8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 8-K

Current Report

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report:  January 11, 2005

Date of Earliest Event Reported:  January 9, 2005

MOVIE GALLERY, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware

(State or Other Jurisdiction of Incorporation)

0-24548	63-1120122
(Commission File Number)	(I.R.S. Employer Identification No.)
900 West Main Street, Dothan, Alabama	36301
(Address of Principal Executive Offices)	(Zip Code)

(334) 677-2108

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o         Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425).

ý         Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12).

o         Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)).

o         Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)).

Item 1.01.  Entry into a Material Definitive Agreement

On January 9, 2005, Movie Gallery, Inc., a Delaware corporation (“Movie Gallery”), and Hollywood Entertainment Corporation, an Oregon corporation (“Hollywood”), entered into an Agreement and Plan of Merger (the “Merger Agreement”).  The Merger Agreement provides for a business combination whereby TG Holdings, Inc. (“Merger Sub”), an Oregon corporation and a wholly owned subsidiary of Movie Gallery, will merge with and into Hollywood (the “Merger”).  As a result of the Merger, the separate corporate existence of Merger Sub will cease and Hollywood will continue as the surviving corporation in the Merger.

At the effective time of the Merger, each share of Hollywood common stock (other than shares owned by Hollywood, Movie Gallery and Merger Sub) will be converted into the right to received $13.25 in cash.  Each outstanding Hollywood stock option at the time of the closing (whether vested or unvested) will be converted into the right to receive an amount in cash equal to the excess, if any, of $13.25 over the per share exercise price of such option multiplied by the number of shares subject to such option.

The Merger is subject to the approval of Hollywood’s shareholders.  In addition, the Merger is subject to clearance under the Hart-Scott-Rodino Antitrust Improvements Act, as well as other customary closing conditions, including Movie Gallery’s receipt of sufficient financing.

Movie Gallery and Hollywood have made customary representations, warranties and covenants in the Merger Agreement, including Hollywood making covenants not to solicit alternative transactions or, subject to certain exceptions, to enter into discussions concerning, or provide confidential information in connection with, an alternative transaction.

The Merger Agreement contains certain termination rights for both Movie Gallery and Hollywood, and further provides that, upon termination of the Merger Agreement under certain circumstances, Hollywood may be obligated to pay Movie Gallery a termination fee of $27.0 million and an expense reimbursement amount of up to $3.0 million.

In connection with the Merger Agreement, Merrill Lynch Capital Corporation, Wachovia Bank, National Association, Wachovia Capital Investments, Inc. and Wachovia Capital Markets, LLC have provided to Movie Gallery a Credit Facilities Commitment Letter dated January 9, 2005.  The Credit Facilities Commitment Letter contemplates, on the terms and conditions provided therein, an aggregate of $1,195,000,000 of debt financing, the proceeds of which will be used to fund the Merger.

The parties currently expect the Merger to close in the second calendar quarter of 2005, although there can be no assurances that the Merger will close in that time period, or at all.

A copy of the Merger Agreement is attached hereto as Exhibit 2.1 and a copy of the Credit Facilities Commitment Letter is attached hereto as Exhibit 10.1, and both are incorporated herein by reference.  The foregoing descriptions of the Merger Agreement and Credit Facilities Commitment Letter are qualified in their entirety by reference to the full text of the Merger Agreement and the Credit Facilities Commitment Letter.

HOLLYWOOD STOCKHOLDERS ARE URGED TO READ THE PROXY STATEMENT REGARDING THE PROPOSED TRANSACTION WHEN IT BECOMES AVAILABLE, BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION.  Stockholders will be able to obtain a free copy of the proxy statement, as well as other filings containing information about the parties, without charge, at the Securities and Exchange Commission’s Internet site (http://www.sec.gov ).  Copies of the proxy statement and the filings with the SEC that will be incorporated by reference in the proxy statement will also be available, without charge, by directing a

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request to Hollywood Entertainment Corp., 9275 S.W. Peyton Lane, Wilsonville, Oregon 97070, Attn: Investor Relations.

The directors and executive officers of Hollywood and other persons may be deemed to be participants in the solicitation of proxies in respect of the transaction. Information regarding Hollywood’s directors and executive officers will be available in the proxy statement.  Other information regarding the participants in the proxy solicitation and a description of their direct and indirect interests, by security holdings or otherwise, will be contained in the proxy statement and other relevant materials to be filed with the SEC when they become available.

Item 7.01.  Regulation FD Disclosure.

On January 10, 2005, Movie Gallery issued a press release announcing the Merger Agreement.  A copy of the press release is attached as Exhibit 99.1.

Item 9.01.  Financial Statements and Exhibits

(c)           Exhibits

Exhibit No.	Description
2.1	Agreement and Plan of Merger, dated as of January 9, 2005, by and among Movie Gallery, Inc., TG Holdings, Inc. and Hollywood Entertainment Corporation
10.1	Credit Facilities Commitment Letter dated as of January 9, 2005 made by Movie Gallery, Inc. and Merrill Lynch Capital Corporation, Wachovia Bank, National Association, Wachovia Capital Investments, Inc. and Wachovia Capital Markets, LLC
99.1	Press Release dated January 10, 2005

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: January 11, 2005	MOVIE GALLERY, INC.
	By:	/s/ Ivy M. Jernigan
		Ivy M. Jernigan Senior Vice President and Chief Financial Officer

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Exhibit Index

Exhibit No.	Description
2.1	Agreement and Plan of Merger, dated as of January 9, 2005, by and among Movie Gallery, Inc., TG Holdings, Inc. and Hollywood Entertainment Corporation
10.1	Credit Facilities Commitment Letter dated as of January 9, 2005 made by Movie Gallery, Inc. and Merrill Lynch Capital Corporation, Wachovia Bank, National Association, Wachovia Capital Investments, Inc. and Wachovia Capital Markets, LLC
99.1	Press Release dated January 10, 2005

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EX-2.1

Exhibit 2.1

Execution Copy

AGREEMENT AND PLAN OF MERGER

by and among

HOLLYWOOD ENTERTAINMENT CORPORATION

and

MOVIE GALLERY, INC.

and

TG HOLDINGS, INC.

Dated as of January 9, 2005

TABLE OF CONTENTS

4.18  Material Contracts

4.19  Termination of Previous Merger Agreement

4.20  Real Estate

4.21  Accounts Payable and Inventory

4.22  Suppliers

4.23  Personnel, etc.

4.24  Assets

4.25  Insurance

4.26  Change of Control Plan

ARTICLE V.  REPRESENTATIONS AND WARRANTIES OF PARENT AND ACQUIROR

5.1  Corporate Existence and Power

5.2  Corporate Authorization

5.3  Governmental Authorization

5.4  Non-Contravention

5.5  Financing

5.6  Finders’ Fees

ARTICLE VI.  COVENANTS OF THE COMPANY

6.1  Company Interim Operations

6.2  Acquisition Proposals; Board Recommendation

6.3  The Notes Tender Offer

6.4  Real Property Holding Company

6.5  Change of Control Plan

ARTICLE VII.  COVENANTS OF PARENT AND ACQUIROR

7.1  Director and Officer Liability

7.2  Transfer Taxes

7.3  Efforts to Obtain Financing and Substitute Financing

ARTICLE VIII.  COVENANTS OF PARENT, ACQUIROR AND THE COMPANY

8.1  Efforts and Assistance/HSR Act

8.2  Shareholder Meeting/Proxy Statement

8.3  Public Announcements

8.4  Access to Information; Notification of Certain Matters

8.5  Further Assurances

8.6  Disposition of Litigation

8.7  Confidentiality Agreement

8.8  Cooperation 144A Offering

ARTICLE IX.  CONDITIONS TO MERGER

9.1  Conditions to the Obligations of Each Party

9.2  Condition to the Obligations of the Company

9.3  Conditions to the Obligations of Acquiror

ARTICLE X.  TERMINATION

10.1  Termination

10.2  Effect of Termination

10.3  Fees and Expenses

ARTICLE XI.  MISCELLANEOUS

11.1  Notices

11.2  Survival

11.3  Amendments; No Waivers

11.4  Successors and Assigns

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11.5  Counterparts; Effectiveness; Third Party Beneficiaries

11.6  Governing Law

11.7  Jurisdiction

11.8  Entire Agreement

11.9  Authorship

11.10  Severability

11.11  Waiver of Jury Trial

11.12  Headings; Construction

Annex 1.1 Definition of Knowledge

Annex 4.26(a) Change of Control Plan

Annex 4.26(b) Change of Control Plan Participants

Annex 6.5 Change of Control Plan Amendment

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AGREEMENT AND PLAN OF MERGER

This AGREEMENT AND PLAN OF MERGER (this “Agreement”) is made and entered into as of January 9, 2005, by and among Hollywood Entertainment Corporation, an Oregon corporation (the “Company”), Movie Gallery, Inc., a Delaware corporation (“Parent”), and TG Holdings, Inc., an Oregon corporation (“Acquiror”) wholly owned by Parent.

WHEREAS, it is the intention of the parties that Acquiror shall merge with and into the Company (the “Merger”) with the Company being the surviving corporation and a wholly owned subsidiary of Parent;

WHEREAS, the Special Committee of the Board of Directors of the Company (the “Special Committee”) and the Board of Directors of the Company, each consisting of a majority of directors who have no direct or indirect interest in the transactions contemplated by this Agreement, other than ownership of Company Shares (as defined below) and Company Options (as defined below), have determined, by the unanimous vote of all of the directors voting on the matter, that it is fair to and in the best interests of the Company and the holders of the Company’s common stock (the “Company Shares”), (i) to terminate the Prior Merger Agreement (as defined below); and (ii) to enter into this Agreement and to consummate the Merger upon the terms and subject to the conditions set forth in this Agreement and in accordance with the Oregon Business Corporation Act (the “OBCA”);

WHEREAS, the Special Committee and the Board of Directors of the Company, by resolutions unanimously adopted by all of the directors voting on the matter, have (i) approved the termination of the Prior Merger Agreement, (ii) approved and declared advisable this Agreement and the Merger and the other transactions contemplated hereby, upon the terms and subject to the conditions set forth in this Agreement and in accordance with the OBCA; (iii) resolved that this Agreement be submitted for a vote at a meeting of Company Shareholders and (iv) resolved to recommend that the holders of Company Shares approve this Agreement;

WHEREAS, the Board of Directors of Acquiror has unanimously (i) determined that the Merger is fair to and in the best interests of Acquiror and its shareholders, (ii) adopted resolutions approving and declaring advisable this Agreement and the Merger and the other transactions contemplated hereby, upon the terms and subject to the conditions set forth in this Agreement and in accordance with the OBCA and (iii) resolved to recommend that the holders of Acquiror Common Shares (as defined below) approve this Agreement;

WHEREAS, Parent, as the sole shareholder of Acquiror, has adopted and approved this Agreement and approved the transactions contemplated hereby; and

NOW, THEREFORE, in consideration of the premises and promises contained herein, and intending to be legally bound, the parties hereto agree as set forth below.

ARTICLE I

DEFINITIONS

1.1Definitions.

As used herein, the following terms have the meanings set forth below:

“Acquiror” has the meaning specified in the recitals to this Agreement.

“Acquiror Common Shares” means the common stock of Acquiror.

“Acquiror Disclosure Schedule” has the meaning specified in the preamble to Article V.

“Acquiror Material Adverse Effect” means any change or effect that would prevent or materially impair the ability of Parent or Acquiror to consummate the Merger and the other transactions contemplated hereby in a timely manner.

“Acquisition Proposal” means any inquiry, offer or proposal from any Person (whether or not in writing and whether or not conditional) (other than an offer or proposal by or on behalf of Parent or Acquiror or any Affiliate of Parent (other than any shareholder of Parent that is not a director or officer of Parent), including the Merger and the transactions contemplated hereby) relating to, or that could reasonably be expected to lead to: (a) a transaction pursuant to which any Person or group of Persons acquires or would acquire Beneficial Ownership of more than fifteen percent (15%) of the outstanding voting power of the Company, whether from the Company or pursuant to a tender offer, exchange offer or otherwise, (b) a merger, consolidation, business combination, reorganization, share exchange, sale of assets, recapitalization, liquidation, dissolution or similar transaction which would result in a Third Party acquiring fifteen percent (15%) or more of the fair market value of the assets of the Company and its Subsidiaries, taken as a whole, (c) any transaction which would result in a Third Party acquiring fifteen percent (15%) or more of the fair market value of the assets (including, without limitation, the capital stock of Subsidiaries) of the Company and its Subsidiaries, taken as a whole, immediately prior to such transaction (whether by purchase of assets, acquisition of stock of a Subsidiary or otherwise), or (d) any combination of the foregoing.

“Adverse Recommendation Notice” has the meaning specified in Section 6.2(c).

“Affiliate” means, with respect to any Person, any other Person, directly or indirectly, controlling, controlled by, or under common control with, such Person.  For purposes of this definition, the term “control” (including the correlative terms “controlling”, “controlled by” and “under common control with”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.

“Agreement” has the meaning specified in the preamble to this Agreement.

“Antitrust Division” has the meaning specified in Section 8.1(d).

“Articles of Merger” has the meaning specified in Section 2.1(b).

“Audited Financial Statements” has the meaning specified in Section 4.8(a).

“Balance Sheet Date” means December 31, 2003.

“Bank Commitment Letter” has the meaning specified in Section 5.5.

“Beneficial Ownership” shall have the meaning provided therefor under Section 13(d) of the Exchange Act and the rules and regulations promulgated under such Section.

“Business Day” means any day, other than a Saturday, Sunday or one on which banks are authorized by Law to be closed in New York, New York or Portland, Oregon.

“Certificate” has the meaning specified in Section 3.3.

“Change of Control Plan” means the Company’s Change of Control Plan for Senior Management, dated as of February 3, 2001.

“Class Shareholders” has the meaning specified in Section 9.3(b).

“Closing” has the meaning specified in Section 2.1(d).

“Closing Date” has the meaning specified in Section 2.1(d).

“Code” means the U.S. Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated thereunder.

“Company” has the meaning specified in the preamble to this Agreement.

“Company Adverse Recommendation Change” has the meaning specified in Section 6.2(c).

“Company Articles of Incorporation” means the Restated Articles of Incorporation of the Company, as amended.

“Company Balance Sheet” means the Company’s consolidated balance sheet included in the Company’s Annual Report on Form 10-K relating to its fiscal year ended on December 31, 2003.

“Company By-laws” means the 1999 Restated By-laws of the Company.

“Company Contract” means any note, bond, mortgage, indenture, deed of trust, license, lease, agreement, contract, commitment, arrangement, Permit, concession, franchise, limited liability or partnership agreement, or other instrument to which the Company or any of its Subsidiaries is a party, or by which they or any of their respective properties, assets or business activities may be bound.

“Company Disclosure Schedule” has the meaning specified in the preamble to Article IV.

“Company Employee Plans” has the meaning assigned in Section 4.13(a).

“Company Material Adverse Effect” means any change, effect, event, occurrence, state of facts or development which had or has a material adverse effect on (a) the business, assets, liabilities, condition (financial or otherwise) or results of operations of the Company and its Subsidiaries, taken as a whole, or (b) the ability of the Company to perform its obligations under this Agreement.  In no event, however, shall any of the following, in and of itself, constitute a Company Material Adverse Effect: (i) any change in the trading price of the Company Shares between the date hereof and the Effective Time (it being understood that any fact or development giving rise to or contributing to such change in the trading price of the Company Shares may be the cause of a Company Material Adverse Effect); (ii) any changes, effects, events, occurrences, states of facts or developments resulting from any change in law or generally accepted accounting principles that affect generally entities such as the Company; (iii) any effect resulting from compliance by the Company with the terms of this Agreement; (iv) the effect of any change that is generally applicable to the industries in which the Company operates or the United States economy or securities markets or the world economy or international securities markets, (v) the effect of any change arising in connection with earthquakes or acts of war, sabotage or terrorism, (vi) any effect of the public announcement of this Agreement, the transactions contemplated hereby or the consummation of such transactions or (vii) any change in the mix of the sources of the Company’s total revenue.

“Company Options” means any options to purchase Company Shares granted pursuant to the Company Option Plans.

“Company Option Plans” means the Company’s 1993 Stock Incentive Plan, as amended, the Company’s 1997 Employee Nonqualified Stock Option Plan, as amended and the Company’s 2001 Stock Incentive Plan.

“Company POS Systems” means the two software programs which manage the point-of-sale information collection for the Hollywood Video stores and the Game Crazy stores, respectively.

“Company Preferred Stock” has the meaning specified in Section 4.5(a).

“Company Proxy Statement” has the meaning specified in Section 8.2(c).

“Company Recommendation” has the meaning specified in Section 6.2(c).

“Company Returns” has the meaning specified in Section 4.12.

“Company SEC Documents” means each form, registration statement (in the form declared effective by the SEC), prospectus, report, schedule, definitive proxy statement or other document filed or otherwise furnished by the Company or any of its Subsidiaries with or to the SEC since January 1, 2000 pursuant to the Securities Act or the Exchange Act, in each case including all exhibits, appendices and attachments thereto, whether filed or otherwise furnished therewith or incorporated by reference therein.

“Company Securities” has the meaning specified in Section 4.5(b).

“Company Shares” has the meaning specified in the recitals to this Agreement.

“Company Shareholders” or “Shareholders” means the holders of Company Shares.

“Company Shareholder Approval” means approval of this Agreement by the vote of holders of a number of Company Shares equal to the sum of (a) a number of Company Shares equal to 50% of the outstanding Company Shares, plus (b) one Company Share.

“Company Shareholder Meeting” has the meaning specified in Section 8.2(b).

“Company Subsidiary” means a Subsidiary of the Company.

“Confidentiality Agreement” has the meaning specified in Section 8.4(a).

“Current Policies” has the meaning specified in Section 7.1(a).

“Default” has the meaning specified in Section 4.18(c).

“Effective Time” has the meaning specified in Section 2.1(b).

“Eligible Assignees” has the meaning specified in Section 5.5.

“End Date” has the meaning specified in Section 10.1(b)(i).

“Environmental Laws” has the meaning specified in Section 4.14(d).

“Equity Interest” means with respect to any Person, any and all shares, interests, participations, rights in, or other equivalents (however designated and whether voting or non-voting) of, such Person’s capital stock or other equity interests (including, without limitation, partnership or membership interests in a partnership or limited liability company or any other interest or participation that confers on a Person the right to receive a share of the profits and losses, or distributions of assets, of the issuing Person) whether outstanding on the date hereof or issued after the date hereof.

“ERISA” has the meaning specified in Section 4.13(a).

“ERISA Affiliate” has the meaning specified in Section 4.13(a).

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

“Exchange Agent” has the meaning specified in Section 3.4(a).

“Exchange Fund” has the meaning specified in Section 3.4(a).

“Financing” has the meaning specified in Section 5.5.

“FTC” has the meaning specified in Section 8.1(d).

“GAAP” means United States generally accepted accounting principles, applied on a consistent basis.

“Governmental Entity” means any supranational, federal, state, local or foreign government, court, administrative agency or commission or other governmental or regulatory authority or instrumentality.

“Hollywood Management Company” means Hollywood Management Company, an Oregon corporation and a wholly owned Subsidiary of the Company.

“HSR Act” has the meaning specified in Section 4.3.

“Insurance Policies” has the meaning specified in Section 4.25.

“Intellectual Property” means (i) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all provisionals, reissuances, continuations, continuations-in-part, divisions, revisions, extensions, and reexaminations thereof, (ii) all trademarks, service marks, trade dress, logos, brand names, trade names, domain names and corporate names, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith, (iii) all copyrightable works, all copyrights, any and all website content, and all applications, registrations, and renewals in connection therewith, (iv) all mask works and all applications, registrations, and renewals in connection therewith, (v) all trade secrets and confidential business information (including research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, research records, records of inventions, test information, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals), (vi) all source code and object code versions of computer software (including data and related documentation), (vii) all moral rights, (viii) all other proprietary rights, and (ix) all copies and tangible embodiments thereof (in whatever form or medium), any rights in or licenses of any of the foregoing, and any claims or causes of actions (pending or filed) arising out of or related to any infringement or misappropriation of any of the foregoing.

“Knowledge” as used in this Agreement shall refer to the actual knowledge, after due inquiry, of each of the Persons listed on Annex 1.1.

“Law” means any supranational, federal, state, local, or foreign law, rule, regulation, judgment, code, ruling, statute, order, decree, injunction, ordinance or other legal requirement (including any arbitral decision or award).

“Leases” has the meaning specified in Section 4.20.

“Lenders” has the meaning specified in Section 5.5.

“License-In Agreements” has the meaning specified in Section 4.17(b).

“Lien” means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind; provided, however, that the term “Lien” shall not include (a) liens for utilities and current Taxes not yet due and payable, (b) mechanics’, carriers’, workers’, repairers’, materialmen’s, warehousemen’s and other similar liens arising or incurred in the ordinary course of business relating to claims not yet due or payable or (c) liens for Taxes (not to exceed $500,000 in the aggregate) being contested in good faith.

“Material Contract” and “Material Contracts” have the meanings specified in Section 4.18(a).

“Merger” has the meaning specified in the recitals to this Agreement.

“Merger Consideration” has the meaning specified in Section 3.3.

“Merger Funds” has the meaning specified in Section 5.6.

“MLCC” has the meaning specified in Section 5.5.

“Noteholders” has the meaning specified in Section 6.3(b).

“Notes Offer to Purchase” has the meaning specified in Section 6.3(b).

“Notes Tender Offer” has the meaning specified in Section 6.3(a).

“Notes Tender Offer Documents” has the meaning specified in Section 6.3(b).

“Notice of Superior Proposal” has the meaning specified in Section 6.2(b).

“OBCA” has the meaning specified in the recitals to this Agreement.

“Parent” has the meaning specified in the preamble to this Agreement.

“Parent Expense Reimbursement Amount” means all reasonable, documented, out of pocket expenses and fees (including reasonable attorneys fees) actually incurred by Parent and its Affiliates on or prior to the termination of this Agreement in connection with the transactions contemplated by this Agreement; provided that this amount shall not be greater than Three Million and No/100 Dollars ($3,000,000.00).

“Permits” has the meaning specified in Section 4.14.

“Person” means an individual, corporation, limited liability company, partnership, association, trust or any other entity or organization, including any Governmental Entity.

“Premises” has the meaning specified in Section 8.4(c).

 “Prior Merger Agreement” means that certain Amended and Restated Agreement and Plan of Merger, dated as of October 13, 2004, by and among the Company, Carso Holdings Corporation and Hollywood Merger Corporation, which agreement was terminated by the Company as of or prior to the date hereof in accordance with the provisions of Section 10.1(f) thereof.

“Real Property” has the meaning specified in Section 4.20.

“Record Holder” has the meaning specified in Section 3.4(b).

“Replacement Policies” has the meaning specified in Section 7.1(a).

“Representatives” has the meaning specified in Section 6.2(a).

 “SEC” means the United States Securities and Exchange Commission.

“Secretary of State” has the meaning specified in Section 2.1(b).

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

“Senior Subordinated Notes” means the Company’s 9.625% Senior Subordinated Notes due 2011 issued pursuant to the Senior Subordinated Notes Indenture.

“Senior Subordinated Notes Indenture” means the indenture relating to the Senior Subordinated Notes, dated as of January 25, 2002, among the Company, Hollywood Management Company and BNY Western Bank, as trustee, as supplemented by the First Supplemental Indenture.

“Special Committee” has the meaning specified in the recitals to this Agreement.

“Subsidiary” means, with respect to any Person, any other Person (including joint ventures) of which such Person, directly or indirectly, (a) has the right or ability to elect, designate or appoint a majority of the Board of Directors or other Persons performing similar functions for such Person, whether as a result of the beneficial ownership of Equity Interests, contractual rights or otherwise or (b) beneficially owns a majority of the voting Equity Interests or a majority of the economic interests.

“Substitute Financing” has the meaning specified in Section 7.3.

“Superior Proposal” means any bona fide written Acquisition Proposal (with all of the percentages included in the definition of Acquisition Proposal increased to 75% for purposes of this definition) that a majority of the members of the Company’s Board of Directors or Special Committee, as appropriate, determines in good faith by resolution duly adopted, after consultation with its outside legal counsel and a nationally recognized investment banking firm, (a) provides to the Company Shareholders consideration with a value per Company Share that exceeds the value per Company Share of the consideration provided for in this Agreement (after taking into account any revisions made or proposed by Parent or Acquiror) and (b) is reasonably capable of being consummated on the terms proposed (taking into account all legal, financial, regulatory and other relevant considerations, including, without limitation, the Person or Persons making the Acquisition Proposal and the likelihood of obtaining financing).

“Surviving Corporation” has the meaning specified in Section 2.1(a).

“Takeover Statute” means any restrictive provision or any applicable “fair value,” “control share acquisition,” “interested shareholder” or other similar anti-takeover statute or regulation, including Sections 60.801 through 60.816 of the OBCA and Sections 60.825 through 60.845 of the OBCA.

“Taxes” means all United States federal, state, local or foreign income, profits, estimated gross receipts, windfall profits, environmental (including taxes under Section 59A of the Code), severance, property, intangible property, occupation, production, sales, use, license, excise, emergency excise, franchise, escheat, capital gains, capital stock, employment, withholding, social security (or similar), disability, transfer, registration, stamp, payroll, goods and services, value added, alternative or add-on minimum tax, estimated, or any other tax, custom, duty or governmental fee, or other like assessment or charge of any kind whatsoever, together with any interest, penalties, fines, related liabilities or additions to taxes that may become payable in respect therefor imposed by any Governmental Entity, whether disputed or not, and including any obligation to indemnify or otherwise assume or succeed to the Tax liability of any other Person.

“Termination Fee” means a cash amount equal to Twenty-Seven Million and No/100 Dollars ($27,000,000.00), which shall be paid as provided in Section 10.2.

“Third Party” means any Person (or group of Persons) other than Parent, Acquiror or any of their Affiliates (other than any shareholder of Parent that is not a director or officer of Parent).

“Third Party Acquisition” means the consummation by a Third Party of any transaction or series of transactions described in clauses (a) through (d) of the definition of “Acquisition Proposal.”

“Transfer Taxes” has the meaning specified in Section 7.2.

“WB” has the meaning specified in Section 5.5.

“WCI” has the meaning specified in Section 5.5.

“WCM” has the meaning specified in Section 5.5.

ARTICLE II

THE MERGER

2.1The Merger.

(a)At the Effective Time, Acquiror shall be merged with and into the Company in accordance with the terms and conditions of this Agreement and the OBCA, at which time the separate corporate existence of Acquiror shall cease and the Company shall continue its existence as the surviving corporation.  In its capacity as the corporation surviving the Merger, this Agreement sometimes refers to the Company as the “Surviving Corporation.”

(b)As soon as practicable on or after the Closing Date, the Company will file articles of merger or other appropriate documents (the “Articles of Merger”) with the Secretary of State of

the State of Oregon (the “Secretary of State”) and make all other filings or recordings required by the OBCA in connection with the Merger.  The Merger shall become effective when the Articles of Merger are duly filed with and accepted by the Secretary of State, or at such later time as is agreed upon by the parties and specified in the Articles of Merger (such time as the Merger becomes effective is referred to herein as the “Effective Time”).

(c)From and after the Effective Time, the Merger shall have the effects set forth in the applicable provisions of the OBCA.  Without limiting the generality of the foregoing, at the Effective Time, without further act or deed, all the property, rights, immunities, privileges, powers, franchises and licenses of the Company and Acquiror shall vest in the Surviving Corporation and all debts, liabilities, obligations, restrictions and duties of each of the Company and Acquiror shall become the debts, liabilities, obligations, restrictions and duties of the Surviving Corporation.

(d)The closing of the Merger (the “Closing”) shall be held at the offices of Troy & Gould Professional Corporation, 1801 Century Park East, Los Angeles, CA 90067 (or such other place as agreed by the parties) not later than the third Business Day following the date on which all of the conditions set forth in Article IX are satisfied or waived (other than those conditions to be satisfied at the Closing, but subject to the satisfaction or waiver thereof), unless the parties hereto agree to another date.  The date upon which the Closing occurs is hereinafter referred to as the “Closing Date.”

2.2Organizational Documents.

(a)At the Effective Time, the Articles of Incorporation of the Surviving Corporation shall be amended to read in their entirety as do the Articles of Incorporation of the Acquiror, and as so amended shall be the Articles of Incorporation of the Surviving Corporation until thereafter amended in accordance with their terms and as provided in the OBCA.

(b)At the Effective Time, the By-laws of the Acquiror as in effect immediately prior to the Effective Time shall be the By-laws of the Surviving Corporation until thereafter amended in accordance with their terms and as provided by the OBCA and the Articles of Incorporation of the Surviving Corporation.

2.3Directors and Officers.

(a)From and after the Effective Time, the directors of Acquiror shall be the directors of the Surviving Corporation until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be, in accordance with the Articles of Incorporation and By-laws of the Surviving Corporation, the OBCA and this Agreement.

(b)From and after the Effective Time, the officers of the Acquiror shall be the officers of the Surviving Corporation until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be, in accordance with the Articles of Incorporation and By-laws of the Surviving Corporation, the OBCA and this Agreement.

ARTICLE III

CONVERSION OF SECURITIES AND RELATED MATTERS

3.1Capital Stock of Acquiror.  At the Effective Time, by virtue of the Merger and without any action on the part of the holder thereof, each Acquiror Common Share that is issued and outstanding immediately prior to the Effective Time shall be converted into one newly issued, fully paid and nonassessable share of common stock of the Surviving Corporation.

3.2Cancellation of Parent and Acquiror-Owned Shares.  At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any Company Share, each Company Share owned by Parent, Acquiror or any Company Subsidiary, if any, immediately prior to the Effective Time shall be canceled and retired and shall cease to exist, and no payment shall be made or consideration delivered in respect therefor.

3.3Conversion of Company Shares.  At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any Company Share, each Company Share issued and outstanding immediately prior to the Effective Time other than any Company Shares to be cancelled pursuant to Section 3.2 shall be canceled, retired and shall cease to exist and shall be converted automatically into the right to receive from Parent (or a Subsidiary thereof) an amount in cash equal to Thirteen and 25/100 Dollars ($13.25) (the “Merger Consideration”), payable by Parent (or a Subsidiary thereof) to the holder thereof upon surrender of the certificate (a “Certificate”) which immediately prior to the Effective Time represented any such Company Shares in the manner provided in Section 3.4; and no other consideration shall be delivered or deliverable on or in exchange therefor.

3.4Exchange of Certificates.

