EXHIBIT 10.53


                           LOAN AND SECURITY AGREEMENT

                                      AMONG

                        K-TEL INTERNATIONAL (USA), INC.,
                          DOMINION ENTERTAINMENT, INC.,
                         K-TEL CONSUMER PRODUCTS, INC.,
                                 K-TEL TV, INC.

                                       AND

                               K-TEL VIDEO, INC.,
                         as Borrowers, on the one hand,

                                       and

                          FOOTHILL CAPITAL CORPORATION,
                                on the other hand

                          Dated as of November 19, 1997


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                                TABLE OF CONTENTS

                                                                         Page(s)

1.  DEFINITIONS AND CONSTRUCTION............................................  1
    1.1      Definitions....................................................  1
    1.2      Accounting Terms............................................... 15
    1.3      Code........................................................... 15
    1.4      Construction................................................... 15
    1.5      Schedules and Exhibits......................................... 15

2.  LOAN AND TERMS OF PAYMENT............................................... 16
    2.1      Revolving Advances............................................. 16
    2.2      Letters of Credit.............................................. 16
    2.3      Term Loan...................................................... 19
    2.4      Intentionally Omitted.......................................... 19
    2.5      Overadvances................................................... 19
    2.6      Interest and Letter of Credit Fees:  Rates, Payments, 
             and Calculations............................................... 19
    2.7      Collection of Accounts......................................... 21
    2.8      Crediting Payments; Application of Collections................. 21
    2.9      Designated Account............................................. 22
    2.10     Maintenance of Loan Account; Statements of Obligations......... 22
    2.11     Fees........................................................... 22

3.  CONDITIONS; TERM OF AGREEMENT........................................... 23
    3.1      Conditions Precedent to the Initial Advance and the Issuance
             of the Initial Letter of Credit................................ 23
    3.2      Conditions Precedent to all Advances and the issuance of all
             Letters of Credit.............................................. 25
    3.3      Conditions Subsequent.......................................... 25
    3.4      Term; Automatic Renewal........................................ 26
    3.5      Effect of Termination.......................................... 26
    3.6      Early Termination by Borrowers................................. 26
    3.7      Termination Upon Event of Default.............................. 26

4.  CREATION OF SECURITY INTEREST........................................... 27
    4.1      Grant of Security Interest..................................... 27
    4.2      Negotiable Collateral.......................................... 27
    4.3      Collection of Accounts, General Intangibles, and Negotiable
             Collateral..................................................... 27
    4.4      Delivery of Additional Documentation Required.................. 27
    4.5      Power of Attorney.............................................. 28
    4.6      Right to Inspect............................................... 28


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5.  REPRESENTATIONS AND WARRANTIES.......................................... 28
    5.1      No Encumbrances................................................ 29
    5.2      Eligible Accounts.............................................. 29
    5.3      Intentionally Omitted.......................................... 29
    5.4      Equipment...................................................... 29
    5.5      Location of Inventory and Equipment............................ 29
    5.6      Inventory Records.............................................. 29
    5.7      Location of Chief Executive Office; FEIN....................... 29
    5.8      Due Organization and Qualification; Subsidiaries............... 30
    5.9      Due Authorization; No Conflict................................. 30
    5.10     Litigation..................................................... 31
    5.11     No Material Adverse Change. ................................... 31
    5.12     Solvency....................................................... 32
    5.13     Employee Benefits.............................................. 32
    5.14     Environmental Condition........................................ 32
    5.15     Business of Dominion........................................... 32

6.  AFFIRMATIVE COVENANTS................................................... 33
    6.1      Accounting System.............................................. 33
    6.2      Collateral Reporting........................................... 33
    6.3      Financial Statements, Reports, Certificates.................... 34
    6.4      Tax Returns.................................................... 35
    6.5      Guarantor Reports.............................................. 35
    6.6      Returns........................................................ 35
    6.7      Title to Equipment............................................. 35
    6.8      Maintenance of Equipment....................................... 35
    6.9      Taxes.......................................................... 36
    6.10     Insurance...................................................... 36
    6.11     No Setoffs or Counterclaims.................................... 37
    6.12     Location of Inventory and Equipment............................ 37
    6.13     Compliance with Laws........................................... 37
    6.14     Employee Benefits.............................................. 38
    6.15     Leases......................................................... 39
    6.16     Royalty Payments............................................... 39

7.  NEGATIVE COVENANTS...................................................... 39
    7.1      Indebtedness................................................... 39
    7.2      Liens.......................................................... 40
    7.3      Restrictions on Fundamental Changes............................ 40
    7.4      Disposal of Assets............................................. 40
    7.5      Change Name.................................................... 40
    7.6      Guarantee...................................................... 40
    7.7      Nature of Business............................................. 40
    7.8      Prepayments and Amendments..................................... 40
    7.9      Change of Control.............................................. 41
    7.10     Consignments................................................... 41
    7.11     Distributions.................................................. 41


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    7.12     Accounting Methods............................................. 41
    7.13     Investments.................................................... 41
    7.14     Transactions with Affiliates................................... 41
    7.15     Suspension..................................................... 42
    7.16     Intentionally Omitted.......................................... 42
    7.17     Use of Proceeds................................................ 42
    7.18     Change in Location of Chief Executive Office; Inventory
             and Equipment with Bailees..................................... 42
    7.19     No Prohibited Transactions Under ERISA......................... 42
    7.20     Financial Covenants............................................ 43
    7.21     Capital Expenditures........................................... 43
    7.22     Library Acquisitions........................................... 44

8.  EVENTS OF DEFAULT....................................................... 44

9.  FOOTHILL'S RIGHTS AND REMEDIES.......................................... 46
    9.1      Rights and Remedies............................................ 46
    9.2      Remedies Cumulative............................................ 48

10. TAXES AND EXPENSES...................................................... 48

11. WAIVERS; INDEMNIFICATION................................................ 49
    11.1     Demand; Protest; etc........................................... 49
    11.2     Foothill's Liability for Collateral............................ 49
    11.3     Indemnification................................................ 49
    11.4     Joint Borrowers................................................ 50

12. NOTICES................................................................. 55

13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.............................. 56

14. DESTRUCTION OF BORROWERS' DOCUMENTS..................................... 57

15. GENERAL PROVISIONS...................................................... 57
    15.1     Effectiveness.................................................. 57
    15.2     Successors and Assigns......................................... 57
    15.3     Section Headings............................................... 58
    15.4     Interpretation................................................. 58
    15.5     Severability of Provisions..................................... 58
    15.6     Amendments in Writing.......................................... 58
    15.7     Counterparts; Telefacsimile Execution.......................... 58
    15.8     Revival and Reinstatement of Obligations....................... 58
    15.9     Integration.................................................... 59


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                             SCHEDULES AND EXHIBITS

Schedule P-1           Permitted Liens
Schedule 5.8           Subsidiaries
Schedule 5.10          Litigation
Schedule 5.13          ERISA Benefit Plans
Schedule 6.12          Location of Inventory and Equipment

Exhibit C-1            Form of Compliance Certificate


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                           LOAN AND SECURITY AGREEMENT


         THIS LOAN AND SECURITY AGREEMENT (THIS "AGREEMENT"), is entered into as
of November 19, 1997, among FOOTHILL CAPITAL CORPORATION, a California
corporation ("Foothill"), with a place of business located at 11111 Santa Monica
Boulevard, Suite 1500, Los Angeles, California 90025-3333, on the one hand, and
K-TEL INTERNATIONAL (USA), INC., a Minnesota corporation ("K-Tel (USA)"),
DOMINION ENTERTAINMENT, INC., a Minnesota corporation ("Dominion"), K-TEL
CONSUMER PRODUCTS, INC., a Minnesota ("Consumer"), K-TEL TV, INC., a Minnesota
corporation ("TV") and K-TEL VIDEO, INC., a Minnesota corporation ("Video")
each, with its chief executive office located at 2605 Fernbrook Lane North,
Minneapolis, Minnesota 55447, on the other hand.

         The parties agree as follows:

         1. DEFINITIONS AND CONSTRUCTION.

         1.1 DEFINITIONS. As used in this Agreement, the following terms shall
have the following definitions:

                  "Account Debtor" means any Person who is or who may become
         obligated under, with respect to, or on account of, an Account.

                  "Accounts" means all currently existing and hereafter arising
         accounts, contract rights, and all other forms of obligations owing to
         a Person arising out of the sale or lease of goods or the rendition of
         services by such Person, irrespective of whether earned by performance,
         and any and all credit insurance, guaranties, or security therefor.

                  "Advances" has the meaning set forth in Section 2.1(a).

                  "Affiliate" means, as applied to any Person, any other Person
         who directly or indirectly controls, is controlled by, is under common
         control with or is a director or officer of such Person. For purposes
         of this definition, "control" means the possession, directly or
         indirectly, of the power to vote 10% or more of the securities having
         ordinary voting power for the election of directors or the direct or
         indirect power to direct the management and policies of a Person.

                  "Agreement" has the meaning set forth in the preamble hereto.

                  "Authorized Person" means any officer or other employee of
         Borrower.

                  "Average Unused Portion of Maximum Amount" means, as of any
         date of determination, (a) the Maximum Amount, less (b) the sum of (i)
         the average


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         Daily Balance of Advances that were outstanding during the immediately
         preceding month, plus (ii) the average Daily Balance of the undrawn
         Letters of Credit that were outstanding during the immediately
         preceding month.

                  "Bankruptcy Code" means the United States Bankruptcy Code (11
         U.S.C. ss. 101 et seq.), as amended, and any successor statute.

                  "Benefit Plan" means a "defined benefit plan" (as defined in
         Section 3(35) of ERISA) for which any Borrower, any Subsidiary of any
         Borrower, or any ERISA Affiliate has been an "employer" (as defined in
         Section 3(5) of ERISA) within the past six years.

                  "Borrower" means any one of K-Tel (USA), Dominion, Consumer,
         TV or Video.

                  "Borrowers' Books" means all of Borrowers' books and records
         including: ledgers; records indicating, summarizing, or evidencing
         Borrowers' properties or assets (including the Collateral) or
         liabilities; all information relating to Borrowers' business operations
         or financial condition; and all computer programs, disk or tape files,
         printouts, runs, or other computer prepared information.

                  "Borrowing Base" has the meaning set forth in Section 2.1(a).

                  "Business Day" means any day that is not a Saturday, Sunday,
         or other day on which national banks are authorized or required to
         close.

                  "Change of Control" shall be deemed to have occurred at such
         time as a "person" or "group" (within the meaning of Sections 13(d) and
         14(d)(2) of the Securities Exchange Act of 1934) becomes the
         "beneficial owner" (as defined in Rule 13d-3 under the Securities
         Exchange Act of 1934) after the date hereof, directly or indirectly, of
         more than 25% of the total voting power of all classes of stock then
         outstanding of Parent entitled to vote in the election of directors or
         if K-Tel (USA), Dominion, Consumer, TV, Video or K-Tel ceases to be
         wholly-owned by Parent.

                  "Closing Date" means the date of the first to occur of the
         making of the initial Advance or the issuance of the initial Letter of
         Credit.

                  "Code" means the California Uniform Commercial Code.

                  "Collateral" means each Borrower's right, title, and interest
         in each of the following:

                           (a) Accounts,

                           (b) Borrowers' Books,


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                           (c) Equipment,

                           (d) General Intangibles,

                           (e) Inventory,

                           (f) Investment Property,

                           (g) Negotiable Collateral,

                           (h) any money, or other assets of Borrowers that now
                  or hereafter come into the possession, custody, or control of
                  Foothill, and

                           (i) the proceeds and products, whether tangible or
                  intangible, of any of the foregoing, including proceeds of
                  insurance covering any or all of the Collateral of Borrowers,
                  and any and all Accounts, Borrowers' Books, Equipment, General
                  Intangibles, Inventory, Investment Property, Negotiable
                  Collateral, money, deposit accounts, or other tangible or
                  intangible property resulting from the sale, exchange,
                  collection, or other disposition of any of the foregoing, or
                  any portion thereof or interest therein, and the proceeds
                  thereof.

                  "Collateral Access Agreement" means a landlord waiver,
         mortgagee waiver, bailee letter, or acknowledgement agreement of any
         warehouseman, processor, lessor, consignee, or other Person in
         possession of, having a Lien upon, or having rights or interests in the
         Equipment or Inventory of any Borrower, in each case, in form and
         substance satisfactory to Foothill.

                  "Collections" means all cash, checks, notes, instruments, and
         other items of payment (including, insurance proceeds, proceeds of cash
         sales, rental proceeds, and tax refunds).

                  "Compliance Certificate" means a certificate substantially in
         the form of Exhibit C-1 and delivered by the chief accounting officer
         of a Borrower to Foothill.

                  "Consumer" means K-tel Consumer Products, Inc., a Minnesota
         corporation.

                  "Copyright Security Agreements" means those certain copyright
         security agreements, of even date herewith between Dominion and
         Foothill and USA and Foothill.

                  "Daily Balance" means the amount of an Obligation owed at the
         end of a given day.

                  "deems itself insecure" means that the Person deems itself
         insecure


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         in accordance with the provisions of Section 1208 of the Code.

                  "Default" means an event, condition, or default that, with the
         giving of notice, the passage of time, or both, would be an Event of
         Default.

                  "Designated Account" means account number 5861561458 of
         Borrowers maintained with Borrowers' Designated Account Bank, or such
         other deposit account of Borrowers (located within the United States)
         which has been designated, in writing and from time to time, by
         Borrowers to Foothill.

                  "Designated Account Bank" means TCF National Bank Minnesota,
         whose office is located at 801 Marquette Avenue, Minneapolis, Minnesota
         55402, and whose ABA number is 291070001.

                  "Dilution" means, in each case based upon the experience of
         the immediately [prior three months,] the result of dividing the Dollar
         amount of (a) bad debt write-downs, discounts, cooperative advertising,
         returns, promotions, credits, or other dilution with respect to the
         Accounts of Borrowers, by (b) Borrowers' Collections (excluding
         extraordinary items) plus the Dollar amount of clause (a).

