred Compensation Benefits earlier
than the first to occur of (A) sixty (60) days after the Participant’s Separation from
Service; (B) the date of the Participant’s Disability; (C) the date of the Participant’s
death; or (D) the first day of the sixth (6th) Plan Year following the Plan Year in which
such Participant first began participating in the Plan.

     (ii) Payment of a Participant’s Deferred Compensation Benefits must commence on or
before the later of (A) sixty (60) days after such Participant’s Separation from Service, or
(B) the fifteenth (15th) day of the month next following the month in which such Participant
attains age seventy (70).

     (iii) Payment of a Participant’s Deferred Compensation Benefits may begin on as many
as, but not more than, three (3) different Payment Dates.

     (iv) The form of payment of any Deferred Compensation Benefits (as determined under
subparagraph (b) below) that begin on a particular Payment Date must be the same.

     (b) Form of Payment. Each deferral election described in Section 3.1(a) shall also
contain the Participant’s election regarding the form of payment of the portion of his Account to
which such election applies. In each election form, the Participant may elect to receive payment
of the portion of his Deferred Compensation Benefits to which such election applies in one (but not
more than one) of the following forms:

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     (i) a lump sum payment; or

     (ii) to the extent permitted by the Committee in its discretion, in equal monthly
installments over a period not exceeding sixty (60) months.

Deferred Compensation Benefits shall be paid in cash, unless the Participant or Beneficiary
consents to payment in the form of other property.

     3.3 Deferral Elections; Modifications.

     (a) Deferral Elections Generally. Each written election described in Section 3.1(a)
shall be made at such time and in such manner as determined by the Committee but in no event later
than December 31 of the year prior to the beginning of the Plan Year for which it is to be
effective; provided, however, that in the year in which a Participant first becomes eligible to
participate in the Plan, such election may be made within thirty (30) days after the Participant
becomes eligible to participate, but such election shall be effective only with respect to
compensation for services performed after the date the election is made. Except as otherwise
provided in subparagraph (c) or on an election form, any elections as to Payment Dates or form of
benefit made pursuant to Section 3.2 shall be irrevocable as to any Deferred Compensation Benefits
that accrue while such elections are in effect.

     (b) Certain Limitations on Deferrals. For each Plan Year, a Participant may defer an
amount up to 100% of the Director Fees earned by the Participant during such Plan Year. Except as
otherwise provided in subparagraph (a), a Participant may defer hereunder only Director Fees that
are earned on or after the date the election is filed with the Committee.

     (c) Termination or Modification of Elections. Notwithstanding the last sentence of
subparagraph (a):

     (i) no revocation of a written election described in Section 3.1(a) shall take effect
until the first day of the Plan Year following the Plan Year in which the Committee receives
such revocation;

     (ii) a written election described in Section 3.1(a) shall automatically terminate on
the earliest to occur of (A) the termination of a Participant’s status as a Director for any
reason or (B) the termination of the Plan; and

     (iii) if permitted by the Committee in its sole discretion, a Participant may change
any Payment Date (but not the form of benefit) previously designated by the Participant
pursuant to Section 3.2, provided, however, that: (A) the Participant must make an election
designating the new Payment Date at least twelve (12) months prior to the Payment Date
previously designated; (B) such election shall not take effect until at least twelve (12)
months after the date on which it is made; (C) the new Payment Date must be at least five
(5) years later in time than the Payment Date previously designated; (D) all payments that
otherwise would have begun on the Payment Date previously designated must, after such
change, begin on the new Payment Date; and (E) the new

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Payment Date designated by the Participant must otherwise comply with the requirements of Section 3.2.

     Section 3.4 Special Rules Related to Distributions.