(a)Exchange Agent.  Prior to the Closing Date, Parent shall appoint a bank or trust company reasonably acceptable to the Company as agent (the “Exchange Agent”) for the benefit of holders of Company Shares for the purpose of exchanging, pursuant to this Article III, Certificates representing Company Shares for the Merger Consideration.  On or before the Closing Date, Parent will deposit or cause to be deposited with the Exchange Agent the aggregate Merger Consideration to be paid in respect of all Company Shares pursuant to this Article III (the “Exchange Fund”), and except as contemplated by Section 3.4(e), Section 3.4(f) or Section 3.4(g) hereof, the Exchange Fund shall not be used for any other purpose.  The Exchange Agent shall invest such Merger Consideration as directed by Parent.  Any interest and other income resulting from such investments shall be paid to Parent. All fees, costs and expenses of the Exchange Agent shall be borne by Parent.

(b)Exchange Procedures.  As promptly as practicable after the Effective Time (but not later than five (5) Business Days after the date on which the Effective Time occurs), the Surviving Corporation shall send, or shall cause the Exchange Agent to send, to each record holder of Certificates (“Record Holder”) immediately prior to the Effective Time, a letter of transmittal and instructions (which shall be in customary form and specify that delivery shall be effected, and risk of loss and title shall pass, only upon delivery of the Certificates to the Exchange Agent), for use in the exchange contemplated by this Section 3.4.  Upon surrender of a Certificate to the

Exchange Agent, together with a duly executed letter of transmittal, the holder shall be entitled to receive in exchange therefor, the Merger Consideration as provided in this Article III in respect of the Company Shares represented by the Certificate (after giving effect to any required withholding Tax).  Until surrendered as contemplated by this Section 3.4, each such Certificate representing Company Shares shall be deemed, after the Effective Time, to represent only the right to receive the Merger Consideration.  No interest shall be paid on any such delivery of cash to be paid pursuant to this Article III upon such delivery.

(c)No Further Rights in Company Shares.  Holders of Company Shares shall cease to be, and shall have no rights as, shareholders of the Company, other than to receive (i) any dividend or other distribution with respect to the Company Shares with a record date occurring prior to the Effective Time and (ii) the Merger Consideration provided in Section 3.3. All cash paid upon surrender of Certificates in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to Company Shares represented thereby.  As of the Effective Time, the stock transfer books of the Company shall be closed and there shall be no further registration of transfers on the Company’s stock transfer books of any Company Shares, other than transfers that occurred before the Effective Time.  If, after the Effective Time, Certificates representing Company Shares are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Section 3.4.

(d)Alternate Endorsement.  If payment of the Merger Consideration in respect of Company Shares is to be made to a Person other than the Person in whose name a surrendered Certificate is registered, it shall be a condition to such payment that the Certificate so surrendered shall be properly endorsed or shall be otherwise in proper form for transfer and that the Person requesting such payment shall have paid any transfer and other Taxes required by reason of such payment in a name other than that of the registered holder of the Certificate surrendered or shall have established to the satisfaction of Parent or the Exchange Agent that such Taxes either have been paid or are not payable.

(e)Return of Merger Consideration.  Upon demand by Parent, the Exchange Agent shall deliver to Surviving Corporation any portion of the Merger Consideration made available to the Exchange Agent pursuant to this Section 3.4 (with any interest and earnings thereon) that remains undistributed to Record Holders twelve (12) months after the Effective Time. Record Holders who have not complied with this Section 3.4 prior to the demand by Parent shall thereafter look only to Surviving Corporation for payment of any claim to the Merger Consideration without any interest thereon.  Any Merger Consideration remaining unclaimed as of a date which is immediately prior to such time as such amounts would otherwise escheat to or become property of any Governmental Entity shall, to the extent permitted by applicable Law, become the property of Surviving Corporation free and clear of any claims or interest of any Person previously entitled thereto.

(f)No Liability.  None of the Surviving Corporation, Parent or the Exchange Agent shall be liable to any Person in respect of amounts paid to a public official pursuant to any applicable abandoned property, escheat or similar Law.

(g)Withholding Rights.  Parent, Surviving Corporation and the Exchange Agent shall be entitled to deduct and withhold from the Merger Consideration otherwise payable hereunder to

any holder of any Certificate any amounts that it is required to deduct and withhold with respect to payment under any provision of federal, state, local or foreign Tax Law.  To the extent that amounts are so withheld, the withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of such Certificate.

(h)Lost Certificates.  If any Certificate has been or is claimed to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming that a Certificate has been lost, stolen or destroyed and, if required by Parent, the posting by such Person of a bond, in such reasonable amount as the Surviving Corporation may direct, as indemnity against any claim that may be made against it with respect to that Certificate, the Exchange Agent will deliver to such Person in exchange for such lost, stolen or destroyed Certificate, the proper amount of the Merger Consideration.

(i)Exchange of Acquiror Stock Certificates.  Immediately after the Effective Time, the Surviving Corporation shall deliver to Parent in exchange for the certificates which immediately prior to the Effective Time represented all the outstanding Acquiror Common Shares that were converted into the right to receive shares of common stock of the Surviving Corporation in accordance with Section 3.1, share certificates registered in the name of Parent, representing the number of shares of common stock of the Surviving Corporation to which Parent is so entitled by virtue of Section 3.1.

3.5Company Stock Options.  With respect to each outstanding Company Option, the Board of Directors of the Company shall provide a 30-day period prior to the consummation of the Merger during which time each outstanding Company Option shall be exercisable to the extent vested.  At the Effective Time, each unexercised Company Option (whether vested or unvested) shall be cancelled with the holder thereof becoming entitled to receive an amount in cash equal to the excess, if any, of (i) the Merger Consideration over (ii) the per share exercise price of such Company Option, multiplied by the number of Company Shares subject to such cancelled Company Options, as such amount may be reduced by any applicable withholding Taxes.

3.6Adjustments.  If between the date of this Agreement and the Effective Time the number of outstanding Company Shares shall have been changed into a different number of shares or a different class, by reason of any stock dividend, subdivision, reclassification, recapitalization, split-up, combination, exchange of shares or the like other than pursuant to the Merger, the amount of Merger Consideration shall be correspondingly adjusted and, if and as appropriate, all other appropriate corresponding adjustments shall be made.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

Except as disclosed in the Company disclosure schedule delivered by the Company to the Acquiror prior to the execution of this Agreement (the “Company Disclosure Schedule”) with specific reference to the particular Section or subsection of this Agreement to which the information set forth in such disclosure schedule relates (it being understood that any information set forth in a particular section of the Company Disclosure Schedule shall be deemed to apply to each other section or subsection thereof or hereof to which its relevance is clearly

apparent on its face), the Company represents and warrants to Parent and Acquiror as set forth below:

4.1Corporate Existence and Power.

(a)The Company is a corporation, duly incorporated and validly existing under the Laws of the State of Oregon, and has all corporate power and authority required to own, lease and operate its properties, to carry on its business as now conducted and (assuming this Agreement is duly approved and adopted at the Company Shareholder Meeting) to consummate the Merger and the other transactions contemplated hereby.

(b)The Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned, leased or operated by it or the nature of its activities makes qualification necessary, except where the failure to be so qualified has not had, and would not be reasonably expected to have, individually or in the aggregate, a Company Material Adverse Effect.

(c)The Company has made available to Acquiror a complete and correct copy of the Company Articles of Incorporation and Company By-laws and the Articles of Incorporation and By-laws (or other constituent documents) of each of the Company Subsidiaries. The corporate records and minute books of the Company and each of the Company Subsidiaries reflect all material action taken and authorizations made at meetings of such companies’ Boards of Directors or any committees thereof and at any shareholders’ meetings thereof.

4.2Corporate Authorization.

(a)The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the Merger and the other transactions contemplated hereby have been duly and validly authorized by the Board of Directors of the Company and, except for the Company Shareholder Approval, no other corporate proceedings on the part of the Company are necessary to authorize or consummate this Agreement or to consummate the other transactions contemplated hereby (other than the filing and recordation of the appropriate documents with respect to the Merger in accordance with the OBCA).

(b)On or prior to the date hereof, the Company’s Board of Directors has (i) determined that this Agreement and the transactions contemplated hereby, including the Merger, are fair to and in the best interests of the Company and the Company Shareholders, (ii) adopted resolutions approving this Agreement and the transactions contemplated hereby and thereby, including the Merger, (iii) adopted resolutions declaring this Agreement and the Merger advisable, (iv) adopted resolutions directing that this Agreement be submitted to a vote at a meeting of Company Shareholders; (v) adopted resolutions recommending to the Company Shareholders that they vote in favor of approving this Agreement in accordance with the terms hereof; and (vi) adopted resolutions approving this Agreement and the Merger, prior to the date on which, to the Knowledge of the Company, any Person that is a party to this Agreement became an “interested shareholder” as such term is defined in Section 60.825 of the OBCA.  Neither the execution, delivery or performance of this Agreement, nor the consummation of the Merger or any of the other transactions contemplated hereby constitute (a) a control share acquisition under Sections 60.801

through 60.816 of the OBCA or any applicable Takeover Statute or (b) a prohibited business combination under Section 60.835 of the OBCA or any applicable Takeover Statute.  To the Knowledge of the Company, no other Takeover Statute applies or purports to apply to this Agreement, the Merger or any of the transactions contemplated hereby.  No provision of the Company Articles of Incorporation or the Company By-laws or similar governing instruments of any Company Subsidiary would, directly or indirectly, restrict or impair the ability of Parent to vote, or otherwise to exercise the rights of a shareholder with respect to, any shares of the Company and any Company Subsidiary that may be acquired or controlled by Parent.

(c)This Agreement has been duly and validly executed and delivered by the Company and, assuming that this Agreement constitutes the valid and binding obligation of Parent and Acquiror, constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium, reorganization, arrangement or similar laws affecting creditors’ rights generally and by general principles of equity.

4.3Third Party Authorization.  The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the Merger and the other transactions contemplated hereby do not and will not require any consent, approval, action, order, authorization, or permit of, or registration or filing with, any Governmental Entity or other Third Party, other than (a) the filing of (i) the Articles of Merger in accordance with the OBCA and (ii) the appropriate documents with respect to the Company’s qualification to do business with the relevant authorities of other states or jurisdictions in which the Company is qualified to do business; (b) compliance with any applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”); (c) compliance with any applicable requirements of the Exchange Act; (d) such as may be required under any applicable state securities or blue sky Laws; and (e) other consents, approvals, actions, orders, authorizations, registrations, declarations, filings and permits which, if not obtained or made, have not had, and would not be reasonably expected to have, individually or in the aggregate, a Company Material Adverse Effect.

4.4Non-Contravention.  The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the Merger and the other transactions contemplated hereby do not and will not (a) contravene, breach or conflict with the Company Articles of Incorporation or the Company By-laws, (b) assuming compliance with the matters referred to in Section 4.3, contravene, breach or conflict with or constitute a violation of any provision of any Law binding upon or applicable to the Company or its Subsidiaries or by which any of their respective properties is bound or affected, (c) constitute a Default under (or an event that with notice or lapse of time or both could reasonably be expected to become a Default) or give rise (with or without notice or lapse of time or both) to a right of termination, amendment, cancellation or acceleration under any Company Contract (excluding real property leases set forth in Section 4.20(i) of the Company Disclosure Schedule but including real properties leases set forth in Section 4.20(ii) of the Company Disclosure Schedule) or mandatory redemption of indebtedness, or (d) result in the creation or imposition of any material Lien on any asset of the Company or any Company Subsidiary, other than, in the case of clauses (b) or (c) any items that have not had, and would not be reasonably expected to have, individually or in the aggregate, a Company Material Adverse Effect.

4.5Capitalization.

(a)The authorized capital stock of the Company consists solely of 100,000,000 Company Shares and 25,000,000 shares of preferred stock (the “Company Preferred Stock”).  As of January 9, 2005, (i) 60,993,769 Company Shares were issued and outstanding, all of which have been duly authorized and validly issued and are fully paid and nonassessable and were issued free of preemptive or similar rights, (ii) no Company Shares were held by Subsidiaries of the Company, (iii) 7,325,698 Company Shares were issuable upon the exercise of Company Options then outstanding (whether or not exercisable), (iv) 5,091,157 Company Shares were reserved for issuance upon the grant of options reserved and available under the Company Option Plans, and (v) no shares of Company Preferred Stock were issued and outstanding.  Since December 31, 2003, the Company has not (i) declared, set aside or paid any dividend or distribution (whether in cash, stock or property) or capital return in respect of any of its Equity Interests including, without limitation, Company Shares, (ii) repurchased, redeemed or otherwise acquired any Company Securities (as defined below), or (iii) amended any material term of any outstanding Company Securities, and its Board of Directors has not resolved to do any of the foregoing.  Since December 31, 2003, the Company has not issued, sold or disposed of any Company Securities other than upon exercise of Company Options outstanding on such date.

(b)Except as set forth in this Section 4.5, the Company has not issued, or reserved for issuance, any (i) Equity Interests of the Company, (ii) securities of the Company convertible into or exchangeable for Equity Interests of the Company or (iii) options, warrants or other rights to acquire from the Company, or obligations of the Company to issue, any Equity Interests of the Company or securities convertible into or exchangeable for, or requiring payments based on the value of, Equity Interests of the Company (the items in clauses (i), (ii) and (iii) being referred to collectively as the “Company Securities”).  There are no outstanding agreements or other obligations of the Company or any Company Subsidiary to issue, sell, repurchase, redeem or otherwise acquire any Company Securities.

(c)Section 4.5(c) of the Company Disclosure Schedule sets forth a complete and accurate list of all outstanding Company Options (whether or not exercisable) as of January 9, 2005, which list sets forth the name of the holders thereof and, to the extent applicable, (i) the exercise price or purchase price thereof, (ii) the number of Company Shares subject thereto, and (iii) the expiration date thereof.

(d)On or prior to the date hereof, the Company’s Board of Directors has duly and validly authorized all corporate actions required to be taken by the Company to effect the actions set forth in Section 3.5 hereof.  The terms and provisions of Section 3.5 hereof (i) do not conflict with or violate any of the terms or provisions of the Company Option Plans and (ii) do not require the prior approval or consent of the holders of any Company Options.

4.6Subsidiaries.

(a)Section 4.6(a) of the Company Disclosure Schedule lists each Company Subsidiary together with the jurisdiction of incorporation of each Subsidiary.  Except for the Equity Interests in each Company Subsidiary, the Company does not own, directly or indirectly, any capital stock or other ownership interest in any other Person.

(b)Each Company Subsidiary (i) is a corporation duly incorporated and is validly existing and in good standing under the Laws of its jurisdiction of incorporation, and has all powers and authority required to own, lease or operate its properties, to carry on its business as now conducted, (ii) has all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, and (iii) is duly qualified to do business as a foreign corporation or entity and is in good standing in each jurisdiction where the character of the property owned, leased or operated by it or the nature of its activities makes such qualification necessary, except, in the case of clauses (ii) or (iii) above, where the failure to have such licenses, authorizations, consents and approvals or to be so qualified has not had, and would not be reasonably expected to have, individually or in the aggregate, a Company Material Adverse Effect.  All of the outstanding Equity Interests in each Company Subsidiary have been duly authorized and validly issued and are fully paid and nonassessable and free of preemptive or similar rights.  All of the Equity Interests in each Company Subsidiary are beneficially owned, directly or indirectly, by the Company.  Since December 31, 2003, no Company Subsidiary has (i) declared, set aside or paid any dividend or distribution (whether in cash, stock or property) or capital return in respect of any of its Equity Interests, (ii) repurchased, redeemed or otherwise acquired any of its Equity Interests or other securities, or (iii) amended any material term of any outstanding security of the Company Subsidiary, and its Board of Directors has not resolved to do any of the foregoing.  Since December 31, 2003, no Company Subsidiary has issued, sold or disposed of any Equity Interests.

(c)Such Equity Interests in each Company Subsidiary are owned free and clear of any Lien and free of any other limitation or restriction (including any limitation or restriction on the right to vote, sell or otherwise dispose of the stock or other ownership interests).  There are no outstanding (i) securities of the Company or any Company Subsidiary convertible into or exchangeable or exercisable for Equity Interests in any Company Subsidiary, (ii) options, warrants or other rights to acquire from the Company or any Company Subsidiary, or obligations of the Company or any Company Subsidiary to issue, any Equity Interests in, or any securities convertible into or exchangeable or exercisable for any Equity Interests in, any Company Subsidiary or (iii) agreements, obligations or arrangements of the Company or any Company Subsidiary to issue, sell, repurchase, redeem or otherwise acquire any Equity Interests of any Company Subsidiary.

(d)None of the Company or any Company Subsidiary is in violation of any provision of its Articles of Incorporation or By-laws or equivalent organizational documents.

4.7Company SEC Documents.

(a)The Company has timely filed or otherwise furnished all forms, registration statements, prospectuses, reports, schedules, definitive proxy statements or other documents required to be filed with or furnished to the SEC by the Company since January 1, 2000.  No Company Subsidiary currently is, and no Company Subsidiary at any time since January 1, 2000 has been, required to file or otherwise furnish any form, report, registration statement or prospectus or other document with or to the SEC.

(b)As of their respective filing dates, each Company SEC Document including, without limitation, any financial statements or schedules included or incorporated by reference therein, at the time filed (and, in the case of registration statements and proxy statements, on the dates of effectiveness and the dates of mailing, respectively) (i) complied in all material respects

with all applicable requirements of the Securities Act and/or the Exchange Act, as the case may be and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.

(c)The Company will file with the SEC and promptly will make available to Acquiror true and complete copies of each form, registration statement, report, schedule, proxy or information statement and other documents (including exhibits thereto) required to be filed with the SEC under the Securities Act or the Exchange Act.

4.8Financial Statements; No Material Undisclosed Liabilities.

(a)Each of the audited consolidated financial statements (including the notes thereto) (the “Audited Financial Statements”) and unaudited consolidated interim financial statements of the Company included in the Company SEC Documents were prepared in conformity with GAAP throughout the periods involved, and each fairly presents, in all material respects, the consolidated financial position of the Company and its consolidated Subsidiaries as of the dates thereof and their consolidated results of operations and statement of cash flows for the periods then ended (subject to normal year-end adjustments in the case of any unaudited interim financial statements, which adjustments shall not be material).

(b)There are no liabilities or obligations of the Company or any Company Subsidiary, which, individually or in the aggregate, would be material to the Company and its Subsidiaries taken as a whole, of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise and would be required by GAAP to be reflected on a consolidated balance sheet of the Company (including the notes thereto) other than: (i) liabilities or obligations disclosed or provided for in the Company Balance Sheet or disclosed in the notes thereto; (ii) liabilities or obligations incurred after December 31, 2003 in the ordinary course of business consistent with past practice which have not had and would not reasonably be expected to have a Company Material Adverse Effect; and (iii) liabilities under this Agreement or incurred in connection with the transactions contemplated hereby.

4.9Internal Control over Financial Reporting; Disclosure Controls and Procedures; Certifications.

(a)The Company and each of its Subsidiaries maintain a process of internal control over financial reporting sufficient to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and that includes policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

(b)The Company has established and maintains disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act), which (i) are designed to ensure that material information relating to the Company, including its consolidated Subsidiaries, is made known to the Company’s principal executive officer and its principal financial officer by others within those entities, particularly during the periods in which the periodic reports required under the Exchange Act are being prepared; (ii) have been evaluated for effectiveness (A) as of a date within 90 days prior to the filing date of each of the Company’s quarterly or annual reports filed since January 1, 2003 and prior to August 14, 2003, and (B) as of the end of each quarterly or annual period of the Company since August 14, 2003; and (iii) are effective in all material respects to perform the functions for which they were established.

(c)The Company is not aware of (i) any significant deficiency in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data or any material weaknesses in internal controls; or (ii) any fraud, whether or not material, that involves management or other present employees who have a significant role in the Company’s internal controls.  Since the most recent evaluation of the Company’s disclosure controls and procedures described in Section 4.9(b) above, there have been no significant changes in internal control over financial reporting or, to the Company’s Knowledge, in other factors that could significantly affect internal control over financial reporting.

(d)The Chief Executive Officer and the Chief Financial Officer of the Company have signed, and the Company has furnished to the SEC, all certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002; such certifications contain no qualifications or exceptions to the matters certified therein, except as to knowledge, and have not been modified or withdrawn; and neither the Company nor any of its officers has received notice from the SEC or any other Governmental Entity questioning or challenging the accuracy, completeness, content, form or manner of filing or submission of such certifications.

4.10Absence of Certain Changes.  Since December 31, 2003, except as expressly contemplated by this Agreement, the Company and each Company Subsidiary has conducted its business in the ordinary course consistent with past practice and neither the Company nor any Company Subsidiary has engaged in any transaction or series of transactions material to the Company or any Company Subsidiary other than in the ordinary course of business and consistent with past practices, and there has not been any action, event, occurrence, development or state of circumstances or facts that, individually or in the aggregate, constitutes or would be reasonably expected to have, a Company Material Adverse Effect.  Without limiting the generality of the foregoing, and except as otherwise expressly contemplated by this Agreement, since December 31, 2003, there has not been:

(i)any damage, destruction or other casualty loss (whether or not covered by insurance) affecting the business or assets of the Company or any Company Subsidiary that has had or would be reasonably expected to have a Company Material Adverse Effect;

(ii)any amendment or change in the Company Articles of Incorporation or the Company By-laws;

(iii)any material change by the Company or any Company Subsidiary in its accounting methods, principles or practices (other than changes required by GAAP or Law);

(iv)any material Tax election, any change in method of accounting with respect to Taxes or any compromise or settlement of any proceeding with respect to any material Tax liability;

(v)any sale, assignment, transfer, lease or other disposition or agreement to sell, assign, transfer, lease or otherwise dispose of any material assets of the Company or any Company Subsidiary other than in the ordinary course of business consistent with past practices;

(vi)any acquisition (by merger, consolidation, or acquisition of stock or assets) by the Company or any Company Subsidiary of any corporation, partnership or other business organization or division thereof or any Equity Interest therein for consideration;

(vii)any (A) incurrence of, (B) guarantee with respect to, or (C) provision of credit support for, any indebtedness by the Company or any Company Subsidiary other than pursuant to the Company’s existing credit facilities in the ordinary course of business or any creation or assumption by the Company or any Company Subsidiary of any Lien on any material asset;

(viii)(A) any employment, deferred compensation, severance, retention or similar agreement entered into or amended by the Company or any Company Subsidiary and any employee, (B) any increase in the compensation payable or to become payable by it to any of its directors or officers or generally applicable to all or any category of the Company’s or any Company Subsidiary’s employees, (C) any increase in the coverage or benefits available under any vacation pay, company awards, salary continuation or disability, sick leave, deferred compensation, bonus or other incentive compensation, insurance, pension or other employee benefit plan, payment or arrangement made to, for or with any of the directors or officers of the Company or any Company Subsidiary or generally applicable to all or any category of the Company’s or any Company Subsidiary’s employees or (D) any severance or retention pay arrangements made to, for or with such directors, officers or employees other than, in the case of clauses (B) and (C) above and only with respect to employees who are not officers or directors of the Company or any Company Subsidiary, increases in the ordinary course of business consistent with past practices and that, in the aggregate, have not resulted in a material increase in the benefits or compensation expense of the Company or any Company Subsidiary;

(ix)any loan, advance or capital contribution made by the Company or any Company Subsidiary to, or investment in, any Person other than loans, advances or capital contributions, or investments of the Company or any Company Subsidiary made in the ordinary course of business consistent with past practices;

(x)any waiver, direct or indirect, by the Company or any Company Subsidiary of (A) any right or rights of material value or (B) any payment of any material debt, liability or other obligation, except for non-material waivers and payments made in the ordinary course of business consistent with past practices;

(xi)any payment, loan or advance of any amount to or in respect of, or the sale, transfer or lease of any properties or assets (whether real, personal or mixed, tangible or intangible) to any officer, director, or employee of the Company, any Company Subsidiary or any Affiliate of any of them, or any business or entity in which the Company, any Company Subsidiary or any Affiliate of any of them, or relative of any such Person, has any material, direct or indirect, interest, except for (A) directors’ fees (B) compensation to the officers and employees of the Company in the ordinary course of business consistent with past practices and (C) advancement or reimbursement of expenses in the ordinary course of business consistent with past practices;

(xii)any amendment, alteration or modification in the terms of any currently outstanding options, warrants or other rights to purchase any capital stock or Equity Interest in the Company or any securities convertible into or exchangeable for such capital stock or Equity Interest, including, without limitation, any reduction in the exercise or conversion price of any such rights or securities, any change to the vesting or acceleration terms of any such rights or securities, or any change to terms relating to the grant of any such rights or securities;

(xiii)any action which, if it had been taken after the date hereof, would have required the consent of Acquiror under Section 6.1 hereof; or

(xiv)any agreement to take any of the actions specified in this Section 4.10, except for this Agreement.

4.11Litigation.  There is no action, suit, claim, investigation, arbitration or proceeding pending, or to the Knowledge of the Company threatened, against the Company or any Company Subsidiary or any of their respective assets or properties before any arbitrator or Governmental Entity that has had, or would be reasonably expected to have, individually or in the aggregate, a Company Material Adverse Effect, and to the Knowledge of the Company, there is no basis for any such action, suit, claim, investigation, arbitration or proceeding.  Neither the Company, nor any Company Subsidiary, any officer, director or employee of the Company or any Company Subsidiary has been permanently or temporarily enjoined by any order, judgment or decree of any arbitrator or any Governmental Entity from engaging in or continuing any conduct or practice in connection with the business or assets of the Company or any Company Subsidiary nor, to the Company’s and the Company Subsidiaries’ Knowledge, is the Company, any Company Subsidiary or any officer, director or employee of the Company or any Company Subsidiary under investigation by any Governmental Entity related to the conduct of the Company’s or any Company Subsidiary’s business.  To the Knowledge of the Company, there is not in existence any order, judgment or decree of any arbitrator or Governmental Entity that is applicable to the Company or any Company Subsidiary enjoining or requiring the Company or any Company Subsidiary to take or refrain from taking any action of any kind with respect to its business or assets.

4.12Taxes.  (a) All material Tax returns, statements, reports and forms required to be filed with any taxing authority by, or with respect to, the Company and each Company Subsidiary (collectively, the “Company Returns”) has been timely filed in accordance with all applicable Laws; (b) the Company and each Company Subsidiary has timely paid all material Taxes due and payable (whether or not shown on any Tax Return) and the Company Returns are true, correct and

complete in all material respects; (c) the Company and each Company Subsidiary has withheld and paid all material Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder or other third party; (d) there is no action, suit, proceeding, audit or claim proposed, pending or in progress against the Company or any Company Subsidiary in respect of any Taxes; (e) neither the Company nor any Company Subsidiary is party to, bound by, or has any obligation under, any Tax sharing agreement or similar contract or arrangement or any agreement that obligates any of them to make any payment computed by reference to the Taxes, taxable income or taxable losses of any other Person; (f) there are no Liens with respect to Taxes on any of the assets or properties of the Company or any Company Subsidiary except with respect to Taxes not yet due and payable; (g) neither the Company nor any Company Subsidiary (1) is, or has been, a member of an affiliated, consolidated, combined or unitary group, other than one of which the Company was the common parent or (2) has any liability for the Taxes of any Person (other than the Company and the Company Subsidiaries) under Section 1.1502-6 of the Treasury regulations promulgated under the Code (or any similar provision of state, local or foreign Law), or as a transferee or successor, by contract or otherwise; (h) no consent under Section 341(f) of the Code has been filed with respect to the Company or any Company Subsidiary; (i) neither the Company nor any Company Subsidiary has agreed to make or is required to make any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise; (j) no waivers of statutes of limitation with respect to any Company Returns have been given by or requested from the Company or a Company Subsidiary; (k) all material deficiencies asserted or assessments made as a result of any examinations of the Company Returns have been fully paid, or are fully reflected as a liability in the Company Balance Sheet, or are being contested and an adequate reserve therefor has been established and is fully reflected in the Company Balance Sheet; (l) none of the Company or any of the Company Subsidiaries has received written notice from any governmental agency in a jurisdiction in which such entity does not file a Tax return stating that such entity is or may be subject to taxation by that jurisdiction; (m) none of the assets of the Company or any Company Subsidiary is property required to be treated as being owned by any other Person pursuant to the “safe harbor lease” provisions of former Section 168(f)(8) of the Code; (n) none of the assets of the Company or any Company Subsidiary directly or indirectly secures any debt the interest on which is tax-exempt under Section 103(a) of the Code; (o) none of the assets of the Company or any Company Subsidiary is “tax-exempt use property” within the meaning of Section 168(h) of the Code; (p) neither the Company nor any predecessor of the Company by merger or consolidation has within the past three years been a party to a transaction intended to qualify under Section 355 of the Code or under so much of Section 356 of the Code as relates to Section 355 of the Code;(q) to the Knowledge of the Company, there are no material limitations on the utilization of the net operating loss, net capital loss, unused investment credits or other credits or excess charitable contribution deductions of the Company and each Company Subsidiary (or any carryovers of the foregoing) under Section 382 and Section 1502 of the Code, not including any limitations arising from the transaction contemplated pursuant to this Agreement; and (r) neither the Company nor any Company Subsidiary has engaged in any intercompany transaction within the meaning of Treasury regulation Section 1.1502-13 for which any material income or gain remains unrecognized or deferred and no material excess loss account within the meaning of Treasury regulation Section 1.1502-19 exists with respect to the Equity Interests of Company or any Company Subsidiary.

4.13Employee Benefits.

(a)Except as set forth on Schedule 4.13(a) of the Company Disclosure Schedule, none of the Company or any ERISA Affiliate (as defined below) maintains, administers, sponsors or otherwise has any liability with respect to any “employee benefit plan”, as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), or any employment, severance or similar contract, plan, arrangement or policy or any other plan or arrangement (written or oral) whether or not subject to ERISA (including any funding mechanism therefore now in effect or required) providing for compensation, bonuses, profit-sharing, stock option or other stock related rights or other forms of incentive or deferred compensation, vacation benefits, insurance coverage (including any self-insured arrangements), health or medical benefits, disability benefits, workers’ compensation, supplemental unemployment benefits, severance benefits and post-employment or retirement benefits (including compensation, pension, health, medical or life insurance benefits) which covers any employee or former employee or director of the Company or any Company Subsidiary.  The Company has delivered to Parent (i) current, accurate and complete copies (or to the extent no such copy exists, an accurate description of the material features) of each Company Employee Plan (as defined below and, if applicable, related trust agreements), (ii) all amendments thereto and written interpretations thereof and (iii) if applicable, for the two most recent years (A) the Form 5500 and attached schedules, (B) audited financial statements and (C) actuarial valuation reports.  The plans required to be listed on Section 4.13(a) of the Company Disclosure Schedule are referred to collectively herein as the “Company Employee Plans.”  An “ERISA Affiliate” means any Person which would be treated as a single employer with the Company or any Company Subsidiary under Section 414 of the Code.