                  "Dilution Reserve" means, as of any date of determination, an
         amount sufficient to reduce Foothill's advance rate against Eligible
         Accounts by one percentage point for each percentage point by which
         Dilution is in excess of 10%.

                  "Disbursement Letter" means an instructional letter executed
         and delivered by Borrowers to Foothill regarding the extensions of
         credit to be made on the Closing Date, the form and substance of which
         shall be satisfactory to Foothill.

                  "Dollars or $" means United States dollars.

                  "Dominion" means Dominion Entertainment, Inc., a Minnesota
         corporation.

                  "Early Termination Premium" has the meaning set forth in
         Section 3.6.

                  "Eligible Accounts" means those Accounts created by a Borrower
         in the ordinary course of business, that arise out of such Borrower's
         sale of goods or rendition of services, that strictly comply with each
         and all of the representations and warranties respecting Accounts made
         by such Borrower to Foothill in the Loan Documents, and that are and at
         all times continue to be acceptable to Foothill in all respects;
         provided, however, that standards of eligibility may be fixed and
         revised from time to time by Foothill in Foothill's reasonable credit
         judgment. Eligible Accounts shall not include the following:


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                           (a) Accounts that the Account Debtor has failed to
                  pay within 120 days of invoice date or Accounts with selling
                  terms of more than 90 days from invoice date;

                           (b) Accounts owed by an Account Debtor or its
                  Affiliates where 50% or more of all Accounts owed by that
                  Account Debtor (or its Affiliates) are deemed ineligible under
                  clause (a) above;

                           (c) Accounts with respect to which the Account Debtor
                  is an employee, Affiliate, or agent of a Borrower;

                           (d) Accounts with respect to which goods are placed
                  on consignment, sale on approval, bill and hold, or other
                  terms by reason of which the payment by the Account Debtor may
                  be conditional;

                           (e) Accounts that are not payable in Dollars or with
                  respect to which the Account Debtor: (i) does not maintain its
                  chief executive office in the United States, or (ii) is not
                  organized under the laws of the United States or any State
                  thereof, or (iii) is the government of any foreign country or
                  sovereign state, or of any state, province, municipality, or
                  other political subdivision thereof, or of any department,
                  agency, public corporation, or other instrumentality thereof,
                  unless (y) the Account is supported by an irrevocable letter
                  of credit satisfactory to Foothill (as to form, substance, and
                  issuer or domestic confirming bank) that has been delivered to
                  Foothill, and upon request from Foothill, is directly drawable
                  by Foothill, or (z) the Account is covered by credit insurance
                  in form and amount, and by an insurer, satisfactory to
                  Foothill;

                           (f) Accounts with respect to which the Account Debtor
                  is either (i) the United States or any department, agency, or
                  instrumentality of the United States (exclusive, however, of
                  Accounts with respect to which the relevant Borrower has
                  complied, to the satisfaction of Foothill, with the Assignment
                  of Claims Act, 31 U.S.C. ss. 3727), or (ii) any State of the
                  United States (exclusive, however, of Accounts owed by any
                  State that does not have a statutory counterpart to the
                  Assignment of Claims Act);

                           (g) Accounts with respect to which the Account Debtor
                  is a creditor of any Borrower, has or has asserted a right of
                  setoff (including chargebacks) except for cooperative
                  advertising allowances and credits for returned Inventory in
                  the ordinary course of Borrowers' business, has disputed its
                  liability, or has made any claim with respect to the Account;

                           (h) Accounts with respect to an Account Debtor whose
                  total obligations owing to the Borrowers exceed 10% of all
                  Eligible Accounts of the Borrowers (or in the case of
                  Handleman Company 25% of all Eligible Accounts, in the case of
                  Anderson Merchandisers 20% of all Eligible Accounts and in the
                  case of each of Musicland and Transworld Entertainment 15% of
                  all Eligible Accounts), to the extent of the obligations owing
                  by such Account Debtor in excess of such percentage;



                                       1
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                           (i) Accounts with respect to which the Account Debtor
                  is subject to any Insolvency Proceeding, or becomes insolvent,
                  or goes out of business;

                           (j) Accounts the collection of which Foothill, in its
                  reasonable credit judgment, believes to be doubtful by reason
                  of the Account Debtor's financial condition;

                           (k) Accounts with respect to which the goods giving
                  rise to such Account have not been shipped and billed to the
                  Account Debtor, the services giving rise to such Account have
                  not been performed and accepted by the Account Debtor, or the
                  Account otherwise does not represent a final sale;

                           (l) Accounts with respect to which the Account Debtor
                  is located in the states of New Jersey or West Virginia (or
                  any other state that requires a creditor to file a Business
                  Activity Report or similar document in order to bring suit or
                  otherwise enforce its remedies against such Account Debtor in
                  the courts or through any judicial process of such state),
                  unless the relevant Borrower has qualified to do business in
                  New Jersey, West Virginia, or such other states, or has filed
                  a Notice of Business Activities Report with the applicable
                  division of taxation, the department of revenue, or with such
                  other state offices, as appropriate, for the then-current
                  year, or is exempt from such filing requirement; and

                           (m) Accounts that represent progress payments or
                  other advance billings that are due prior to the completion of
                  performance by a Borrower of the subject contract for goods or
                  services.

                  "Equipment" means all of a Person's present and hereafter
         owned machinery, machine tools, motors, equipment, furniture,
         furnishings, fixtures, vehicles (including motor vehicles and
         trailers), tools, parts, goods (other than consumer goods, farm
         products, or Inventory), wherever located, including, all attachments,
         accessories, accessions, replacements, substitutions, additions, and
         improvements to any of the foregoing.

                  "ERISA" means the Employee Retirement Income Security Act of
         1974, 29 U.S.C.ss.ss. 1000 et seq., amendments thereto, successor
         statutes, and regulations or guidance promulgated thereunder.

                  "ERISA Affiliate" means (a) any corporation subject to ERISA
         whose employees are treated as employed by the same employer as the
         employees of a Borrower under IRC Section 414(b), (b) any trade or
         business subject to ERISA whose employees are treated as employed by
         the same employer as the employees of a Borrower under IRC Section
         414(c), (c) solely for purposes of Section 302 of ERISA and Section 412
         of the IRC, any organization subject to ERISA that is a member of an
         affiliated service group of which a Borrower is a member under IRC
         Section 414(m), or (d) solely for purposes of Section 302 of ERISA and
         Section 412 of the IRC, any party subject to ERISA that is a party to
         an arrangement with a Borrower and whose


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         employees are aggregated with the employees of such Borrower under IRC
         Section 414(o).

                  "ERISA Event" means (a) a Reportable Event with respect to any
         Benefit Plan or Multiemployer Plan, (b) the withdrawal of a Borrower,
         any of its Subsidiaries or ERISA Affiliates from a Benefit Plan during
         a plan year in which it was a "substantial employer" (as defined in
         Section 4001(a)(2) of ERISA), (c) the providing of notice of intent to
         terminate a Benefit Plan in a distress termination (as described in
         Section 4041(c) of ERISA), (d) the institution by the PBGC of
         proceedings to terminate a Benefit Plan or Multiemployer Plan, (e) any
         event or condition (i) that provides a basis under Section 4042(a)(1),
         (2), or (3) of ERISA for the termination of, or the appointment of a
         trustee to administer, any Benefit Plan or Multiemployer Plan, or (ii)
         that may result in termination of a Multiemployer Plan pursuant to
         Section 4041A of ERISA, (f) the partial or complete withdrawal within
         the meaning of Sections 4203 and 4205 of ERISA, of a Borrower, any of
         its Subsidiaries or ERISA Affiliates from a Multiemployer Plan, or (g)
         providing any security to any Plan under Section 401(a)(29) of the IRC
         by a Borrower or its Subsidiaries or any of their ERISA Affiliates.

                  "Event of Default" has the meaning set forth in Section 8.

                  "Excess Availability" means the amount as determined by
         Foothill at any time, equal to: (a) (i) the amount of the Advances
         available to Borrowers as of such time based upon the applicable
         lending formulas set forth in Section 2.1, subject to the sublimits and
         reserves from time to time established in accordance with Sections
         2.1(b), 6.15 and 10, minus (b) the sum of (i) the amount of the
         outstanding Obligations (including Letters of Credit), plus (ii) the
         aggregate amount of trade payables payable by Borrowers that are more
         than 90 days from invoice date and those royalty payments payable by
         Borrowers that are past due in accordance with normal industry
         practices.

                  "Existing Lender" means TCF National Bank Minnesota.

                  "FEIN" means Federal Employer Identification Number.

                  "Foothill" has the meaning set forth in the preamble to this
         Agreement.

                  "Foothill Account" has the meaning set forth in Section 2.7.

                  "Foothill Expenses" means all: reasonable costs or expenses
         (including taxes, and insurance premiums) required to be paid by a
         Borrower under any of the Loan Documents that are paid or incurred by
         Foothill; reasonable out-of-pocket fees or charges paid or incurred by
         Foothill in connection with Foothill's transactions with Borrowers,
         including, fees or charges for photocopying, notarization, couriers and
         messengers, telecommunication, public record searches (including tax
         lien, litigation, and UCC searches and including searches with the
         patent and trademark office, the


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         copyright office, or the department of motor vehicles), filing,
         recording, publication, appraisal (including periodic Collateral
         appraisals); costs and expenses incurred by Foothill in the
         disbursement of funds to Borrowers (by wire transfer or otherwise);
         charges paid or incurred by Foothill resulting from the dishonor of
         checks; costs and expenses paid or incurred by Foothill to correct any
         default or enforce any provision of the Loan Documents, or in gaining
         possession of, maintaining, handling, preserving, storing, shipping,
         selling, preparing for sale, or advertising to sell the Collateral, or
         any portion thereof, irrespective of whether a sale is consummated;
         reasonable out-of-pocket costs and expenses paid or incurred by
         Foothill in examining Borrowers' Books in addition to the fees set
         forth in Section 2.11; costs and expenses of third party claims or any
         other suit paid or incurred by Foothill in enforcing or defending the
         Loan Documents or in connection with the transactions contemplated by
         the Loan Documents or Foothill's relationship with Borrowers or any
         guarantor; and Foothill's reasonable attorneys fees and expenses
         incurred in advising, structuring, drafting, reviewing, administering,
         amending, terminating, enforcing, defending or concerning the Loan
         Documents (including attorneys fees and expenses incurred in connection
         with a "workout," a "restructuring," or an Insolvency Proceeding
         concerning Borrowers or any guarantor of the Obligations), irrespective
         of whether suit is brought.

                  "GAAP" means generally accepted accounting principles as in
         effect from time to time in the United States, consistently applied.

                  "General Intangibles" means all of any Person's present and
         future general intangibles and other personal property (including
         contract rights, rights arising under common law, statutes, or
         regulations, choses or things in action, goodwill, patents, trade
         names, trademarks, servicemarks, copyrights, blueprints, drawings,
         purchase orders, customer lists, monies due or recoverable from pension
         funds, route lists, rights to payment and other rights under any
         royalty or licensing agreements, infringement claims, computer
         programs, information contained on computer disks or tapes, literature,
         reports, catalogs, deposit accounts, insurance premium rebates, tax
         refunds, and tax refund claims), other than goods, Accounts, and
         Negotiable Collateral.

                  "Governing Documents" means the certificate or articles of
         incorporation, by-laws, or other organizational or governing documents
         of any Person.

                  "Guaranty" means that certain continuing guaranty of the
         Obligations, of even date herewith, from Parent.

                  "Hazardous Materials" means (a) substances that are defined or
         listed in, or otherwise classified pursuant to, any applicable laws or
         regulations as "hazardous substances," "hazardous materials,"
         "hazardous wastes," "toxic substances," or any other formulation
         intended to define, list, or classify substances by reason of
         deleterious properties such as ignitability, corrosivity, reactivity,
         carcinogenicity, reproductive toxicity, or "EP toxicity", (b) oil,
         petroleum, or petroleum derived substances, natural gas, natural gas
         liquids, synthetic gas, drilling fluids, produced waters, and other
         wastes associated with the exploration, development, or production of


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         crude oil, natural gas, or geothermal resources, (c) any flammable
         substances or explosives or any radioactive materials, and (d) asbestos
         in any form or electrical equipment that contains any oil or dielectric
         fluid containing levels of polychlorinated biphenyls in excess of 50
         parts per million.

                  "Indebtedness" means: (a) all obligations of a Person for
         borrowed money, (b) all obligations of a Person evidenced by bonds,
         debentures, notes, or other similar instruments and all reimbursement
         or other obligations of a Person in respect of letters of credit,
         bankers acceptances, interest rate swaps, or other financial products,
         (c) all obligations of a Person under capital leases, (d) all
         obligations or liabilities of others secured by a Lien on any property
         or asset of a Person, irrespective of whether such obligation or
         liability is assumed, and (e) any obligation of a Person guaranteeing
         or intended to guarantee (whether guaranteed, endorsed, co-made,
         discounted, or sold with recourse to such Person) any indebtedness,
         lease, dividend, letter of credit, or other obligation of any other
         Person.

                  "Insolvency Proceeding" means any proceeding commenced by or
         against any Person under any provision of the Bankruptcy Code or under
         any other bankruptcy or insolvency law, assignments for the benefit of
         creditors, formal or informal moratoria, compositions, extensions
         generally with creditors, or proceedings seeking reorganization,
         arrangement, or other similar relief.

                  "Intangible Assets" means, with respect to any Person, that
         portion of the book value of all of such Person's assets that would be
         treated as intangibles under GAAP.

                  "Intellectual Property Security Agreement" means that certain
         Intellectual Property Security Agreement between Foothill and Parent.

                  "Inventory" means all present and future inventory in which a
         Person has any interest, including goods held for sale or lease or to
         be furnished under a contract of service and all of such Person's
         present and future raw materials, work in process, finished goods, and
         packing and shipping materials, wherever located.

                  "Investment Property" has the meaning set forth in Section
         9115 of the Code.

                  "IRC" means the Internal Revenue Code of 1986, as amended, and
         the regulations thereunder.

                  "K-Tel (USA)" means K-tel International (USA), Inc., a
         Minnesota corporation.

                  "L/C" has the meaning set forth in Section 2.2(a).

                  "L/C Guaranty" has the meaning set forth in Section 2.2(a).