     (a) Unforeseeable Emergency Distributions. The Committee may at any time, upon
written request of the Participant, cause to be paid to such Participant an amount equal to all or
any part of such Participant’s Deferred Compensation Benefits if the Committee determines, in its
absolute discretion based on such reasonable evidence that it shall require, that such a payment or
payments is necessary for the purpose of alleviating the consequences of an Unforeseeable Emergency
occurring with respect to the Participant. This decision will be determined based upon the
relevant facts and circumstances of each case. Payments of amounts because of an Unforeseeable
Emergency shall be permitted only to the extent reasonably necessary to satisfy the emergency need
(including amounts necessary to pay any Federal, state, local or foreign income taxes or penalties
reasonably anticipated to result from the distribution) and shall not be permitted to the extent
such need may be relieved through reimbursement or compensation from insurance or otherwise, by
liquidation of the Participant’s assets (to the extent liquidation would not itself cause severe
financial hardship), or by the cessation of Deferrals under the Plan.

     (b) Small Accounts. If a Participant’s Account is $15,500 (this amount shall be
adjusted for cost-of-living increases pursuant to Section 402(g)(4) of the Code) or less at the
time of the Participant’s Separation from Service, such Participant’s Deferred Compensation
Benefits shall automatically be paid to him in a single lump sum payment as soon as practicable
following Separation from Service.

     Section 3.5 Participants’ Accounts. The Company shall establish and maintain an Account for
each Director and such sub-accounts as the Committee deems necessary or appropriate. Each Account
so established shall be credited as appropriate for Deferrals and Earnings with respect to such
Deferrals and debited for any distributions from such Account.

ARTICLE IV

BENEFICIARIES

     Section 4.1 Beneficiary Designations. A designation of a Beneficiary hereunder may be made
only by an instrument (in form acceptable to the Committee) signed by the Participant and filed
with the Committee prior to the Participant’s death. In the absence of such a designation and at
any other time when there is no existing Beneficiary designated hereunder, the Beneficiary of a
Participant shall be his estate. A person designated by a Participant as his Beneficiary who dies
or which ceases to exist shall not be entitled to any part of any payment thereafter to be made to
the Participant’s Beneficiary unless the Participant’s designation specifically provides to the
contrary. If two or more persons designated as a Participant’s Beneficiary are in existence with
respect to a single Deferred Compensation Benefit, the amount of any payment to the Beneficiary
under this Plan shall be divided equally among such persons, unless the Participant’s designation
specifically provided to the contrary.

7

 

     Section 4.2 Change in Beneficiary. A Participant may, at any time and from time to time,
change a Beneficiary designation hereunder without the consent of any existing Beneficiary or any
other person. Any change in Beneficiary shall be made by giving written notice thereof to the Committee and any
change shall be effective only if received by the Committee prior to the death of the Participant.

     Section 4.3 Distributions to Beneficiaries. The Beneficiary or Beneficiaries of a Participant
shall be entitled to receive the unpaid Deferred Compensation Benefits to which the Participant was
entitled at his death payable in a lump sum as soon as practicable following the date of the
Participant’s death.

ARTICLE V

MISCELLANEOUS

     Section 5.1 Liability of Company. Nothing in this Plan shall constitute the creation of a
trust or other fiduciary relationship between the Company and any Participant, Beneficiary or any
other person.

     Section 5.2 Ownership of Assets; Relationship with Company. Notwithstanding anything herein
to the contrary, Participants shall have no right, title or interest whatsoever in or to the
Accounts or the Deferred Compensation Benefits. Nothing contained in the Plan, and no action taken
pursuant to its provisions, shall create or be construed to create a trust of any kind or a
fiduciary relationship between the Company and any Participant or any other person. To the extent
that any person acquires a right to receive payments from the Company under this Plan, such right
shall be no greater than the right of an unsecured general creditor of the Company.

     Section 5.3 No Guarantee of Continued Status as Director. Nothing in this Plan shall be
construed as guaranteeing future status as a Director to any Participant.