(b)None of the Company Employee Plans are subject to Title IV of ERISA.  None of the Company, any Company Subsidiary, or any ERISA Affiliate has incurred any liability (whether absolute or contingent) with respect to any employee pension benefit plan (as defined in Section 3(2) of ERISA) or any multiemployer plan (as defined in Section 3(37) of ERISA) under Title IV of ERISA, and no events have occurred and no circumstances exist that could reasonably be expected to result in any such liability to the Company, any Company Subsidiary or any ERISA Affiliate.

(c)Each Company Employee Plan which is intended to be qualified under Section 401(a) of the Code is so qualified and has been so qualified during the period from its adoption to date, and each trust forming a part thereof is exempt from Tax pursuant to Section 501(a) of the Code and nothing has occurred, whether by action or failure to act, that could reasonably be expected to cause the loss of such qualification.  The Company has furnished to Acquiror copies of the most recent Internal Revenue Service determination letters with respect to each Company Employee Plan.  Each Company Employee Plan has been maintained in compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations, including ERISA and the Code, which are applicable to such Company Employee Plan.  Further, nothing has been done or omitted to be done and no transaction or holding of any asset under or in connection with any Company Employee Plan has occurred that could reasonably be expected to make the Company or any Company Subsidiary, or, to the Knowledge of the Company, any officer or director of the Company or any Company Subsidiary, subject to any liability under Section 502(i) or 502(l)  of ERISA or liable for any Tax pursuant to Section 4975 of the Code (assuming the taxable period of any such transaction expired as of the date hereof).

(d)No Company Employee Plan exists that could result in the payment to any present or former employee, consultant or independent contractor of the Company or any Company Subsidiaries of any money or other property or accelerate or provide any other rights or benefits to any present or former employee, consultant or independent contractor of the Company or any Company Subsidiaries as a result of the transactions contemplated by this Agreement.  Section 4.13(d) of the Company Disclosure Schedule sets forth (i) the type and amount of any compensation or benefit that is or may become payable to any present or former employee or independent contractor of the Company or any Company Subsidiaries and that constitutes a retention bonus or payment, severance or termination payment or benefit, annual bonus award, or similar payment, and (ii) the type and amount of any payment that would not be deductible pursuant to the terms of Section 162(m) of the Code.  There is no contract, agreement, plan or arrangement covering any employee or former employee of the Company or any Company Subsidiary that, individually or collectively, would give rise to the payment of any amount that would not be deductible pursuant to the terms of Section 280G of the Code.  Section 4.13(a) of the Company Disclosure Schedule sets forth the maximum aggregate amount payable in respect of any and all payments, costs, excise taxes, fees and expenses due, payable, owed or forgiven as a result of termination pursuant to any severance agreement, contract, benefit plan or other arrangement existing on the date hereof pursuant to which the Company or any Company Subsidiary has any obligation or liability in connection with the termination of any officer of the Company.

(e)There has been no amendment to, written interpretation or announcement (whether or not written) relating to, or change in employee participation or coverage under, any Company Employee Plan, other than as required by applicable Law, which could reasonably be expected to increase the expense of maintaining such Company Employee Plan above the level of the expense incurred in respect thereof for the year ended December 31, 2003.

(f)Neither the Company nor any Company Subsidiary has or has ever had any obligations to provide retiree health and life insurance under any Company Employee Plan, other than benefits mandated by Section 4980B of the Code or under applicable Law, and each Company Employee Plan may be amended or terminated without incurring any liability thereunder.

(g)No Company Employee Plan is under audit or is the subject of an audit or investigation by the Internal Revenue Service, the Department of Labor or any other Governmental Entity, nor is any such audit or investigation pending, to the Knowledge of the Company, and (ii) with respect to any Company Employee Plan, (A) no actions, suits, termination proceedings or claims (other than routine claims for benefits in the ordinary course) are pending or, to the Knowledge of the Company, threatened and (B) to the Knowledge of the Company, no facts or circumstances exist that could reasonably be expected to give rise to any such actions, suits or claims.

4.14Compliance with Laws; Licenses, Permits and Registrations.

(a)Neither the Company nor any Company Subsidiary is in violation of, or has violated, any applicable provisions of any Laws, except for violations which have not had, and would not be reasonably expected to have, individually or in the aggregate, a Company Material Adverse Effect. The Company has not been given notice of, and to the Knowledge of the Company,

the Company is not being investigated with respect to, and has not been threatened to be charged with, any material violation of any applicable Law.

(b)None of the Company, any of its Subsidiaries or, to Knowledge of the Company, any directors, officers, agents or employees of the Company or any of its Subsidiaries has (on behalf of the Company or any Subsidiary) (i) used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns or violated any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (iii) made any other unlawful payment.  Neither the Company nor any of its Subsidiaries has participated in any boycotts.

(c)The Company and each Company Subsidiary has, maintains in full force and effect, and is in compliance with, all material permits, licenses, easements, variances, exemptions, consents, certificates, approvals, authorizations of and registrations (collectively, “Permits”) with and under all federal, state, local and foreign Laws and all Environmental Laws, and from all Governmental Entities required by the Company and each Company Subsidiary to carry on their respective businesses as currently conducted, except as would not have, individually or in the aggregate, a Company Material Adverse Effect.

(d)The respective businesses of the Company and each Company Subsidiary are, and have been, conducted in compliance with all applicable federal, state, local and foreign statutes, laws, ordinances, orders, judgments, rules or regulations relating to the protection of the environment or occupational safety and health (“Environmental Laws”) except as would not have a Company Material Adverse Effect.

(e)Neither the Company nor any Company Subsidiary has (i) received any request for information, or been notified that it may be a “potentially responsible party”, related to any property on the Superfund National Priorities List, or any state equivalent list, (ii) created or assumed any liabilities, guaranties, obligations or indemnifications under any Environmental Law, consent decree or contract with any third party, including any Governmental Entity, related to any property currently or formerly owned, operated or leased by the Company or the Company Subsidiaries; (iii) received, or been subject to, any complaint, summons, citation, notice, order, claim, litigation, investigation, judicial or administrative proceeding, or judgment from any third party, including, any Governmental Entity, regarding any actual or alleged violations of, or actual or potential liability under, any Environmental Laws, nor has any Knowledge of any basis for such violations or liability; or (iv) any responsibility or liability under Environmental Law for any compliance, cleanup or remediation related to any hazardous materials or waste.

(f)To the Knowledge of the Company, none of the Real Property contains any asbestos containing material or mold that may be in a condition, location or form that (i) is reasonably likely to pose a risk to human health or the environment, (ii) may require any abatement, containment or remediation or (iii) may otherwise be regulated under Environmental Law.

4.15Finders’ Fees; Opinion of Financial Advisor.

(a)Other than UBS Investment Bank and Lazard Freres & Co. LLC, whose fees are set forth in Section 4.15 of the Company Disclosure Schedule, all of which fees and expenses will be borne by the Company, there is no investment banker, financial advisor, broker, finder or other intermediary which has been retained by, or is authorized to act on behalf of, the Company or any Company Subsidiary which might be entitled to any fee or commission from the Company, Parent, Acquiror or any of their respective Affiliates upon consummation of the Merger or any of the other transactions contemplated by this Agreement.

(b)The Special Committee has received the opinion of Lazard Freres & Co. LLC, dated the date of this Agreement, and subject to the qualifications stated therein, to the effect that the Merger Consideration to be received by the Company Shareholders (other than Parent and its Subsidiaries) is fair, from a financial point of view, to such Company Shareholders.

4.16Affiliate Transactions.  Except as set forth in Section 4.16 of the Company Disclosure Schedule, and except for employment agreements with officers of the Company set forth on Section 4.18(vi) of the Company Disclosure Schedule, to the Knowledge of the Company, there are no Company Contracts with any (i) present or former officer or director of the Company or any Company Subsidiary or any of their immediate family members (including their spouses), (ii) record or beneficial owner of five percent or more of any voting securities of the Company or (iii) Affiliate of any such officer, director, family member or beneficial owner.

4.17Intellectual Property.

(a)Set forth on Section 4.17(a) of the Company Disclosure Schedule are all (i) issued patents and pending patent applications, (ii) trademark and service mark registrations and applications for registration thereof, (iii) copyright work registrations and applications for registration thereof, and (iv) internet domain name registrations and applications and reservations therefor, in each case that are owned by or on behalf of the Company or any of the Company Subsidiaries.  With respect to the Company POS Systems and each item of Intellectual Property required to be identified in Section 4.17(a) of the Company Disclosure Schedule: (i) the Company or a Company Subsidiary is the sole owner and possesses all right, title, and interest in and to such systems or item, free and clear of any Lien; (ii) such systems or item is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge of which the Company has received notice; (iii) no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand of which the Company has received notice is pending or, to the Knowledge of the Company, is threatened that challenges the legality, validity, enforceability, registrations, use, or ownership of such systems or item; and (iv) neither the Company nor any Company Subsidiary has agreed to indemnify any Person for or against any interference, infringement, misappropriation, or other conflict with respect to such systems or item, excluding any of the foregoing which would not reasonably be expected to result in a Company Material Adverse Effect.

(b)Set forth on Section 4.17(b) of the Company Disclosure Schedule is a list of all material agreements under which the Company or any Company Subsidiary licenses from a third party material Intellectual Property that is used by the Company or such Subsidiary in the conduct of its business, except for off-the-shelf software programs that the Company and its Subsidiaries

use in the ordinary course of business (such agreements being referred to as “License-In Agreements”).  The Company has delivered to Parent correct and complete copies of all License-In Agreements.  To the Knowledge of the Company, (i) each License-In Agreement is valid, binding, and in full force and effect; (ii) each License-In Agreement will continue to be valid, binding, and in full force and effect on identical terms following the consummation of the transactions contemplated hereby; (iii) neither the Company nor any of the Company Subsidiaries is in Default of any such License-In Agreement, and no event has occurred that with notice or lapse of time would constitute a Default or permit termination, modification, or acceleration thereunder; (iv) neither the Company nor any Company Subsidiary has repudiated any provision of any License-In Agreement; and (v) neither the Company nor any of the Company Subsidiaries has granted any sublicense or similar right with respect to any License-In Agreement in the case of each of clauses (i), (ii), (iii) and (iv), except for any of the foregoing that have not had, and are not reasonably expected to have, a Company Material Adverse Effect.

(c)The Company and the Company Subsidiaries own or have the right to use, without payments to any other Person except pursuant to a License-In Agreement that is specified in Section 4.17(b) of the Company Disclosure Schedule, all Intellectual Property actually used in, the operation of the business of the Company and the Company Subsidiaries as and where the business is presently conducted.  Each item of Intellectual Property (except for off-the-shelf software programs that the Company and its Subsidiaries use in the ordinary course of business) owned or used by the Company and the Company Subsidiaries immediately prior to the Closing hereunder will be owned or available for use by the Company and the Company Subsidiaries on identical terms and conditions immediately subsequent to the Closing hereunder, excluding any item of such Intellectual Property, the absence of which would not reasonably be expected to have a Company Material Adverse Effect.  The Company and the Company Subsidiaries are taking or have taken all commercially reasonable actions that are required to maintain, and all commercially reasonable actions that they reasonably believe are required to protect, each item of Intellectual Property that they own or use, excluding any item of such Intellectual Property, the absence of which would not reasonably be expected to have a Company Material Adverse Effect.

(d)None of (i) the Company or any of the Company Subsidiaries, (ii) the Intellectual Property owned by the Company or any Company Subsidiary, and (iii) the operation of the business of the Company or any Company Subsidiary has interfered with, infringed upon, misappropriated, or otherwise come into conflict with any Intellectual Property rights of third parties, and neither the Company nor any of the Company Subsidiaries has received any written charge, complaint, claim, demand, or notice during the past two (2) years, (or earlier, if not resolved) alleging any such interference, infringement, misappropriation, or violation (including any claim that the Company or any Company Subsidiary must license or refrain from using any Intellectual Property rights of any third party), excluding any of the foregoing that would not reasonably be expected to have a Company Material Adverse Effect. To the Knowledge of the Company, no third party has interfered with, infringed upon, misappropriated, or otherwise come into conflict with any Intellectual Property rights of the Company or any of the Company Subsidiaries during the past two (2) years (or earlier if not resolved), excluding any such interference, infringement or misappropriation that would not reasonably be expected to have a Company Material Adverse Effect.

(e)The Company and the Company Subsidiaries have used reasonable efforts to maintain the confidentiality of all non-public information of the kind described in clause (v) or (vi) of the definition of “Intellectual Property” hereunder that (i) is owned by the Company and/or any Company Subsidiary and (ii) that derives material economic value from not being generally known to other person who can obtain economic value from its disclosure or use in accordance with protection procedures believed by the Company and the Company Subsidiaries to be adequate for protection.

(f)As of the Effective Time, no former or current shareholder, employee, director or officer of the Company or any Company Subsidiary will have, directly or indirectly, any interest in any Intellectual Property used in or pertaining to the business of the Company and the Company Subsidiaries, nor will any such Person have any rights to past or future royalty payments or license fees from the Company or any Company Subsidiary, deriving from licenses, technology agreements or other agreements, whether written or oral, between any such Person and the Company and/or any Company Subsidiary.

(g)The transactions contemplated hereunder will not violate any privacy policy or other terms of use relating to any web sites of the Company or the Company Subsidiaries.  The Company and each of the Company Subsidiaries’ use and dissemination of any and all data and information concerning users of such web sites are in all material respects in compliance with their privacy policies and terms of use, and all applicable laws and regulations.

4.18Material Contracts.

(a)Section 4.18 of the Company Disclosure Schedule sets forth a complete and accurate list of all Company Contracts (other than contracts, undertakings, commitments or agreements for employee benefit matters set forth in Section 4.13 of the Company Disclosure Schedule and real property leases set forth in Section 4.20(i) of the Company Disclosure Schedule) of the following categories (collectively, and together with the contracts, undertakings, commitments or agreements for employee benefit matters set forth in Section 4.13 of the Company Disclosure Schedule and the real property leases set forth in Section 4.20(ii) of the Company Disclosure Schedule, the “Material Contracts” and each a “Material Contract”):

(i)Company Contracts requiring annual expenditures by or liabilities of any party thereto in excess of $2,500,000 which have a remaining term in excess of ninety (90) days or are not cancelable (without material penalty, cost or other liability) within ninety (90) days;

(ii)Company Contracts containing covenants limiting the freedom of the Company or any Company Subsidiary or other Affiliate of the Company (including Parent and its Affiliates after the Effective Time) to engage in any line of business or compete with any Person, in any product line or line of business, or operate at any location;

(iii)promissory notes, loans, agreements, indentures, evidences of indebtedness or other instruments and contracts providing for the borrowing or lending of money, in an amount in excess of $1,000,000, whether as borrower, lender or guarantor;

(iv)joint venture, alliance or partnership agreements or joint development or similar agreements with any Third Party;

(v)all material licenses, sublicenses, consent, royalty or other agreements concerning Intellectual Property;

(vi)(A) employment contracts and other contracts with current or former officers, directors, consultants, independent contractors or agents and (B) all severance, change in control or similar arrangements with any current or former directors, officers, employees, consultants, independent contractors or agents that, in the case of either (A) or (B), will result in any obligation (absolute or contingent) of the Company or any Company Subsidiary to make any payment to any current or former directors, officers, employees, consultants, independent contractors or agents as a result of either the consummation of the transactions contemplated hereby, termination of employment (or the relevant relationship), or both;

(vii)Company Contracts with Affiliates of the Company;

(viii)Company Contracts with any Governmental Entity which have a remaining term in excess of one year or are not cancelable (without material cost, penalty or other liability) within one hundred eighty (180) days; or

(ix)Company Contracts pending for the acquisition or sale, directly or indirectly (by merger or otherwise), of assets (whether tangible or intangible) in excess of $1,500,000 in market or book value with respect to any contract or the capital stock of another Person, in each case in an amount in excess of $1,500,000.

(b)True and complete copies of the written Material Contracts and descriptions of verbal Material Contracts, if any, have been delivered or made available to the Acquiror.  Each of the Material Contracts is a valid and binding obligation of the Company and, to the Company’s Knowledge, the other parties thereto, enforceable against the other parties thereto in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium, reorganization, arrangement or similar laws affecting creditors’ rights generally and by general principles of equity.  Except for the consummation of the transactions contemplated hereby, no event has occurred which would, on notice or lapse of time or both, entitle the holder of any indebtedness issued pursuant to a Material Contract identified on Schedule 4.18 of the Company Disclosure Schedule in response to paragraph (a)(iii) above to accelerate, or which does accelerate, the maturity of any such indebtedness.

(c)Neither the Company nor any Company Subsidiary is, or has received any notice that any other party is, in breach, default or violation (each a “Default”) (and no event has occurred or not occurred through the Company’s or the Company Subsidiary’s inaction or, to the Knowledge of the Company, through the action or inaction of any Third Parties, which with notice or the lapse of time or both would constitute a Default) of any term, condition or provision of any Material Contract to which the Company or any Company Subsidiary is a party or by which any of them or any of their respective properties or assets may be bound, except for Defaults which have not had, and would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect.

(d)Neither the Company nor any Company Subsidiary is in conflict with, or in Default of any Company Contract, except to the extent that any such conflict or Default does not constitute a Company Material Adverse Effect.

4.19Termination of Previous Merger Agreement.  The Prior Merger Agreement was terminated in accordance with the provisions of Section 10.1(f) thereof and the Board of Directors of the Company and the Special Committee has each withdrawn its recommendation of the approval of the Prior Merger Agreement by the Company Shareholders.  In connection with such termination, the Company will pay, in accordance with Section 10.2(b) of the Prior Merger Agreement, to Hollywood Merger Corporation not more than $4,000,000 in full satisfaction of amounts owed by the Company under the Prior Merger Agreement to any party thereto or any member of management of the Company that was to participate in the transactions contemplated by the Prior Merger Agreement.  The Company complied with all of the provisions of Section 6.2 of the Prior Merger Agreement and has no further liability under the Prior Merger Agreement to any party thereto or any member of management of the Company that was to participate in the transactions contemplated by the Prior Merger Agreement; provided, however, that the Company has executory obligations under Sections 8.3 and 8.7 of the Prior Merger Agreement; provided further that the Company is in compliance with its obligations under such Sections 8.3 and 8.7.

4.20Real Estate.  Except as has not had, and would not be reasonably expected to have, individually or in the aggregate, a Company Material Adverse Effect: (i) all of the leases, licenses, tenancies, subleases and all other occupancy agreements (“Leases”) in which the Company or any Company Subsidiary is a tenant, subtenant, landlord or sublandlord (the leased and subleased space or parcel of real property thereunder being, collectively, the “Real Property”), are in full force and effect, (ii) neither the Company (or the applicable Company Subsidiary), nor to the Knowledge of the Company, any other party to any Lease, is in default under the Leases, and no event has occurred which, with notice or lapse of time, would constitute a Default by the Company (or such Subsidiary) under the Leases and (iii) the Company (or the applicable Company Subsidiary) enjoys peaceful and undisturbed possession under the Leases.  The Company does not currently own and has not owned in the past, and no Company Subsidiary currently owns or has owned in the past, any real property or any interests (other than the Leases) therein.  All of the Leases of the Company and its Subsidiaries are set forth on Section 4.20 of the Company Disclosure Schedule.

4.21Accounts Payable and Inventory.  Since December 31, 2003, the Company has (i) discharged its material accounts payable and other material current liabilities and obligations in accordance with past practice, and (ii) purchased and maintained inventory in an amount which it reasonably believes to be appropriate for normal requirements of the Company’s business and current business conditions consistent with its past practices.

4.22Suppliers.  Set forth in Section 4.22 of the Company Disclosure Schedule is a list of the ten largest suppliers of the Company based on the dollar value of products purchased by the Company for the fiscal year ended December 31, 2003.  Since such date, there has not been, nor as a result of the Merger is there reasonably anticipated to be, any material change in relations with any of the major suppliers of the Company and its Subsidiaries.

4.23Personnel, etc.

(a)Set forth in Section 4.23 of the Company Disclosure Schedule is a list setting forth: (i) the name of each officer of the Company and each of the Company’s Subsidiaries,

specifying the title of each such Person; and (ii) the name of each director of the Company and each of the Company’s Subsidiaries.

(b)The Company has heretofore provided Acquiror with a complete and accurate schedule of compensation which each of the officers referred to in clause (a) above is currently entitled to receive.

4.24Assets.  The assets and properties of the Company and the Company Subsidiaries, considered as a whole, constitute all of the material assets and properties which are reasonably required for the business and operations of the Company and its Subsidiaries as presently conducted.  The Company and its Subsidiaries have good title to or a valid leasehold estate in, free and clear of any Liens, all personal properties and assets reflected on the Company Balance Sheet at the Balance Sheet Date (except for properties or assets subsequently sold in the ordinary course of business consistent with past practices).

4.25Insurance.  Each of the Company and its Subsidiaries maintains insurance policies (the “Insurance Policies”) against all risks of a character and in such amounts as are usually insured against by similarly situated companies in the same or similar businesses.  Section 4.25 of the Company Disclosure Schedule contains a complete and accurate list of all Insurance Policies of the Company and its Subsidiaries.  Each Insurance Policy is in full force and effect and is valid, outstanding and enforceable, and all premiums due thereon have been paid in full, in each case without any exception other than those which have not had, and would not be reasonably expected to have, individually or in the aggregate, a Company Material Adverse Effect.  None of the Insurance Policies will terminate or lapse (or be affected in any other materially adverse manner) by reason of the transactions contemplated by this Agreement, in each case without any exception other than those which have not had, and would not be reasonably expected to have, individually or in the aggregate, a Company Material Adverse Effect.  Each of the Company and its Subsidiaries has complied in all material respects with the provisions of each Insurance Policy under which it is the insured party.  No insurer under any Insurance Policy has canceled or generally disclaimed liability under any such policy or, to the Company’s Knowledge, indicated any intent to do so or not to renew any such policy, in each case without any exception other than those which have not had, and would not be reasonably expected to have, individually or in the aggregate, a Company Material Adverse Effect.  All material claims under the Insurance Policies have been filed in a timely fashion.  Since the Company’s formation, there have been no historical gaps in insurance coverage of the Company and/or its Subsidiaries.

4.26Change of Control Plan.   A copy of the Change of Control  Plan is attached hereto as Annex 4.26(a).  Participation in the Change of Control Plan is limited to the individuals set forth on Annex 4.26(b).

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF PARENT AND ACQUIROR

Except as disclosed in the disclosure schedule delivered by Parent and the Acquiror to the Company prior to the execution of this Agreement (the “Acquiror Disclosure Schedule”) with specific reference to the particular Section or subsection of this Agreement to which the

information set forth in such disclosure schedule relates, Parent and Acquiror jointly and severally represent and warrant to the Company that:

5.1Corporate Existence and Power.  Parent is a corporation duly incorporated, validly existing and in good standing under the Laws of the State of Delaware, and Acquiror is a corporation duly incorporated and validly existing under the Laws of the State of Oregon.  Each of Parent and Acquiror has all corporate powers and authority required to own, lease and operate its respective properties and carry on its respective business as now conducted and to consummate the Merger and the other transactions contemplated hereby.  Each of Parent and Acquiror is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned, leased or operated by it or the nature of its activities makes qualification necessary, except where the failure to be so qualified has not had, and would not be reasonably expected to have, individually or in the aggregate, an Acquiror Material Adverse Effect.

5.2Corporate Authorization.  The execution, delivery and performance by Parent and the Acquiror of this Agreement, and the consummation by Parent and the Acquiror of the Merger and the other transactions contemplated hereby and thereby, as applicable, are within the corporate powers of Parent and the Acquiror and have been duly and validly authorized by all necessary corporate action, as applicable, and no other corporate proceedings on the part of Parent or the Acquiror are necessary to authorize this Agreement or to consummate the transactions contemplated hereby.  This Agreement has been duly and validly executed and delivered by Parent and the Acquiror, as applicable, and assuming that this Agreement constitutes the valid and binding obligation of the Company and/or the other parties thereto, this Agreement constitutes the valid and binding obligation of Parent and the Acquiror, as applicable, enforceable in accordance with its terms.

5.3Governmental Authorization.  The execution, delivery and performance by Parent and the Acquiror of this Agreement, and the consummation by Parent and the Acquiror of the transactions contemplated hereby, will not require any consent, approval, action, order, authorization, or permit of, or registration or filing with, any Governmental Entity, other than (a) the filing of the Articles of Merger in accordance with the OBCA; (b) compliance with any applicable requirements of the HSR Act; (c) compliance with any applicable requirements of the Exchange Act; (d) such as may be required under any applicable state securities or blue sky Laws; and (e) other consents, approvals, actions, orders, authorizations, registrations, declarations, filings and permits which, if not obtained or made, have not had, and would not be reasonably expected to have, individually or in the aggregate, an Acquiror Material Adverse Effect.

5.4Non-Contravention.  The execution, delivery and performance by Parent and the Acquiror of this Agreement and the consummation by Parent and the Acquiror of the Merger and the other transactions contemplated hereby do not and will not (a) contravene or conflict with Parent’s Certificate of Incorporation or By-laws or Acquiror’s Articles of Incorporation or By-laws, (b) assuming compliance with the matters referred to in Section 5.3, contravene or conflict with or constitute a violation of any provision of any Law binding upon or applicable to Parent or the Acquiror or by which any of their respective properties is bound or affected, (c) constitute a Default under (or an event that with notice or lapse of time or both could reasonably be expected to become a Default) or give rise (with or without notice or lapse of time or both) to a right of

termination, amendment, cancellation or acceleration under any agreement, contract, note, bond, mortgage, indenture, lease, franchise, Permit or other similar authorization or joint venture, limited liability or partnership agreement or other instrument binding upon Acquiror, other than, in the case of clauses (b) and (c) any items that have not had, and would not be reasonably expected to have, individually or in the aggregate, an Acquiror Material Adverse Effect.

5.5Financing.  Acquiror has delivered to the Company signed counterpart(s) of the Credit Facilities Commitment Letter dated as of January 9, 2005 made by Merrill Lynch Capital Corporation (“MLCC”), Wachovia Bank, National Association (“WB”), Wachovia Capital Investments, Inc. (“WCI” and, together with (1) MLCC and WB and (2) up to two (2) assignees of any or all of WCI, MLCC and/or WB that are Eligible Assignees (as hereinafter defined), the “Lenders”) and Wachovia Capital Markets, LLC (“WCM” ), and accepted by Parent, pursuant to which the Lenders have agreed, subject to the terms and conditions set forth therein, to provide or cause to be provided up to an aggregate of $1,195,000,000 of debt financing in connection with the transactions contemplated hereby (the “Bank Commitment Letter”; and the financing referred to in the Bank Commitment Letter is herein referred to as the “Financing”). The Bank Commitment Letter has not been amended and is in full force and effect as of the date hereof.  The Acquiror shall not, without the prior written consent of the Company, agree to any amendment or modification of the Bank Commitment Letter that (i) reduces the respective commitments of the Lenders thereunder upon receipt, acceptance and allocation of commitments of other lenders, (ii) amends or modifies any of conditions precedent to the availability of the commitments provided by the Lenders in a manner that is materially more onerous or burdensome to the Acquiror to obtain the Financing provided for in the Bank Commitment Letter, (iii) reduces the aggregate amount of the Financing to an aggregate amount below that which is necessary to consummate the transactions contemplated hereby or (iv) change the identity of the Lenders (other than the addition of two additional Lenders as contemplated in subclause (2) above); provided that, without the prior consent of the Company, the Bank Commitment Letter may be amended or modified to substitute other lenders for any of the Lenders, so long as such substitute lenders are among the financial institutions identified in the letter of even date with this Agreement addressed by the Company to the Acquiror, MLCC, WB, WCI and WCM (such financial institutions are referred to herein as “Eligible Assignees”) or to add up to two (2) Eligible Assignees as Initial Senior Secured Lenders and/or Initial Interim Lenders (both as defined in the Bank Commitment Letter as in effect on the date hereof) (in such case, the “Bank Commitment Letter” shall mean the Bank Commitment Letter as so amended or modified; provided further that nothing herein shall be construed to prevent the Acquiror from consenting to the receipt, acceptance and allocation commitments with respect to the Financing so long as the commitments of the Lenders with respect thereto are not reduced thereby). The funds in the amounts set forth in the Bank Commitment Letter (including the sources and uses of funds contemplated thereby (including the cash on hand of the Company)) will be sufficient to enable Acquiror and the Company to pay the Merger Consideration, to make all other necessary payments by them in connection with the Merger (including the repayment of certain outstanding indebtedness of the Company) and to pay all of the related fees and expenses, in each case as contemplated by the Bank Commitment Letter (collectively, the “Merger Funds”).

5.6Finders’ Fees.  Other than fees and expenses to be borne by the Surviving Corporation at the Closing and except for Merrill Lynch & Co. and Wachovia Securities there is no investment banker, financial advisor, broker, finder or other intermediary which has been retained by, or is authorized to act on behalf of, the Parent, Acquiror or any Affiliate thereof, which might be

entitled to any fee or commission from the Parent, Acquiror, Company, any Company Subsidiary, or of any of their respective Affiliates upon consummation of the Merger or the other transactions contemplated by this Agreement.