<PAGE>


                  "Letter of Credit" means an L/C or an L/C Guaranty, as the
         context requires.

                  "Library" means the library of music rights owned by one or
         more Borrowers.

                  "Lien" means any interest in property securing an obligation
         owed to, or a claim by, any Person other than the owner of the
         property, whether such interest shall be based on the common law,
         statute, or contract, whether such interest shall be recorded or
         perfected, and whether such interest shall be contingent upon the
         occurrence of some future event or events or the existence of some
         future circumstance or circumstances, including the lien or security
         interest arising from a mortgage, deed of trust, encumbrance, pledge,
         hypothecation, assignment, deposit arrangement, security agreement,
         adverse claim or charge, conditional sale or trust receipt, or from a
         lease, consignment, or bailment for security purposes and also
         including reservations, exceptions, encroachments, easements,
         rights-of-way, covenants, conditions, restrictions, leases, and other
         title exceptions and encumbrances affecting Real Property.

                  "Loan Account" has the meaning set forth in Section 2.10.

                  "Loan Documents" means this Agreement, the Intellectual
         Property Security Agreement, the Copyright Security Agreements, the
         Disbursement Letter, the Letters of Credit, the Lockbox Agreements, the
         Guaranty and any security agreements securing the Guaranty, any note or
         notes executed by any Borrower and payable to Foothill, and any other
         agreement entered into, now or in the future, in connection with this
         Agreement.

                  "Lockbox Account" shall mean a depositary account established
         pursuant to one of the Lockbox Agreements.

                  "Lockbox Agreements" means those certain Lockbox Operating
         Procedural Agreements and those certain Depository Account Agreements,
         in form and substance satisfactory to Foothill, each of which is among
         a Borrower or Borrowers, Foothill, and one of the Lockbox Banks.

                  "Lockbox Banks" means TCF National Bank Minnesota, or such
         other bank as may be agreed to by Foothill and Borrower from time to
         time.

                  "Lockboxes" has the meaning set forth in Section 2.7.

                  "Material Adverse Change" means (a) a material adverse change
         in the business, prospects, operations, results of operations, assets,
         liabilities or financial condition of Borrowers on a consolidated
         basis, (b) the material impairment of a Borrower's ability to perform
         its obligations under the Loan Documents to which it is a party or of
         Foothill to enforce the Obligations or realize upon the Collateral, (c)
         a


<PAGE>


         material adverse effect on the value of the Collateral or the amount
         that Foothill would be likely to receive (after giving consideration to
         delays in payment and costs of enforcement) in the liquidation of such
         Collateral, or (d) a material impairment of the priority of Foothill's
         Liens with respect to the Collateral.

                  "Maximum Amount" means $6,000,000.

                  "Multiemployer Plan" means a "multiemployer plan" (as defined
         in Section 4001(a)(3) of ERISA) to which a Borrower, any of its
         Subsidiaries, or any ERISA Affiliate has contributed, or was obligated
         to contribute, within the past six years.

                  "Negotiable Collateral" means all of a Person's present and
         future letters of credit, notes, drafts, instruments, security
         entitlements, securities (including the shares of stock of Subsidiaries
         of such Person), documents, personal property leases (wherein such
         Person is the lessor), and chattel paper.

                  "Obligations" means all loans, Advances, debts, principal,
         interest (including any interest that, but for the provisions of the
         Bankruptcy Code, would have accrued), contingent reimbursement
         obligations under any outstanding Letters of Credit, premiums
         (including Early Termination Premiums), liabilities (including all
         amounts charged to Borrowers' Loan Account pursuant hereto),
         obligations, fees, charges, costs, or Foothill Expenses (including any
         fees or expenses that, but for the provisions of the Bankruptcy Code,
         would have accrued), lease payments, guaranties, covenants, and duties
         owing by a Borrower to Foothill of any kind and description (whether
         pursuant to or evidenced by the Loan Documents or pursuant to any other
         agreement between Foothill and any Borrower, and irrespective of
         whether for the payment of money), whether direct or indirect, absolute
         or contingent, due or to become due, now existing or hereafter arising,
         and including any debt, liability, or obligation owing from a Borrower
         to others that Foothill may have obtained by assignment or otherwise,
         and further including all interest not paid when due and all Foothill
         Expenses that a Borrower is required to pay or reimburse by the Loan
         Documents, by law, or otherwise.

                  "Overadvance" has the meaning set forth in Section 2.5.

                  "Parent" means K-tel International, Inc., a Minnesota
         corporation.

                  "Pay-Off Letter" means a letter, in form and substance
         reasonably satisfactory to Foothill, from Existing Lender respecting
         the amount necessary to repay in full all of the obligations of
         Borrowers owing to Existing Lender and obtain a termination or release
         of all of the Liens existing in favor of Existing Lender in and to the
         properties or assets of Borrowers.

                  "PBGC" means the Pension Benefit Guaranty Corporation as
         defined in Title IV of ERISA, or any successor thereto.


<PAGE>


                  "Permitted Liens" means (a) Liens held by Foothill, (b) Liens
         for unpaid taxes that either (i) are not yet due and payable or (ii)
         are the subject of Permitted Protests, (c) Liens set forth on Schedule
         P-1, (d) the interests of lessors under operating leases and purchase
         money Liens of lessors under capital leases to the extent that the
         acquisition or lease of the underlying asset is permitted under Section
         7.21 and so long as the Lien only attaches to the asset purchased or
         acquired and only secures the purchase price of the asset, (e) Liens
         arising by operation of law in favor of warehousemen, landlords,
         carriers, mechanics, materialmen, laborers, or suppliers, incurred in
         the ordinary course of business of a Borrower and not in connection
         with the borrowing of money, and which Liens either (i) are for sums
         not yet due and payable, or (ii) are the subject of Permitted Protests,
         (f) Liens arising from deposits made in connection with obtaining
         worker's compensation or other unemployment insurance, (g) Liens or
         deposits to secure performance of bids, tenders, or leases (to the
         extent permitted under this Agreement), incurred in the ordinary course
         of business of a Borrower and not in connection with the borrowing of
         money, (h) Liens arising by reason of security for surety or appeal
         bonds in the ordinary course of business of a Borrower, and (i) Liens
         of or resulting from any judgment or award that would not have a
         Material Adverse Effect and as to which the time for the appeal or
         petition for rehearing of which has not yet expired, or in respect of
         which a Borrower is in good faith prosecuting an appeal or proceeding
         for a review, and in respect of which a stay of execution pending such
         appeal or proceeding for review has been secured.

                  "Permitted Protest" means the right of a Borrower to protest
         any Lien (other than any such Lien that secures the Obligations), tax
         (other than payroll taxes or taxes that are the subject of a United
         States federal tax lien), or rental payment, provided that (a) a
         reserve with respect to such obligation is established on the books of
         such Borrower in an amount that is reasonably satisfactory to Foothill,
         (b) any such protest is instituted and diligently prosecuted by such
         Borrower in good faith, and (c) Foothill is satisfied that, while any
         such protest is pending, there will be no impairment of the
         enforceability, validity, or priority of any of the Liens of Foothill
         in and to the Collateral.

                  "Person" means and includes natural persons, corporations,
         limited liability companies, limited partnerships, general
         partnerships, limited liability partnerships, joint ventures, trusts,
         land trusts, business trusts, or other organizations, irrespective of
         whether they are legal entities, and governments and agencies and
         political subdivisions thereof.

                  "Plan" means any employee benefit plan, program, or
         arrangement maintained or contributed to by a Borrower or with respect
         to which it may incur liability.

                  "Real Property" means any estates or interests in real
         property now owned or hereafter acquired by a Borrower.

                  "Reference Rate" means the variable rate of interest, per
         annum,


<PAGE>


         most recently announced by Norwest Bank Minnesota, National
         Association, or any successor thereto, as its "base rate," irrespective
         of whether such announced rate is the best rate available from such
         financial institution.

                  "Renewal Date" has the meaning set forth in Section 3.4.

                  "Reportable Event" means any of the events described in
         Section 4043(c) of ERISA or the regulations thereunder other than a
         Reportable Event as to which the provision of 30 days notice to the
         PBGC is waived under applicable regulations.

                  "Retiree Health Plan" means an "employee welfare benefit plan"
         within the meaning of Section 3(1) of ERISA that provides benefits to
         individuals after termination of their employment, other than as
         required by Section 601 of ERISA.

                  "Solvent" means, with respect to any Person on a particular
         date, that on such date (a) at fair valuations, all of the properties
         and assets of such Person are greater than the sum of the debts,
         including contingent liabilities (but excluding payables to other
         Subsidiaries of Parent), of such Person, (b) the present fair salable
         value of the properties and assets of such Person is not less than the
         amount that will be required to pay the probable liability of such
         Person on its debts (other than payables to other Subsidiaries of
         Parent) as they become absolute and matured, (c) such Person is able to
         realize upon its properties and assets and pay its debts and other
         liabilities, contingent obligations and other commitments (other than
         payables to other Subsidiaries of Parent) as they mature in the normal
         course of business, (d) such Person does not intend to, and does not
         believe that it will, incur debts beyond such Person's ability to pay
         as such debts mature, and (e) such Person is not engaged in business or
         a transaction, and is not about to engage in business or a transaction,
         for which such Person's properties and assets would constitute
         unreasonably small capital after giving due consideration to the
         prevailing practices in the industry in which such Person is engaged.
         In computing the amount of contingent liabilities at any time, it is
         intended that such liabilities will be computed at the amount that, in
         light of all the facts and circumstances existing at such time,
         represents the amount that reasonably can be expected to become an
         actual or matured liability.

                  "Subsidiary" of a Person means a corporation, partnership,
         limited liability company, or other entity in which that Person
         directly or indirectly owns or controls the shares of stock or other
         ownership interests having ordinary voting power to elect a majority of
         the board of directors (or appoint other comparable managers) of such
         corporation, partnership, limited liability company, or other entity.

                  "Tangible Net Worth" means, as of any date of determination,
         the difference of (a) a Person's total stockholder's equity, minus (b)
         the sum of: (i) all Intangible Assets of such Person, and (ii) all
         amounts due to such Person from Affiliates.

                  "Term Loan" has the meaning set forth in Section 2.3.


<PAGE>


                  "TV" means K-tel TV, Inc., a Minnesota corporation.

                  "Video" means K-tel Video, Inc., a Minnesota corporation.

                  "Voidable Transfer" has the meaning set forth in Section 15.8.

         1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP. When used herein, the term
"financial statements" shall include the notes and schedules thereto. Whenever
the term "Borrower" is used in respect of a financial covenant or a related
definition, it shall be understood to mean Borrowers on a consolidated basis
unless the context clearly requires otherwise.

         1.3 CODE. Any terms used in this Agreement that are defined in the Code
shall be construed and defined as set forth in the Code unless otherwise defined
herein.

         1.4 CONSTRUCTION. Unless the context of this Agreement clearly requires
otherwise, references to the plural include the singular, references to the
singular include the plural, the term "including" is not limiting, and the term
"or" has, except where otherwise indicated, the inclusive meaning represented by
the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and
similar terms in this Agreement refer to this Agreement as a whole and not to
any particular provision of this Agreement. An Event of Default shall "continue"
or be "continuing" until such Event of Default has been waived in writing by
Foothill. Section, subsection, clause, schedule, and exhibit references are to
this Agreement unless otherwise specified. Any reference in this Agreement or in
the Loan Documents to this Agreement or any of the Loan Documents shall include
all alterations, amendments, changes, extensions, modifications, renewals,
replacements, substitutions, and supplements, thereto and thereof, as
applicable.

         1.5 SCHEDULES AND EXHIBITS. All of the schedules and exhibits attached
to this Agreement shall be deemed incorporated herein by reference.


<PAGE>


         2. LOAN AND TERMS OF PAYMENT.

         2.1 REVOLVING ADVANCES.

                  (a) Subject to the terms and conditions of this Agreement,
         Foothill agrees to make advances ("Advances") to Borrowers in an amount
         outstanding not to exceed at any one time the lesser of (i) the Maximum
         Amount less the outstanding balance of all undrawn or unreimbursed
         Letters of Credit, or (ii) the Borrowing Base less the aggregate amount
         of all undrawn or unreimbursed Letters of Credit. For purposes of this
         Agreement, "Borrowing Base", as of any date of determination, shall
         mean the result of:

                           (x) the lesser of (i) 80% of Eligible Accounts, less
                  the amount, if any, of the Dilution Reserve, and (ii) an
                  amount equal to Borrower's Collections with respect to
                  Accounts for the immediately preceding 120 day period, MINUS

                           (y) the aggregate amount of reserves, if any,
                  established by Foothill under Sections 2.1(b), 6.15 and 10.

                  (b) Anything to the contrary in Section 2.1(a) above
         notwithstanding, Foothill may create reserves against the Borrowing
         Base or reduce its advance rate based upon Eligible Accounts without
         declaring an Event of Default if it determines that there has occurred
         a Material Adverse Change.

                  (c) Amounts borrowed pursuant to this Section 2.1 may be
         repaid and, subject to the terms and conditions of this Agreement,
         reborrowed at any time during the term of this Agreement.

                  2.2 LETTERS OF CREDIT.

                  (a) Subject to the terms and conditions of this Agreement,
         Foothill agrees to issue letters of credit for the account of a
         Borrower (each, an "L/C") or to issue guarantees of payment (each such
         guaranty, an "L/C Guaranty") with respect to letters of credit issued
         by an issuing bank for the account of a Borrower. Foothill shall have
         no obligation to issue a Letter of Credit if either of the following
         would result:

                           (i) the sum of 100% of the aggregate amount of
                  undrawn and unreimbursed Letters of Credit would exceed the
                  Borrowing Base less the amount of outstanding Advances; or

                           (ii) the aggregate amount of all undrawn or
                  unreimbursed Letters of Credit would exceed the lower of: (x)
                  the Maximum Amount less the amount of outstanding Advances; or
                  (y) $3,000,000.