     Section 5.4 Payment to Guardian. If a benefit payable hereunder is payable to a minor, to a
person declared incompetent or to a person incapable of handling the disposition of his property,
the Committee may direct payment of such benefit to the guardian, legal representative or person
having the care and custody of such minor, incompetent or person. The Committee may require such
proof of incompetency, minority, incapacity or guardianship as it may deem appropriate prior to
distribution of the benefit. Such distribution shall completely discharge the Company from all
liability with respect to such benefit.

     Section 5.5 Assignment. No right or interest under this Plan of any Participant or
Beneficiary shall be assignable or transferable in any manner or be subject to alienation,
anticipation, sale, pledge, encumbrance or other legal process or in any manner be liable for or
subject to the debts or liabilities of the Participant or Beneficiary.

     Section 5.6 Severability. If any provision of this Plan or the application thereof to any
circumstance(s) or person(s) is held to be invalid by a court of competent jurisdiction, the
remainder of the Plan and the application of such provision to other circumstances or persons shall
not be affected thereby.

8

 

     Section 5.7 Expenses; Liability for Benefits. The Company shall be liable for the payment of
the Deferred Compensation Benefits which are payable hereunder to the Directors and for the
expenses of administering the Plan, as determined by the Committee.

ARTICLE VI

ADMINISTRATION OF PLAN

     Section 6.1 Administration.

     (a) General. The Plan shall be administered by the Committee. The Committee shall
have sole and absolute discretion to interpret where necessary all provisions of the Plan
(including, without limitation, by supplying omissions from, correcting deficiencies in, or
resolving inconsistencies or ambiguities in, the language of the Plan), to determine the rights and
status under the Plan of Participants or other persons, to resolve questions or disputes arising
under the Plan and to make any determinations with respect to the benefits payable under the Plan
and the persons entitled thereto as may be necessary for the purposes of the Plan. The Committee’s
determination of the rights of any Director shall be final and binding on all persons, subject only
to the appeal provisions outlined in Section 6.4 hereof.

     (b) Compliance with Tax Provisions. The Plan is intended to comply with the
provisions of Section 409A of the Code (including the U.S. Treasury Regulations and other guidance
issued thereunder), and the Committee shall interpret the Plan in a manner consistent therewith.

     (c) Delegation of Duties. The Committee may delegate any of its administrative
duties, including, without limitation, duties with respect to the processing, review,
investigation, approval and payment of Deferred Compensation Benefits, to a named administrator or
administrators.

     Section 6.2 Regulations. The Committee may promulgate any rules and regulations it deems
necessary in order to carry out the purposes of the Plan or to interpret the provisions of the
Plan; provided, however, that no rule, regulation or interpretation shall be contrary to the
provisions of the Plan. The rules, regulations and interpretations made by the Committee shall,
subject only to the appeal provisions outlined in Section 6.4 hereof, be final and binding on all
persons.

     Section 6.3 Trust Fund. The Company shall, from time to time but not less often than
quarterly, contribute to the Trustee such amounts as the Company deems necessary or appropriate to
fund the full amount of Deferred Compensation Benefits accrued hereunder. The Trustee shall invest
and reinvest the Trust Fund in accordance with the terms of this Plan and the Trust Agreement. At
the option of the Company, the Company may pay from its funds, or may direct the Trustee to pay
from the Trust Fund, all expenses of administering the Trust Fund, including Trustee’s fees and
expenses, and all taxes and other expenses attributable to the Trust Fund, all as determined by the
Company.

9

 

     Section 6.4 Appeal Provisions. The Committee shall determine the rights of any Director or
former Director to any Deferred Compensation Benefits hereunder. Any Director or former Director
who believes that he has not received the Deferred Compensation Benefits to which he is entitled
under the Plan may file a claim in writing with the Committee. The Committee shall, no later than
90 days after the receipt of a claim (unless special circumstances require an extension of up to 90
additional days, provided that written notice of the extension of time is given to the claimant
within the first 90 day period), either allow or deny the claim in writing. If a claimant does not
receive written notice of the Committee’s decision on his claim within the above mentioned period,
the claim shall be deemed to have been denied in full.