ARTICLE VI

COVENANTS OF THE COMPANY

The Company agrees as set forth below:

6.1Company Interim Operations.  Except as set forth in the Company Disclosure Schedule or as otherwise expressly permitted by any other provision of this Agreement, without the prior consent of Acquiror (which shall not be unreasonably withheld or delayed), from the date hereof until the Effective Time, the Company shall, and shall cause its Subsidiaries to, conduct their respective businesses only in the ordinary and usual course consistent with past practice, and shall use reasonable best efforts, to (i) preserve intact its present business organization, (ii) keep available the services of its key employees and those of each Company Subsidiary, and (iii) preserve existing relationships with its material suppliers and other Persons with which the Company or any Company Subsidiary has significant business relationships.  Without limiting the generality of the foregoing, and as an extension thereof, except as set forth in the Company Disclosure Schedule or as otherwise expressly contemplated by this Agreement, from the date hereof until the Effective Time, without the prior consent of Acquiror (which shall not be unreasonably withheld or delayed), the Company shall not and shall not permit its Subsidiaries, directly or indirectly, to:

(a)propose or adopt any change in its Articles of Incorporation or By-laws (or equivalent organizational or governing documents);

(b)(i) split, combine or reclassify any shares of capital stock or amend the terms of any rights, warrants or options to acquire its securities, (ii) except for ordinary course dividends by a Company Subsidiary, declare, set aside or pay any dividend (including, without limitation, an extraordinary dividend) or other distribution (whether in cash, stock or property or any combination thereof) in respect of its Equity Interests, or (iii) redeem, repurchase or otherwise acquire or offer to redeem, repurchase, or otherwise acquire any of its securities or any rights, warrants or options to acquire its securities;

(c)issue, deliver, sell, grant, pledge, encumber or transfer or authorize the issuance, delivery, sale, grant, pledge, encumbrance or transfer of, or agree to commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase or otherwise) its Equity Interests or any securities convertible into or exercisable for its Equity Interests, other than the issuance of Company Shares pursuant to the exercise of Company Options outstanding on January 9, 2005;

(d)merge with or acquire (by merger, consolidation, acquisition of stock or assets, joint venture or otherwise of a direct or indirect ownership interest or investment) in one transaction or series of related transactions any Person, for an aggregate consideration in excess of

$5,000,000, any Equity Interests or other securities of any Person, any division or business of any Person or all or substantially all of the assets of any Person;

(e)sell, lease, encumber or otherwise dispose of any assets or securities with carrying value in excess of $3,750,000;

(f)(i) (A) incur any indebtedness for borrowed money, except to fund operations of the business in the ordinary course consistent with past practice under the Company’s existing credit facility, (B) issue or sell any debt securities of the Company or any Company Subsidiary; (C) make any loans, advances or capital contributions to, or, except as permitted by Section 6.1(d), investments in, any other Person, other than in the ordinary course of business consistent with past practices, in no event in an aggregate principal amount in excess of $2,250,000, (D) assume, guarantee or endorse, or otherwise become liable or responsible (whether directly, contingently or otherwise) for, the obligations of any Person (other than obligations of Subsidiaries and the endorsements of negotiable instruments for collection in each such case in the ordinary course of business consistent with past practice), or (E) alter or amend in any way any compensation (including without limitation, any commission schedule) or other payments due to employees or independent contractors of the Company (other than, with respect to employees who are not officers or directors of the Company or any Company Subsidiary, increases in the ordinary course of business consistent with past practice and that, in the aggregate, will not result in a material increase in benefits or compensation expense of the Company or any Company Subsidiary) or (ii) enter into or materially amend any contract, agreement, commitment or arrangement to effect any of the transactions prohibited by this Section 6.1(f);

(g)(i) except as required by Law or any existing agreement, increase the amount of compensation of any director or officer of the Company or any Company Subsidiary, (ii) except as required by Law, an agreement existing on the date hereof or pursuant to a Company severance policy existing on the date hereof, grant any severance or termination pay to any director, employee, consultant, independent contractor or agent of the Company or any Company Subsidiary, (iii) adopt any additional employee benefit plan, (iv) provide for the payment of any amounts as a result of the consummation of the transactions contemplated by this Agreement, (v) except as may be required by Law or as necessary to comply with the terms of this Agreement, amend in any material respect any Company Employee Plan or (vi) pay any bonuses except to the extent provided on Section 6.1(g) of the Company Disclosure Schedule;

(h)authorize any single capital expenditure or any expenditures not in the ordinary course of business in excess of $3,750,000 or aggregate capital expenditures and other expenditures not in the ordinary course of business in excess of $10,000,000, except as set forth on Section 6.1(h) of the Company Disclosure Schedule;

(i)make any changes in its accounting methods, principles or practices currently in effect, except as required by changes in GAAP or by Regulation S-X of the Exchange Act, in each case as concurred in by its independent public accountants;

(j)except as set forth on Section 6.1(j) of the Company Disclosure Schedule, (i) settle, pay or discharge, any litigation, investigation, arbitration, proceeding or other claim, liability or obligation for an amount in excess of $2,000,000 or (ii) settle, pay or discharge any claim

against the Company with respect to or arising out of the transactions contemplated by this Agreement for an amount in excess of $2,000,000in the aggregate;

(k)(i) make any material Tax election or take any position on any Company Return filed on or after the date of this Agreement or adopt any method of accounting therein that is materially inconsistent with elections made, positions taken or methods of accounting used in preparing or filing similar returns in prior periods unless such position, election or method is required by changes in applicable Law, (ii) enter into any settlement or compromise of any material Tax liability, (iii) file any amended Company Return with respect to any material Tax, (iv) change any annual Tax accounting period, (v) enter into any closing agreement relating to any material Tax, (vi) surrender any right to claim a material Tax refund or (vii) give or request any waiver of a statute of limitation with respect to any Company Return;

(l)(i) make any expenditures or commitments for such expenditures in connection with the entry or proposed entry into any new line of business, or (ii) make any expenditures or commitments for such expenditures, in either case, in a material amount, in connection with the entry or proposed entry into any extension of an existing line of business not set forth on Section 6.1(l) of the Company Disclosure Schedule;

(m)adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company or any Company Subsidiary (other than the Merger);

(n)grant any loan, advance, extensions of credit to current or former employees or forgiveness or deferral of any loans due from any employee, other than any loan, advance or extension of credit to a current employee in circumstances and in amounts consistent with past practice, in any event not to exceed $50,000 for any one employee and $250,000 in the aggregate;

(o)effect new programs or change existing programs that relate to employment contracts, severance benefits, change in control benefits, bonuses, commissions, base salaries, phantom stock grants, incentive trips, prizes and awards, 401-(k) and pension benefits, vacation and PTO benefits, health and medical benefits or any other remuneration of any kind to any employee, except as required by applicable Law and except for renewals of expiring health and welfare programs and except for replacing health and welfare programs with new programs, in each case having terms substantially the same as the program expired or replaced;

(p)enter into any contract or agreement other than in the ordinary course of business consistent with past practices that would be material to the Company and its Subsidiaries, taken as a whole;

(q)amend, modify or waive in any material respects any right that is material to the Company under any Company Contract of the Company or any of its Subsidiaries, other than in the ordinary course of business consistent with past practice;

(r)take any action that would result in any representation or warranty of the Company contained in this Agreement which is qualified as to materiality becoming untrue as of the Effective Time or any representation or warranty not so qualified becoming untrue in any material respect as of the Effective Time;

(s)except as required by applicable Law or GAAP, revalue in any material respect any of its assets, including writing down the value of inventory in any material manner, or writing-off notes or accounts receivable in any material manner;

(t)collect accounts receivable or satisfy accounts payable except in the ordinary course of business consistent with past practices;

(u)alter through merger, liquidation, reorganization or restructuring or any other fashion the corporate structure or ownership of any Company Subsidiary;

(v)permit to lapse any registrations or applications for material Intellectual Property owned by the Company or its Subsidiaries;

(w)sell, assign, license or encumber any material Intellectual Property of the Company or of any of the Company Subsidiaries, other than in the ordinary course of business, consistent with past practice; or

(x)authorize, agree or commit to do any of the foregoing.

Notwithstanding the covenants of the Company set forth above in this Section 6.1, cash on hand at the Company which is available as a source of funds to pay the Merger Consideration as contemplated by the Bank Commitment Letter may be used to repay indebtedness for money borrowed that would otherwise comprise indebtedness to be repaid pursuant to the Refinancing (as defined in the Bank Commitment Letter) that is then due in accordance with its original scheduled maturity or that may be prepaid without penalty or premium.

6.2Acquisition Proposals; Board Recommendation.

(a)The Company shall not, and the Company shall cause its Subsidiaries and its and their respective officers, directors, employees, attorneys, accountants, advisors, representatives and agents (“Representatives”) (including any Representative of the Special Committee) not to, directly or indirectly, (i) solicit or initiate or knowingly encourage any inquiry, offer or proposal that constitutes, or could reasonably be expected to lead to, an Acquisition Proposal, (ii) participate or engage in or continue any discussions or negotiations with, or disclose or provide any non-public information relating to the Company or its Subsidiaries to, or afford access to any of the properties, books or records of the Company or its Subsidiaries to, any Person with respect to an Acquisition Proposal, (iii) enter into any agreement or agreement in principle with any Person with respect to an Acquisition Proposal, or (iv) grant any waiver or release under any standstill or similar agreement by any Person who has made an Acquisition Proposal, provided, however, that prior to obtaining the Company Shareholder Approval (and in no event after obtaining such Company Shareholder Approval), the Company, its Subsidiaries and their respective Representatives (including any Representative of the Special Committee) may participate or engage in discussions or negotiations with, or disclose or provide non-public information relating to the Company or its Subsidiaries to, or afford access to the properties, books or records of the Company or its Subsidiaries to, a Person that has made (and not withdrawn) a bona fide, written Acquisition Proposal that is reasonably capable of being financed if, but only if, (A) such Acquisition Proposal was made after the date of this Agreement (it being understood than an Acquisition Proposal made after the date of this Agreement by a Person who made an Acquisition Proposal prior to the date of

this Agreement shall be considered a new Acquisition Proposal made after the date of this Agreement) and none of the Company, its Subsidiaries and their Representatives (including any Representative of the Special Committee) has violated any of the restrictions set forth in this Section 6.2, (B) such Person shall have entered into a confidentiality agreement with the Company on terms that are no less favorable to the Company or Parent than the Confidentiality Agreement (including without limitation the standstill provisions thereof), (C) each of the Board of Directors of the Company and the Special Committee has determined in good faith by resolution duly adopted, after consultation with outside legal counsel and a financial advisor of nationally recognized reputation, that such Acquisition Proposal constitutes or could reasonably be expected to lead to a Superior Proposal, and (D) within 24 hours after participating or engaging in any such discussions or negotiations or disclosing or providing any such non-public information or affording such access, the Company shall give Parent and Acquiror written notice of the identity of such Person and the terms of the Acquisition Proposal and, prior to or concurrently with disclosing or providing any such non-public information, the Company shall disclose or provide all such information to Acquiror.  The Company shall, and shall cause its Subsidiaries and instruct their Representatives (including any Representative of the Special Committee) to, immediately cease and cause to be terminated all existing discussions or negotiations with any Person conducted heretofore with respect to any Acquisition Proposal and request the prompt return or destruction of all confidential information previously furnished.

(b)In addition to the obligations of the Company set forth in Section 6.2(a), the Company shall promptly as practicable (i) advise Parent and Acquiror, telephonically and in writing, of the Company’s receipt of any Acquisition Proposal and (ii) provide Parent and Acquiror, in writing, with the terms and conditions of any such Acquisition Proposal, or such proposal, inquiry or request and the identity of the Person making the same.  The Company shall keep Parent informed on a current basis of the status and all material terms (including any change to the material terms) of any such Acquisition Proposal.  Immediately upon determination by the Special Committee or the Board of Directors of the Company, as applicable, that an Acquisition Proposal constitutes a Superior Proposal, the Company shall deliver to Parent and Acquiror a written notice (a “Notice of Superior Proposal”) advising them of such determination, specifying the terms and conditions of such Superior Proposal and the identity of the Person making such Superior Proposal, and providing Parent and Acquiror with a copy of the Superior Proposal.

(c)Each of the Board of Directors of the Company and the Special Committee has adopted a resolution recommending the approval of this Agreement and the Merger by the Company Shareholders (the “Company Recommendation”).  Neither the Board of Directors nor any committee thereof shall (i) withdraw (or modify in a manner adverse to Parent), or propose publicly to withdraw (or modify in a manner adverse to Parent), the Company Recommendation (it being understood that taking a neutral position or no position with respect to an Acquisition  Proposal shall be considered an adverse modification, provided that taking a neutral position or no position with respect to a tender offer or exchange offer that is an Acquisition Proposal for a period of time not in excess of thirty (30) days after commencement of such tender offer or exchange offer shall not be considered an adverse modification) or (ii) recommend, adopt or approve, or propose publicly to recommend, adopt or approve, any Acquisition Proposal (any action described in clause (i) or (ii) being referred to as a “Company Adverse Recommendation Change”).  Notwithstanding the foregoing, the Board of Directors of the Company or the Special Committee  may make a Company Adverse Recommendation Change if it reasonably determines in good faith

(following consultation with outside counsel) that it is necessary to do so in order to comply with their fiduciary duties to the Company Shareholders under applicable Law and the Company has fully complied with its obligations under this Section 6.2; provided, however, that no Company Adverse Recommendation Change may be made in response to an Acquisition Proposal until after the third Business Day following Parent’s receipt of written notice from the Company (an “Adverse Recommendation Notice”) advising Parent that the Board of Directors or the Special Committee, as applicable, has determined that such Acquisition Proposal is a Superior Proposal, that the Board of Directors or the Special Committee, as applicable, intends to make such Company Adverse Recommendation Change and containing all information required by Section 6.2(a), together with copies of any written offer or proposal in respect of such Superior Proposal (it being understood and agreed that any material amendment to the financial terms or other material terms of such Superior Proposal shall require a new Adverse Recommendation Notice and a new three Business Day period. In determining whether to make a Company Adverse Recommendation Change in response to a Superior Proposal, the Board of Directors of the Company and the Special Committee shall take into account any changes to the terms of this Agreement proposed by Parent (in response to an Adverse Recommendation Notice or otherwise) in determining whether such Acquisition Proposal still constitutes a Superior Proposal (which changes Company and Parent and Acquiror agree, and agree to cause their respective Representatives, to negotiate in good faith).  For the avoidance of doubt, nothing in this Section 6.2 shall prohibit the Company or its Board of Directors or the Special Committee from taking and disclosing to the Company Shareholders a position, or any information, with respect to an Acquisition Proposal by a Third Party to the extent required under applicable Law (including Rule 14d-9 and Rule 14e-2 promulgated under the Exchange Act); provided that unless and until this Agreement is terminated in accordance with Section 10.1 hereof, nothing in this sentence shall affect the obligations of the Company and its Board of Directors under any other provision of this Agreement, including Section 8.2(b).

6.3The Notes Tender Offer.

(a)Provided that this Agreement shall not have been terminated in accordance with Section 10.1, at the request of the Parent, the Company will commence a tender offer (the “Notes Tender Offer”) in respect of the $225,000,000 aggregate principal amount at maturity of the Senior Subordinated Notes, as and at the time that the Parent shall request, with the cooperation of the Parent.  If commenced, the Notes Tender Offer shall be in accordance with applicable Law and shall be solely on the terms and conditions specified by the Parent; provided, that the Notes Tender Offer (and all obligations to make any payments to holders of all or any portion of Senior Subordinated Notes in connection therewith or to modify the terms or provisions of any Senior Subordinated Notes) shall be conditioned upon the consummation of the Merger, and shall terminate immediately upon the termination of this Agreement prior to the Effective Time.  The Company agrees not to consummate the Notes Tender Offer unless the Parent consents in writing to such consummation.  The Company agrees to use its reasonable efforts to cooperate with the Parent and, subject to the preceding sentence and applicable Law, to use its reasonable best efforts to consummate the Notes Tender Offer if so requested by the Parent.  If commenced, the Company shall terminate the Notes Tender Offer upon request of the Parent.

(b)If requested by the Parent, the Company shall promptly prepare an Offer to Purchase and Consent Solicitation Statement in connection with the Notes Tender Offer in form and substance satisfactory to the Parent (as amended from time to time, the “Notes Offer to

Purchase”), together with related letters of transmittal and similar ancillary agreements (such documents, together with all supplements and amendments thereto, being referred to herein collectively as the “Notes Tender Offer Documents”), relating to the Notes Tender Offer, and to disseminate to the record holders of the Senior Subordinated Notes, and to the extent known by the Company, the beneficial owners of the Senior Subordinated Notes (collectively, the “Noteholders”), the Notes Tender Offer Documents; provided, however, that prior to the dissemination thereof, the Company shall consult with Parent with respect to the Notes Tender Offer Documents and shall afford Parent reasonable opportunity to comment thereon. Parent and the Acquiror shall provide the Company with any information for inclusion in the Notes Tender Offer Documents which may be required under applicable Law and which is reasonably requested by the Company.  If at any time prior to the acceptance of Senior Subordinated Notes pursuant to the Notes Tender Offer any event should occur that is required by applicable Law to be set forth in an amendment of, or a supplement to, the Notes Tender Offer Documents, the Company will prepare and disseminate such amendment or supplement; provided, however, that prior to such dissemination, the Company shall consult with Parent with respect to such amendment or supplement and shall afford Parent reasonable opportunity to comment thereon.  The Company will notify Parent at least 48 hours prior to the dissemination of the Notes Tender Offer Documents, or 24 hours prior to the mailing of any amendment or supplement thereto, to the Noteholders.

6.4Real Property Holding Company.  The Company shall provide to Parent, at the Effective Time, a certificate from an officer of the Company, signed under penalty of perjury, to the effect that the Company is not, and has not been at any time during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code, a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code.

6.5Change of Control Plan.   Prior to the Effective Time, the Company shall take all actions necessary to amend the Change of Control Plan in the manner set forth on Annex 6.5.

ARTICLE VII

COVENANTS OF PARENT AND ACQUIROR

Parent and Acquiror, jointly and severally, agree as set forth below:

7.1Director and Officer Liability.

(a)From and after the Effective Time, Parent shall cause the Surviving Corporation to honor all of the Company’s obligations to indemnify and hold harmless the present and former officers and directors of the Company in respect of acts or omissions occurring at or prior to the Effective Time to the extent provided under the Company Articles of Incorporation and the Company By-laws and other indemnity arrangements in effect on the date hereof (to the fullest extent permitted by applicable Law), and shall not amend (in a manner adverse to such present and former officers and directors) the provisions relating to indemnification, exculpation or the liability of directors in the Company Articles of Incorporation or the Company By-laws for at least six (6) years after the Effective Time; provided, however, that the Surviving Corporation shall have no obligation to provide such indemnification to the extent that it is ultimately determined that such indemnification is prohibited under applicable Law.  In respect of any matter for which a present or

former director or officer may be entitled to indemnification, subject to receipt by the Surviving Corporation of a writing that sets forth (i) that such person has a good faith belief that the person is entitled to indemnification and (ii) an undertaking from such person to repay any amount advanced hereunder if it is ultimately determined that the person is not entitled to indemnification, the Surviving Corporation shall advance to such person all reasonable costs and expenses incurred by him or her within twenty (20) days after receipt by the Surviving Corporation of a written request for such advance.  The Surviving Corporation shall not require any security for any such undertaking.  For a period of six (6) years after the Effective Time, Parent shall cause the Surviving Corporation to maintain the current policies of officers’ and directors’ liability insurance maintained by the Company (the “Current Policies”) (provided that the Surviving Corporation may substitute therefor policies with reputable and financially sound carriers of at least the same coverage and amount containing terms and conditions that are no less favorable (the “Replacement Policies”)) in respect of acts or omissions occurring prior to the Effective Time covering each such Person currently covered by such Current Policies; provided, however, that in no event shall the Surviving Corporation be required to expend, per annum, in excess of 200% of the annual premium currently paid by the Company for such coverage (or such coverage as is available for 200% of such annual premium); provided, further, that if the annual premium required to provide the foregoing insurance exceeds 200% of the annual premium currently paid by the Company (which the Company represents and warrants is equal to approximately $1,200,000 per annum), the Company shall provide as much of such insurance as can be purchased for such premium, and, any present or former officer or director, upon reasonable written notice thereof from the Surviving Corporation, who desires to be covered by the Current Policies may so elect and shall be covered by the Current Policies so long as such former offer or director pays the portion of the premium for such Current Policies in excess of the amount which the Surviving Corporation is obligated to pay pursuant to this Section 7.1. Alternatively, with the consent of Parent, which consent shall not be unreasonably withheld, the Company may purchase “tail” insurance coverage covering a period of six (6) years after the Effective Time, at a cost no greater than that set forth above, that provides coverage identical in all material respects to the coverage described above.  The insurance purchased pursuant to this Section 7.1 shall be prepaid at the Effective Time and shall be non-cancelable.

(b)This Section 7.1 shall survive the consummation of the Merger and is intended to be for the benefit of, and shall be enforceable by, present or former officers or directors, their heirs and personal representatives and shall be binding on the Surviving Corporation and its successors and assigns and the covenants and agreements contained herein shall not be deemed exclusive of any other rights to which any present or former officer or director is entitled, whether pursuant to Law, contract or otherwise.

(c)If the Surviving Corporation or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any Person, then, and in each case, to the extent reasonably necessary, proper provision shall be made so that the successors and assigns of the Surviving Corporation shall assume the obligations set forth in this Section 7.1.

(d)Nothing in this Agreement is intended to, shall be construed to or shall release, waive or impair any rights to directors’ and officers’ insurance claims under any policy that is or

has been in existence with respect to the Company or any of its officers, directors or employees, it being understood and agreed that the indemnification provided for in this Section 7.1 is not prior to or in substitution for any such claims under such policies.

7.2Transfer Taxes.  Parent and the Company shall cooperate in the preparation, execution and filing of all returns, applications, questionnaires or other documents, regarding any real property transfer, stamp, recording, documentary, gains, sales, use, value added, stock transfer and any other fees and similar taxes which become payable in connection with the Merger (collectively, “Transfer Taxes”).  From and after the Effective Time, the Surviving Corporation shall pay or cause to be paid all Transfer Taxes.

7.3Efforts to Obtain Financing and Substitute Financing.  Parent and Acquiror shall use their commercially reasonable best efforts to meet all conditions set forth in, and obtain the funds in the amounts set forth in, and to be provided pursuant to, the Bank Commitment Letter as promptly as reasonably practicable in light of the anticipated date of the Company Shareholder Meeting.  If funds in the amounts set forth in, and to be provided by the financing sources pursuant to, the Bank Commitment Letter, or any portion thereof, become unavailable to Acquiror on the terms and conditions set forth therein, then Parent and Acquiror shall use their commercially reasonable best efforts to obtain substitute financing on terms and conditions reasonably satisfactory to Parent and Acquiror (“Substitute Financing”) as promptly as reasonably practicable.

ARTICLE VIII

COVENANTS OF PARENT, ACQUIROR AND THE COMPANY

The parties hereto agree as set forth below:

8.1Efforts and Assistance/HSR Act.   (a)  Subject to the terms and conditions hereof, each party will use its commercially reasonable best efforts to take, or cause to be taken, all actions, to file, or caused to be filed, all documents and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement as promptly as practicable, including, without limitation, obtaining all necessary consents, waivers, approvals, authorizations, Permits or orders from all Governmental Entities or other Third Parties and satisfying the conditions applicable to such party that are contained herein.  Each party shall also refrain from taking, directly or indirectly, any action which would impair such party’s ability to consummate the Merger and the other transactions contemplated by this Agreement.  Without limiting the foregoing, the Company shall use commercially reasonable best efforts to (i) take all action necessary or desirable so that no Takeover Statute or similar statute or regulation is or becomes applicable to the Merger or any of the other transactions contemplated by this Agreement and (ii) if any Takeover Statute or regulation becomes applicable to any of the foregoing, take all action necessary so that the Merger and the other transactions contemplated by this Agreement may be consummated as promptly as practicable on the terms contemplated in this Agreement and otherwise to minimize the effect of such statute or regulation on the Merger and such other transactions.  Each of the Company and Acquiror will use their reasonable best efforts to ensure that neither the execution, delivery and performance of this Agreement nor the consummation of the Merger or any of the other transactions contemplated hereby or thereby constitute (a) a control

share acquisition under Sections 60.801 through 60.816 of the OBCA or any applicable Takeover Statute or (b) a prohibited business combination under Section 60.835 of the OBCA or any applicable Takeover Statute.

(b)The Company, Parent and Acquiror shall cooperate with one another in determining whether any action by or in respect of, or filing with, any Governmental Entity is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any Material Contracts, in connection with the consummation of the transactions contemplated by this Agreement.  Each of the Company, Parent and Acquiror will, and will cause its respective Subsidiaries, if any, to take all reasonable actions necessary to obtain (and will cooperate with each other in obtaining) any consent, approval, waiver, authorization, order or approval of, or any exemption by, any Governmental Entity or other public or private Third Party required to be obtained or made by the Company, Parent and Acquiror or any of their respective Subsidiaries, if any, in connection with the Merger or the taking of any action contemplated by this Agreement.

(c)The Company, Parent and Acquiror shall furnish all information required to be included in any application or other filing to be made pursuant to the rules and regulations of any Governmental Entity in connection with the transactions contemplated by this Agreement.  Parent, Acquiror and the Company shall have the right to review in advance, and to the extent reasonably practicable each will consult the other on, all the information relating to the other and each of their respective Subsidiaries, that appears in any filing made with, or written materials submitted to, any Third Party or any Governmental Entity in connection with the Merger and the other transactions contemplated by this Agreement.

(d)Each of the Company, Parent and Acquiror undertakes and agrees to file as soon as reasonably practicable notifications under the HSR Act with the United States Federal Trade Commission (the “FTC”) and the Antitrust Division of the United States Department of Justice (the “Antitrust Division”).  Each of the parties further agrees to respond as fully and promptly as practicable to any inquiries and/or requests for information or documents received from any Governmental Entity in connection with antitrust matters related to the Merger or the other transactions contemplated by this Agreement.  None of the Company, Parent or Acquiror shall extend any waiting period under the HSR Act or enter into any agreement with the FTC or the Antitrust Division not to consummate the transactions contemplated by this Agreement, except with the prior written consent of the other parties hereto, which consent shall not be unreasonably withheld or delayed.

(e)Parent and the Company shall, from the date hereof until the End Date, use their respective commercially reasonable best efforts to avoid the entry of, or to have vacated or terminated, any decree, order, or judgment that would restrain, prevent or delay the Closing.  Notwithstanding anything to the contrary in this Agreement, Parent shall not be required to take any actions in connection with, or agree to, any hold separate order, sale, divestiture, or disposition of stores of Parent or Company that, individually or in the aggregate, could reasonably be expected to have a Company Material Adverse Effect.  Provided that such actions are consistent with the foregoing, Parent shall have the right to determine, after full consultation with the Company and consideration of the Company’s views, whether to contest through litigation on the merits, negotiation or other action any position or claim, including any demands for sale, divestiture or disposition of assets or business of Parent and/or the Company or, effective as of the Effective

Time, the Surviving Corporation or their respective Subsidiaries, asserted by any Governmental Entity in connection with antitrust matters which would operate to hinder or delay the Effective Time.  Parent shall have the right to direct and control any such litigation, negotiation or other action, with counsel of its own choosing, provided that Parent shall afford the Company a reasonable opportunity to participate therein (subject to Parent’s direction and control),and the Company and Parent each agrees to reasonably cooperate with the other with respect thereto to facilitate the Closing.  At the request of Parent, the Company shall agree to divest, hold separate or otherwise take or commit to take any action that limits its freedom of action with respect to, or its ability to retain, any of the stores of the Company, provided that any such action shall be conditioned upon the consummation of the Merger.

(f)Each of the Company, Parent and Acquiror (and/or their respective outside counsel, as appropriate) shall cooperate fully with one another in connection with any review or request for information by any Governmental Entity related to antitrust matters, including by apprising each other of communications, providing copies of documents as appropriate, and participating jointly in meetings, where advisable and permitted by the Governmental Entity involved.

8.2Shareholder Meeting/Proxy Statement.

(a)The Company, Parent and Acquiror shall use their respective reasonable best efforts to take or cause to be taken such actions as may be required to be taken under the Exchange Act, the Securities Act and any other federal securities laws, and under any applicable state securities or blue sky Laws in connection with the Merger and the other transactions contemplated hereby.

(b)The Company shall duly provide notice to each record holder of the outstanding Company Shares, and shall duly hold a meeting of its Shareholders  as promptly as practicable for the purpose of obtaining the Company Shareholder Approval (the “Company Shareholder Meeting”), and the Company shall use its reasonable best efforts to have the Company Proxy Statement cleared by the SEC and to hold the Company Shareholder Meeting as soon as practicable after the date on which the Company Proxy Statement is cleared by the SEC.  Parent and the Acquiror shall use their reasonable best efforts to have the Company Proxy Statement cleared by the SEC.

(c)In connection with the Merger and the Company Shareholder Meeting, the Company shall prepare and file with the SEC, as promptly as practicable, a proxy statement relating to the Company Shareholder Meeting (together with any amendments thereof or supplements thereto and any other required proxy materials, the “Company Proxy Statement”) and shall use its reasonable best efforts to respond to the comments of the SEC and to cause the Company Proxy Statement to be mailed to the Company Shareholders as promptly as practicable; provided, however, that prior to the filing of the Company Proxy Statement, the Company shall consult with Parent and the Acquiror with respect to such filings and shall afford Parent and the Acquiror reasonable opportunity to comment thereon.  Parent and the Acquiror shall provide the Company with any information for inclusion in the Company Proxy Statement which may be required under applicable Law and which is reasonably requested by the Company.  The Company shall promptly notify Parent and the Acquiror of the receipt of comments of the SEC and of any

request from the SEC for amendments or supplements to the Company Proxy Statement or for additional information, and will promptly supply Parent and the Acquiror with copies of all correspondence between the Company or any of its Representatives, on the one hand, and the SEC or members of its staff, on the other hand with respect to the Company Proxy Statement or the Merger.  If at any time prior to the Company Shareholder Meeting any event should occur which is required by applicable Law to be set forth in an amendment of, or a supplement to, the Company Proxy Statement, the Company will prepare and mail such amendment or supplement; provided, however, that prior to such mailing, the Company shall consult with Parent and the Acquiror with respect to such amendment or supplement and shall afford Parent and the Acquiror reasonable opportunity to comment thereon.  The Company will notify Parent and the Acquiror at least 48 hours prior to the mailing of the Company Proxy Statement or any amendment or supplement thereto to the Company Shareholders.  Subject to the provisions of Section 6.2, the Company Recommendation, together with a copy of the opinion referred to in Section 4.15(b), shall be included in the Company Proxy Statement.

(d)The Company represents and warrants that the Company Proxy Statement will, as of the time the Company Proxy Statement (or any amendment thereof or supplement thereto) is first mailed to the Company Shareholders and as of the time of the Company Shareholder Meeting, not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading.  The Company Proxy Statement will comply as to form in all material respects with the provisions of the Exchange Act. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to any statements made or incorporated by reference in the Company Proxy Statement based on information supplied by Parent or the Acquiror for inclusion or incorporation by reference therein.

(e)Parent and the Acquiror represent and warrant that the information supplied or to be supplied by Parent and the Acquiror in writing expressly for inclusion or incorporation by reference in the Company Proxy Statement will, as of the time the Company Proxy Statement (or any amendment thereof or supplement thereto) is first mailed to the Company Shareholders, and as of the time of the Company Shareholder Meeting, not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading.  Notwithstanding the foregoing, Parent and the Acquiror make no representation or warranty with respect to any statements made or incorporated by reference in the Company Proxy Statement based on information supplied by Company for inclusion or incorporation by reference therein.

8.3Public Announcements.  So long as this Agreement is in effect, the Company shall consult with Parent before issuing any press release or making any public statement with respect to this Agreement and the transactions contemplated hereby and shall not issue any such press release or make any such public statement except as may be required by applicable Law without the prior consent of Parent, which shall not be unreasonably withheld or delayed.  Notwithstanding anything in this Agreement to the contrary, the Company shall, as promptly as practicable after the execution hereof, file or furnish to the SEC a current report on Form 8-K which attaches as exhibits this Agreement and copies of all executed financing commitment letters received by Parent and Acquiror and delivered to the Company in connection with this Agreement.  So long as this Agreement is in effect, before issuing any press release or making any public statement with

respect to this Agreement and the transactions contemplated hereby, Parent and the Acquiror shall consult with the Company and provide the Company a reasonable period of time to review the proposed press release or public statement and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by applicable Law.