<PAGE>


         Each Borrower expressly understands and agrees that Foothill shall have
         no obligation to arrange for the issuance by issuing banks of the
         letters of credit that are to be the subject of L/C Guarantees. Each
         Borrower and Foothill acknowledge and agree that certain of the letters
         of credit that are to be the subject of L/C Guarantees may be
         outstanding on the Closing Date. Each Letter of Credit shall have an
         expiry date no later than 60 days prior to the date on which this
         Agreement is scheduled to terminate under Section 3.4 (without regard
         to any potential renewal term) and all such Letters of Credit shall be
         in form and substance acceptable to Foothill in its sole discretion. If
         Foothill is obligated to advance funds under a Letter of Credit,
         Borrowers immediately shall reimburse such amount to Foothill and, in
         the absence of such reimbursement, the amount so advanced immediately
         and automatically shall be deemed to be an Advance hereunder and,
         thereafter, shall bear interest at the rate then applicable to Advances
         under Section 2.6.

                  (b) Each Borrower hereby agrees to indemnify, save, defend,
         and hold Foothill harmless from any loss, cost, expense, or liability,
         including payments made by Foothill, expenses, and reasonable attorneys
         fees incurred by Foothill arising out of or in connection with any
         Letter of Credit. Each Borrower agrees to be bound by the issuing
         bank's regulations and interpretations of any Letters of Credit
         guarantied by Foothill and opened to or for such Borrower's account or
         by Foothill's interpretations of any L/C issued by Foothill to or for
         such Borrower's account, even though this interpretation may be
         different from such Borrower's own, and Borrowers understand and agree
         that Foothill shall not be liable for any error, negligence, or
         mistake, whether of omission or commission, in following any Borrower's
         instructions or those contained in the Letter of Credit or any
         modifications, amendments, or supplements thereto. Each Borrower
         understands that the L/C Guarantees may require Foothill to indemnify
         the issuing bank for certain costs or liabilities arising out of claims
         by a Borrower against such issuing bank. Each Borrower hereby agrees to
         indemnify, save, defend, and hold Foothill harmless with respect to any
         loss, cost, expense (including reasonable attorneys fees), or liability
         incurred by Foothill under any L/C Guaranty as a result of Foothill's
         indemnification of any such issuing bank.

                  (c) Each Borrower hereby authorizes and directs any bank that
         issues a letter of credit guaranteed by Foothill to deliver to Foothill
         all instruments, documents, and other writings and property received by
         the issuing bank pursuant to such letter of credit, and to accept and
         rely upon Foothill's instructions and agreements with respect to all
         matters arising in connection with such letter of credit and the
         related application. A Borrower may or may not be the "applicant" or
         "account party" with respect to such letter of credit.

                  (d) Any and all charges, commissions, fees, and costs incurred
         by Foothill relating to the letters of credit guaranteed by Foothill
         shall be considered Foothill Expenses for purposes of this Agreement
         and immediately shall be reimbursable by Borrowers to Foothill.

                  (e) Immediately upon the termination of this Agreement,
         Borrowers agree to: (i) provide cash collateral to be held by Foothill
         in an amount equal


<PAGE>


         to 102% of the maximum amount of Foothill's obligations under Letters
         of Credit, (ii) cause to be delivered to Foothill releases of all of
         Foothill's obligations under outstanding Letters of Credit, or (iii)
         provide Foothill with a back to back letter of credit, in form and
         substance acceptable to Foothill, issued by a bank reasonably
         satisfactory to Foothill. At Foothill's discretion, any proceeds of
         Collateral received by Foothill after the occurrence and during the
         continuation of an Event of Default may be held as the cash collateral
         required by this Section 2.2(e).

                  (f) If by reason of (i) any change in any applicable law,
         treaty, rule, or regulation or any change in the interpretation or
         application by any governmental authority of any such applicable law,
         treaty, rule, or regulation, or (ii) compliance by the issuing bank or
         Foothill with any direction, request, or requirement (irrespective of
         whether having the force of law) of any governmental authority or
         monetary authority including, without limitation, Regulation D of the
         Board of Governors of the Federal Reserve System as from time to time
         in effect (and any successor thereto):

                           (A) any reserve, deposit, or similar requirement is
                  or shall be imposed or modified in respect of any Letters of
                  Credit issued hereunder, or

                           (B) there shall be imposed on the issuing bank or
                  Foothill any other condition regarding any letter of credit,
                  or Letter of Credit, as applicable, issued pursuant hereto;

         and the result of the foregoing is to increase, directly or indirectly,
         the cost to Foothill or to the issuing bank (which is payable by
         Foothill) of issuing, making, guaranteeing, or maintaining any letter
         of credit, or Letter of Credit, as applicable, or to reduce the amount
         receivable in respect thereof by such issuing bank or Foothill, then,
         and in any such case, Foothill may, at any time within a reasonable
         period after the additional cost is incurred or the amount received is
         reduced, notify Borrowers, and Borrowers shall pay on demand such
         amounts as the issuing bank or Foothill may specify to be necessary to
         compensate the issuing bank or Foothill for such additional cost or
         reduced receipt, together with interest on such amount from the date of
         such demand until payment in full thereof at the rate set forth in
         Section 2.6(a) or (c)(i), as applicable. The determination by the
         issuing bank or Foothill, as the case may be, of any amount due
         pursuant to this Section 2.2(f), as set forth in a certificate setting
         forth the calculation thereof in reasonable detail, shall, in the
         absence of manifest or demonstrable error, be final and conclusive and
         binding on all of the parties hereto.

         2.3 TERM LOAN. Foothill has agreed to make a term loan on the Closing
Date (the "Term Loan") to Borrowers in the original principal amount of
$4,000,000; provided, however, that the outstanding principal balance of the
Term Loan cannot, at any time, exceed an amount equal to 33% of the auction
value of the Library based upon the most recent appraisal of the Library
obtained by Foothill. The outstanding principal balance and all accrued and
unpaid interest under the Term Loan shall be due and payable upon the
termination of this Agreement, whether by its terms, by prepayment, by
acceleration, or otherwise. The unpaid principal balance of the Term


<PAGE>


Loan may be prepaid in whole or in part without penalty or premium at any time
during the term of this Agreement upon 30 days prior written notice by Borrowers
to Foothill. All amounts outstanding under the Term Loan shall constitute
Obligations.

         2.4 INTENTIONALLY OMITTED.

         2.5 OVERADVANCES. If, at any time or for any reason, the amount of
Obligations owed by Borrowers to Foothill pursuant to Sections 2.1, 2.2 and 2.3
is greater than either the Dollar or percentage limitations set forth in
Sections 2.1, 2.2 and 2.3 (an "Overadvance"), Borrowers immediately shall pay to
Foothill, in cash, the amount of such excess to be used by Foothill first, to
repay Advances outstanding under Section 2.1 and, thereafter, to be held by
Foothill as cash collateral to secure Borrower's obligation to repay Foothill
for all amounts paid pursuant to Letters of Credit.

         2.6 INTEREST AND LETTER OF CREDIT FEES: RATES, PAYMENTS, AND
CALCULATIONS.

                  (a) Interest Rate. Except as provided in clause (b) below, all
         Obligations (except for undrawn Letters of Credit) shall bear interest
         on the Daily Balance at a per annum rate equal to the Reference Rate.

                  (b) Letter of Credit Fee. Borrowers shall pay Foothill a fee
         (in addition to the charges, commissions, fees, and costs set forth in
         Section 2.2(d)) equal to 1.25% per annum times the Daily Balance of the
         aggregate undrawn amount of all outstanding Letters of Credit.

                  (c) Default Rate. Upon the occurrence and during the
         continuation of an Event of Default, (i) all Obligations (except for
         undrawn Letters of Credit) shall bear interest at a per annum rate
         equal to four percentage points above the Reference Rate, and (ii) the
         Letter of Credit fee provided in Section 2.6(b) shall be increased to
         5.25% per annum times the aggregate undrawn amount of all outstanding
         Letters of Credit.

                  (d) Minimum Interest. In no event shall the rate of interest
         chargeable hereunder for any day be less than 7.00% per annum. To the
         extent that interest accrued hereunder at the rate set forth herein
         would be less than the foregoing minimum daily rate, the interest rate
         chargeable hereunder for such day automatically shall be deemed
         increased to the minimum rate.

                  (e) Payments. Interest and Letter of Credit fees payable
         hereunder shall be due and payable, in arrears, on the first day of
         each month during the term hereof. Each Borrower hereby authorizes
         Foothill, at its option, without prior notice to such Borrower, to
         charge such interest and Letter of Credit fees, all Foothill Expenses
         (as and when incurred), the charges, commissions, fees, and costs
         provided for in Section 2.2(d) (as and when accrued or incurred), the
         fees and charges provided for in Section 2.11 (as and when accrued or
         incurred), and all other payments due under any


<PAGE>


         Loan Document to Borrowers' Loan Account, which amounts thereafter
         shall accrue interest at the rate then applicable to Advances
         hereunder. Any interest not paid when due shall be compounded and shall
         thereafter accrue interest at the rate then applicable to Advances
         hereunder.

                  (f) Computation. The Reference Rate as of the date of this
         Agreement is 8.50% per annum. In the event the Reference Rate is
         changed from time to time hereafter, the applicable rate of interest
         hereunder automatically and immediately shall be increased or decreased
         by an amount equal to such change in the Reference Rate. All interest
         and fees chargeable under the Loan Documents shall be computed on the
         basis of a 360 day year for the actual number of days elapsed and
         charged or compounded monthly.

                  (g) Intent to Limit Charges to Maximum Lawful Rate. In no
         event shall the interest rate or rates payable under this Agreement,
         plus any other amounts paid in connection herewith, exceed the highest
         rate permissible under any law that a court of competent jurisdiction
         shall, in a final determination, deem applicable. Borrowers and
         Foothill, in executing and delivering this Agreement, intend legally to
         agree upon the rate or rates of interest and manner of payment stated
         within it; provided, however, that, anything contained herein to the
         contrary notwithstanding, if said rate or rates of interest or manner
         of payment exceeds the maximum allowable under applicable law, then,
         ipso facto as of the date of this Agreement, Borrowers are and shall be
         liable only for the payment of such maximum as allowed by law, and
         payment received from Borrowers in excess of such legal maximum,
         whenever received, shall be applied to reduce the principal balance of
         the Obligations to the extent of such excess.

         2.7 COLLECTION OF ACCOUNTS. Borrowers shall at all times maintain
lockboxes (the "Lockboxes") and, immediately after the Closing Date, shall
instruct all Account Debtors (other than licensees from Dominion) with respect
to the Accounts, General Intangibles, and Negotiable Collateral of Borrowers to
remit all Collections in respect thereof to such Lockboxes. Borrowers, Foothill,
and the Lockbox Banks shall enter into the Lockbox Agreements, which among other
things shall provide for the opening of a Lockbox Account for the deposit of
Collections at a Lockbox Bank. Each Borrower agrees that all Collections and
other amounts received by such Borrower from any Account Debtor or any other
source immediately upon receipt shall be deposited into a Lockbox Account. No
Lockbox Agreement or arrangement contemplated thereby shall be modified by a
Borrower without the prior written consent of Foothill. Upon the terms and
subject to the conditions set forth in the Lockbox Agreements, all amounts
received in each Lockbox Account shall be wired each Business Day into an
account (the "Foothill Account") maintained by Foothill at a depositary selected
by Foothill.

         2.8 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. The receipt of any
Collections by Foothill (whether from transfers to Foothill by the Lockbox Banks
pursuant to the Lockbox Agreements or otherwise) immediately shall be applied
provisionally to reduce the Obligations outstanding under Section 2.1, but shall
not be considered a payment on account unless such Collection item is a wire
transfer of


<PAGE>


immediately available federal funds and is made to the Foothill Account or
unless and until such Collection item is honored when presented for payment.
From and after the Closing Date, Foothill shall be entitled to charge Borrowers
for one Business Day of `clearance' or `float' at the rate set forth in Section
2.6(a) or Section 2.6(c)(i), as applicable, on all Collections that are received
by Foothill (regardless of whether forwarded by the Lockbox Banks to Foothill,
whether provisionally applied to reduce the Obligations under Section 2.1, or
otherwise). This across-the-board one Business Day clearance or float charge on
all Collections is acknowledged by the parties to constitute an integral aspect
of the pricing of Foothill's financing of Borrowers, and shall apply
irrespective of the characterization of whether receipts are owned by a Borrower
or Foothill, and whether or not there are any outstanding Advances, the effect
of such clearance or float charge being the equivalent of charging one Business
Day of interest on such Collections. Should any Collection item not be honored
when presented for payment, then Borrowers shall be deemed not to have made such
payment, and interest shall be recalculated accordingly. Anything to the
contrary contained herein notwithstanding, any Collection item shall be deemed
received by Foothill only if it is received into the Foothill Account on a
Business Day on or before 11:00 a.m. California time. If any Collection item is
received into the Foothill Account on a non-Business Day or after 11:00 a.m.
California time on a Business Day, it shall be deemed to have been received by
Foothill as of the opening of business on the immediately following Business
Day.

         2.9 DESIGNATED ACCOUNT. Foothill is authorized to make the Advances and
issue or cause to be issued, the Letters of Credit under this Agreement based
upon telephonic or other instructions received from anyone purporting to be an
Authorized Person, or without instructions if pursuant to Section 2.6(e).
Borrowers agree to establish and maintain a single Designated Account with the
Designated Account Bank for the purpose of receiving the proceeds of the
Advances requested by Borrowers and made by Foothill hereunder. Unless otherwise
agreed by Foothill and Borrowers, any Advance requested by Borrowers and made by
Foothill hereunder shall be made to the Designated Account.