     A denial of a claim by the Committee, wholly or partially, shall be written in a manner
calculated to be understood by the claimant and shall include:

     (a) the specific reasons for the denial;

     (b) specific reference to pertinent Plan provisions on which the denial is based;

     (c) a description of any additional material or information necessary for the claimant to
perfect the claim and an explanation of why such material or information is necessary; and

     (d) an explanation of the claim review procedure.

     A claimant whose claim is denied (or his duly authorized representative) may within 60 days
after receipt of denial of a claim file with the Committee a written request for a review of such
claim. If the claimant does not file a request for review of his claim within such 60-day period,
the claimant shall be deemed to have acquiesced in the original decision of the Committee on his
claim. If such an appeal is so filed within such 60-day period, the Company (or its delegate)
shall conduct a full and fair review of such claim. During such review, the claimant shall be
given the opportunity to review documents that are pertinent to his claim and to submit issues and
comments in writing.

     The Company shall mail or deliver to the claimant a written decision on the matter based on
the facts and the pertinent provisions of the Plan within 60 days after the receipt of the request
for review (unless special circumstances require an extension of up to 60 additional days, in which
case written notice of such extension shall be given to the claimant prior to the commencement of
such extension). Such decision shall be written in a manner calculated to be understood by the
claimant, shall state the specific reasons for the decision and the specific Plan provisions on
which the decision was based and shall, to the extent permitted by law, be final and binding on all
interested persons. If the decision on review is not furnished to the claimant within the
above-mentioned time period, the claim shall be deemed to have been denied on review.

     Section 6.5 Revocability of Committee/Company Action. Any action taken by the Committee with
respect to the rights or benefits under the Plan of any Director or former Director shall be
revocable by the Committee as to payments not yet made to such person, and acceptance of any
Deferred Compensation Benefits under the Plan constitutes acceptance of and

10

 

agreement to the Committee’s or the Company’s making any appropriate adjustments in future
payments to such person (or to recover from such person) any excess payment or underpayment
previously made to him.

     Section 6.6 Amendment. The Committee may at any time amend any or all of the provisions of
this Plan, except that no such amendment may (a) reduce the balance of any Participant’s Account as
of the date of such amendment, (b) change the time or form of distribution from a Participant’s
Account or (c) materially change the provisions of the Plan applicable to a Participant’s Account
upon a Change in Control, without the prior written consent of such Participant. Any amendment
shall be in the form of a written instrument executed by an officer of the Company pursuant to a
resolution adopted by the Committee. Subject to the foregoing provisions of this Section 6.6, such
amendment shall become effective as of the date specified in such instrument or, if no such date is
specified, on the date of its execution.

     Section 6.7 Termination. The Committee, in its discretion (without the consent of any
Subsidiary which adopts the Plan), may terminate this Plan and pay amounts due hereunder to the
full extent permitted by and in accordance with Section 409A of the Code (including, but not
limited to, Section 1.409A-3(j)(4)(ix) of the U.S. Treasury Regulations), except that no such
termination may (a) reduce the balance of any Participant’s Account as of the date of such
termination or (b) materially change the provisions of the Plan applicable to a Participant’s
Account upon a Change in Control, without the prior written consent of such Participant. Any such
termination shall be expressed in the form of a written instrument executed by an officer of the
Company pursuant to a resolution adopted by the Committee. Subject to the foregoing provisions of
this Section 6.7, such termination shall become effective as of the date specified in such
instrument or, if no such date is specified, on the date of its execution. Written notice of any
termination shall be given to the Participants as soon as practicable after the instrument is
executed.

[Signature page to Follow]

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     Executed
this 15th day of August, 2007.

	 	 	 	 	 	 	 
	 	 	CORRECTIONS CORPORATION OF AMERICA	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ David M. Garfinkle		 	 
	 

	 	 	 	 

	 	 
	 

	 	Its:	 	Vice President, Finance and
Controller 	 	 
	 

	 	 	 	 

	 	 

12

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