8.4Access to Information; Notification of Certain Matters.

(a)From the date hereof until the Effective Time and subject to applicable Law, the Company shall (i) give to Parent, Acquiror and their Representatives reasonable access during normal business hours to its offices, properties, books and records; (ii) furnish or make available to Parent, Acquiror and their Representatives any financial and operating data and other information as those Persons may reasonably request; and (iii) instruct its Representatives to cooperate with the reasonable requests of Parent and Acquiror in their investigation.  Any investigation pursuant to this Section shall be conducted in a manner which will not interfere unreasonably with the conduct of the business of the Company and its Subsidiaries and shall be in accordance with any other existing agreements or obligations binding on the Company or any of its Subsidiaries.  Unless otherwise required by Law, each of Parent and Acquiror will hold, and will cause its respective Representatives to hold any nonpublic information obtained in any investigation in confidence in accordance with and agrees to be bound by, the terms of that certain confidentiality agreement, dated as of November 19, 2004 (the “Confidentiality Agreement”), between the Company and the Parent.  No investigations pursuant to this Section 8.4(a) shall affect any representations or warranties of the parties herein or the conditions to the obligations of the parties hereto.

(b)The Company shall give prompt notice to Parent and Acquiror, and Parent and Acquiror shall give prompt notice to the Company, of (i) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which would reasonably be expected to cause any representation or warranty of such party contained in this Agreement to be untrue or inaccurate in any material respect; (ii) any failure of the Company, Parent or Acquiror, as the case may be, to materially comply with or satisfy, or the occurrence or nonoccurrence of any event, the occurrence or nonoccurrence of which would reasonably be expected to cause the failure by such party to materially comply with or satisfy, any covenant, condition or agreement to be complied with or satisfied by it hereunder; (iii) any notice or other communication from any Third Party alleging that the consent of such Third Party is or may be required in connection with the transactions contemplated by this Agreement; (iv) any actions, suits, claims, investigations or proceedings commenced or, to the best of such party’s knowledge, threatened against, or affecting such party which, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to this Agreement or which relate to the consummation of the transactions contemplated hereby; and (v) the occurrence of any event, development or circumstance which has had or would be reasonably expected to result in a Company Material Adverse Effect or Acquiror Material Adverse Effect; provided, however, that the delivery of any notice pursuant to this Section 8.4(b) shall not limit or otherwise affect the remedies available hereunder to the party giving or receiving such notice.

(c)Parent, the Acquiror and their agents, shall have the right, from time to time, prior to the Closing Date or earlier termination of this Agreement, during normal business hours and after reasonable notice has been provided, to enter upon the real property owned or leased by the Company or any Company Subsidiary (collectively, the “Premises”) for the purpose of conducting

visual inspections of the Premises, taking of measurements, making of surveys and generally for the reasonable performance of a standard “Phase I” investigation relating to the Premises, all at Acquiror’s sole cost and expense; provided, however, that Parent or the Acquiror shall (i) restore any damage to the Premises or any adjacent property caused by such actions within a reasonable time period after such entry; (ii) not unreasonably interfere with the conduct of the business of the Company or any Company Subsidiary and (iii) not conduct any soil borings, or groundwater testing or any other “Phase II” testing without the prior written consent of the Company.  Any entry by Parent or the Acquiror onto the Premises shall be subject to, and conducted in accordance with, any other existing agreements or obligations binding on the Company or any Company Subsidiary and all applicable Environmental Laws.  Parent and the Acquiror shall keep the Premises free and clear of any mechanic’s or materialmen’s liens arising out of any entry onto or inspection of the Premises.  Parent and the Acquiror shall not disturb the Premises beyond what is reasonably necessary to conduct its investigations.

8.5Further Assurances.  Upon the terms and subject to the conditions of this Agreement, each of the parties hereto shall use their respective reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all other things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement, to obtain as promptly as practicable all necessary waivers, consents and approvals and to effect all necessary registrations and filings, and otherwise to satisfy or cause to be satisfied all conditions precedent to its obligations under this Agreement.  At and after the Effective Time, the officers and directors of the Surviving Corporation will be authorized to execute and deliver, in the name and on behalf of the Company or Acquiror, any deeds, bills of sale, assignments or assurances and to take and do, in the name and on behalf of the Company or Acquiror, any other actions and things to vest, perfect or confirm of record or otherwise in the Surviving Corporation any and all right, title and interest in, to and under any of the rights, properties or assets of the Company acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger.

8.6Disposition of Litigation.  The Company will consult with Parent and the Acquiror with respect to any action by any Third Party to restrain or prohibit or otherwise oppose the Merger or the other transactions contemplated by this Agreement and, subject to Section 6.2, will use reasonable best efforts to resist any such effort to restrain or prohibit or otherwise oppose the Merger or the other transactions contemplated by this Agreement.  Acquiror may participate in (but not control) the defense of any shareholder litigation against the Company and its directors relating to the transactions contemplated by this Agreement at Acquiror’s sole cost and expense (subject to Section 10.2).  In addition, subject to Section 6.2, the Company will not voluntarily cooperate with any Third Party which has sought or may hereafter seek to restrain or prohibit or otherwise oppose the Merger or the other transactions contemplated by this Agreement, other than extending professional courtesies to such Third Party, and will cooperate with Acquiror to resist any such effort to restrain or prohibit or otherwise oppose the Merger or the other transactions contemplated by this Agreement.

8.7Confidentiality Agreement.  The parties acknowledge that the Company and Parent entered into the Confidentiality Agreement, which shall be deemed to be incorporated herein as if it were set forth in its entirety, and which Confidentiality Agreement shall continue in full force and effect in accordance with its terms until the earlier of (a) the Effective Time or (b) the

expiration of the Confidentiality Agreement according to its terms; provided that, to the extent any provision of this Agreement permits Parent or Acquiror to take any action otherwise prohibited under the Confidentiality Agreement (including without limitation the ability of Parent pursuant to Section 8.3 hereof to issue press releases and make public statements after consulting with the Company and providing the Company an opportunity to review the proposed press release or public statement), the terms of this Agreement shall prevail.

8.8Cooperation with Financing.  The Company shall use reasonable efforts to cooperate with and assist Acquiror in obtaining the Financing and, in this connection, the Company shall, upon the request of the Parent, (a) provide, and cause the Affiliates and Representatives of the Company to provide, financial information and projections (including updated projections) requested by the Lenders, (b) assist, and cause the Affiliates and Representatives of the Company to assist, in the preparation of a bank offering memorandum and a customary offering circular for a Rule 144A debt securities offering and other marketing materials necessary for the Lenders to effect a syndication of the Financing (including providing all financial information necessary to such offering memorandum and offering circular) and (c) make available Representatives of the Company (other than employees of the Company that are not anticipated to have a position with Parent or a Subsidiary of Parent after the Merger) for participation in road shows and presentations in connection with the marketing of the Financing to potential investors.

ARTICLE IX

CONDITIONS TO MERGER

9.1Conditions to the Obligations of Each Party.  The obligations of the Company, Parent and Acquiror to consummate the Merger are subject to the satisfaction or waiver of the following conditions:

(a)the Company Shareholder Approval shall have been obtained;

(b)any applicable waiting period or required approval under the HSR Act, or any other similar applicable Law, required prior to the completion of the Merger, in connection with the Merger or the other transactions contemplated by this Agreement, shall have expired or been earlier terminated or received; and

(c)no Governmental Entity of competent authority or jurisdiction shall have issued any Law or taken any other action then in effect, which restrains, enjoins or otherwise prohibits or makes illegal the consummation of the Merger; provided, however, that the parties hereto shall use their respective reasonable best efforts to have any such Law or other legal restraint vacated.

9.2Condition to the Obligations of the Company.  The obligations of the Company to consummate the Merger are subject to the satisfaction or waiver of the following further conditions:  (i) Parent and Acquiror shall have performed in all material respects all of their obligations hereunder required to be performed by them at or prior to the Effective Time, (ii) (A) the representations and warranties of Parent and Acquiror contained in this Agreement that are qualified by reference to materiality or an Acquiror Material Adverse Effect shall be true and correct when made and at and as of the Effective Time, as if made at and as of such time (provided

that representations made as of a specific date shall be required to be true and correct as of such date only), (B) the representations and warranties of the Parent and Acquiror set forth in Section 5.1, Section 5.2, Section 5.5 and Section 5.6 that are not qualified by Acquiror Material Adverse Effect shall have been true and correct in all respects when made and at and as of the Effective Time, as if made as of such time (provided that representations made as of a specific date shall be required to be true and correct as of such date only), and (C) all other representations and warranties of Parent and Acquiror shall be true and correct when made and at and as of the Effective Time as if made at and as of such time (provided that representations made as of a specific date shall be required to be true and correct as of such date only), except where the failure of such representations and warranties to be so true and correct, individually or in the aggregate, does not have, and is not reasonably likely to have, an Acquiror Material Adverse Effect and (iii) the Company shall have received a certificate signed by the Chief Executive Officer or President of each of Parent and Acquiror to the foregoing effect.

9.3Conditions to the Obligations of Acquiror.  The obligations of Parent and Acquiror to consummate the Merger are subject to the satisfaction or waiver of the following further conditions:

(a)(i) the Company shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Effective Time, (ii) (A) the representations and warranties of the Company contained in this Agreement that are qualified by reference to materiality or a Company Material Adverse Effect shall be true and correct when made and at and as of the Effective Time, as if made at and as of such time (provided that representations made as of a specific date shall be required to be true and correct as of such date only), (B) the representations and warranties of the Company set forth in Section 4.1(a), Section 4.2, Section 4.5, Section 4.6(b) and Section 4.15 that are not qualified by Company Material Adverse Effect shall have been true and correct in all respects (except, with respect to Section 4.5, for de minimus deviations) when made and at and as of the Effective Time, as if made at and as of such time (provided that representations made as of a specific date shall be required to be true and correct as of such date only), and (C) all other representations and warranties of the Company shall have been true and correct when made and at and as of the Effective Time, as if made at and as of such time (provided that representations made as of a specific date shall be required to be true and correct as of such date only), except where the failure of such representations and warranties to be so true and correct, individually or in the aggregate, does not have, and is not reasonably likely to have, a Company Material Adverse Effect and (iii) Parent shall have received a certificate signed by the Chief Executive Officer of the Company to the foregoing effect;

(b)there shall not be pending (i) any action or proceeding by any Governmental Entity or (ii) any action or proceeding by any other Person, in any case referred to in clauses (i) and (ii), before any court or Governmental Entity that has a reasonable probability of success seeking (x) to make illegal or to restrain or prohibit the consummation of the Merger or the other transactions contemplated hereby or seeking to obtain material damages, (y) to restrain or prohibit Parent’s (including its Affiliates) ownership or operation of all or any material portion of the business or assets of the Company (including the Surviving Corporation after the Effective Time) to dispose of or hold separate all or any material portion of the business or assets of the Company (including the Surviving Corporation after the Effective

Time) or its Subsidiaries, or (z) to impose or confirm material limitations on the ability of Parent or any of its Affiliates (including the Surviving Corporation after the Effective Time) to effectively control the business or operations of the Company (including the Surviving Corporation after the Effective Time) or any of its Subsidiaries or effectively to exercise full rights of ownership of the Company Shares; provided, however, that any such action or proceeding shall not be the basis for  the failure of the condition set forth in this Section 9.3(b) to be satisfied if:  (a) the parties to such action or proceeding have entered into a memorandum of understanding or other agreement (approved by Parent and the Company, which approvals shall not be unreasonably withheld) with respect to the settlement of such action or proceeding, (b) the final date by which the court requires that the members of the class or putative class of shareholders that is covered by the memorandum of understanding or other agreement (the “Class Shareholders”) complete their election to opt out of any settlement of such action or proceeding that is the subject of the memorandum of understanding has passed, (c) the number of Company Shares beneficially owned by the Class Shareholders who have been permitted by the court to opt out of any settlement of such action or proceeding that is the subject of the memorandum of understanding does not exceed the number equal to 10% of the number of Company Shares outstanding on the date hereof and (d) final approval by the court under Rule 23 of the Federal Rules of Civil Procedure (or, in the case of a state court, equivalent state rule) has been received; and

(c)since the date of this Agreement, there shall not have occurred any change, event, occurrence, development or circumstance which, individually or in the aggregate, constitutes or could reasonably be expected to result in, a Company Material Adverse Effect; and

(d)the financings and related transactions (including the sources and uses of funds) contemplated by the Bank Commitment Letter (or in any Substitute Financing, if applicable), including the repayment of the Company’s and its Subsidiaries’ indebtedness as contemplated therein, and the release of any related liens shall have been consummated on terms reasonably acceptable to Acquiror; provided, however, that the terms of the Bank Commitment Letter are hereby deemed to be acceptable to Acquiror.

ARTICLE X

TERMINATION

10.1Termination.  This Agreement may be terminated and the Merger abandoned at any time prior to the Effective Time by written notice, whether before or after the Company Shareholder Approval shall have been obtained (provided that, in the case of a termination by the Company under this Section 10.1, such termination shall also have been approved by the Special Committee):

(a)by mutual written agreement of Parent and the Company, in each case duly authorized by their respective Boards of Directors;

(b)by either Parent or the Company, if

(i)the Merger shall not have been consummated by May 1, 2005 (the “End Date”); provided, however, that the right to terminate this Agreement under this Section

10.1(b)(i) shall not be available to any party whose breach of any provision of this Agreement has resulted in the failure of the Merger to occur on or before the End Date; provided further, however, that if the failure to consummate the Merger by such date is due solely to a delay in obtaining (A) approval for the transactions contemplated by this Agreement pursuant to the HSR Act in accordance with Section 8.1 of this Agreement and/or (B) clearance of the Company Proxy Statement in accordance with Section 8.2 of this Agreement, (I) neither Parent nor the Company shall be entitled to terminate this Agreement pursuant to this Section 10.1(b)(i) and (II) the date referred to in this Section 10.1(b)(i) shall be earlier of (1) June 30, 2005 or (2) five (5) Business Days after both of the following have occurred: (x) the approval for the transactions contemplated by this Agreement pursuant to the HSR Act shall have been obtained and (y) the Company Shareholder Approval has occurred;

(ii)there shall be any Law that makes consummation of the Merger illegal or otherwise prohibited or any ruling, judgment, injunction, order or decree of any Governmental Entity having competent jurisdiction enjoining the Company or Acquiror from consummating the Merger is entered and the ruling, judgment, injunction, order or decree shall have become final and nonappealable and, prior to that termination, the parties shall have used reasonable best efforts to resist, resolve or lift, as applicable, the Law, ruling, judgment, injunction, order or decree; provided, however, that the right to terminate this Agreement pursuant to this Section 10.1(b)(ii) shall not be available to any party whose breach of any provision of this Agreement results in the imposition of such ruling, judgment, injunction, order or decree or the failure of such ruling, judgment, injunction, order or decree to be resisted, resolved or lifted, as applicable; or

(iii)at the Company Shareholder Meeting or any adjournment thereof at which this Agreement has been voted upon, the Company Shareholder Approval shall not have been obtained;

(c)by the Company, if there has been a breach of or failure to perform any representation, warranty, covenant or agreement on the part of Parent or Acquiror set forth in this Agreement such that any of the conditions set forth in Section 9.2(a) would not be satisfied, and such condition is either incapable of being satisfied by the End Date or is not cured within ten (10) Business Days after notice from the Company; provided, however, that the Company shall not also then be in material breach of this Agreement;

(d)by Parent, if there has been a breach of or failure to perform any representation, warranty, covenant or agreement on the part of the Company set forth in this Agreement such that any of the conditions set forth in Section 9.3(a) would not be satisfied, and such condition is either incapable of being satisfied by the End Date or is not cured within ten (10) Business Days after notice from the Parent; provided, however, that Parent or Acquiror shall not also then be in material breach of this Agreement; or

(e)by Parent, if:

(i)the Company shall have breached, in any material respects, any of its obligations under Section 6.2 or Section 8.2 (other than breaches which are cured within three (3) Business Days after notice from Parent) of this Agreement;

(ii)the Board of Directors of the Company shall (A) withdraw, modify, condition or qualify the Company Recommendation in a manner adverse to Parent or Acquiror or approve or recommend to the Company Shareholders an Acquisition Proposal, (B) approve or recommend that the Company Shareholders tender their Company Shares in any tender or exchange offer that is an Acquisition Proposal or fail, within thirty (30) days of commencement of any such tender or exchange offer, to send to Company Shareholders a statement disclosing that the Company recommends rejection of such tender or exchange offer, or (C) approve a resolution or agree to do, or publicly propose to do, any of the foregoing;

(iii)any Person or group (other than Parent, Acquiror or their Subsidiaries) acquires Beneficial Ownership of a majority of the outstanding Company Shares; or

(iv)any other Third Party Acquisition shall have occurred.

(f)by the Company, if (i) the Company enters into a definitive agreement for a Superior Proposal in accordance, and has otherwise complied, with Section 6.2 hereof in all material respects, (ii) concurrently with such termination, the Company shall have paid Parent the Termination Fee and (iii) at the time and in accordance with Section 10.2, the Company pays Parent the Parent Expense Reimbursement Amount.

The party desiring to terminate this Agreement pursuant to Sections 10.1(b) through (f) shall give written notice of such termination to the other party in accordance with Section 11.1 of this Agreement; provided that no termination by the Company shall be effective unless and until the Company shall have paid any Termination Fee and/or Parent Expense Reimbursement Amount required to be then paid by it pursuant to Section 10.2 of this Agreement.

10.2Effect of Termination.

(a)In the event of termination of this Agreement by either the Company or Acquiror as provided in Section 10.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of the Company or Acquiror or their respective Subsidiaries, officers or directors except (i) with respect to Section 8.3, Section 8.7, this Section 10.2, Section 10.3 and Article XI and (ii) with respect to any liabilities for damages incurred or suffered by a party as a result of the willful and material breach by the other party of any of its representations, warranties, covenants or other agreements set forth in this Agreement.

(b)The Company agrees that if this Agreement is terminated prior to the Effective Time as a consequence of a failure or non-waiver of any condition contained in Section 9.3(a) or Section 9.3(c) or pursuant to Section 10.1(b)(iii), Section 10.1(d), Section 10.1(e) or Section 10.1(f), then the Company shall pay Acquiror an amount equal to the Parent Expense Reimbursement Amount.  Payment of the Parent Expense Reimbursement Amount pursuant to this Section 10.2(b) shall be made not later than five (5) Business Days after Parent has delivered to the Company a notice of demand for payment and a documented itemization setting forth in reasonable detail all expenses for which it seeks payment (which itemization may be supplemented and updated from time to time until the thirtieth (30th) day after Parent delivers notice of demand for payment).

(c)In addition to any payment required by Section 10.2(b) and notwithstanding any other provision of this Agreement, the Company and Parent agree that:

(i)if this Agreement is terminated pursuant to Section 10.1(e)(i), (ii) or (iii) or Section 10.1(f) then the Company shall immediately pay to Parent the Termination Fee;

(ii)if this Agreement is terminated pursuant to Section 10.1(b)(iii) or Section 10.1(d) then, in the event that, prior to such termination, (A) any Third Party Acquisition occurs or (B) any Third Party shall have publicly made, proposed, communicated or disclosed an intention to make a bona fide Acquisition Proposal (or such Acquisition Proposal becomes publicly known or is otherwise communicated to the Board of Directors of the Company or the Special Committee) that, in the event of a termination pursuant to Section 10.1(d), could reasonably be expected to lead to a Superior Proposal, the Company shall immediately pay to Parent the Termination Fee;

(iii)if (A) this Agreement is terminated pursuant to Section 10.1(b)(iii) or Section 10.1(d) and (B) no Termination Fee has been paid by the Company to Parent and (C) within twelve (12) months following such termination, (1) the Company enters into a definitive agreement with respect to an Acquisition Proposal or (2) any Third Party Acquisition occurs, then the Company shall immediately pay to Parent the Termination Fee upon the first to occur of the events described in clause (C)(1) and (C)(2) of this sentence; and

(iv)if (A) this Agreement is terminated pursuant to Section 10.1(b)(i) (provided that at the time of such termination pursuant to Section 10.1(b)(i), the conditions precedent in Section 9.1(b) and Section 9.3(d) shall have been capable of being satisfied and the reason for the Closing not having previously occurred shall not be the failure to satisfy the conditions precedent set forth in Section 9.2 through no fault of the Company) and (B) prior to such termination, (1) any Third Party Acquisition occurs or (2) any Third Party shall have publicly made, proposed, communicated or disclosed an intention to make a bona fide Acquisition Proposal, or such Acquisition Proposal becomes publicly known or is otherwise communicated to the Board of Directors of the Company or the Special Committee, and (C) no Termination Fee has been paid by the Company to Parent and (D) within twelve (12) months following such termination, (1) the Company enters into a definitive agreement with respect to an Acquisition Proposal or (2) any Third Party Acquisition occurs, then the Company shall immediately pay to Parent the Termination Fee upon the first to occur of the events described in clause (D)(1) and (D)(2) of this sentence.  Solely for the purposes of Sections 10.2(c)(ii), (iii) and (iv) and Section 10.1(e)(iv) hereof, all references to 15% in the definition of the term “Acquisition Proposal” shall be deemed to be 20%.

(d)The parties acknowledge that the agreements contained in Section 10.2(b) and Section 10.2(c) are an integral part of the transactions contemplated by this Agreement, and that without the agreement, they would not enter into this Agreement; accordingly, if the Company fails to pay promptly the Parent Expense Reimbursement Amount or the Termination Fee payable by it pursuant to this Section 10.2, then the Company shall pay to Parent its costs and expenses (including attorneys’ fees) in connection with collecting such amounts, together with interest on the amounts at the prime rate in effect from time to time and quoted in The Wall Street Journal during such period from the date such payment was due under this Agreement until the date of payment.

10.3Fees and Expenses.  Except as otherwise specifically provided herein, all fees and expenses incurred in connection herewith and the transactions contemplated hereby shall be paid by the party incurring such fees and expenses, whether or not the Merger is consummated.

ARTICLE XI

MISCELLANEOUS

11.1Notices.  All notices, requests and other communications to any party hereunder shall be in writing (including facsimile or similar writing) and shall be given,

if to Parent or Acquiror, to:

Movie Gallery, Inc.
900 West Main Street
Dothan, Alabama 36301
Attention:  S. Page Todd
Facsimile No.: 334-836-3626

with a copy to:

Troy & Gould Professional Corporation
1801 Century Park East, 26^th Floor
Los Angeles, California 90067
Attention:  Lawrence P. Schnapp, Esq.
Facsimile No.:  310-201-4746

and

Alston & Bird LLP
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Attention:  J. Vaughan Curtis
Facsimile No.:  404-881-7777

if to the Company, to:

Hollywood Entertainment Corporation
9275 S.W. Peyton Lane
Wilsonville, Oregon  97070
Attention:  Donald Eckman
Facsimile No.:  503-570-1680

with a copy to:

Gibson, Dunn & Crutcher LLP
2029 Century Park East, Suite 4000
Los Angeles, California  90067
Attention:  Jonathan K. Layne, Esq.
Facsimile No.:  310-552-7053

and

Stoel Rives LLP
Standard Insurance Center
900 S.W. Fifth Avenue, Suite 2600
Portland, Oregon  97204-1268
Attention:  Robert J. Moorman, Esq.
Facsimile No.:  503-220-2480

or such other address or facsimile number as a party may hereafter specify for the purpose by notice to the other parties hereto. Each notice, request or other communication shall be effective only (a) if given by facsimile, when the facsimile is transmitted to the facsimile number specified in this Section and the appropriate facsimile confirmation is received or (b) if given by overnight courier or personal delivery when delivered at the address specified in this Section.

11.2Survival.  None of the representations, warranties, covenants or agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time; provided, however, that this Section 11.2 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time, including, but not limited to, those covenants in Articles 2, 3, 7 and 11 which contemplate performance after the Effective Time.

11.3Amendments; No Waivers.

(a)Any provision of this Agreement may be amended or waived prior to the Effective Time, if, and only if, the amendment or waiver is in writing and signed, in the case of an amendment, by the Company, Parent and Acquiror, or in the case of a waiver, by the party against whom the waiver is to be effective.  No amendment or waiver shall be binding on the Company unless approved by the Special Committee.

(b)At any time prior to the Effective Time, Parent and the Company may with respect to the other party (a) extend the time for the performance of any of the obligations or other acts of such other party and (b) waive any inaccuracies in the representations and warranties of such other party contained herein or in any document delivered pursuant hereto.  No such extension or waiver shall be deemed or construed as a continuing extension or waiver on any occasion other than the one on which such extension or waiver was granted or as an extension or waiver with respect to any provision of this Agreement not expressly identified in such extension or waiver on the same or any other occasion.  No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof

preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by Law.

11.4Successors and Assigns.  The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that all or any of the rights or obligations of Acquiror may be assigned to any direct or indirect wholly-owned Subsidiary of Acquiror (which assignment shall not relieve Acquiror of its obligations hereunder); provided, further, that other than with respect to the foregoing proviso, no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other parties hereto.  Any purported assignment in violation hereof shall be null and void.

11.5Counterparts; Effectiveness; Third Party Beneficiaries.  This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.  This Agreement shall become effective when each party hereto shall have received counterparts hereof signed by all of the other parties hereto.  Except as set forth in Sections 3.3, 3.4 or 7.1, no provision of this Agreement is intended to confer upon any Person other than the parties hereto any rights or remedies hereunder.

11.6Governing Law.  This Agreement shall be construed in accordance with and governed by the internal Laws of the State of Delaware applicable to contracts executed and fully performed within the State of Delaware, except to the extent that the Merger is mandatorily governed by the laws of the State of Oregon.

11.7Jurisdiction.  Except as otherwise expressly provided in this Agreement, the parties hereto agree that any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby shall be brought exclusively in the Court of Chancery of the State of Delaware, County of New Castle or, if such court does not have jurisdiction over the subject matter of such proceeding or if such jurisdiction is not available, the United States District Court for the District of Delaware, and each of the parties hereby consents to the exclusive jurisdiction of those courts (and of the appropriate appellate courts therefrom) in any suit, action or proceeding and irrevocably waives, to the fullest extent permitted by Law, any objection which it may now or hereafter have to the laying of the venue of any suit, action or proceeding in any of those courts or that any suit, action or proceeding which is brought in any of those courts has been brought in an inconvenient forum.  Process in any suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any of the named courts.  Without limiting the foregoing, each party agrees that service of process on it by notice as provided in Section 11.1 shall be deemed effective service of process.

11.8Entire Agreement.  This Agreement (together with the exhibits and schedules hereto) and the Confidentiality Agreement constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both oral and written, between the parties with respect to the subject matter hereof.

11.9Authorship.  The parties agree that the terms and language of this Agreement were the

result of negotiations between the parties and, as a result, there shall be no presumption that any ambiguities in this Agreement shall be resolved against any party.  Any controversy over construction of this Agreement shall be decided without regard to events of authorship or negotiation.

11.10Severability.  If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party.  Upon a determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible.

11.11Waiver of Jury Trial.  EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY.

11.12Headings; Construction.  The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.  In this Agreement (a) words denoting the singular include the plural and vice versa, (b) “it” or “its” or words denoting any gender include all genders, (c) the word “including” shall mean “including without limitation,” whether or not expressed, (d) any reference herein to a Section, Article, Paragraph, Clause or Schedule refers to a Section, Article, Paragraph or Clause of or a Schedule to this Agreement, unless otherwise stated, and (e) when calculating the period of time within or following which any act is to be done or steps taken, the date which is the reference day in calculating such period shall be excluded and if the last day of such period is not a Business Day, then the period shall end on the next day which is a Business Day.

[Signature Page Follows]

**                                        &# 160;                                                *

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

HOLLYWOOD ENTERTAINMENT
CORPORATION, an Oregon corporation

/s/ Tim Price

By:       Tim Price

Its:        Chief Financial Officer

TG HOLDINGS, INC., an Oregon corporation

/s/ S. Page Todd

By:       S. Page Todd

Its:       Vice President

MOVIE GALLERY, INC., a Delaware
corporation

/s/ S. Page Todd

By:       S. Page Todd

Its:       Executive Vice President

EX-10.1

Exhibit 10.1

[EXECUTION COPY]

WACHOVIA BANK, NATIONAL
ASSOCIATION WACHOVIA CAPITAL INVESTMENTS, INC. WACHOVIA CAPITAL MARKETS, LLC One Wachovia Center 301 South College Street Charlotte, NC 28288 MERRILL LYNCH CAPITAL
CORPORATION
Four World Financial Center
250 Vesey Street
New York, NY  10080

January 9, 2005

Movie Gallery, Inc.

900 West Main Street

Dothan, AL  36301

Re: Project Top Gun – Amended and Restated
Credit Facilities Commitment Letter

Ladies and Gentlemen:

This Amended and Restated Credit Facilities Commitment Letter amends and restates in its entirety the Credit Facilities Commitment Letter, dated December 1, 2004, among Movie Gallery, Inc. (“you” or the “Company”), Merrill Lynch Capital Corporation (“MLCC”), Wachovia Bank, National Association (“WB”), Wachovia Capital Investments, Inc. (“WCI”) and Wachovia Capital Markets, LLC (“WCM”, and together with WB, WCI and MLCC, “we” or “us”).  References to such Credit Facilities Commitment Letter (including such references thereto as simply the “Commitment Letter”) made on or after the date hereof shall refer to such letter as amended and restated hereby (as so amended and restated, this “Commitment Letter”).

You have delivered to us on the date hereof a draft execution copy of the Merger Agreement (the “Merger Agreement”), among Hollywood Entertainment Corporation (“Target”), you and TG Holdings, Inc. (a newly-formed wholly-owned subsidiary of the Company referred to herein as “Newco”), which Merger Agreement you have informed us you expect will be executed and delivered by each of the parties thereto and pursuant to which you intend, through Newco, to effect the acquisition (the “Acquisition”) of Target and its subsidiaries, and pursuant to which Newco will be merged (the “Merger”) with and into Target, with Target as the surviving corporation.

The structure of the Acquisition and the other transactions contemplated hereby are subject to such revisions as agreed to by the parties hereto.  The approximate sources and uses of the funds necessary to consummate the Acquisition and the other transactions contemplated hereby are set forth on Annex I to this Commitment Letter.  All references herein to “dollars” or “$” are references to United States dollars.