         2.10 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS. At the
request of Borrowers, to facilitate and expedite the administration and
accounting processes and procedures of their borrowings under this Agreement,
Foothill has agreed, in lieu of maintaining separate loan accounts on Foothill's
books in the name of each of the Borrowers, that Foothill shall maintain a
single account on its books in the names of all of the Borrowers (the "Loan
Account"). All Advances made by Foothill to Borrowers or for Borrowers' account,
including accrued interest, Foothill Expenses, and any other payment Obligations
of Borrowers shall be made jointly and severally to the Borrowers and shall be
charged to the Loan Account. In accordance with Section 2.8, the Loan Account
will be credited with all payments received by Foothill from any Borrower or for
any Borrower's account, including all amounts received in the Foothill Account
from any Lockbox Bank. Foothill shall render one statement regarding the Loan
Account to K-Tel USA on behalf of Borrowers, including principal, interest,
fees, and including an itemization of all charges and expenses constituting
Foothill Expenses


<PAGE>


owing, and such statements shall be conclusively presumed to be correct and
accurate, absent manifest error, and constitute an account stated between
Borrowers and Foothill unless, within 30 days after receipt thereof by
Borrowers, Borrowers shall deliver to Foothill written objection thereto
describing the error or errors contained in any such statements. Each Borrower
hereby expressly agrees and acknowledges that Foothill shall have no obligation
to account separately to such Borrower.

         2.11 FEES. Borrowers shall pay to Foothill the following fees:

                  (a) Closing Fee. On the Closing Date, a closing fee of
         $75,000;

                  (b) Unused Line Fee. On the first day of each month during the
         term of this Agreement, an unused line fee in an amount equal to 0.25%
         per annum times the Average Unused Portion of the Maximum Amount.

                  (c) Financial Examination, Documentation, and Appraisal Fees.
         Foothill's customary fee of $650 per day per examiner, plus
         out-of-pocket expenses for each financial analysis and examination
         (i.e., audits) of Borrowers performed by personnel employed by
         Foothill; and, the actual charges paid or incurred by Foothill if it
         elects to employ the services of one or more third Persons to perform
         such financial analyses and examinations (i.e., audits) of Borrowers or
         to appraise the Library on an annual basis so long as the cost of any
         such appraisal does not exceed $7,500. Foothill agrees to provide
         Borrowers with a copy of all appraisals of the Library obtained by it;
         and

                  (d) Servicing Fee. On the first day of each month during the
         term of this Agreement, and thereafter so long as any Obligations are
         outstanding, a servicing fee in an amount equal to $2,500.

         3. CONDITIONS; TERM OF AGREEMENT.

         3.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE AND THE ISSUANCE OF THE
INITIAL LETTER OF CREDIT. The obligation of Foothill to make the initial
Advance, to issue or cause to be issued the initial Letter of Credit is subject
to the fulfillment, to the satisfaction of Foothill and its counsel, of each of
the following conditions on or before the Closing Date:

                  (a) the Closing Date shall occur on or before November 24,
         1997;

                  (b) Foothill shall have received searches reflecting the
         filing of its financing statements;

                  (c) Foothill shall have received each of the following
         documents, duly executed, and each such document shall be in full force
         and effect:


<PAGE>


                           a. the Lockbox Agreements;

                           b. the Disbursement Letter;

                           c. the Pay-Off Letter, together with UCC termination
                  statements and other documentation evidencing the termination
                  by Existing Lender of its Liens in and to the properties and
                  assets of Borrowers;

                           d. the Intellectual Property Security Agreement;

                           e. the Copyright Security Agreements; and

                           f. the Guaranty and security agreements and a
                  security agreement - stock pledge securing such Guaranty;

                  (d) Foothill shall have received a certificate from the
         Secretary of each Borrower attesting to the resolutions of each
         Borrower's Board of Directors authorizing its execution, delivery, and
         performance of this Agreement and the other Loan Documents to which
         such Borrower is a party and authorizing specific officers of such
         Borrower to execute the same, and Foothill shall have received a
         certificate from the Secretary of Parent attesting to the resolutions
         of Parent's Board of Directors authorizing its execution, delivery and
         performance of the Guaranty and the security documents securing the
         Guaranty;

                  (e) Foothill shall have received copies of Parent's and each
         Borrower's Governing Documents, as amended, modified, or supplemented
         to the Closing Date, certified by the Secretary of Parent or such
         Borrower;

                  (f) Foothill shall have received a certificate of status with
         respect to each Borrower and Parent, dated within 10 days of the
         Closing Date, such certificate to be issued by the appropriate officer
         of the jurisdiction of organization of such Borrower and Parent, which
         certificate shall indicate that such Borrower or Parent is in good
         standing in such jurisdiction;

                  (g) Foothill shall have received certificates of status with
         respect to each Borrower and Parent, each dated within 15 days of the
         Closing Date, such certificates to be issued by the appropriate officer
         of the jurisdictions in which its failure to be duly qualified or
         licensed would constitute a Material Adverse Change, which certificates
         shall indicate that such Borrower is in good standing in such
         jurisdictions;

                  (h) Foothill shall have received a certificate of insurance,
         together with the endorsements thereto, as are required by Section
         6.10, the form and substance of which shall be satisfactory to Foothill
         and its counsel;


<PAGE>


                  (i) Foothill shall have received duly executed certificates of
         title with respect to that portion of the Collateral that is subject to
         certificates of title;

                  (j) Foothill shall have received an opinion of Borrowers'
         counsel in form and substance satisfactory to Foothill in its sole
         discretion;

                  (k) Foothill shall have received satisfactory evidence that
         all tax returns required to be filed by Borrowers have been timely
         filed and all taxes upon each Borrower or its properties, assets,
         income, and franchises (including payroll taxes) have been paid prior
         to delinquency, except such taxes that are the subject of a Permitted
         Protest;

                  (l) As of the Closing Date, Borrowers shall have not less than
         $500,000 of Excess Availability after giving effect to the payments
         permitted by Section 7.17(a)(i); and

                  (m) all other documents and legal matters in connection with
         the transactions contemplated by this Agreement shall have been
         delivered, executed, or recorded and shall be in form and substance
         satisfactory to Foothill and its counsel.

         3.2 CONDITIONS PRECEDENT TO ALL ADVANCES AND THE ISSUANCE OF ALL
LETTERS OF CREDIT. The following shall be conditions precedent to all Advances
and the issuance of all Letters of Credit:

                  (a) the representations and warranties contained in this
         Agreement and the other Loan Documents shall be true and correct in all
         respects on and as of the date of such extension of credit, as though
         made on and as of such date (except to the extent that such
         representations and warranties relate solely to an earlier date);

                  (b) no Default or Event of Default shall have occurred and be
         continuing on the date of such extension of credit, nor shall either
         result from the making thereof; and

                  (c) no injunction, writ, restraining order, or other order of
         any nature prohibiting, directly or indirectly, the extending of such
         credit shall have been issued and remain in force by any governmental
         authority against any Borrower, Foothill, or any of their Affiliates.

         3.3 CONDITIONS SUBSEQUENT. As conditions subsequent to initial closing
hereunder, Borrowers shall perform or cause to be performed the following (the
failure by Borrowers to so perform or cause to be performed constituting an
Event of Default):

                  (a) within 30 days of the Closing Date, deliver to Foothill
         the certified copies of the policies of insurance, together with the
         endorsements thereto, as are required by Section 6.10, the form and
         substance of which shall be satisfactory to


<PAGE>


         Foothill and its counsel; and

                  (b) within 30 days of the Closing Date, deliver to Foothill
         Collateral Access Agreements from each of their lessors.

         3.4 TERM; AUTOMATIC RENEWAL. This Agreement shall become effective upon
the execution and delivery hereof by Borrowers and Foothill and shall continue
in full force and effect for a term ending on the date (the "Renewal Date") that
is four years from the Closing Date and automatically shall be renewed for
successive one year periods thereafter, unless sooner terminated pursuant to the
terms hereof. Either party may terminate this Agreement effective on the Renewal
Date or on any anniversary of the Renewal Date by giving the other party at
least 90 days prior written notice. The foregoing notwithstanding, Foothill
shall have the right to terminate its obligations under this Agreement
immediately and without notice upon the occurrence and during the continuation
of an Event of Default.

         3.5 EFFECT OF TERMINATION. On the date of termination of this
Agreement, all Obligations (including contingent reimbursement obligations of
Borrowers with respect to any outstanding Letters of Credit) immediately shall
become due and payable without notice or demand. No termination of this
Agreement, however, shall relieve or discharge Borrowers of Borrowers' duties,
Obligations, or covenants hereunder, and Foothill's continuing security
interests in the Collateral shall remain in effect until all Obligations have
been fully and finally discharged and Foothill's obligation to provide
additional credit hereunder is terminated. If Borrowers have sent a notice of
termination pursuant to the provisions of Section 3.4, but fail to pay the
Obligations in full on the date set forth in said notice, then Foothill may, but
shall not be required to, renew this Agreement for an additional term of one
year.

         3.6 EARLY TERMINATION BY BORROWERS. The provisions of Section 3.4 that
allow termination of this Agreement by Borrowers only on the Renewal Date and
certain anniversaries thereof notwithstanding, Borrowers have the option, at any
time upon 90 days prior written notice to Foothill, to terminate this Agreement
by paying to Foothill, in cash, the Obligations (including an amount equal to
102% of the undrawn amount of the Letters of Credit), in full, together with a
premium (the "Early Termination Premium") equal to: (a) $150,000 if the
termination occurs within the first 12 months after the Closing Date, (b)
$125,000 if the termination occurs during months 13 through 24 after the Closing
Date, (c) $100,000 if the termination occurs during months 25 through 36 after
the Closing Date, and (d) $75,000 at all times after the 36th month after the
Closing Date.

         3.7 TERMINATION UPON EVENT OF DEFAULT. If Foothill terminates this
Agreement upon the occurrence of an Event of Default, in view of the
impracticability and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Foothill's
lost profits as a result thereof, Borrowers shall pay to Foothill upon the
effective date of such termination, a premium in an amount equal to the Early
Termination Premium. The Early Termination Premium


<PAGE>


shall be presumed to be the amount of damages sustained by Foothill as the
result of the early termination and Borrowers agree that it is reasonable under
the circumstances currently existing. The Early Termination Premium provided for
in this Section 3.7 shall be deemed included in the Obligations.

         4. CREATION OF SECURITY INTEREST.

         4.1 GRANT OF SECURITY INTEREST. Each Borrower hereby grants to Foothill
a continuing security interest in all of such Borrower's currently existing and
hereafter acquired or arising Collateral in order to secure prompt repayment of
any and all Obligations and in order to secure prompt performance by such
Borrower of each of its covenants and duties under the Loan Documents.
Foothill's security interests in the Collateral shall attach to all Collateral
without further act on the part of Foothill or Borrowers. Anything contained in
this Agreement or any other Loan Document to the contrary notwithstanding,
except for the sale of Inventory to buyers in the ordinary course of business,
no Borrower has any authority, express or implied, to dispose of any item or
portion of the Collateral.

         4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral, including
proceeds, is evidenced by or consists of Negotiable Collateral, Borrowers,
immediately upon the request of Foothill, shall endorse and deliver physical
possession of such Negotiable Collateral to Foothill.

         4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, AND NEGOTIABLE
COLLATERAL. At any time that an Event of Default has occurred and is continuing
or Foothill deems itself insecure, Foothill or Foothill's designee may (a)
notify customers or Account Debtors of any Borrower that the Accounts, General
Intangibles, or Negotiable Collateral of such Borrower have been assigned to
Foothill or that Foothill has a security interest therein, and (b) collect the
Accounts, General Intangibles, and Negotiable Collateral of such Borrower
directly and charge the collection costs and expenses to the Loan Account. Each
Borrower agrees that it will hold in trust for Foothill, as Foothill's trustee,
any Collections that it receives and immediately will deliver said Collections
to Foothill in their original form as received by Borrower.

         4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time upon the
request of Foothill, Borrowers shall execute and deliver to Foothill all
financing statements, continuation financing statements, fixture filings,
security agreements, pledges, assignments, endorsements of certificates of
title, applications for title, affidavits, reports, notices, schedules of
accounts, letters of authority, amendments to the Copyright Security Agreements
and all other documents that Foothill reasonably may request, in form
satisfactory to Foothill, to perfect and continue perfected Foothill's security
interests in the Collateral, and in order to fully consummate all of the
transactions contemplated hereby and under the other the Loan Documents.

         4.5 POWER OF ATTORNEY. Each Borrower hereby irrevocably makes,
constitutes, and appoints Foothill (and any of Foothill's officers, employees,
or agents


<PAGE>


designated by Foothill) as such Borrower's true and lawful attorney, with power
to (a) if such Borrower refuses to, or fails timely to execute and deliver any
of the documents described in Section 4.4, sign the name of such Borrower on any
of the documents described in Section 4.4, (b) at any time that an Event of
Default has occurred and is continuing or Foothill deems itself insecure, sign
such Borrower's name on any invoice or bill of lading relating to any Account of
such Borrower, drafts against Account Debtors, schedules and assignments of
Accounts of such Borrower, verifications of Accounts of such Borrower, and
notices to Account Debtors, (c) send requests for verification of Accounts of
such Borrower, (d) endorse such Borrower's name on any Collection item that may
come into Foothill's possession, (e) at any time that an Event of Default has
occurred and is continuing or Foothill deems itself insecure, notify the post
office authorities to change the address for delivery of such Borrower's mail to
an address designated by Foothill, to receive and open all mail addressed to
such Borrower, and to retain all mail relating to the Collateral of such
Borrower and forward all other mail to such Borrower, (f) at any time that an
Event of Default has occurred and is continuing or Foothill deems itself
insecure, make, settle, and adjust all claims under such Borrower's policies of
insurance and make all determinations and decisions with respect to such
policies of insurance, and (g) at any time that an Event of Default has occurred
and is continuing or Foothill deems itself insecure, settle and adjust disputes
and claims respecting the Accounts of such Borrower directly with Account
Debtors, for amounts and upon terms that Foothill determines to be reasonable,
and Foothill may cause to be executed and delivered any documents and releases
that Foothill determines to be necessary. The appointment of Foothill as such
Borrower's attorney, and each and every one of Foothill's rights and powers,
being coupled with an interest, is irrevocable until all of the Obligations have
been fully and finally repaid and performed and Foothill's obligation to extend
credit hereunder is terminated.

         4.6 RIGHT TO INSPECT. Foothill (through any of its officers, employees,
or agents) shall have the right, from time to time, during normal business
hours, hereafter to inspect Borrowers' Books and to check, test, and appraise
the Collateral in order to verify Borrowers' financial condition or the amount,
quality, value, condition of, or any other matter relating to, the Collateral.