In addition, you have advised us that in connection with the consummation of the Acquisition, (a) Newco will raise gross cash proceeds of not less than $475 million from either (A) the issuance of unsecured senior notes (the “Senior Notes”) (the “Senior Note Offering”), or (B) if the Senior Note Offering is not consummated prior to or concurrently with the consummation of the

Acquisition, the draw down under an unsecured senior interim loan (the “Interim Loan”) that would be anticipated to be refinanced with debt securities substantially similar to the Senior Notes (the “Take-out Securities”); and (b) Newco and/or wholly owned subsidiaries of the Company will enter into senior secured credit facilities in the aggregate principal amount of $720 million (the “Senior Secured Credit Facilities” and, together with the Interim Loan, the “Credit Facilities”); provided, that the Senior Notes (or, if the Senior Note Offering is not consummated prior to or concurrently with the consummation of the Acquisition, the Interim Loan) will be redeemed (or the commitments in respect of the Interim Loan will be reduced) in an amount equal to the amount of Target’s 9.625% Senior Subordinated Notes due 2011 (the “Existing Notes”) that are not purchased by Target pursuant to the Tender Offer described below as of the date of consummation of the Acquisition (the “Closing Date”) or purchased by Target pursuant to the Change of Control Offer described below.

In addition, you have advised us that, on the Closing Date, Newco will use a portion of the proceeds from the Senior Note Offering (or, if the Senior Note Offering is not consummated prior to or concurrently with the consummation of the Acquisition, the Interim Loan) and the Senior Secured Credit Facilities, together with cash on hand, to pay the merger consideration to shareholders of Target and to repay, directly or indirectly, all funded indebtedness of the Company and its Subsidiaries (excluding capital leases and other funded indebtedness to be determined) and terminate all commitments to make extensions of credit thereunder (the “Company Refinancing”).  Immediately after the consummation of the Merger, the Company will cause Target and its subsidiaries to repay all of their respective existing indebtedness (other than Existing Notes not tendered in the tender offer described below) and terminate all commitments to make extensions of credit (the “Target Refinancing” and, together with the Company Refinancing, the “Refinancing”) under their respective existing indebtedness (the “Existing Indebtedness”).

In connection with the Target Refinancing, Target will make a tender offer (the “Tender Offer”) for the Existing Notes, together with a related consent solicitation.  In the event that less than all of the Existing Notes have been validly tendered and not withdrawn as of the Closing Date, Target will commence a change of control offer (the “Change of Control Offer”) on or promptly after the Closing Date for the Existing Notes pursuant to the terms of the indenture governing the Existing Notes.  In the event Target is required to make a Change of Control Offer and Senior Notes are issued on the Closing Date, proceeds from the Senior Note Offering in an amount equal to (a) the aggregate principal amount of Existing Notes not purchased in the Tender Offer plus (b) the aggregate principal amount of Senior Notes issued on the Closing Date minus (c) $475million will be deposited into an escrow account.  On the date of consummation of the Change of Control Offer, proceeds will be released from escrow to fund the Change of Control Offer.  Any such escrowed amounts not used to fund the Change of Control Offer will be used to redeem Senior Notes.

The Acquisition, the Senior Note Offering (if consummated), the Refinancing, the Tender Offer, the Change of Control Offer (if made), the entering into and borrowings under the Credit Facilities by the parties herein described and the other transactions contemplated hereby entered into and consummated in connection with the Acquisition are herein referred to as the “Transactions.”

You have requested that we commit to provide the Credit Facilities to finance the Acquisition and the Refinancing and the payment of certain related fees and expenses.

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Accordingly, subject to the terms and conditions set forth below, we hereby agree with you as follows:

1.             Commitment.  WB and MLCC, severally and not jointly, each hereby commits to provide to Newco and/or one or more wholly owned subsidiaries of the Company, 90% and 10%, respectively, of the principal amount of the Senior Secured Credit Facilities, upon the terms and subject to the conditions set forth or referred to herein, in the Amended and Restated Fee Letter (the “Fee Letter”) dated the date hereof and delivered to you, and in the Senior Secured Credit Facilities Summary of Terms and Conditions attached hereto (and incorporated by reference herein) as Exhibit A (the “Senior Secured Term Sheet”).  WB and MLCC, with respect to their commitments to the Senior Secured Credit Facilities as set forth in the preceding sentence, together with any successor(s) or assignee(s) thereto as approved by you (such approval not to be unreasonably withheld, delayed or conditioned, subject to Section 5.5 of the Merger Agreement), are collectively referred to herein as the “Initial Senior Secured Lenders”.  WCI and MLCC, severally and not jointly, each hereby also commits to provide to Newco and/or one or more wholly owned subsidiaries of the Company, 90% and 10%, respectively, of the principal amount of the Interim Loan, upon the terms and subject to the conditions set forth or referred to herein, in the Fee Letter and in the Interim Loan Summary of Terms and Conditions attached hereto (and incorporated by reference herein) as Exhibit B (the “Interim Loan Term Sheet” and together with the Senior Secured Term Sheet, the “Term Sheets”).  WCI and MLCC, with respect to their commitments to the Interim Loan as set forth in the preceding sentence, together with any successor(s) or assignee(s) thereto as approved by you (such approval not to be unreasonably withheld, delayed or conditioned, subject to Section 5.5 of the Merger Agreement), are collectively referred to herein as the “Initial Interim Lenders”; and the Initial Senior Secured Lenders and the Initial Interim Lenders are collectively referred to herein as the “Initial Lenders”.  At the Closing Date, any unused term loan and interim loan commitments under this Commitment Letter in respect of the Credit Facilities will terminate immediately after making the extensions of credit thereunder contemplated hereby; provided, thatif the Company is required to make a Change of Control Offer, commitments to provide the Interim Loan in an amount equal to (a) the aggregate principal amount of the Existing Notes not purchased in the Tender Offer minus (b) the amount of proceeds from the Senior Note Offering placed into escrow to fund the Change of Control Offer will not be terminated on the Closing Date, but will terminate on the date of consummation of the Change of Control Offer immediately after making the extensions of credit thereunder.  To the extent that an underwriting or purchase agreement is entered into in respect of the Senior Note Offering, the commitments hereunder shall be terminated on the date of purchase of Senior Notes thereunder in an amount equal to the expected aggregate gross proceeds from the Senior Notes covered thereby, first, in respect of the Interim Loan, and second, in respect of the Senior Secured Credit Facilities in amounts among the tranches thereof as determined by us in consultation with you.

2.             Syndication.  We reserve the right and intend, prior to or after the execution of the definitive documentation for the Credit Facilities (the “Credit Documents”), to syndicate a portion of our commitments to one or more financial institutions (together with the Initial Lenders, the “Lenders”).  If you accept this Commitment Letter as provided below in respect of the Senior Secured Credit Facilities, each of our commitments hereunder in respect thereof is subject to us (or one or more of our respective affiliates) acting in the capacities (if any) set out against our respective names in Part B of Annex II hereto, and if you accept this Commitment Letter as provided below in respect of the Interim Loan, each of our commitments hereunder in respect thereof is subject to us (or one or more of

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our respective affiliates) acting in the capacities (if any) set out against our respective names in Part A of Annex II hereto, including in each case any other debt financing (including any high yield debt financing) that is consummated in connection with the Acquisition.  The Lead Arranger (or one or more of its affiliates) will manage all aspects of the syndication (in consultation with you), decisions as to the selection of potential Lenders to be approached and when they will be approached, when their commitments will be accepted and which Lenders will participate and the final allocations of the commitments among the Lenders (which are likely not to be pro rata across facilities among Lenders), and we will exclusively perform all functions and exercise all authority as customarily performed and exercised in such capacities, including selecting counsel for the Lenders and negotiating the Credit Documents.  The commitments of the Initial Senior Secured Lenders will not be reduced prior to funding of the Senior Secured Credit Facilities by receipt, acceptance and allocation of commitments to the Senior Secured Credit Facilities from other Lenders, and the commitments of the Initial Interim Lenders will not be reduced prior to funding of the Interim Loan (or the issuance of Senior Notes in lieu of such funding) by receipt, acceptance and allocation of commitments to the Interim Loan from other Lenders.  You agree that no other advisors, agents, co-agents, managers or arrangers will be appointed and no other titles or roles will be awarded in connection with the financing transactions contemplated hereby without the Lead Arranger’s prior consent.  You agree that no Lender will receive compensation outside the terms contained herein and in the Fee Letter in order to obtain its commitment to participate in the Credit Facilities.

You understand that the Lead Arranger intends to commence the separate syndication of each of the Senior Secured Credit Facilities and the Interim Loan promptly, and you agree actively to assist us in achieving a timely syndication that is satisfactory to us.  The syndication efforts will be accomplished by a variety of means, including direct contact during the syndication between senior management, advisors and affiliates of the Company and Target on the one hand and the proposed Lenders on the other hand, and the hosting by the Company, with the Lead Arranger, of meetings with prospective Lenders at such times and places as we may reasonably request (it being understood and agreed that participation of Target’s senior management in any such meetings is expected to include only those members of Target’s senior management who have been offered and who have accepted positions of employment with the Company and/or one or more of the Company’s subsidiaries post-Transaction (i.e., after giving effect to the consummation of the Transactions)).  You agree, promptly upon the Lead Arranger’s request, to (a) provide, and cause your affiliates and advisors to provide, and use your reasonable best efforts to have Target provide, to us all information requested by the Lead Arranger to complete successfully the syndication, including information and projections (including updated projections) contemplated hereby, (b) assist, and cause your affiliates and advisors to assist, and use your reasonable best efforts to have Target assist, the Lead Arranger in the preparation of a Confidential Information Memorandum and other marketing materials (the contents of which you shall be solely responsible for) to be used in connection therewith (including obtaining any necessary consents of Target’s accountants), and (c) make available representatives of the Company, Target and their subsidiaries and affiliates for participation in road shows and presentations.  You also agree to use your reasonable best efforts to ensure that our syndication efforts benefit materially from the existing lending and investment banking relationships of the Company (and its affiliates).

3.             Fees.  As consideration for our commitments hereunder and the agreement of the Lead Arranger to arrange, manage, structure and syndicate the Credit Facilities, you agree to pay to

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us the fees as set forth in the Term Sheets and in the Fee Letter to the extent that you have accepted this Commitment Letter with respect to such Credit Facilities.

4.             Conditions.  Our commitments hereunder are subject to the conditions set forth elsewhere herein, in the Term Sheets and the Fee Letter, and are also subject to the negotiation, execution and delivery of definitive documentation customary for facilities and transactions of the type contemplated hereby which shall be satisfactory in all respects to us.

Our commitments hereunder are also subject to the conditions that (a) no disruption or adverse change shall have occurred and be continuing in or affecting the loan syndication or financial, banking or capital market conditions generally from those in effect on the date hereof that, individually or in the aggregate, in the sole judgment of the Lead Arranger, would materially adversely affect our ability to syndicate the Credit Facilities or the ability of the Company to effect the sale of the Take-out Securities; and no banking moratorium shall have been declared by either Federal or New York authorities and shall be continuing; (b) there shall not have occurred or become known any material adverse change or any condition, fact, event or development that has resulted or could reasonably be expected to result in a material adverse change in the business, results of operations, financial condition, assets, liabilities or prospects of either (i) the Company and Target and their subsidiaries taken together as a whole (after giving pro forma effect to the Transactions), on the one hand, or (ii) Targetand its subsidiaries, taken together as a whole (before and after giving effect to the Transactions), on the other hand (each, a “Material Adverse Change”) since (x) in the case of the foregoing clause (b)(i), October 3, 2004, and (y) in the case of the foregoing clause (b)(ii), September 30, 2004; (c) the Lead Arranger shall be satisfied that, after the date hereof and prior to and during the syndication of the Credit Facilities, none of the Company or Target or any of their respective subsidiaries or affiliates shall have syndicated or issued, attempted to syndicate or issue, announced or authorized the announcement of, or engaged in discussions concerning the syndication or issuance of, any debt facility or debt security of (or other financing by) any of them, including renewals thereof, other than the Senior Note Offering and the Credit Facilities; (d) there shall be no material change in the structure or terms and conditions of the Transactions, and each of the other transactions contemplated hereby and thereby from those contemplated in this Commitment Letter and in the draft execution copy of the Merger Agreement (together with the schedules, exhibits and annexes thereto) you delivered to us on the date hereof; (e) if you accept this Commitment Letter in respect of the Interim Loan, you and WCM and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”) shall have executed and delivered the Amended and Restated Engagement Letter dated the date hereof (the “Engagement Letter”) and such Engagement Letter shall be in full force and effect and you shall not be in breach thereof; and (f) none of the Information and Projections (each as defined below in Section 5 hereof) shall be misleading or incorrect in any material respect taken as a whole, in light of the circumstances under which such statements were made.

5.             Information and Investigations.  You hereby represent and covenant that (a) all information and data (excluding financial projections) that have been or will be made available by you or Target or any of your or Target’s respective affiliates, representatives or advisors to any of us or any Lender (whether prior to or on or after the date hereof), taken as a whole (the “Information”), is and will be complete and correct in all material respects and does not and will not, taken as a whole, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements contained therein not misleading in light of the circumstances under which such

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statements are made, and (b) all financial projections concerning the Company, Target and their respective subsidiaries and the Transactions (the “Projections”) that have been made or will be prepared by or on behalf of you or any of your affiliates, representatives or advisors and that have been or will be made available to any of us or any Lender (whether prior to or on or after the date hereof) have been and will be prepared in good faith based upon assumptions believed by you to be reasonable.  You agree that we shall be given such access to business, financial, legal and other information regarding the Company and Target and their respective subsidiaries as any of us shall reasonably request including, without limitation, access to the management, books and records, contracts and properties of the Company and Target and their respective subsidiaries.  You agree to supplement the Information and the Projections from time to time until the date of consummation of the Acquisition (the “Closing Date”) and, if requested by us, for a reasonable period thereafter necessary to complete the syndication of the Credit Facilities, so that the representation and covenant in the preceding sentence remain correct in all material respects (and not just on the date that any Information is furnished).  In arranging the Credit Facilities, including the syndication thereof, we will be entitled to use and rely primarily on the Information and the Projections without responsibility for independent check or verification thereof.

6.             Indemnification.  You agree (i) to indemnify and hold harmless each of the Initial Lenders, WCM, MLPF&S and each of the other Lenders and their respective officers, directors, employees, affiliates, representatives, advisors, agents and controlling persons and their respective successors and assigns (each Initial Lender and each such other person being an “Indemnified Party”) from and against any and all losses, claims, damages, costs, expenses and liabilities, joint or several, to which any Indemnified Party may become subject under any applicable law, or otherwise related to or arising out of or in connection with this Commitment Letter, the Fee Letter, the Term Sheets, the Credit Facilities, the loans under the Credit Facilities, the use of proceeds of any such loan, any of the Transactions or any related transaction or the performance by any Indemnified Party of the services contemplated hereby, and will reimburse each Indemnified Party promptly upon demand for any and all expenses (including the reasonable fees, disbursements and other charges of counsel) as they are incurred in connection with the investigation of or preparation for or defense of any pending or threatened claim or any action or proceeding arising therefrom, whether or not such Indemnified Party is a party and whether or not such claim, action or proceeding is initiated or brought by or on behalf of you, Target or any of your or their respective affiliates, or any other person or entity, and whether or not any of the Transactions are consummated or this Commitment Letter is terminated, except to the extent found in a final non-appealable judgment by a court of competent jurisdiction to have resulted primarily from such Indemnified Party’s bad faith, gross negligence or willful misconduct; provided, that, you shall not be liable for the fees and expenses of more than one counsel (together with appropriate local counsel) at any time for all Indemnified Parties in connection with any one action or separate but substantially similar or related actions arising in the same jurisdiction out of the same general allegations or circumstances, and (ii) not to assert any claim against any Indemnified Party for consequential, punitive or exemplary damages on any theory of liability in connection in any way with the transactions described in or contemplated by this Commitment Letter and the Fee Letter.  No Indemnified Party shall be liable for any damages arising from the use by others of Information or other materials obtained through electronic, telecommunications or other information transmission systems.

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You agree that, without our prior written consent, neither you nor any of your affiliates or subsidiaries will settle, compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding in respect of which indemnification has been or could be sought under the indemnification provisions hereof (whether or not any Indemnified Party is an actual or potential party to such claim, action or proceeding), unless such settlement, compromise or consent (i) includes an unconditional written release in form and substance satisfactory to the Indemnified Parties of each Indemnified Party from all liability arising out of or related to such claim, action or proceeding and (ii) does not include any statement as to or an admission of fault, culpability or failure to act by or on behalf of any Indemnified Party.  Conversely, you shall not be liable under this Commitment Letter for any settlement of any claim or proceeding made by an Indemnified Party without your prior written consent (not to be unreasonably withheld, conditioned or delayed).

In the event that an Indemnified Party is requested or required to appear as a witness or deponent in any action brought by or on behalf of or against you, Target or any of your or Target’s respective subsidiaries or affiliates in which such Indemnified Party is not named as a defendant, you agree to reimburse such Indemnified Party for all expenses incurred by it in connection with such Indemnified Party’s appearing and preparing to appear as such a witness or a deponent, including, without limitation, the reasonable fees and expenses of its legal counsel.

7.             Expenses.  In addition to any fees that may become payable to us under the Fee Letter, the Company agrees to reimburse each of us and our respective affiliates, upon our request made from time to time, for our and their out-of-pocket expenses including, without limitation, all reasonable due diligence expenses, fees of consultants engaged with your consent (not to be unreasonably withheld), syndication expenses (including the costs of printing, distribution and bank meetings), appraisal and valuation fees and expenses, travel expenses, duplication fees and expenses, audit fees, search fees, filing and recording fees, disbursements and other charges and the reasonable fees, disbursements and other charges of counsel (and any local counsel), and any sales, use or similar taxes (and any additions to such taxes) related to any of the foregoing) incurred in connection with the Transactions, and the negotiation, preparation, execution and delivery, waiver or modification, and collection and enforcement of this Commitment Letter, the Term Sheets, the Fee Letter, the Credit Documents and the security arrangements in connection therewith, and/or any documents relating to any offering of the Take-Out Securities, whether or not such fees and expenses are incurred before or after the date hereof or the Transactions contemplated by this Commitment Letter are consummated or any loan documentation is entered into or any extension of credit is made under the Credit Facilities or this Commitment Letter is terminated or expires; provided, however, that the Company shall be obligated to reimburse the legal fees, disbursements and other charges for only one principal outside law firm engaged by us.

8.             Confidentiality.  This Commitment Letter, the Term Sheets and the Fee Letter, the contents of any of the foregoing, and our and/or our respective affiliates’ activities pursuant hereto or thereto, are confidential and shall not be disclosed by or on behalf of you or any of your affiliates to any person without our prior written consent, except that you may disclose this Commitment Letter and the Term Sheets (but not the Fee Letter or any matter related to any information in the Fee Letter) (i) to your and Target’s officers, directors, employees and advisors, and then only in connection with the Transactions and on a confidential and need-to-know basis, and (ii) as you are required to make by applicable law or compulsory legal process (based on the advice of legal

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counsel); provided, however, that if disclosure is required by compulsory legal process you agree to give us prompt notice thereof and to cooperate with us in securing a protective order and that any disclosure made pursuant to public filings shall be subject to our prior approval.  You agree that you will permit us to review and approve (such approval not to be unreasonably withheld) any reference to us or any of our respective affiliates in connection with the Credit Facilities or the transactions contemplated hereby contained in any press release or similar public disclosure prior to public release.  You agree that we and our respective affiliates may share information concerning you, Target and your and Target’s respective subsidiaries and affiliates among ourselves in connection with the performance of our services hereunder and as contemplated in connection herewith and the evaluation and consummation of financings and transactions contemplated hereby.  Further, we shall be permitted to use information related to the syndication and arrangement of the Credit Facilities in connection with marketing, press releases or other transactional announcements or updates provided to investor or trade publications, subject to confidentiality obligations or disclosure restrictions reasonably requested by you.  Furthermore, we hereby notify you that pursuant to the requirements of the USA Patriot Act, Title III of Pub. L. 107-56 (signed into law October 26, 2001) (the “Patriot Act”), each of us is required to obtain, verify and record information that identifies you in accordance with the Patriot Act.

9.             Termination.  Each of our several commitments hereunder is based upon the accuracy and completeness of the financial and other information regarding the Company, Target and your and Target’s respective subsidiaries and the Transactions previously provided to us.  In the event that (a) by means of continuing review or otherwise we become aware of or discover new information or developments concerning conditions or events previously disclosed to us that is inconsistent in any material adverse respect with the Projections or the Information provided to us prior to the date hereof, or if any condition, fact, event or development shall have occurred or become known that in the Lead Arranger’s judgment has resulted in or could reasonably be expected to have or result in a Material Adverse Change or (b) the Merger Agreement is terminated or expires or the effort to acquire Target is abandoned, this Commitment Letter and our commitments hereunder shall terminate.  In addition, each of our commitments hereunder shall terminate in its entirety upon the earlier of (i) May 1, 2005, if the Credit Documents have not been executed and delivered by the Company and the Lenders by such date, unless the Credit Documents have not been executed and delivered by such date due solely to a delay in obtaining the requisite approvals for consummation of the Acquisition under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or clearance by the SEC of Target’s proxy statement with respect to the Merger as contemplated by the provisions of the Merger Agreement, in which case, June 30, 2005, and (ii) the initial funding under the Credit Documents.  Notwithstanding the foregoing, the provisions of Sections 3, 5, 6, 7, 8, 11, 12 and 14 hereof shall survive any termination pursuant to this Section 9.

10.           Assignment; etc.  This Commitment Letter and each of our commitments hereunder shall not be assignable by any party hereto (other than by each of us to our respective affiliates) without the prior written consent of the other parties hereto (such consent not to be unreasonably withheld, delayed or conditioned), and any attempted assignment shall be void and of no effect; provided, however, that nothing contained in this Section 10 shall prohibit us (in our sole discretion) from performing any of our duties hereunder through any of our branches or affiliates, and you will owe any related duties (including those set forth in Section 2 above) to any such branch or affiliate.  This Commitment Letter is intended to be solely for the benefit of, and is not intended to

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confer any benefits upon or create any rights in favor of any person other than, the parties hereto, the Lenders and, with respect to the indemnification provided for herein, each of the Indemnified Parties.

11.           Governing Law; Waiver of Jury Trial.  This Commitment Letter shall be governed by, and construed in accordance with, the laws of the State of New York (without regard to any principles of conflict of laws thereof to the extent the same are not mandatorily applicable by statute and would require or permit the application of the laws of another jurisdiction).  Each of the parties hereto waives all right to trial by jury in any action, proceeding or counterclaim (whether based upon contract, tort or otherwise) related to or arising out of or in connection with this Commitment Letter, the Fee Letter, the Term Sheets, the Credit Facilities, the loans under the Credit Facilities, the use of proceeds of any such loan, any of the Transactions or any related transaction or the performance by us or any of our respective affiliates of the services contemplated hereby.

12.           Amendments; Counterparts; etc.  No amendment or waiver of any provision hereof or of the Term Sheets or of the Fee Letter shall be effective unless in writing and signed by the parties hereto and then only in the specific instance and for the specific purpose for which given.  This Commitment Letter, the Engagement Letter, the Term Sheets and the Fee Letter are the only agreements between the parties hereto with respect to the matters contemplated hereby and thereby and set forth the entire understanding of the parties with respect thereto.  This Commitment Letter may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.  Delivery of an executed counterpart by telecopier shall be effective as delivery of a manually executed counterpart.

13.           Public Announcements; Notices.  We may, at our expense, publicly announce as we may choose the capacities in which we or our respective affiliates have acted hereunder.  Any notice given pursuant hereto shall be mailed or hand delivered in writing (i) to you, addressed to Joe Malugen, the Chief Executive Officer of the Company, at your address set forth on page one hereof, with a copy to S. Page Todd, General Counsel, at the same address, and such persons as you may designate in writing; (ii) to WB, WCI and WCM, at One Wachovia Center, 301 South College Street, Charlotte, North Carolina  28288-0737, attention:  Fritz Bentien; (iii) to MLCC and MLPF&S, at Four World Financial Center, 250 Vesey Street, New York, New York  10080, attention:  High Yield Capital Markets; and, in the case of (ii) and (iii), with a copy to Mayer, Brown, Rowe & Maw LLP, 1675 Broadway, New York, New York 10019, attention: Sal Guerrera/Jin K. Kim/Benjamin W. Lau.

14.           Submission to Jurisdiction.  Each of the parties hereto hereby irrevocably and unconditionally (a) submits, for itself and its property, to the non-exclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Commitment Letter or the transactions contemplated hereby, or for recognition or enforcement of any judgment, and agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court, (b) waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Commitment Letter or the transactions contemplated hereby in any New York State or in any such

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Federal court and (c) waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

15.           Acknowledgement.  By signing this Commitment Letter, each of the parties hereto hereby acknowledges and agrees that (a) WB and MLCC are offering to provide the Senior Secured Credit Facilities separate and apart from WCI’s and MLCC’s offer to provide the Interim Loan and (b) WCI and MLCC are offering to provide the Interim Loan separate and apart from WB’s and MLCC’s offer to provide the Senior Secured Credit Facilities.

Please confirm that the foregoing correctly sets forth our agreement of the terms hereof and the Fee Letter by signing and returning to each of us the duplicate copy of this letter and the Fee Letter enclosed herewith.  Unless we receive your executed duplicate copies hereof and thereof by 11:59 p.m., New York City time, on the date hereof, each of our commitments hereunder will expire at such time.

(Signature Pages Follow)

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We are pleased to have this opportunity and we look forward to working with you on this transaction.

Very truly yours,
WACHOVIA BANK, NATIONAL ASSOCIATION
By:		/s/ David Haase
	Name:	David Haase
	Title:	Managing Director
WACHOVIA CAPITAL INVESTMENTS, INC.
By:		/s/ David Haase
	Name:	David Haase
	Title:	Managing Director
WACHOVIA CAPITAL MARKETS, LLC
By:		/s/ David Haase
	Name:	David Haase
	Title:	Managing Director
MERRILL LYNCH CAPITAL CORPORATION
By:		/s/ William H. Gates
	Name:	William H. Gates
	Title:	Vice President

The provisions of this Commitment Letter
with respect to the Senior Secured
Credit Facilities are agreed to and
accepted as of the date first written above:
MOVIE GALLERY, INC.
By:	/s/ S. Page Todd
	Name:  S. Page Todd
	Title:  Executive Vice President
The provisions of this Commitment Letter
with respect to the Interim Loan are
agreed to and accepted as of the
date first written above:
MOVIE GALLERY, INC.
By:	/s/ S. Page Todd
	Name:  S. Page Todd
	Title:  Executive Vice President

ANNEX I

Sources and Uses of Funds

(in U.S.$ in millions)

Sources

Cash	$	175.0
Revolving Facility	$	0.1	(1)
Term Loan A Facility	$	95.0
Term Loan B Facility	$	550.0
Senior Notes or Interim Loan	$	475.0
Total Sources	$	1,295.1

Uses

Cash Purchase Price of Target	$	852.4
Refinancing of Existing Indebtedness (including premium)	$	356.4
Financing and M&A Fees	$	41.3
Transaction Expenses, Severance Costs, Other Restructuring Charges	$	45.0
Total Uses	$	1,295.1

(1)No more than a maximum amount to be mutually agreed upon by the Company and the Lead Arranger of the $75 million Revolving Facility will be drawn down at the Closing Date to fund consummation of the Transactions.

ANNEX II

Appointments

PART A

Interim Loan

Lead Arranger:	Wachovia Capital Markets, LLC shall be the sole and exclusive lead arranger for the Interim Loan
Book Runner:	Wachovia Capital Markets, LLC shall be the sole and exclusive book runner for the Interim Loan
Administrative Agent:	Wachovia Bank, National Association
Syndication Agent:	To be determined
Documentation Agent:	To be determined

Senior Note Offering

Lead Manager:	Wachovia Capital Markets, LLC shall be the sole and exclusive lead manager for the Senior Note Offering
Book Runner:	Wachovia Capital Markets, LLC shall be the sole and exclusive book runner for the Senior Note Offering

Tender Offer

Dealer Manager: Wachovia Capital Markets, LLC

PART B

Senior Secured Credit Facilities

Lead Arranger:	Wachovia Capital Markets, LLC shall be the sole and exclusive lead arranger for the Senior Secured Credit Facilities
Book Runner:	Wachovia Capital Markets, LLC shall be the sole and exclusive book runner for the Senior Secured Credit Facilities

Administrative Agent:	Wachovia Bank, National Association
Syndication Agent:	To be determined
Documentation Agent:	To be determined

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EXHIBIT A

SENIOR SECURED CREDIT FACILITIES

SUMMARY OF TERMS AND CONDITIONS*

Borrower:	“Borrower” means Newco and/or one or more other wholly owned subsidiaries of Movie Gallery, Inc. (“MGI”). Immediately after the initial borrowing under the Senior Secured Credit Facilities (defined below), Newco will be merged with and into Target, with Target as the surviving corporation, and Target will assume all obligations of Newco.
Sole and Exclusive Book Runner and Sole and Exclusive Lead Arranger:	“Lead Arranger” and “Book Runner” shall have the meanings set forth in Annex II to the Commitment Letter.
Lenders:	Each of Wachovia Bank, National Association (“WB”) and Merrill Lynch Capital Corporation (“MLCC”) or one of their respective affiliates (collectively, and together with any successor(s) or assignee(s) thereto as approved by MGI in accordance with Section 1 of the Commitment Letter, the “Initial Senior Secured Lenders”) and a syndicate of financial institutions (collectively with the Initial Senior Secured Lenders, the “Lenders”) arranged by the Lead Arranger in consultation with Borrower.
Administrative Agent:	As set forth in Annex II to the Commitment Letter.
Syndication Agent:	As set forth in Annex II to the Commitment Letter.
Documentation Agent:	As set forth in Annex II to the Commitment Letter.
Senior Secured Credit Facilities:	Senior secured credit facilities (the “Senior Secured Credit Facilities”) in an aggregate principal amount of $720 million to be made available to Borrower, such Senior Secured Credit Facilities comprising:
(A)	Term Loan Facilities. Term loan facilities in an aggregate principal amount of up to $645 million comprising (a) a term loan A facility in an aggregate principal amount of up to $95 million (the “Term Loan A Facility”) and (b) a term loan B facility in an aggregate principal amount of up to $550 million (the “Term Loan B Facility” and together with the Term Loan A Facility,the “Term Loan Facilities”). Loans under the Term Loan Facilities are herein referred to as “Term Loans.”
(B)	Revolving Credit Facility. A revolving credit facility in an aggregate principal amount of $75 million (the “Revolving

*              Capitalized terms used herein and not defined shall have the meanings assigned to such terms in the Amended and Restated Credit Facilities Commitment Letter (the “Commitment Letter”) to which this Exhibit A is attached.