         5. REPRESENTATIONS AND WARRANTIES.

         In order to induce Foothill to enter into this Agreement, each Borrower
makes the following representations and warranties which shall be true, correct,
and complete in all respects as of the date hereof, and shall be true, correct,
and complete in all respects as of the Closing Date, and at and as of the date
of the making of each Advance and the issuance of each Letter of Credit made
thereafter, as though made on and as of the date of such Advance and the
issuance of each Letter of Credit (except to the extent that such
representations and warranties relate solely to an earlier date) and such
representations and warranties shall survive the execution and delivery of this
Agreement:

         5.1 NO ENCUMBRANCES. Each Borrower has good and indefeasible title


<PAGE>


to its Collateral, free and clear of Liens except for Permitted Liens.

         5.2 ELIGIBLE ACCOUNTS. The Eligible Accounts of each Borrower are bona
fide existing obligations created by the sale and delivery of Inventory, the
licensing of copyrights or the rendition of services to Account Debtors in the
ordinary course of such Borrower's business, unconditionally owed to such
Borrower without defenses, disputes, offsets, counterclaims, or rights of return
or cancellation. The property giving rise to such Eligible Accounts has been
delivered to the Account Debtor, or to the Account Debtor's agent for immediate
shipment to and unconditional acceptance by the Account Debtor. Borrowers have
not received notice of actual or imminent bankruptcy, insolvency, or material
impairment of the financial condition of any Account Debtor regarding any
Eligible Account.

         5.3 INTENTIONALLY OMITTED.

         5.4 EQUIPMENT. All of the Equipment of Borrowers is used or held for
use in Borrowers' business and is fit for such purposes.

         5.5 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and Equipment of
Borrowers are not stored with a bailee, warehouseman, or similar party (without
Foothill's prior written consent) and are located only at the locations
identified on Schedule 6.12 or otherwise permitted by Section 6.12.

         5.6 INVENTORY RECORDS. Each Borrower keeps correct and accurate records
itemizing and describing the kind, type, quality, and quantity of its Inventory,
and such Borrower's cost therefor.

         5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN. The chief executive
office of each Borrower is located at 2605 Fernbrook Lane North, Minneapolis,
Minnesota 55447 and each Borrower's FEIN is set forth below:

             Borrower                           FEIN
             --------                           ----
             K-Tel (USA)                        41-1550160
             Dominion                           41-1545922
             Consumer                           41-1862470
             TV                                 41-1773274
             Video                              41-1862472

         5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.

                  (a) Each Borrower is duly organized and existing and in good
         standing under the laws of the State of Minnesota and qualified and
         licensed to do business in, and in good standing in, any state where
         the failure to be so licensed or qualified reasonably could be expected
         to have a Material Adverse Change.


<PAGE>


                  (b) Set forth on Schedule 5.8, is a complete and accurate list
         of each Borrower's direct and indirect Subsidiaries, showing: (i) the
         jurisdiction of their incorporation; (ii) the number of shares of each
         class of common and preferred stock authorized for each of such
         Subsidiaries; and (iii) the number and the percentage of the
         outstanding shares of each such class owned directly or indirectly by
         such Borrower. All of the outstanding capital stock of each such
         Subsidiary has been validly issued and is fully paid and
         non-assessable.

                  (c) Except as set forth on Schedule 5.8, no capital stock (or
         any securities, instruments, warrants, options, purchase rights,
         conversion or exchange rights, calls, commitments or claims of any
         character convertible into or exercisable for capital stock) of any
         direct or indirect Subsidiary of any Borrower is subject to the
         issuance of any security, instrument, warrant, option, purchase right,
         conversion or exchange right, call, commitment or claim of any right,
         title, or interest therein or thereto.

         5.9 DUE AUTHORIZATION; NO CONFLICT.

                  (a) The execution, delivery, and performance by each Borrower
         of this Agreement and the Loan Documents to which it is a party have
         been duly authorized by all necessary corporate action.

                  (b) The execution, delivery, and performance by each Borrower
         of this Agreement and the Loan Documents to which it is a party do not
         and will not (i) violate any provision of federal, state, or local law
         or regulation (including Regulations G, T, U, and X of the Federal
         Reserve Board) applicable to such Borrower, the Governing Documents of
         such Borrower, or any order, judgment, or decree of any court or other
         Governmental Authority binding on such Borrower, (ii) conflict with,
         result in a breach of, or constitute (with due notice or lapse of time
         or both) a default under any material contractual obligation or
         material lease of such Borrower, (iii) result in or require the
         creation or imposition of any Lien of any nature whatsoever upon any
         properties or assets of such Borrower, other than Permitted Liens, or
         (iv) require any approval of stockholders or any approval or consent of
         any Person under any material contractual obligation of such Borrower.

                  (c) Other than the filing of appropriate financing statements,
         fixture filings, and mortgages, the execution, delivery, and
         performance by each Borrower of this Agreement and the Loan Documents
         to which such Borrower is a party do not and will not require any
         registration with, consent, or approval of, or notice to, or other
         action with or by, any federal, state, foreign, or other Governmental
         Authority or other Person.

                  (d) This Agreement and the Loan Documents to which any
         Borrower is a party, and all other documents contemplated hereby and
         thereby, when executed and delivered by such Borrower will be the
         legally valid and binding obligations of such Borrower, enforceable
         against such Borrower in accordance with


<PAGE>


         their respective terms, except as enforcement may be limited by
         equitable principles or by bankruptcy, insolvency, reorganization,
         moratorium, or similar laws relating to or limiting creditors' rights
         generally.

                  (e) The Liens granted by each Borrower to Foothill in and to
         its properties and assets pursuant to this Agreement and the other Loan
         Documents are validly created, perfected, and first priority Liens,
         subject only to Permitted Liens.

         5.10 LITIGATION. There are no actions or proceedings pending by or
against any Borrower before any court or administrative agency and no Borrower
has any knowledge or belief of any pending, threatened, or imminent litigation,
governmental investigations, or claims, complaints, actions, or prosecutions
involving any Borrower or any guarantor of the Obligations, except for: (a)
ongoing collection matters in which a Borrower is the plaintiff; (b) matters
disclosed on Schedule 5.10; and (c) matters arising after the date hereof that,
if decided adversely to a Borrower, would not have a Material Adverse Change.

         5.11 NO MATERIAL ADVERSE CHANGE. All financial statements relating to
any Borrower or any guarantor of the Obligations that have been delivered by any
Borrower to Foothill have been prepared in accordance with GAAP (except, in the
case of unaudited financial statements, for the lack of footnotes and being
subject to year-end audit adjustments) and fairly present, in all material
respects, such Borrower's (or such guarantor's, as applicable) financial
condition as of the date thereof and such Borrower's results of operations for
the period then ended. There has not been a Material Adverse Change with respect
to any Borrower (or such guarantor, as applicable) since the date of the latest
financial statements submitted to Foothill on or before the Closing Date.

         5.12 SOLVENCY. Each Borrower is Solvent. No transfer of property is
being made by any Borrower and no obligation is being incurred by any Borrower
in connection with the transactions contemplated by this Agreement or the other
Loan Documents with the intent to hinder, delay, or defraud either present or
future creditors of any Borrower.

         5.13 EMPLOYEE BENEFITS. None of Borrowers, any of their Subsidiaries,
or any of their ERISA Affiliates maintains or contributes to any Benefit Plan,
other than those listed on Schedule 5.13. Each Borrower, each of its
Subsidiaries and each ERISA Affiliate have satisfied the minimum funding
standards of ERISA and the IRC with respect to each Benefit Plan to which it is
obligated to contribute. No ERISA Event has occurred nor has any other event
occurred that may result in an ERISA Event that reasonably could be expected to
result in a Material Adverse Change. None of Borrowers or their Subsidiaries,
any ERISA Affiliate, or any fiduciary of any Plan is subject to any direct or
indirect liability with respect to any Plan under any applicable law, treaty,
rule, regulation, or agreement. None of Borrowers or their Subsidiaries or any
ERISA Affiliate is required to provide security to any Plan under Section
401(a)(29) of the IRC.



                                       1
<PAGE>


         5.14 ENVIRONMENTAL CONDITION. None of Borrowers' properties or assets
has ever been used by any Borrower or, to the best of each Borrower's knowledge,
by previous owners or operators in the disposal of, or to produce, store,
handle, treat, release, or transport, any Hazardous Materials. None of
Borrowers' properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a Hazardous Materials
disposal site, or a candidate for closure pursuant to any environmental
protection statute. No Lien arising under any environmental protection statute
has attached to any revenues or to any real or personal property owned or
operated by any Borrower. No Borrower has received a summons, citation, notice,
or directive from the Environmental Protection Agency or any other federal or
state governmental agency concerning any action or omission by any Borrower
resulting in the releasing or disposing of Hazardous Materials into the
environment.

         5.15 BUSINESS OF DOMINION. Dominion's sole business is to own the
Library and to license the various music rights to other Persons. The only
liabilities of Dominion are royalties and claims relating to the Library. None
of such claims will materially and adversely affect the value of the Library.

         6. AFFIRMATIVE COVENANTS.

         Each Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, such Borrower shall do all of the following:

         6.1 ACCOUNTING SYSTEM. Maintain a standard and modern system of
accounting that enables such Borrower to produce financial statements in
accordance with GAAP, and maintain records pertaining to its Collateral that
contain information as from time to time may be requested by Foothill. Such
Borrower also shall keep a modern inventory reporting system that shows all
additions, sales, claims, returns, and allowances with respect to its Inventory.

         6.2 COLLATERAL REPORTING. Provide Foothill with the following documents
at the following times in form satisfactory to Foothill: (a) on weekly basis or
more frequently upon Foothill's request, a summary of Borrowers' sales journal,
collection journal, and credit register since the last such schedule and an
estimated calculation of the Borrowing Base as of such date, (b) on a monthly
basis and, in any event, by no later than the 15th day of each month during the
term of this Agreement, (i) a detailed calculation of the Borrowing Base, (ii) a
detailed aging, by total, of such Borrower's Accounts, together with a
reconciliation to the detailed calculation of the Borrowing Base previously
provided to Foothill, and (iii) a schedule of additional copyright filings and
copyrights, (c) on a monthly basis and, in any event, by no later than the 15th
day of each month during the term of this Agreement, a summary aging, by vendor,
of such Borrower's accounts payable and any book overdraft, and a report of
accrued royalties and royalty payments payable by such Borrower, (d) upon
request, Inventory reports specifying such Borrower's cost and the wholesale
market value of its Inventory by category, with additional detail showing
additions to and deletions from its


<PAGE>


Inventory, (e) on weekly basis or more frequently upon Foothill's request, a
summary of returns, disputes, or claims, unless such information is contained in
another report required in this Section 6.2, (f) upon request, copies of
invoices in connection with its Accounts, customer statements, credit memos,
remittance advices and reports, deposit slips, shipping and delivery documents
in connection with its Accounts and for Inventory and Equipment acquired by such
Borrower, purchase orders and invoices, (g) on a quarterly basis, a detailed
list of such Borrower's customers, (h) on a monthly basis, a calculation of the
Dilution for the prior month; and (i) such other reports as to the Collateral or
the financial condition of such Borrower as Foothill may request from time to
time. Original sales invoices evidencing daily sales shall be mailed by such
Borrower to each Account Debtor and, after the occurrence of an Event of
Default, at Foothill's direction, the invoices shall indicate on their face that
such Borrower's Account has been assigned to Foothill and that all payments are
to be made directly to Foothill.

         6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Deliver to Foothill:
(a) as soon as available, but in any event within 30 days after the end of each
month during each of such Parent's fiscal years, a company prepared balance
sheet, income statement, and statement of cash flow covering Parent's operations
during such period; and (b) as soon as available, but in any event within 90
days after the end of each of Parent's fiscal years, financial statements of
Parent's for each such fiscal year, audited by independent certified public
accountants reasonably acceptable to Foothill and certified, without any
qualifications, by such accountants to have been prepared in accordance with
GAAP, together with a certificate of such accountants addressed to Foothill
stating that such accountants do not have knowledge of the existence of any
Default or Event of Default. Such audited financial statements shall include a
balance sheet, profit and loss statement, and statement of cash flow and, if
prepared, such accountants' letter to management. In addition to the financial
statements referred to above, Parent agrees to deliver financial statements
prepared on a consolidating basis so as to present Parent and each such related
entity separately, and on a consolidated basis.

         Together with the above, Borrowers also shall deliver to Foothill
Parent's Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and Form 8-K
Current Reports, and any other filings made by Parent with the Securities and
Exchange Commission, if any, as soon as the same are filed, or any other
information that is provided by Parent to its shareholders, and any other report
reasonably requested by Foothill relating to the financial condition of such
Parent.

         Each month, together with the financial statements provided pursuant to
Section 6.3(a), Parent shall deliver to Foothill a certificate signed by its
chief financial officer to the effect that: (i) all financial statements
delivered or caused to be delivered to Foothill hereunder have been prepared in
accordance with GAAP (except, in the case of unaudited financial statements, for
the lack of footnotes and being subject to year-end audit adjustments) and
fairly present the financial condition of Parent in all material respects, (ii)
the representations and warranties of Borrowers contained in this Agreement and
the other Loan Documents are true and correct in all material respects on and as
of the date of such certificate, as though made on and as of such date (except
to 


<PAGE>


the extent that such representations and warranties relate solely to an earlier
date), (iii) for each month that also is the date on which a financial covenant
in Section 7.20 is to be tested, a Compliance Certificate demonstrating in
reasonable detail compliance at the end of such period with the applicable
financial covenants contained in Section 7.20, and (iv) on the date of delivery
of such certificate to Foothill there does not exist any condition or event that
constitutes a Default or Event of Default (or, in the case of clauses (i), (ii),
or (iii), to the extent of any non-compliance, describing such non-compliance as
to which he or she may have knowledge and what action Parent has taken, is
taking, or proposes to take with respect thereto).

         Each Borrower shall have issued written instructions to its independent
certified public accountants authorizing them to communicate with Foothill and
to release to Foothill whatever financial information concerning such Borrower
that Foothill may request. Each Borrower hereby irrevocably authorizes and
directs all auditors, accountants, or other third parties to deliver to
Foothill, at such Borrower's expense, copies of such Borrower's financial
statements, papers related thereto, and other accounting records of any nature
in their possession, and to disclose to Foothill any information they may have
regarding such Borrower's business affairs and financial conditions.

         6.4 TAX RETURNS. Deliver to Foothill copies of each of such Borrower's
future federal income tax returns, and any amendments thereto, within 30 days of
the filing thereof with the Internal Revenue Service.

         6.5 GUARANTOR REPORTS. Cause any guarantor of any of the Obligations to
deliver its annual financial statements at the time when such Borrower provides
its audited financial statements to Foothill and copies of all federal income
tax returns as soon as the same are available and in any event no later than 30
days after the same are required to be filed by law.

         6.6 RETURNS. Cause returns and allowances, if any, as between such
Borrower and its Account Debtors to be on the same basis and in accordance with
the usual customary practices of such Borrower, as they exist at the time of the
execution and delivery of this Agreement. If, at a time when no Event of Default
has occurred and is continuing, any Account Debtor returns any Inventory to such
Borrower, such Borrower promptly shall determine the reason for such return and,
if such Borrower accepts such return, issue a credit memorandum (with a copy to
be sent to Foothill) in the appropriate amount to such Account Debtor. If, at a
time when an Event of Default has occurred and is continuing, any Account Debtor
returns any Inventory to such Borrower, such Borrower promptly shall determine
the reason for such return and, if Foothill consents (which consent shall not be
unreasonably withheld), issue a credit memorandum (with a copy to be sent to
Foothill) in the appropriate amount to such Account Debtor.

         6.7 TITLE TO EQUIPMENT. Upon Foothill's request, such Borrower
immediately shall deliver to Foothill, properly endorsed, any and all evidences
of 


<PAGE>


ownership of, certificates of title, or applications for title to any items of
its Equipment.

         6.8 MAINTENANCE OF EQUIPMENT. Maintain its Equipment in good operating
condition and repair (ordinary wear and tear excepted), and make all necessary
replacements thereto so that the value and operating efficiency thereof shall at
all times be maintained and preserved. Other than those items of Equipment that
constitute fixtures on the Closing Date, such Borrower shall not permit any item
of its Equipment to become a fixture to real estate or an accession to other
property, and such Equipment shall at all times remain personal property.

         6.9 TAXES. Cause all assessments and taxes, whether real, personal, or
otherwise, due or payable by, or imposed, levied, or assessed against such
Borrower or any of its property to be paid in full, before delinquency or before
the expiration of any extension period, except to the extent that the validity
of such assessment or tax shall be the subject of a Permitted Protest. Such
Borrower shall make due and timely payment or deposit of all such federal,
state, and local taxes, assessments, or contributions required of it by law, and
will execute and deliver to Foothill, on demand, appropriate certificates
attesting to the payment thereof or deposit with respect thereto. Such Borrower
will make timely payment or deposit of all tax payments and withholding taxes
required of it by applicable laws, including those laws concerning F.I.C.A.,
F.U.T.A., state disability, and local, state, and federal income taxes, and
will, upon request, furnish Foothill with proof satisfactory to Foothill
indicating that such Borrower has made such payments or deposits.

         6.10 INSURANCE.

                  (a) At its expense, keep its Collateral insured against loss
         or damage by fire, theft, explosion, sprinklers, and all other hazards
         and risks, and in such amounts, as are ordinarily insured against by
         other owners in similar businesses. Such Borrower also shall maintain
         business interruption, public liability, product liability, and
         property damage insurance relating to such Borrower's ownership and use
         of its Collateral, as well as insurance against larceny, embezzlement,
         and criminal misappropriation.

                  (b) All such policies of insurance shall be in such form, with
         such companies, and in such amounts as may be reasonably satisfactory
         to Foothill. All insurance required herein shall be written by
         companies which are authorized to do insurance business in the State of
         California. All hazard insurance and such other insurance as Foothill
         shall specify, shall contain a California Form 438BFU (NS) mortgagee
         endorsement, or an equivalent endorsement satisfactory to Foothill,
         showing Foothill as sole loss payee thereof, and shall contain a waiver
         of warranties. Every policy of insurance referred to in this Section
         6.10 shall contain an agreement by the insurer that it will not cancel
         such policy except after 30 days prior written notice to Foothill and
         that any loss payable thereunder shall be payable notwithstanding any
         act or negligence of such Borrower or Foothill which might, absent such
         agreement, result in a forfeiture of all or a part of such insurance
         payment. Such Borrower shall deliver to


<PAGE>


         Foothill certified copies of such policies of insurance and evidence of
         the payment of all premiums therefor.

                  (c) Original policies or certificates thereof satisfactory to
         Foothill evidencing such insurance shall be delivered to Foothill at
         least 30 days prior to the expiration of the existing or preceding
         policies. Such Borrower shall give Foothill prompt notice of any loss
         covered by such insurance, and Foothill shall have the right to adjust
         any loss. If an Event of Default has occurred and is continuing,
         Foothill shall have the exclusive right to adjust all losses payable
         under any such insurance policies without any liability to such
         Borrower whatsoever in respect of such adjustments. Any monies received
         as payment for any loss under any insurance policy including the
         insurance policies mentioned above, shall be paid over to Foothill to
         be applied at the option of Foothill either to the prepayment of the
         Obligations without premium, in such order or manner as Foothill may
         elect. Upon the occurrence of an Event of Default, Foothill shall have
         the right to apply all prepaid premiums to the payment of the
         Obligations in such order or form as Foothill shall determine.

                  (d) Such Borrower shall not take out separate insurance
         concurrent in form or contributing in the event of loss with that
         required to be maintained under this Section 6.10, unless Foothill is
         included thereon as named insured with the loss payable to Foothill
         under a standard California 438BFU (NS) Mortgagee endorsement, or its
         local equivalent. Such Borrower immediately shall notify Foothill
         whenever such separate insurance is taken out, specifying the insurer
         thereunder and full particulars as to the policies evidencing the same,
         and originals of such policies immediately shall be provided to
         Foothill.

         6.11 NO SETOFFS OR COUNTERCLAIMS. Make payments hereunder and under the
other Loan Documents by or on behalf of such Borrower without setoff or
counterclaim and free and clear of, and without deduction or withholding for or
on account of, any federal, state, or local taxes. Foothill represents to
Borrowers that it is a California corporation that is wholly-owned by Norwest
Corporation, a Delaware corporation.

         6.12 LOCATION OF INVENTORY AND EQUIPMENT. Keep its Inventory and
Equipment only at the locations identified on Schedule 6.12; provided, however,
that Borrowers may amend Schedule 6.12 so long as such amendment occurs by
written notice to Foothill not less than 30 days prior to the date on which the
Inventory or Equipment of Borrowers is moved to such new location, so long as
such new location is within the continental United States, and so long as, at
the time of such written notification, Borrowers provide any financing
statements or fixture filings necessary to perfect and continue perfected
Foothill's security interests in such assets and also provides to Foothill a
Collateral Access Agreement.

         6.13 COMPLIANCE WITH LAWS. Comply with the requirements of all
applicable laws, rules, regulations, and orders of any governmental authority,
including the Fair Labor Standards Act and the Americans With Disabilities Act,
other than laws,


<PAGE>


rules, regulations, and orders the non-compliance with which, individually or in
the aggregate, would not have and could not reasonably be expected to have a
Material Adverse Change.

         6.14 EMPLOYEE BENEFITS.

                  (a) Deliver to Foothill: (i) promptly, and in any event within
         10 Business Days after such Borrower or any of its Subsidiaries knows
         or has reason to know that an ERISA Event has occurred that reasonably
         could be expected to result in a Material Adverse Change, a written
         statement of the chief financial officer of such Borrower describing
         such ERISA Event and any action that is being taking with respect
         thereto by such Borrower, any such Subsidiary or ERISA Affiliate, and
         any action taken or threatened by the IRS, Department of Labor, or
         PBGC. Such Borrower or such Subsidiary, as applicable, shall be deemed
         to know all facts known by the administrator of any Benefit Plan of
         which it is the plan sponsor, (ii) promptly, and in any event within 3
         Business Days after the filing thereof with the IRS, a copy of each
         funding waiver request filed with respect to any Benefit Plan and all
         communications received by such Borrower, any of its Subsidiaries or,
         to the knowledge of such Borrower, any ERISA Affiliate with respect to
         such request, and (iii) promptly, and in any event within 3 Business
         Days after receipt by such Borrower, any of its Subsidiaries or, to the
         knowledge of such Borrower, any ERISA Affiliate, of the PBGC's
         intention to terminate a Benefit Plan or to have a trustee appointed to
         administer a Benefit Plan, copies of each such notice.

                  (b) Cause to be delivered to Foothill, upon Foothill's
         request, each of the following: (i) a copy of each Plan (or, where any
         such plan is not in writing, complete description thereof) (and if
         applicable, related trust agreements or other funding instruments) and
         all amendments thereto, all written interpretations thereof and written
         descriptions thereof that have been distributed to employees or former
         employees of such Borrower or its Subsidiaries; (ii) the most recent
         determination letter issued by the IRS with respect to each Benefit
         Plan; (iii) for the three most recent plan years, annual reports on
         Form 5500 Series required to be filed with any governmental agency for
         each Benefit Plan; (iv) all actuarial reports prepared for the last
         three plan years for each Benefit Plan; (v) a listing of all
         Multiemployer Plans, with the aggregate amount of the most recent
         annual contributions required to be made by such Borrower or any ERISA
         Affiliate to each such plan and copies of the collective bargaining
         agreements requiring such contributions; (vi) any information that has
         been provided to such Borrower or any ERISA Affiliate regarding
         withdrawal liability under any Multiemployer Plan; and (vii) the
         aggregate amount of the most recent annual payments made to former
         employees of such Borrower or its Subsidiaries under any Retiree Health
         Plan.

         6.15 LEASES. Pay when due all rents and other amounts payable under any
leases to which such Borrower is a party or by which such Borrower's properties
and assets are bound, unless such payments are the subject of a Permitted
Protest. To the extent that such Borrower fails timely to make payment of such
rents and other


<PAGE>


amounts payable when due under its leases, Foothill shall be entitled, in its
discretion, to reserve an amount equal to such unpaid amounts against the
Borrowing Base.

         6.16 ROYALTY PAYMENTS. Make royalty payments in accordance with normal
industry practices.

         7. NEGATIVE COVENANTS.

         Each Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, such Borrower will not do any of the following:

         7.1 INDEBTEDNESS. Create, incur, assume, permit, guarantee, or
otherwise become or remain, directly or indirectly, liable with respect to any
Indebtedness, except:

                  (a) Indebtedness evidenced by this Agreement, together with
         Indebtedness to issuers of letters of credit that are the subject of
         L/C Guarantees;

                  (b) Indebtedness set forth in the latest financial statements
         of Borrowers submitted to Foothill on or prior to the Closing Date;

                  (c) Indebtedness secured by Permitted Liens; and

                  (d) refinancings, renewals, or extensions of Indebtedness
         permitted under clauses (b) and (c) of this Section 7.1 (and
         continuance or renewal of any Permitted Liens associated therewith) so
         long as: (i) the terms and conditions of such refinancings, renewals,
         or extensions do not materially impair the prospects of repayment of
         the Obligations by Borrowers, (ii) the net cash proceeds of such
         refinancings, renewals, or extensions do not result in an increase in
         the aggregate principal amount of the Indebtedness so refinanced,
         renewed, or extended, (iii) such refinancings, renewals, refundings, or
         extensions do not result in a shortening of the average weighted
         maturity of the Indebtedness so refinanced, renewed, or extended, and
         (iv) to the extent that Indebtedness that is refinanced was
         subordinated in right of payment to the Obligations, then the
         subordination terms and conditions of the refinancing Indebtedness must
         be at least as favorable to Foothill as those applicable to the
         refinanced Indebtedness.

         7.2 LIENS. Create, incur, assume, or permit to exist, directly or
indirectly, any Lien on or with respect to any of its property or assets, of any
kind, whether now owned or hereafter acquired, or any income or profits
therefrom, except for Permitted Liens (including Liens that are replacements of
Permitted Liens to the extent that the original Indebtedness is refinanced under
Section 7.1(d) and so long as the replacement Liens only encumber those assets
or property that secured the original Indebtedness).


<PAGE>


         7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES. Except for transactions among
Borrowers, enter into any merger, consolidation, reorganization, or
recapitalization, or reclassify its capital stock, or liquidate, wind up, or
dissolve itself (or suffer any liquidation or dissolution), or convey, sell,
assign, lease, transfer, or otherwise dispose of, in one transaction or a series
of transactions, all or any substantial part of its property or assets.

         7.4 DISPOSAL OF ASSETS. Sell, lease, assign, transfer, or otherwise
dispose of any of such Borrower's properties or assets other than: (a) sales of
Inventory to buyers in the ordinary course of such Borrower's business as
currently conducted and (b) licenses of music rights from the Library in the
ordinary course of such Borrower's business as currently conducted.

         7.5 CHANGE NAME. Change such Borrower's name, FEIN, corporate structure
(within the meaning of Section 9402(7) of the Code), or identity, or add any new
fictitious name.

         7.6 GUARANTEE. Guarantee or otherwise become in any way liable with
respect to the obligations of any third Person except by endorsement of
instruments or items of payment for deposit to the account of such Borrower or
which are transmitted or turned over to Foothill.

         7.7 NATURE OF BUSINESS. Make any change in the principal nature of such
Borrower's business.

         7.8 PREPAYMENTS AND AMENDMENTS.

                  (a) Except in connection with a refinancing permitted by
         Section 7.1(d), prepay, redeem, retire, defease, purchase, or otherwise
         acquire any Indebtedness owing to any third Person, other than the
         Obligations in accordance with this Agreement, and

                  (b) Directly or indirectly, amend, modify, alter, increase, or
         change any of the terms or conditions of any agreement, instrument,
         document, indenture, or other writing evidencing or concerning
         Indebtedness permitted under Sections 7.1(b), (c), or (d).

         7.9 CHANGE OF CONTROL. Cause, permit, or suffer, directly or
indirectly, any Change of Control.

         7.10 CONSIGNMENTS. Consign any Inventory or sell any of its Inventory
on bill and hold, or other conditional terms of sale.