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		Facility”). Loans under the Revolving Facility are herein referred to as “Revolving Loans”; the Term Loans and the Revolving Loans are herein referred to collectively as “Loans.” Up to an amount to be agreed of the Revolving Facility will be available as a letter of credit subfacility. Up to an amount to be agreed of the Revolving Facility will be available as a swingline subfacility.
Documentation:		Usual for facilities and transactions of this type and reasonably acceptable to Borrower and the Initial Senior Secured Lenders. The documentation for the Senior Secured Credit Facilities will include, among others, a credit agreement (the “Credit Agreement”), guarantees and appropriate pledge, security interest, mortgage, deposit account and other collateral documents (collectively, the “Senior Credit Documents”). Borrower and each Guarantor (as defined below under “Guarantors”) are herein referred to as the “Credit Parties” and individually referred to as a “Credit Party.”
Transactions:		As described in the Commitment Letter.
Availability/Purpose:	(A)	Term Loan Facilities. Term Loans will be available, subject to the terms and conditions set forth in the Senior Credit Documents, in a single draw on the date of the consummation of the Acquisition to finance the Acquisition and the Refinancing and to pay related fees and expenses. Amounts borrowed under the Term Loan Facilities that are repaid or prepaid may not be reborrowed.
(B)		Revolving Facility. The entire Revolving Facility will be available, subject to the terms and conditions set forth in the Senior Credit Documents, for working capital and general corporate purposes after the Closing Date until the date which is 5 years after the Closing Date (the “Revolving Loan Maturity Date”). Letters of credit will be used by the Borrower solely for general corporate purposes. In addition, (a) up to a maximum amount to be mutually agreed upon in aggregate principal amount of the Revolving Facility may be drawn on the Closing Date to fund consummation of the Transactions and (b) up to an amount to be agreed in letters of credit may be issued under the Revolving Credit Facility to replace existing letters of credit or for other specified general corporate purposes to be agreed.
		Total extensions of credit under the Revolving Facility shall not at any time exceed the commitments thereunder then in effect. Revolving Loans may, subject to the terms and conditions set forth in the Senior Credit Documents, be reborrowed to the extent of the commitments under the Revolving Facility then in effect.
Increase in Revolving Facility:		After the Closing Date, the Borrower may request that the Revolving Facility be increased in an amount up to $25 million, at times and subject to terms and conditions to be mutually agreed upon; provided, that all Lenders under the Revolving Facility shall

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	be granted a right of first offer to participate in such increase on a pro  rata basis (in accordance with their then existing commitments), but no Lender shall be required to provide all or any portion of such increase. To the extent such Lenders are unwilling to provide the full amount of such increase requested by the Borrower, the Lead Arranger will have the sole right, upon terms and conditions to be mutually agreed upon, to syndicate the balance of such requested increase to prospective lenders (other than the Lenders) reasonably satisfactory to the Borrower. Consent of the Lenders shall not be required for any such increase of the Revolving Facility.
Guarantors:	MGI and each of the direct and indirect subsidiaries of MGI existing on the Closing Date (after giving effect to the Transactions) or thereafter created or acquired (other than any foreign subsidiary where the granting of such guarantee would have an adverse tax consequence for such subsidiary or MGI), shall unconditionally guarantee, on a joint and several basis, all obligations of Borrower under the Senior Secured Credit Facilities and (to the extent relating to the Loans) under each interest rate protection agreement entered into with a Lender or an affiliate of a Lender. Each guarantor of any of the Senior Secured Credit Facilities is herein referred to as a “Guarantor” and its guarantee is referred to herein as a “Guarantee.”
Security:	The Senior Secured Credit Facilities, the Guarantees, and (to the extent relating to the Loans) the obligations of Borrower under each interest rate protection agreement, foreign exchange agreement and currency hedging agreement entered into with a Lender or an affiliate of a Lender will be secured by (A) a perfected first priority lien on and security interest in, and pledge of, all of the capital stock and intercompany notes of Borrower and each of the other direct and indirect subsidiaries of MGI existing on the Closing Date (after giving effect to the Transactions) or thereafter created or acquired (other than in the case of foreign subsidiaries which are not Guarantors, in which case no more than 662/3 of the capital stock of such foreign subsidiary shall be pledged); and (B) a perfected first priority lien on, and security interest in, all of the tangible and intangible properties and assets (including all cash, cash equivalents, contract rights (including under partnership agreements, management agreements, operating agreements, affiliation agreements and similar agreements), inventory, real property interests, intellectual property, trade names, equipment, receivables and proceeds of the foregoing) of each Credit Party (collectively, the “Collateral”), except for those properties and assets for which the Initial Senior Secured Lenders shall determine in their sole discretion that the costs of obtaining such security interest are excessive in relation to the value of the security to be afforded thereby or as otherwise agreed to between the parties (it being understood that none of the foregoing shall be subject to any other liens or security interests, except for certain

A-3

		customary exceptions to be agreed upon). The determination as to which real property and leasehold interests will be subject to such liens and security interests will be determined by the Initial Senior Secured Lenders upon review of the value of such subject properties and leases and the cost of obtaining such liens. All such security interests will be created pursuant to documentation reasonably satisfactory in all material respects to the Initial Senior Secured Lenders and on the Closing Date such security interests shall have become perfected and the Initial Senior Secured Lenders shall have received reasonably satisfactory evidence as to the enforceability and priority thereof.
Termination of Commitments:		The commitments in respect of the Senior Secured Credit Facilities (including pursuant to the Commitment Letter) will terminate in their entirety on May 1, 2005 if the initial funding under the Senior Secured Credit Facilities does not occur on or prior to such date, unless the initial funding has not occurred by such date due solely to a delay in obtaining the requisite approvals for consummation of the Acquisition under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), or clearance by the SEC of Target’s proxy statement with respect to the Merger as contemplated by the provisions of the Merger Agreement, in which case, such commitments will terminate in their entirety on June 30, 2005.
Final Maturity:	(A)	Term Loan Facilities. The Term Loan A Facility will mature on the date 5 years after the Closing Date. The Term Loan B Facility will mature on the earlier of (a) the date 6 years after the Closing Date and (b) the date which is 91 days prior to the maturity date of the Existing Notes (if any remain outstanding after giving effect to the Transactions consummated on the Closing Date).
(B)		Revolving Facility. The Revolving Facility will mature on the date 5 years after the Closing Date.
Reduction and Amortization Schedule:		Amortization of the Term Loan Facilities will be determined by the Lead Arranger and the Borrower in a mutually agreeable manner.
Letters of Credit:		Letters of credit under the Revolving Facility (“Letters of Credit”) will be issued by a Lender selected by the Administrative Agent and reasonably satisfactory to the Borrower (in such capacity, the “L/C Lender”). The issuance of all Letters of Credit shall be subject to the customary procedure of the L/C Lender.
Letter of Credit Fees:		Letter of Credit fees will be payable for the account of the Revolving Facility Lenders on the daily average undrawn face amount of each Letter of Credit at a rate per annum equal to the applicable margin for Revolving Loans which are LIBO rate loans in effect at such time, which fees shall be paid quarterly in arrears. In addition, an issuing fee on the face amount of each Letter of

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		Credit equal to 0.125% per  annumshall be payable to the L/C Lender for its own account, which fee shall also be paid upon issuance.
Interest Rates and Fees:		Interest rates and fees in connection with the Senior Secured Credit Facilities will be as specified on Annex I attached hereto.
Default Rate:		During the continuance of any Default under the Credit Documents, all obligations under the Senior Credit Documents shall bear interest at the applicable interest rate (including the applicable margin) plus 2.00% per  annum.
Mandatory Prepayments/ Reductions in Commitments:		Subject to the next paragraph, Loans under the Credit Facilities shall be prepaid with (a) 75% of Excess Cash Flow (to be defined in a mutually satisfactory manner), with a step down to 50% of Excess Cash Flow upon achievement of and during the maintenance of a Leverage Ratio (to be defined in a mutually satisfactory manner) of 2.50 to 1.00 or lower, and with a further step down to zero upon achievement of and during the maintenance of a Leverage Ratio (as so defined) of 2.00 to 1.00 or lower, (b) 100% of the net cash proceeds (which term shall mean net of any applicable taxes) above an annual amount to be agreed upon of all non-ordinary-course asset sales or other dispositions of property or recoveries by any of the Credit Parties and their subsidiaries (including insurance and condemnation proceeds in excess of an agreed amount), subject to the right to reinvest within 12 months and subject to certain exceptions to be agreed, (c) 100% of the net proceeds of issuances of debt obligations of any of the Credit Parties and their respective subsidiaries other than debt permitted to be incurred under the Credit Agreement, (d) 50% of the net proceeds of issuances of equity of MGI, subject to certain exceptions to be agreed upon and with step downs based upon achievement of a reduced Leverage Ratio to be negotiated, and (e) 100% of any amount received in excess of an amount to be agreed in respect of any claim under the Merger Agreement or as direct or indirect result of any breach of any term or provision of the Merger Agreement or otherwise in respect of any claim by any of the Credit Parties or any of their respective subsidiaries arising out of the Acquisition.
		The proceeds of the Senior Notes shall be applied to reduce the commitments in respect of or, if after the Closing Date, to reduce the funded amount of the Interim Loan.
Voluntary Prepayments/ Reductions in Commitments:	(A)	Term Loan Facilities. Borrowings under the Term Loan Facilities may be prepaid at any time in whole or in part at the option of Borrower, in a minimum principal amount and in multiples to be agreed upon without premium or penalty (subject, in the case of LIBOR borrowings, to payment of LIBOR breakage costs arising from prepayments not made on the last day of the relevant interest period). Voluntary prepayments of Term Loans will be applied in

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	inverse order of maturity to the remaining scheduled amortization payments in respect thereof.
(B)	Revolving Facility. The unutilized portion of the commitments under the Revolving Facility may be reduced and loans under the Revolving Facility may be repaid at any time, in each case, at the option of Borrower, in a minimum principal amount and in multiples to be agreed upon, without premium or penalty (subject, in the case of LIBOR borrowings, to payment of LIBOR breakage costs arising from prepayments not made on the last day of the relevant interest period).
Conditions to Effectiveness and to Initial Loans:	The effectiveness of the Credit Agreement and the making of the initial credit extensions under the Senior Secured Credit Facilities shall be subject to the conditions precedent specified herein and in the Commitment Letter (all such conditions to be satisfied in a manner reasonably satisfactory in all material respects to the Initial Senior Secured Lenders, including, but not limited to, execution and delivery of the Senior Credit Documents reasonably acceptable in form and substance to the Initial Senior Secured Lenders by each Credit Party thereto prior to the Closing Date; delivery of reasonably satisfactory borrowing certificates and other customary closing certificates; receipt of valid security interests as contemplated hereby; absence of defaults, prepayment events or creation of liens under debt instruments (including, without limitation, to the extent any Existing Notes remain outstanding on the Closing Date, the indenture governing the Existing Notes, other than the requirement to offer to redeem the Existing Notes following the change of control that would be effected by the Acquisition) or other agreements as a result of the transactions contemplated hereby; absence of litigation (other than litigation that would not constitute a Material Adverse Change); evidence of authority; compliance with applicable laws and regulations (including but not limited to ERISA, margin regulations, bank regulatory limitations and environmental laws); delivery of reasonably satisfactory legal opinions; and adequate insurance.
	The making of the initial credit extensions under the Senior Secured Credit Facilities will be subject the following conditions:
(A)	The delivery, on or prior to the Closing Date, of a certificate from the chief financial officer of MGI in form and substance reasonably satisfactory to the Initial Senior Secured Lenders with respect to the solvency of MGI and its subsidiaries immediately after the consummation of the Transactions to occur on the Closing Date.
(B)	Either (i) the Senior Note Offering shall have been consummated for gross proceeds of not less than $475 million minus the aggregate principal amount of Existing Notes not purchased in the Tender Offer, or (ii) the drawdown of the Interim Loan shall be

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	consummated for gross proceeds of not less than $475 million minus (1) any gross proceeds from the Senior Note Offering and (2) the aggregate principal amount of Existing Notes not purchased in the Tender Offer) in each case pursuant to agreements in form and substance reasonably satisfactory to the Initial Senior Secured Lenders.
(C)	Simultaneously with (or immediately following) the making of the initial Loans, the Acquisition shall have been consummated in all material respects in accordance with the terms of the draft execution copy of the Merger Agreement delivered to the Initial Senior Secured Lenders on January 9, 2005 (without the waiver or amendment of any material condition or any change in monetary terms unless consented to by the Initial Senior Secured Lenders, which consent shall not be unreasonably withheld) and in accordance with the terms described in, and as contemplated by, the Commitment Letter (other than such changes therefrom which could not reasonably be expected to be materially adverse to the Lenders). Each of the parties thereto shall have complied in all material respects with all covenants set forth in the Merger Agreement to be complied with by it on or prior to the Closing Date (without the waiver or amendment of any of the material terms thereof unless consented to by the Initial Senior Secured Lenders, which consent shall not be unreasonably withheld).
(D)	All liens in respect of the Existing Indebtedness shall have been released and the Administrative Agent shall have received evidence thereof reasonably satisfactory to the Administrative Agent and a “pay-off” letter or letters reasonably satisfactory to the Administrative Agent with respect to the Existing Indebtedness. After giving effect to the Transactions and the other transactions contemplated hereby, MGI, Target and their respective subsidiaries shall have outstanding no indebtedness or preferred stock (or direct or indirect guarantee or other credit support in respect thereof) other than the loans under the Credit Facilities, the Senior Notes, Existing Notes not purchased pursuant to the Tender Offer or Change of Control Offerand such other debt and preferred stock in an amount acceptable to the Initial Senior Secured Lenders and for which arrangements reasonably satisfactory to the Initial Senior Secured Lenders have been made. In the event the Tender Offer is consummated on or prior to the Closing Date, the Tender Offer shall have been consummated in all material respects on terms and conditions and pursuant to documentation reasonably satisfactory to the Initial Senior Secured Lenders.
	The capitalization and tax structure of MGI, Target and their respective subsidiaries (after giving effect to the Transactions) shall be as set forth in the Commitment Letter (and the annexes and exhibits thereto) and in the written information provided to the Initial Senior Secured Lenders on or prior to the date of the Commitment Letter with any material changes to such

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	capitalization or tax structure subject to the approval of the Initial Senior Secured Lenders.
(E)	There shall not have occurred or become known any material adverse change or any condition, fact, event or development that has resulted or could reasonably be expected to result in a material adverse change in the business, results of operations, or financial condition, assets, liabilities or prospects of (i) MGI and Target and their subsidiaries taken together as a whole (after giving pro forma effect to the Transactions), on the one hand, or (ii) Target and its subsidiaries taken together as a whole (before and after giving effect to the Transactions), on the other hand (each, a “Material Adverse Change”) since (x) in the case of the foregoing clause (i), October 3, 2004, and (y) in the case of the foregoing clause (ii), September 30, 2004.
(F)	The Initial Senior Secured Lenders shall have received reasonably satisfactory evidence (including satisfactory supporting schedules and other data) that (i) the ratio of pro forma consolidated debt to consolidated EBITDA of MGI and its subsidiaries for the 12-month period ending on the last day of the month which occurred more than 20 days prior to the Closing Date (calculated on a pro forma combined basis after giving effect to the Transactions, together with such adjustments as would be permitted to be reflected on pro forma financial statements pursuant to Regulation S-X, including and together with giving pro forma effect to the sale, disposition or divestiture of all stores that would be required in connection with obtaining requisite approvals under the HSR Act to the extent such sale, disposition or divestiture shall have been consummated on or prior to the Closing Date or (in the reasonable judgment of the Initial Senior Secured Lenders) subjected to a binding definitive purchase and sale agreement executed and delivered on or prior to the Closing Date (including the application of the net cash proceeds (or, in the case of such purchase and sale agreement, the expected net cash proceeds) of such sale, disposition or divestiture to the reduction of, as determined by the Lead Arranger, the Term Loan Facilities and/or the Senior Note Offering or Interim Loan)) was not greater than 3.3:1; and (ii) consolidated EBITDA of Target and its subsidiaries (calculated on a stand-alone basis, prior to giving effect to the Transactions) for the four-fiscal-quarter period ending on the last date set forth below which occurred more than 20 days prior to the Closing Date shall not be less than the amount set forth opposite such date below:

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4 fiscal quarter period ending on	Minimum EBITDA
12/31/04	$	229 million
03/31/05	$	220 million

	For purposes of clauses (i) and (ii) above of this paragraph (F), EBITDA shall be determined in a manner substantially consistent with the determination of EBITDA set forth on Annex II hereto.
	The Initial Senior Secured Lenders shall have received reasonably satisfactory evidence on the Closing Date that since December 1, 2004, other than to the extent necessary to effect the Transactions or comply with the terms of the Commitment Letter or Fee Letter, MGI and its subsidiaries have conducted their respective businesses in the ordinary and usual course consistent with past practice and with the projections delivered to the Initial Senior Secured Lenders and, without limiting the generality of the foregoing, have not made or declared any stock dividends or stock repurchases.
(G)	On the Closing Date, prior to giving effect to the Transactions, Target shall have no less than $165 million in cash that would be reflected on its balance sheet, and the Initial Senior Secured Lenders shall have received a certificate from the Borrower’s chief financial officer showing that Target has no less than $165 million in cash that would be reflected on its balance sheet on the Closing Date prior to giving effect to the Transactions; provided, however, that such required amount of cash on hand at Target shall be reduced on a dollar for dollar basis to the extent that Target shall have used such cash following the date of the Commitment Letter but prior to the Closing Date to repay indebtedness that would otherwise comprise indebtedness to be repaid pursuant to the Refinancing, but such reduction to cash on hand will be offset by any incurrence of debt (other than incurrences of debt under the Credit Facilities or the Senior Notes) by Target following the date of the Commitment Letter.
	On the Closing Date, MGI and Target shall have utilized, and shall have caused their respective subsidiaries to have utilized, all available cash (other than $50 million in cash that would be reflected on their collective balance sheets), prior to giving effect to any funding under the Credit Facilities or receipt of proceeds from the issuance of any Senior Notes, to consummate the Transactions (it being understood that there shall be a correlative reduction in the amount of the Term Loan Facilities and/or the Senior Note Offering or Interim Loan, as determined by the Lead Arranger, to the extent that after giving effect to such reduction and to such utilization of such available cash, there are sufficient funds to consummate the Transactions), and the Initial Senior Secured Lenders shall have received a certificate from MGI’s chief

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	financial officer showing that MGI, Target and their respective subsidiaries have no more than $50 million in cash that would be reflected on such balance sheets.
(H)	The respective amounts of the sources and uses for the Transactions shall be consistent with the table set forth in Annex I to the Commitment Letter.
(I)	All requisite governmental authorities shall have approved or consented to the Transactions and the other transactions contemplated hereby to the extent required (without the imposition of any materially burdensome condition or qualification in the reasonable judgment of the Initial Senior Secured Lenders), all applicable appeal periods shall have expired and there shall be no governmental or judicial action, actual or threatened, that, in the judgment of the Initial Senior Secured Lenders, has or could have a reasonable likelihood of restraining, preventing or imposing materially burdensome conditions on any of the Transactions or the other transactions contemplated hereby; it being understood that with respect to actions taken in connection with discussions or negotiations with the United States Federal Trade Commission and the Antitrust Division of the United States Department of Justice relating to antitrust matters in respect of obtaining requisite approvals under the HSR Act for the Acquisition, an action in connection with, or agreement to, any hold separate order, sale, divesture or disposition of stores of the Company or Target or any of their respective subsidiaries that, individually or in the aggregate, could not reasonably be expected to have a “Company Material Adverse Effect” (as defined in the Merger Agreement) or a Company Material Adverse Effect (as defined in the Merger Agreement, but assuming the reference therein to “Company” or “Company and its Subsidiaries” is a reference to Company (as defined in the Commitment Letter), Target and their subsidiaries taken together as a whole (after giving effect to the Transactions)) shall not be deemed to be a “materially burdensome condition” for purposes of this sentence or for purposes of paragraph (L) below. The Transactions shall be in material compliance with all applicable laws and regulations. All requisite third parties shall have approved or consented to the Transactions and the other transactions contemplated hereby, except to the extent the failure to obtain such approvals and consents could not reasonably be expected, individually or in the aggregate, to have a material adverse effect on the business, results of operations, financial condition, assets, liabilities or prospects of Target and its subsidiaries (before and after giving effect to the Transactions).
(J)	The Initial Senior Secured Lenders shall have received reasonably satisfactory title insurance policies (including such endorsements as the Initial Senior Secured Lenders may reasonably require), legal opinions and other customary documentation reasonably required by the Initial Senior Secured Lenders with respect to real

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	property of MGI, Target and their subsidiaries subject to mortgages for which receipt of such items is customary or appropriate.
(K)	All accrued fees and expenses (including the reasonable fees and expenses of counsel to the Lenders, the Initial Senior Secured Lenders and the Administrative Agent) of the Lenders, the Initial Senior Secured Lenders and the Administrative Agent in connection with the Credit Documents shall have been paid. All fees owed pursuant to the Fee Letter shall have been paid.
(L)	There shall not be pending (i) any action or proceeding by any foreign or domestic government, court, administrative agency, commission or other governmental or regulatory authority or instrumentality (collectively, a “governmental entity”) or (ii) any action or proceeding by any other person or entity, in any case referred to in the foregoing clauses (i) and (ii), before any court or other governmental entity that has a reasonable possibility of success (w) seeking to make illegal or to restrain or prohibit the consummation of, or to impose materially burdensome conditions upon, the Merger, any of the other Transactions or any other transaction contemplated hereunder or under the Commitment Letter or seeking to obtain material damages, (x) seeking (1) to restrain or prohibit MGI’s, Target’s or any of their respective subsidiaries’ ownership or operation of all or any material portion of the businesses or assets of MGI and Target and their subsidiaries taken together as a whole (after giving pro forma effect to the Transactions), on the one hand, or Target and its subsidiaries taken together as a whole (before and after giving effect to the Transactions), on the other hand, or (2) to compel MGI, Target or any of their respective subsidiaries to dispose of or hold separate all or any material portion of the businesses or assets of MGI and Target and their subsidiaries taken together as a whole (after giving pro forma effect to the Transactions), on the one hand, or Target and its subsidiaries taken together as a whole (before and after giving effect to the Transactions) on the other hand, (y) seeking to impose or confirm material limitations on the ability of MGI, Target or any of their respective subsidiaries to effectively control their respective businesses or operations (including the ability of the Borrower to effectively exercise full rights of ownership over the capital stock of the Target) or (z) which could reasonably be expected to adversely affect the legality, validity or enforceability of the Credit Documents or which could reasonably be expected to have a material adverse effect on the ability of the Credit Parties taken as a whole to perform their obligations under the Credit Documents or on the rights and remedies of the Lenders (other than, for purposes of this subclause (z), those actions or proceedings outstanding as of the date of the Commitment Letter and disclosed in writing to the Initial Senior Secured Lenders on or prior to such date); provided, however, that any such action or proceeding brought by or on

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	behalf of beneficial holders of the Target’s common stock shall not be the basis for the failure of the condition set forth in this paragraph (L) if: (a) the parties to such action or proceeding have entered into a memorandum of understanding or other agreement with respect to the settlement of such action or proceeding reasonably acceptable to the Initial Senior Secured Lenders, (b) the final date by which the court requires that the members of the class or putative class of shareholders that is covered by the memorandum of understanding or other agreement (the “Class Shareholders”) complete their election to opt out of any settlement of such action or proceeding that is the subject of the memorandum of understanding has passed, (c) the number of shares of the Target’s common stock beneficially owned by the Class Shareholders who have been permitted by the court to opt out of any settlement of such action or proceeding that is the subject of the memorandum of understanding does not exceed the number equal to 10% of the number of such shares outstanding on the date of the Merger Agreement and (d) final approval by the relevant court under Rule 23 of the Federal Rules of Civil Procedure (or, in the case of a state court, equivalent state rule) has been received.
(M)	The Lenders shall have received projected cash flows, balance sheets and income statements for the period of seven years following the Closing Date, which projections shall be (i) based upon reasonable assumptions made in good faith and (ii) substantially in conformity with those projections delivered to the Lenders during syndication. The Lenders shall have received (a) unaudited interim consolidated financial statements of MGI and Target for each fiscal quarterly period ended after the latest audited financial statements, to the extent such quarterly financial statements have been or are required to have been filed with the U.S. Securities and Exchange Commission (and the equivalent quarterly period in the prior year), reviewed in accordance with SAS 100 by an independent accounting firm of national standing, (b) monthly consolidated financial statements for MGI and Target for the months subsequent to the latest annual or quarterly financial statements and ended not less than 30 days prior to the Closing Date, (c) appropriate pro forma consolidated financial statements for MGI prepared in accordance with Regulation S-X and (d) audited consolidated financial statements for MGI and Target and such other financial statements, selected financial data and financial information, if any, which would be required in a registration statement on Form S-1 for a registered debt offering. The Initial Senior Secured Lenders shall have received all documentation and other information required by bank regulatory authorities under applicable “know your customer” and anti-money laundering rules and regulations, including without limitation the U.S.A. Patriot Act.
(N)	MGI and Borrower shall have received credit ratings from

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	Standard & Poor’s and Moody’s.
(O)	The Lenders shall have received the results of a recent lien, tax and judgment search in such jurisdictions and offices as reasonably determined by the Initial Senior Secured Lenders (including without limitation where assets of each of MGI, Target and their respective subsidiaries are located or recorded), and such search shall reveal no liens on any of their assets except for liens permitted by the Senior Credit Documents or liens to be discharged in connection with the transactions contemplated hereby.
(P)	All other material documentation, including, without limitation, any tax sharing agreement, employment agreement or other financing arrangement, with respect to or in connection with any of the Transactions shall be in form and substance reasonably satisfactory to the Initial Senior Secured Lenders (it being understood and agreed that the draft execution copy of the Merger Agreement delivered to the Initial Senior Secured Lenders on January 9, 2005 is acceptable to the Initial Senior Secured Lenders).
(Q)	The Initial Senior Secured Lenders shall have received such other legal opinions (including, but not limited to, any necessary tax opinions), corporate documents, security documents, due diligence materials and other instruments and/or certificates as they may reasonably request.
Conditions to All Extensions of Credit:	Each extension of credit under the Senior Secured Credit Facilities will be subject to customary conditions, including the (i) absence of any Default or Event of Default, and (ii) continued accuracy of representations and warranties.
Representations and Warranties:	Customary for facilities similar to the Senior Secured Credit Facilities and such additional representations and warranties as may reasonably be required by the Initial Senior Secured Lenders.
Affirmative Covenants:	Customary for facilities similar to the Senior Secured Credit Facilities and such others as may reasonably be required by the Initial Senior Secured Lenders.
Negative Covenants:	Customary for facilities similar to the Senior Secured Credit Facilities and such others as may reasonably be required by the Initial Senior Secured Lenders (all such covenants to be applicable to each of the Credit Parties and its subsidiaries and subject to baskets and exceptions to be agreed upon), including, but not limited to, limitation on indebtedness; limitation on liens and further negative pledges; limitation on investments; limitation on capital expenditures; limitation on contingent obligations; limitation on dividends, redemptions and repurchases of equity interests; limitation on mergers, acquisitions and asset sales; limitation on sale-leaseback transactions; limitation on transactions

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	with affiliates; limitation on activities of MGI; limitation on dividend and other payment restrictions affecting subsidiaries; limitation on changes in business conducted; limitation on change to fiscal year; limitation on amendment of documents relating to other indebtedness and other material documents; limitation on creation of subsidiaries; limitation on prepayment or repurchase of other indebtedness; and limitation on restricted payments. Notwithstanding the foregoing, the negative covenants in the Credit Agreement shall contain exceptions to be agreed upon for the purpose of permitting transfers of cash and other assets, and other transactions including the incurrence of intercompany debt, between and among the Credit Parties. No material change may be made to the Merger Agreement without the consent of the Initial Senior Secured Lenders, which consent shall not be unreasonably withheld.
Financial Covenants:	The Senior Secured Credit Facilities will contain the following financial covenants based upon the financial information provided to the Initial Senior Secured Lenders (definitions and numerical calculations to be set forth in the Credit Agreement): maximum ratio of total debt to EBITDA (to be defined), fixed charge coverage ratio (to be defined) and interest coverage ratio (to be defined). These financial covenants will be tested on a quarterly basis and will apply to MGI and its subsidiaries on a consolidated basis.
Interest Rate Management:	The Borrower shall, within a to-be-determined period of time following the Closing Date, enter into an interest rate swap or similar interest rate protection arrangement for the purpose of protecting it against fluctuations in interest rates to the extent necessary to provide that at least 50% of the aggregate principal amount of the Term Loans and Senior Notes is subject to a fixed interest rate, on terms and with a counterparty reasonably acceptable to the Administrative Agent, and shall maintain such arrangement until the third anniversary of the Closing Date.
Events of Default:	Customary for facilities similar to the Senior Secured Credit Facilities and others to be reasonably specified by the Initial Senior Secured Lenders.
Yield Protection, Increased Costs, Gross Up and Other Tax Indemnities:	Usual for facilities and transactions of this type.
Assignments and Participations:	Each assignment (unless to another Lender or its affiliates) shall be: (a) with respect to the Term Loan A Facility and the Revolving Facility, in a minimum amount of $1 million (unless Borrower and the Administrative Agent otherwise consent or unless the assigning Lender’s exposure is thereby reduced to zero) and (b) with respect to the Term Loan B Facility, in a minimum amount of $1 million (unless Borrower and the Administrative Agent otherwise consent

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	or unless the assigning Lender’s exposure is thereby reduced to zero). Assignments (which may be non pro  rata among loans and commitments) shall be permitted with the consent of the Administrative Agent and Borrower (except for assignments to another Lender or its affiliates, for which consent shall not be required) (such consent not to be unreasonably withheld, delayed or conditioned); provided that any assignment shall only be subject to the consent of the Borrower so long as no Default or Event of Default has occurred and is continuing. Participations shall be permitted without restriction. Voting rights of participants will be subject to customary limitations.
	An assignment fee payable to the Administrative Agent of $3,500 shall be required in connection with any assignment by any Lender.
Required Lenders:	Lenders holding a majority of the outstanding Loans and commitments for all issues other than the application of proceeds or certain other matters (to be determined) adverse to any individual tranche of the Senior Secured Credit Facilities, in which case Lenders holding a majority of the outstanding Loans and commitments in each voting class (with such Lenders under (i) the Term Loan B Facility and (ii) the Revolving Facility and the Term Loan A Facility, voting as separate classes), subject to amendments of certain provisions of the Senior Credit Documents requiring the consent of Lenders having a greater share (or all) of the outstanding credit exposure.
Expenses and Indemnification:	In addition to those out-of-pocket expenses reimbursable under the Commitment Letter, all out-of-pocket expenses of the Lead Arranger, the Initial Senior Secured Lenders and the Administrative Agent, Syndication Agent and Documentation Agent (and the Lenders for enforcement costs and documentary taxes) associated with the preparation, execution and delivery of any waiver or modification (whether or not effective) of, and the enforcement of, any Senior Credit Document (including the reasonable fees, disbursements and other charges of counsel for the Lead Arranger, the Initial Senior Secured Lenders, the Administrative Agent, Syndication Agent and Documentation Agent) are to be paid by the Credit Parties. The Credit Parties will indemnify each of the Lead Arranger, the Initial Senior Secured Lenders, the Administrative Agent, Syndication Agent, Documentation Agent and the other Lenders and hold them harmless from and against all costs, expenses (including reasonable fees, disbursements and other charges of counsel) and liabilities arising out of or relating to any litigation or other proceeding (regardless of whether the Lead Arranger, any such Initial Senior Secured Lender, the Administrative Agent, the Syndication Agent, the Documentation Agent or any such other Lender is a party thereto) that relate to the Transactions or any transactions related thereto, except to the extent determined by a

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	court of competent jurisdiction in a final and nonappealable judgment to have resulted primarily from such person’s gross negligence, bad faith or willful misconduct.
Governing Law and Forum:	New York (except for security documentation that the Administrative Agent determines should be governed by local law).
Waiver of Jury Trial:	All parties to the Senior Credit Documents will waive right to trial by jury.
Special Counsel for the Book Runner, Lead Arranger, the Initial Senior Secured Lenders, the Administrative Agent, the Syndication Agent and the Documentation Agent:	Mayer, Brown, Rowe & Maw LLP.

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ANNEX I

Interest Rates and Fees:

Borrower will be entitled to make borrowings based on the ABR plus the Applicable Margin or LIBOR plus the Applicable Margin.

The “Applicable Margin” shall be (A) with respect to LIBOR Loans, (i) under the Revolving Facility, 2.75% per  annum, (ii) under the Term Loan A Facility, 2.75% per  annum, and (iii) under the Term Loan B Facility, 3.00% per  annum and (B) with respect to ABR Loans, (i) under the Revolving Facility, 1.75% per  annum, (ii) under the Term Loan A Facility 1.75% per  annum, and (iii) under the Term Loan B Facility, 2.00% per  annum.  Beginning with the first fiscal quarter ended more than three months after the Closing Date, the Applicable Margin for Revolving Loans and the Term Loan A Facility will vary based on reference to a Leverage Ratio (to be defined in a mutually satisfactory manner) in each case for the most recent fiscal quarter as follows:

Level	Leverage Ratio	Applicable Base Rate (ABR) Margin		Applicable LIBOR Margin
I	Greater than or equal to 2.75 to 1.00	1.75	%	2.75	%
II	Greater than or equal to 2.25 to 1.00 but less than 2.75 to 1.00	1.50	%	2.50	%
III	Greater than or equal to 1.75 to 1.00 but less than 2.25 to 1.00	1.25	%	2.25	%
IV	Less than 1.75 to 1.00	1.00	%	2.00	%

Unless consented to by the Administrative Agent in its sole discretion, no LIBOR Loans may be elected on the Closing Date or prior to the date 30 days thereafter (unless the completion of the primary syndication of the Senior Secured Credit Facilities as determined by the Administrative Agent shall have occurred).

“ABR” means the higher of (i) the prime rate of interest announced by the Administrative Agent from time to time, changing when and as said prime rate changes, and (ii) the Federal Funds Rate plus 0.50% per  annum.  The prime rate is not necessarily the lowest rate charged by the Administrative Agent to its customers.

“LIBOR” means the rate determined by the Administrative Agent to be available to the Lenders in the London interbank market for deposits in the amount of, and for a maturity corresponding to, the amount of the applicable LIBOR Loan, as adjusted for maximum statutory reserves.

Borrower may select interest periods of one, two, three or six months for LIBOR borrowings.  Interest will be payable in arrears (i) in the case of ABR Loans, at the end of each quarter and (ii) in the case of LIBOR Loans, at the end of each interest period and, in the case of any interest period longer than three months, no less frequently than every three months.  Interest on all borrowings shall be calculated on the basis of the actual number of days elapsed over (x) in the case of LIBOR Loans, a 360-day year, and (y) in the case of base rate ABR Loans, a 365- or 366-day year, as the case may be.

Commitment fees accrue on the undrawn amount of the Revolving Facility, commencing on the date of the making of the initial credit extensions under the Senior Secured Credit Facilities.  The commitment fee in respect of the Senior Secured Credit Facilities will be 0.50% per  annum.

All commitment fees will be payable in arrears at the end of each quarter and upon any termination of any commitment, in each case for the actual number of days elapsed over a 360-day year.

The Senior Credit Documents will contain customary protective provisions for such matters as defaulting banks, capital adequacy, increased costs, reserves, funding losses, illegality and withholding taxes.

ANNEX II

EBITDA Calculation

($ in 000’s)

				Nine Months Ended					12 Months
	FYE			September 30,					September 30,
Hollywood	2003			2004			2003		2004
Operating income	$	185,094		$	121,203		$	136,892	$	169,405
Depreciation and amortization*	60,762			47,232			45,675		62,319
Non-cash stock comp	564			133			432		265
Restructuring adjustments	(2,106		)	(190		)	—		(2,296		)
Merger expenses				4,464					4,464
EBITDA	$	244,314		$	172,842		$	182,999	$	234,157

			Nine Months Ended				12 Months
	January 4,		October 3,				October 3,
Movie Gallery	2004		2004		2003		2004
Operating income	$	81,891	$	62,927	$	53,196	$	91,622
Depreciation and amortization*	23,569		22,151		16,911		28,809
Non-cash stock comp	1,481		28		1,626		(117		)
Alternative delivery investment losses	1,450		4,886		700		5,636
EBITDA	$	108,391	$	89,992	$	72,433	$	125,950

*Excluding rental inventory amortization

EXHIBIT B

INTERIM LOAN

SUMMARY OF TERMS AND CONDITIONS(1)

Borrower:	“Borrower” means Newco and/or one or more wholly owned subsidiaries of Movie Gallery, Inc. (“MGI”).  Immediately after the initial draw down under the Interim Loan, Newco will be merged with and into Target, with Target as the surviving corporation, and Target will assume all obligations of Newco.
Sole and Exclusive Lead Arranger and Sole and Exclusive Book Runner:	“Lead Arranger” and “Book Runner” shall have the meanings set forth in Annex II to the Commitment Letter.
Administrative Agent:	As set forth in Annex II to the Commitment Letter.
Syndication Agent:	As set forth in Annex II to the Commitment Letter.
Documentation Agent:	As set forth in Annex II to the Commitment Letter.
Lenders:	Each of Wachovia Capital Investments, Inc. (“WCI”) and Merrill Lynch Capital Corporation (“MLCC”) or one of their respective affiliates (collectively, and together with any successor(s) or assignee(s) thereto as approved by MGI, in accordance with Section 1 of the Commitment Letter, the “Initial Interim Lenders”) and a syndicate of financial institutions (collectively with Initial Interim Lenders, the “Lenders”) arranged by the Lead Arranger in consultation with Borrower.
Principal Amount:	Up to $475 million.
Documentation:	Usual for facilities and transactions of this type and reasonably acceptable to Borrower and the Lenders.  The documentation for the Interim Loan will include, among others, a credit agreement (the “Interim Loan Agreement”), guarantees and other appropriate documents (collectively, the “Interim Loan Documents”).
Transactions:	As described in the Commitment Letter.

(1)           Capitalized terms used herein and not defined shall have the meanings assigned to such terms in the Amended and Restated Credit Facilities Commitment Letter to which this Exhibit B is attached (the “Commitment Letter”).

Use of Proceeds:	Together with the Senior Secured Credit Facilities to effect the Acquisition and the Refinancing, to consummate the  Tender Offer and the Change of Control Offer, if any,  and to pay the fees and expenses related to the Transactions.
Termination of Commitments:	The commitments in respect of the Interim Loan (including pursuant to the Commitment Letter) will terminate on May 1, 2005 if the Acquisition has not been consummated on or prior to such date, unless the Acquisition has not occurred by such date due solely to a delay in obtaining the requisite approvals under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or clearance by the SEC of Target’s proxy statement with respect to the Merger as contemplated by the provisions of the Merger Agreement, in which case, such commitments will terminate on June 30, 2005.  In addition, the commitments in respect of the Interim Loan will automatically and permanently terminate on the date of the consummation of the Acquisition to the extent not drawn down on such date; provided, that, if Target is required to make a Change of Control Offer, commitments in respect of the Interim Loan in an amount equal to (a) the aggregate principal amount of the Existing Notes not purchased in the Tender Offer minus (b) the amount of proceeds from the Senior Notes Offering placed into escrow to fund the Change of Control Offer will not terminate on such date, but will automatically and permanently terminate on the date of consummation of the Change of Control Offer to the extent not drawn down on such date.
Maturity:	The Interim Loan will mature on the date (the “Initial Maturity Date”) that is twelve months after the initial funding date (the “Funding”). Upon the satisfaction of the terms and conditions described under “Exchange Feature; Rollover Securities and Rollover Loans”, the Interim Loan will be exchanged at any time thereafter for, at the option of each Lender, either (i) unsecured senior debt securities (“Rollover Securities”), evidenced by an indenture in a form attached to the Interim Loan Agreement and maturing on the sixth anniversary of the Initial Maturity Date, or (ii) unsecured senior loans maturing on the sixth anniversary of the Initial Maturity Date (the “Rollover Loans”), evidenced by the Interim Loan Agreement.
Interest Rate:	(A) Interim Loan.  The Interim Loan will bear interest at a rate per annum expressed as a basis point spread (the “Spread”) over 30 day LIBOR (as adjusted every 30 days and adjusted for all applicable reserve requirements) at such time, as follows:

B-2

From the Beginning of Month	To the End of Month	Spread
1	3	950 bps
4	6	1000 bps
7	9	1050 bps
10	12	1100 bps

B-3

	On the Interim Loan, the total cash interest cap shall be 14.0% per  annum and the total interest cap shall be 16.0% per  annum (in each case, exclusive of any additional interest payable due to an event of default).  To the extent that the accrued interest on the Interim Loan at any time exceeds the interest that would accrue at the maximum cash interest rate, such excess will be paid by adding the amount thereof to the outstanding principal of the Interim Loan.  In no event will the interest rate on the Interim Loan be less than 11.00% per  annum.
	(B) Rollover Securities and Rollover Loans.  The Rollover Securities and the Rollover Loans will bear interest at a rate per annum equal to 1150 basis points (increasing by 50 basis points each fiscal quarter) plus 30 day LIBOR (as adjusted every 30 days and as adjusted for all applicable reserves).  Any holder of Rollover Securities or Rollover Loans may elect, at its sole option, to fix the interest rate per annum on its Rollover Securities or Rollover Loans at the then effective rate of interest per annum (in which case interest shall then be paid semi-annually in arrears).
	On the Rollover Securities and the Rollover Loans, the total cash interest cap shall be 14.0% per  annum and the total interest cap shall be 16.0% per annum (in each case, exclusive of any additional interest payable due to an event of default).  To the extent that the accrued interest exceeds the interest that would accrue at the maximum cash interest rate, the excess will be paid by adding the amount thereof to the outstanding principal.  In no event will the interest rate on the Rollover Securities or the Rollover Loans be less than 11.00% per  annum.
	Upon and during the continuance of an event of default, the interest rate then applicable to the Interim Loan or the Rollover Securities or Rollover Loans will increase to a margin of 200 basis points over the rate otherwise in effect.
Interest Payment Dates:	(A) Interim Loan.  Monthly, in arrears.
	(B) Rollover Securities and Rollover Loans.  Quarterly, in arrears.
Security:	None.
Guarantees:	The Interim Loan (and the Rollover Securities and Rollover Loans) will be guaranteed on a senior unsecured basis by each entity that guarantees the Senior Secured Credit Facilities.  Each such guarantee is herein referred to as a

B-4

	“Guarantee” and each such guarantor, a “Guarantor.” The Guarantors and Borrower are herein referred to as the “Credit Parties.”
Ranking:	The Interim Loan (and the Rollover Securities and Rollover Loans) will be an unsecured senior obligation of Borrower ranking pari  passu in right of payment with other senior indebtedness of the Borrower, and senior to all subordinated indebtedness of Borrower which is not pari  passu in right of payment therewith.
Optional Prepayment:	The Interim Loan will be prepayable at par at any time at Borrower’s option, in whole or in part, plus accrued and unpaid interest.  Breakage costs, if any, will be paid by Borrower.
Mandatory Prepayment of Interim Loan:	Subject to the terms of the Senior Secured Credit Facilities upon the receipt by MGI or any of its subsidiaries of the net cash proceeds from (i) the incurrence of any debt or the issuance of any debt securities (other than under the Senior Secured Credit Facilities and subject to limited exceptions and baskets to be agreed upon), (ii) any capital contribution or the sale or issuance of any capital stock or any securities convertible into or exchangeable for capital stock or any warrants, rights or options to acquire capital stock (subject to baskets and exceptions to be agreed upon) and (iii) insurance proceeds or asset sales and other asset dispositions (subject to limited exceptions and baskets to be agreed upon), Borrower will prepay the Interim Loan in an amount equal to such net proceeds not previously applied to such prepayments at par, together with accrued interest thereon.  In addition, upon the occurrence of a Change of Control (to be defined), Borrower will be required to offer to prepay the entire aggregate principal amount of the Interim Loan or the Rollover Securities and Rollover Loans in cash for a purchase price equal to 101% of the principal amount thereof, in each case, plus accrued and unpaid interest.  Breakage costs, if any, will be paid by Borrower.
Exchange Feature; Rollover Securities and Rollover Loans:	On or after the Initial Maturity Date, if (i) any amount remains outstanding with respect to the Interim Loan and (ii) the Conditions to Conversion, as set forth below, are satisfied, each Lender may have its interest in the Interim Loan exchanged for, at the option of such Lender, either Rollover Securities or Rollover Loans.
	The “Conditions to Conversion” will be the absence of: (i) any bankruptcy default, (ii) any payment default on any indebtedness of the Borrower or any of its subsidiaries (or the acceleration thereof), and (iii) any default under the

B-5

	Interim Loan Documents, the Engagement Letter or the Fee Letter.
	The Rollover Securities and the Rollover Loans will be (i) mandatorily redeemable or repayable (as the case may be) on the basis applicable to the Interim Loan, except that, in lieu of mandatory prepayments, Borrower shall be required to make mandatory offers to purchase such Rollover Securities or Rollover Loans and (ii) optionally redeemable or repayable (as the case may be) at declining premiums on terms customary for high-yield debt securities, including four year no call provisions.  All mandatory offers to purchase and all optional prepayments shall be made pro rata between the Rollover Securities and the Rollover Loans.
	The Rollover Securities will be evidenced by an indenture in form for qualification under the Securities Act and the Trust Indenture Act and will otherwise contain provisions customary for public debt securities, with such provisions as agreed to by the Joint Lead Arrangers, and the Rollover Loans will be evidenced by the Interim Loan Agreement.  The holders of the Rollover Securities will be entitled to exchange offer and other registration rights to permit resale by the holders of Rollover Securities without restriction under applicable securities laws no less favorable to holders than those customarily applicable to an offering pursuant to Rule 144A.
Conditions to Effectiveness and to Interim Loan:	The making of the Interim Loan shall be subject to the same conditions precedent that are set forth in the Commitment Letter and in Exhibit A to the Commitment Letter with respect to the Senior Secured Credit Facilities and to the following additional conditions:
	(a)           MGI and the Borrower shall have provided to the Initial Interim Lenders (1) as soon as practicable and in no event later than 30 days prior to the Closing Date (or such other date as the Initial Interim Lenders shall consent), a substantially complete initial draft (as reasonably determined by the Initial Interim Lenders) of a Rule 144A confidential offering memorandum relating to the issuance of the Senior Notes (which contains all financial statements and other data of MGI, the Borrower and Target to be included therein (including all audited financial statements (such audits to be performed by independent registered public accounting firms, whose audit reports shall be unqualified), all unaudited financial statements (each of which shall have undergone a SAS 100 review) and all appropriate pro forma financial statements) satisfactory in form and substance (other than as to financial statements) to the Initial Interim Lenders and

B-6

prepared in accordance with, or reconciled to, generally accepted accounting principles in the United States and prepared in accordance with Regulation S-X under the Securities Act of 1933, as amended (the “Securities Act”)), and substantially all other data (including selected financial data) as the Securities and Exchange Commission would require in a registered offering of the Senior Notes, as are customary and appropriate for such a document or as may be required by the Initial Interim Lenders (collectively, the “Required Information”), and (2) as soon as practicable and in no event later than 30 days prior to the Closing Date (or such other date as the Initial Interim Lenders shall consent), a complete printed preliminary offering memorandum or (as determined by the Initial Interim Lenders) prospectus usable in a customary high-yield road show relating to the issuance of the Senior Notes which contains all Required Information.

(b)           MGI, the Borrower and Target shall have cooperated with and used their reasonable best efforts to assist the marketing effort for the Senior Note Offering, including to provide all due diligence materials requested, to effect the issuance of the Senior Notes in lieu of the draw down of the Interim Loan and including, without limitation, making senior management of MGI, the Borrower and Target available for due diligence, rating agencies presentations and a road show and other meetings with potential investors for the Senior Notes as required by the Initial Interim Lenders in their judgment to market the Senior Notes.

(c)           Ernst & Young LLP, independent accountants which have audited the financial statements of the Borrower contained in the offering documents, and PricewaterhouseCoopers LLP, independent accountants which have audited the financial statements of the Target contained in the offering documents, each shall make available and have delivered to the Initial Interim Lenders prior to the pricing date of the applicable offering, in a form they have informed the Initial Interim Lenders they are prepared to execute, whether or not the transaction prices, to the extent required by the Initial Interim Lenders, a draft of an agreed upon comfort letter in accordance with the requirements of SAS 72 covering the registration statement or confidential offering memorandum, as applicable, (including any documents incorporated by reference therein) to the extent it relates to MGI or Target, as applicable, or any of their respective subsidiaries or affiliates, it being understood that delivery of an executed comfort letter will not be a condition to the making of the Interim Loan.

B-7

	(d)           If requested in the judgment of the Initial Interim Lenders, there shall have been provided in any confidential information memorandum relating to syndication of the Interim Loan, or in any other document relating to the syndication of the Interim Loan, reasonably detailed consolidated financial projections prepared in good faith based upon reasonable assumptions by or on behalf of MGI, Target and their respective subsidiaries for MGI, Target and their respective subsidiaries, as the case may be, for current fiscal year and the seven subsequent fiscal years that are not different in a materially adverse manner as compared with those previously made available to the Lenders.
	(e)           Borrower shall have entered into the Senior Secured Credit Facilities with one or more financial institutions for $720 million under the Senior Secured Credit Facilities (not more than an amount to be mutually agreed upon by the Borrower and the Initial Interim Lenders in aggregate principal amount of Revolving Loans to be drawn at funding under the Revolving Facility), pursuant to agreements and on terms and conditions thereunder, in form and substance satisfactory to the Initial Interim Lenders; it being understood that the Senior Secured Credit Facilities contemplated by the Commitment Letter are acceptable to the Initial Interim Lenders.
Representations and Warranties:	Customary for facilities similar to the Interim Loan and such additional representations and warranties as may be required by the Initial Interim Lenders.
Affirmative Covenants:	Customary for facilities similar to the Interim Loan and such additional affirmative covenants as may be required by the Initial Interim Lenders.
	In addition, the Interim Loan Agreement will contain provisions pursuant to which Borrower shall undertake to (i) cooperate with the Take-out Banks (as defined below under “Refinancing of Interim Loan”) and provide the Take-out Banks with information required by the Take-out Banks in connection with any Debt Offering (as defined below under “Refinancing of Interim Loan”) or other means of refinancing the Interim Loan and the Rollover Securities and the Rollover Loans, (ii) assist the Take-out Banks in connection with the marketing of the Take-out Securities (including promptly providing to the Take-out Banks any information requested to effect the issue and sale of the Take-out Securities and making available senior management of Borrower and Target for investor meetings), (iii) cooperate with the Take-out Banks in the timely preparation of any registration statement or private placement memorandum

B-8

	relating to any Debt Offering and other marketing materials to be used in connection with the syndication of the Interim Loan, and (iv) obtain or reconfirm credit ratings from Standard & Poor’s and Moody’s.
	Upon issuance of the Rollover Securities and the Rollover Loans, the affirmative covenants shall conform to a customary high-yield indenture.
Negative Covenants:	Customary for facilities similar to the Interim Loan and such others as may be required by the Initial Interim Lenders (with customary baskets and exceptions to be negotiated), including, but not limited to, limitation on indebtedness; limitation on liens; limitation on investments; limitation on capital expenditures; limitation on contingent obligations; limitation on dividends, redemptions and repurchases of equity interests; limitation on mergers, acquisitions and asset sales; limitation on restrictions on amending the Interim Loan Documents; limitation on issuance, sale or other disposition of subsidiary stock; limitation on sale-leaseback transactions; limitation on transactions with affiliates; limitation on dividend and other payment restrictions affecting subsidiaries; limitation on changes in business conducted; and limitation on prepayment or repurchase of subordinated indebtedness or other pari passu indebtedness.
	Upon issuance of the Rollover Securities and the Rollover Loans, the negative covenants shall conform to a customary high-yield indenture.
Events of Default:	Customary for facilities similar to the Interim Loan and such others as may be required by the Initial Interim Lenders.
Refinancing of Interim Loan:	Borrower shall undertake to use its reasonable best efforts to, at the option of the Borrower in consultation with the Initial Lenders, (i) prepare an offering memorandum for a private placement through resale pursuant to Rule 144A or (ii) file a registration statement under the Securities Act with respect to the Take-out Securities (in each case, the “Debt Offering”), to refinance in full the Interim Loan or the Rollover Securities and the Rollover Loans and consummate such Debt Offering as soon as practicable thereafter in an amount sufficient to refinance the Interim Loan or the Rollover Securities and the Rollover Loans.  Such Debt Offering shall be on such terms and conditions (including (without limitation) covenants, events of default, interest rate, yield and redemption prices and dates) as the financial institutions party to the Engagement Letter (the “Take-out Banks”) may in their judgment determine to be appropriate in light of prevailing circumstances and market conditions and the

B-9

	financial condition and prospects of Borrower and its subsidiaries at the time of sale and containing such other customary terms as determined by the Take-out Banks.  If any Take-out Securities are issued in a transaction not registered under the Securities Act, all such Take-out Securities shall be entitled to the benefit of a registration rights agreement to be entered into by the relevant issuer and any other obligor in respect of indebtedness being refinanced in customary form acceptable to the Take-out Banks (which shall include provisions for a customary registered exchange offer with respect to any Take-out Securities)
Yield Protection, Increased Costs, Gross Up and Other Tax Indemnities:	Usual for facilities and transactions of this type.
Required Lenders:	Lenders having a majority of the outstanding credit exposure (the “Required Lenders”), subject to amendments of certain provisions of the Interim Loan Documents requiring the consent of Lenders having a greater amount (or all) of the outstanding credit exposure.
Assignments and Participations:	Each assignment (unless to another Lender or its affiliates) shall be in a minimum amount of $1.0 million (unless Borrower and the Administrative Agent otherwise consent or unless the assigning Lender’s exposure is thereby reduced to zero). Assignments shall be permitted with the Administrative Agent’s consent (such consent not to be unreasonably withheld, delayed or conditioned).  Participations shall be permitted without restriction. Voting rights of participants will be subject to customary limitations.
	No assignment fees shall be required in connection with any assignment by any Lender.
Expenses and Indemnification:	In addition to those out-of-pocket expenses reimbursable under the Commitment Letter, all out-of-pocket expenses of the Lead Arranger, the Initial Interim Lenders and the Administrative Agent, Syndication Agent and Documentation Agent (and the Lenders for enforcement costs and documentary taxes) associated with the preparation, execution and delivery of any waiver or modification (whether or not effective) of, and the enforcement of, any Interim Loan Document (including the reasonable fees, disbursements and other charges of counsel for the Lead Arranger, the Initial Interim Lenders and the Administrative Agent, Syndication Agent and Documentation Agent) are to be paid by the Credit Parties.
	The Credit Parties will indemnify the Lead Arranger, the Initial Interim Lenders, the Administrative Agent,

B-10

	Syndication Agent, Documentation Agent and the other Lenders and hold them harmless from and against all costs, expenses (including the reasonable fees, disbursements and other charges of counsel) and liabilities arising out of or relating to any litigation or other proceeding (regardless of whether the Lead Arranger, any such Initial Interim Lender, the Administrative Agent, Syndication Agent, Documentation Agent or any such other Lender is a party thereto) that relate to the Transactions or any transactions related thereto, except to the extent determined by a court of competent jurisdiction in a final and nonappealable judgment to have resulted primarily from such person’s gross negligence, bad faith or willful misconduct.
Governing Law and Forum:	New York.
Waiver of Jury Trial:	All parties to the Interim Loan Documents waive right to trial by jury.
Special Counsel for the Book Runner and Lead Arranger:	Mayer, Brown, Rowe & Maw LLP.

B-11

EX-99.1

Exhibit 99.1

	Contact: Thomas D. Johnson, Jr.
SVP – Corporate Finance and
Business Development
(334) 702-2400

MOVIE GALLERY TO ACQUIRE HOLLYWOOD ENTERTAINMENT
FOR $13.25 PER SHARE IN CASH

Combination creates 2^nd Largest Rentailer in North America with

approximately $2.5 Billion in Revenues and 4,500 Stores

Dothan, AL (January 10, 2005) – Movie Gallery, Inc. (NASDAQ: MOVI) today announced that it has entered into a definitive merger agreement with Hollywood Entertainment Corporation (NASDAQ: HLYW) under which Movie Gallery will acquire all of the outstanding shares of Hollywood for $13.25 per share in cash or approximately $850 million.  Under the terms of the agreement, which was unanimously approved by Movie Gallery’s board of directors, Movie Gallery will also assume approximately $350 million of Hollywood’s debt.  The transaction has a value of $1.2 billion and is expected to be completed during the second quarter of 2005.  Movie Gallery expects the transaction to be immediately accretive to its earnings per share.

The combined company will be the second largest North American video rental company with annual revenue of approximately $2.5 billion and approximately 4,500 stores located in all 50 U.S. states, Canada and Mexico.

Joe Malugen, Movie Gallery’s Chairman, President and Chief Executive Officer, said, “This transformational merger creates a leading North American rentailer with outstanding prospects for future growth.  With a broader geographic presence and greatly improved distribution capabilities and scale, our combined company will be a strong competitor, well-positioned for continued success in urban, suburban and rural markets.

Mr. Malugen continued, “We are proud of our successful track record of integrating acquisitions, including more than 200 companies purchased over the last ten years.  We believe this combination with Hollywood presents an outstanding opportunity to enhance value for shareholders, create new career opportunities for employees and associates of both companies and expand our presence to better serve customers and the communities in which we operate.”

Mr. Malugen, will serve as Chairman, President and Chief Executive Officer of the combined company following completion of the merger.  Movie Gallery will remain headquartered in Dothan, Alabama, and Hollywood Entertainment will remain headquartered in Wilsonville, Oregon.  Hollywood will become a subsidiary of Movie Gallery and will continue to operate under the Hollywood brand name.

The merger is conditioned, among other things, upon the approval of Hollywood’s shareholders and customary regulatory approvals and the receipt by Movie Gallery of sufficient financing.  Wachovia Bank and Merrill Lynch & Co. have committed to provide the necessary financing to consummate this all cash transaction.  The company noted that, with respect to the regulatory approval process, there is very little overlap between its and Hollywood’s store locations.

Merrill Lynch & Co. and Wachovia Securities, Inc. acted as financial advisors, and Alston & Bird LLP and Troy & Gould PC acted as legal counsel to Movie Gallery.

About Movie Gallery

Movie Gallery currently owns and operates more than 2,475 video specialty stores located throughout North America.  Movie Gallery is the leading home video specialty retailer focused on the suburban and rural markets.

FORWARD LOOKING STATEMENT

This news release contains forward-looking statements relating to Movie Gallery’s intent to acquire Hollywood Entertainment Corporation.  Specific forward-looking statements relate to Movie Gallery’s expectations regarding the potential benefits of such transaction, including (i) the anticipated benefits to Movie Gallery’s and Hollywood’s stockholders, employees and customers and (ii) the competitive advantages that could result from the transaction.  These forward-looking statements are based on Movie Gallery’s current intent, expectations, estimates and projections and are not guarantees of future performance.  These statements involve risks, uncertainties, assumptions and other factors that are difficult to predict and that could cause actual results to vary materially from those expressed in or indicated by them.  In addition, some factors are beyond Movie Gallery’s control.  The statements made in this release are contingent upon completion of the proposed transaction.  Other factors that could cause actual results to differ materially from the statements made in this release include, among others: (i) Movie Gallery’s and Hollywood’s ability to receive all necessary approvals, including any necessary governmental or regulatory approvals and the approval of the Hollywood stockholders, if applicable; (ii) changes to Movie Gallery’s strategy and business plan, including its plans regarding use of capital; (iii) consumer demand for Movie Gallery’s planned product and service offerings; (iv) the variability in consumer appeal of the movie titles and games software released for rental and sale; (v) Movie Gallery’s ability to respond to changing consumer preferences and to effectively adjust its product mix, service offerings and marketing and merchandising initiatives; (vi) Movie Gallery’s ability to timely implement and maintain the necessary information technology systems and infrastructure to support shifts in consumer preferences and any corresponding changes to Movie Gallery’s operating model, including changes related to the proposed transaction; (vii) the extent and timing of Movie Gallery’s continued investment of incremental operating expenses and capital expenditures to continue to develop and implement its initiatives; (viii) vendor determinations relating to pricing and distribution of their product and Movie Gallery’s ability to reach agreements with service, product and content providers on acceptable commercial terms; and (ix) other factors as described in Movie Gallery’s filings with the Securities and Exchange Commission, including the detailed factors discussed under the heading “Cautionary Statements” in Movie Gallery’s annual report on Form 10-K for the fiscal year ended January 4, 2004.

HOLLYWOOD STOCKHOLDERS ARE URGED TO READ THE PROXY STATEMENT REGARDING THE PROPOSED TRANSACTION WHEN IT BECOMES AVAILABLE, BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION. 

Stockholders will be able to

obtain a free copy of the proxy statement, as well as other filings containing information about the parties, without charge, at the SEC’s Internet site ( http://www.sec.gov ).  Copies of the proxy statement and the filings with the SEC that will be incorporated by reference in the proxy statement will also be available, without charge, by directing a request to Hollywood Entertainment Corp., 9275 S.W. Peyton Lane, Wilsonville, Oregon 97070, Attn: Investor Relations.

The directors and executive officers of Hollywood Entertainment and other persons may be deemed to be participants in the solicitation of proxies in respect of the proposed transaction. Information regarding Hollywood Entertainment’s directors and executive officers will be available in the proxy statement.  Other information regarding the participants in the proxy solicitation and a description of their direct and indirect interests, by security holdings or otherwise, will be contained in the proxy statement and other relevant materials to be filed with the SEC if and when they become available.

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