         7.11 DISTRIBUTIONS. Make any distribution or declare or pay any
dividends (in cash or other property, other than capital stock) on, or purchase,
acquire, redeem, or retire any of such Borrower's capital stock, of any class,
whether now or


<PAGE>


hereafter outstanding; provided, however, that Borrowers may pay dividends to
Parent or redeem or retire shares of Borrowers' capital so long as all of the
following conditions are met: (a) no Event of Default has occurred and is
continuing, (b) Borrowers' have not less than $500,000 of Excess Availability
after giving effect to the dividend, redemption or retirement, and (c) the
aggregate amount of such payments by all Borrowers during the term of this
Agreement does not exceed $4,000,000.

         7.12 ACCOUNTING METHODS. Modify or change its method of accounting or
enter into, modify, or terminate any agreement currently existing, or at any
time hereafter entered into with any third party accounting firm or service
bureau for the preparation or storage of such Borrower's accounting records
without said accounting firm or service bureau agreeing to provide Foothill
information regarding the Collateral or such Borrower's financial condition.
Such Borrower waives the right to assert a confidential relationship, if any, it
may have with any accounting firm or service bureau in connection with any
information requested by Foothill pursuant to or in accordance with this
Agreement, and agrees that Foothill may contact directly any such accounting
firm or service bureau in order to obtain such information.

         7.13 INVESTMENTS. Directly or indirectly make, acquire, or incur any
liabilities (including contingent obligations) for or in connection with (a) the
acquisition of the securities (whether debt or equity) of, or other interests
in, a Person, (b) loans, advances, capital contributions, or transfers of
property to a Person, or (c) the acquisition of all or substantially all of the
properties or assets of a Person.

         7.14 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of such Borrower
except for: (a) transactions that are in the ordinary course of such Borrower's
business, upon fair and reasonable terms, that are fully disclosed to Foothill
and (b) reimbursements to Parent for expenses and taxes paid by Parent for the
benefit of Borrowers.

         7.15 SUSPENSION. Suspend or go out of a substantial portion of its
business.

         7.16 INTENTIONALLY OMITTED.

         7.17 USE OF PROCEEDS. Use (a) the proceeds of the Advances made
hereunder for any purpose other than (i) on the Closing Date, (w) to repay in
full the outstanding principal, accrued interest, and accrued fees and expenses
owing to Existing Lender, (x) to pay $1,850,000 to satisfy royalty audit claims,
(y) to repay to Parent outstanding Indebtedness in the amount of $1,500,000, and
(z) to pay transactional costs and expenses incurred in connection with this
Agreement, and (ii) thereafter, consistent with the terms and conditions hereof,
for its lawful and permitted corporate purposes.

         7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND
EQUIPMENT WITH BAILEES. Relocate its chief executive office to a new location
without providing 30 days prior written notification thereof to Foothill and so
long as, at the time


<PAGE>


of such written notification, such Borrower provides any financing statements or
fixture filings necessary to perfect and continue perfected Foothill's security
interests and also provides to Foothill a Collateral Access Agreement with
respect to such new location. The Inventory and Equipment of such Borrower shall
not at any time now or hereafter be stored with a bailee, warehouseman, or
similar party without Foothill's prior written consent.

         7.19 NO PROHIBITED TRANSACTIONS UNDER ERISA. Directly or indirectly:

                  (a) engage, or permit any Subsidiary of such Borrower to
         engage, in any prohibited transaction which is reasonably likely to
         result in a civil penalty or excise tax described in Sections 406 of
         ERISA or 4975 of the IRC for which a statutory or class exemption is
         not available or a private exemption has not been previously obtained
         from the Department of Labor;

                  (b) permit to exist with respect to any Benefit Plan any
         accumulated funding deficiency (as defined in Sections 302 of ERISA and
         412 of the IRC), whether or not waived;

                  (c) fail, or permit any Subsidiary of such Borrower to fail,
         to pay timely required contributions or annual installments due with
         respect to any waived funding deficiency to any Benefit Plan;

                  (d) terminate, or permit any Subsidiary of such Borrower to
         terminate, any Benefit Plan where such event would result in any
         liability of such Borrower, any of its Subsidiaries or any ERISA
         Affiliate under Title IV of ERISA;

                  (e) fail, or permit any Subsidiary of such Borrower to fail,
         to make any required contribution or payment to any Multiemployer Plan;

                  (f) fail, or permit any Subsidiary of such Borrower to fail,
         to pay any required installment or any other payment required under
         Section 412 of the IRC on or before the due date for such installment
         or other payment;

                  (g) amend, or permit any Subsidiary of such Borrower to amend,
         a Plan resulting in an increase in current liability for the plan year
         such that either of such Borrower, any Subsidiary of such Borrower or
         any ERISA Affiliate is required to provide security to such Plan under
         Section 401(a)(29) of the IRC; or

                  (h) withdraw, or permit any Subsidiary of such Borrower to
         withdraw, from any Multiemployer Plan where such withdrawal is
         reasonably likely to result in any liability of any such entity under
         Title IV of ERISA;

which, individually or in the aggregate, results in or reasonably would be
expected to result in a claim against or liability of such Borrower, any of its
Subsidiaries or any

<PAGE>


ERISA Affiliate in excess of $100,000.

         7.20 FINANCIAL COVENANTS. Have Parent fail to have Tangible Net Worth
of at least the following amounts, as of the dates set forth below:

         Minimum Tangible Net Worth          Fiscal Quarter Ending:
         --------------------------          ----------------------
               $4,675,000                    September 30, 1997
                5,000,000                    December 31, 1997
                5,475,000                    March 31, 1998
                5,675,000                    June 30, 1998
                6,000,000                    September 30, 1998
                6,475,000                    December 31, 1998
                6,875,000                    March 31, 1999
                7,275,000                    June 30, 1999
                7,675,000                    September 30, 1999
               $8,000,000                    December 31, 1999 and thereafter

         7.21 CAPITAL EXPENDITURES. Borrowers shall not, in the aggregate, make
capital expenditures in any fiscal year in excess of $1,000,000. To the extent
that Borrowers' capital expenditures in any fiscal year are less than
$1,000,000, the difference between $1,000,000 and the amount actually incurred
can be carried forward to future fiscal years so long as the maximum amount of
such expenditures (including the carried forward amounts) does not exceed
$2,000,000 in any fiscal year. In addition to the amounts permitted in the
preceding sentences, Borrowers may incur a one time charge for computer system
upgrades in an amount not to exceed $750,000.

         7.22 LIBRARY ACQUISITIONS. Borrowers shall not, in the aggregate, make
acquisitions of music rights for the Library at a cost payable in cash in any
fiscal year in excess of $2,000,000 and after giving effect to each such
acquisition, Borrowers' must have at least $500,000 of Excess Availability.

         8. EVENTS OF DEFAULT.

         Any one or more of the following events shall constitute an event of
default (each, an "Event of Default") under this Agreement:

         8.1 If Borrowers fail to pay when due and payable or when declared due
and payable, any portion of the Obligations (whether of principal, interest
(including any interest which, but for the provisions of the Bankruptcy Code,
would have accrued


<PAGE>


on such amounts), fees and charges due Foothill, reimbursement of Foothill
Expenses, or other amounts constituting Obligations);

         8.2 If any Borrower fails to perform, keep, or observe any term,
provision, condition, covenant, or agreement contained in this Agreement, in any
of the Loan Documents, or in any other present or future agreement between such
Borrower and Foothill; provided, however, that Borrowers' failure to perform,
keep, or observe the terms of Sections 6.2, 6.3, 6.4, 6.7, 6.8, 6.13 or 6.15
shall not constitute an Event of Default unless such failure continues for five
days or more;

         8.3 If there is a Material Adverse Change;

         8.4 If any material portion of any Borrower's properties or assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any third Person, and such attachment, seizure or
levy is not released within 10 days of the date thereof;

         8.5 If an Insolvency Proceeding is commenced by any Borrower;

         8.6 If an Insolvency Proceeding is commenced against any Borrower and
any of the following events occur: (a) such Borrower consents to the institution
of the Insolvency Proceeding against it; (b) the petition commencing the
Insolvency Proceeding is not timely controverted; (c) the petition commencing
the Insolvency Proceeding is not dismissed within 45 calendar days of the date
of the filing thereof; provided, however, that, during the pendency of such
period, Foothill shall be relieved of its obligation to extend credit hereunder;
(d) an interim trustee is appointed to take possession of all or a substantial
portion of the properties or assets of, or to operate all or any substantial
portion of the business of, such Borrower; or (e) an order for relief shall have
been issued or entered therein;

         8.7 If any Borrower is enjoined, restrained, or in any way prevented by
court order from continuing to conduct all or any material part of its business
affairs;

         8.8 If a notice of Lien, levy, or assessment is filed of record with
respect to any of any Borrower's properties or assets by the United States
Government, or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, or if any taxes or debts owing
at any time hereafter to any one or more of such entities becomes a Lien,
whether choate or otherwise, upon any of such Borrower's properties or assets
and the same is not paid on the payment date thereof;

         8.9 If a judgment or other claim becomes a Lien or encumbrance upon any
material portion of any Borrower's properties or assets and such Lien or
encumbrance is not discharged or released within 30 days of the date thereof;

         8.10 If there is a default in any material agreement to which any


<PAGE>


Borrower is a party with one or more third Persons and such default (a) occurs
at the final maturity of the obligations thereunder, or (b) results in a right
by such third Person(s), irrespective of whether exercised, to accelerate the
maturity of such Borrower's obligations thereunder;

         8.11 If any Borrower makes any payment on account of Indebtedness that
has been contractually subordinated in right of payment to the payment of the
Obligations, except to the extent such payment is permitted by the terms of the
subordination provisions applicable to such Indebtedness;

         8.12 If any material misstatement or misrepresentation exists now or
hereafter in any warranty, representation, statement, or report made to Foothill
by any Borrower or any officer, employee, agent, or director of any Borrower, or
if any such warranty or representation is withdrawn; or

         8.13 If the obligation of Parent under the Guaranty is limited or
terminated by operation of law or by the Parent, or Parent becomes the subject
of an Insolvency Proceeding, or Parent shall be in default of the Guaranty or
any of the security agreements securing the Guaranty.

         9. FOOTHILL'S RIGHTS AND REMEDIES.

         9.1 RIGHTS AND REMEDIES. Upon the occurrence, and during the
continuation, of an Event of Default Foothill may, at its election, without
notice of its election and without demand, do any one or more of the following,
all of which are authorized by Borrowers:

                  (a) Declare all Obligations, whether evidenced by this
         Agreement, by any of the other Loan Documents, or otherwise,
         immediately due and payable;

                  (b) Cease advancing money or extending credit to or for the
         benefit of Borrowers under this Agreement, under any of the Loan
         Documents, or under any other agreement between Borrowers and Foothill;

                  (c) Terminate this Agreement and any of the other Loan
         Documents as to any future liability or obligation of Foothill, but
         without affecting Foothill's rights and security interests in the
         Collateral and without affecting the Obligations;

                  (d) Settle or adjust disputes and claims directly with Account
         Debtors for amounts and upon terms which Foothill considers advisable,
         and in such cases, Foothill will credit Borrowers' Loan Account with
         only the net amounts received by Foothill in payment of such disputed
         Accounts after deducting all Foothill Expenses incurred or expended in
         connection therewith;


<PAGE>


                  (e) Cause Borrowers to hold all of their returned Inventory in
         trust for Foothill, segregate all such returned Inventory from all
         other property of any Borrower or in any Borrower's possession and
         conspicuously label said returned Inventory as the property of
         Foothill;

                  (f) Without notice to or demand upon any Borrower or any
         guarantor, make such payments and do such acts as Foothill considers
         necessary or reasonable to protect its security interests in the
         Collateral. Borrowers agree to assemble the Collateral if Foothill so
         requires, and to make the Collateral available to Foothill as Foothill
         may designate. Each Borrower authorizes Foothill to enter the premises
         where the Collateral is located, to take and maintain possession of the
         Collateral, or any part of it, and to pay, purchase, contest, or
         compromise any encumbrance, charge, or Lien that in Foothill's
         determination appears to conflict with its security interests and to
         pay all expenses incurred in connection therewith. With respect to any
         of Borrowers' owned or leased premises, each Borrower hereby grants
         Foothill a license to enter into possession of such premises and to
         occupy the same, without charge, for up to 120 days in order to
         exercise any of Foothill's rights or remedies provided herein, at law,
         in equity, or otherwise;

                  (g) Without notice to any Borrower (such notice being
         expressly waived), and without constituting a retention of any
         collateral in satisfaction of an obligation (within the meaning of
         Section 9505 of the Code), set off and apply to the Obligations any and
         all (i) balances and deposits of any Borrower held by Foothill
         (including any amounts received in the Lockbox Accounts), or (ii)
         indebtedness at any time owing to or for the credit or the account of
         any Borrower held by Foothill;

                  (h) Hold, as cash collateral, any and all balances and
         deposits of any Borrower held by Foothill, and any amounts received in
         the Lockbox Accounts, to secure the full and final repayment of all of
         the Obligations;

                  (i) Ship, reclaim, recover, store, finish, maintain, repair,
         prepare for sale, advertise for sale, and sell (in the manner provided
         for herein) the Collateral. Foothill is hereby granted a license or
         other right to use, without charge, any Borrower's labels, patents,
         copyrights, rights of use of any name, trade secrets, trade names,
         trademarks, service marks, and advertising matter, or any property of a
         similar nature, as it pertains to the Collateral, in completing
         production of, advertising for sale, and selling any Collateral and
         each Borrower's rights under all licenses and all franchise agreements
         shall inure to Foothill's benefit;

                  (j) Sell the Collateral at either a public or private sale, or
         both, by way of one or more contracts or transactions, for cash or on
         terms, in such manner and at such places (including any Borrower's
         premises) as Foothill determines is commercially reasonable. It is not
         necessary that the Collateral be present at any such sale;

                  (k) Foothill shall give notice of the disposition of the
         Collateral

<PAGE>


         as follows:

                           (1) Foothill shall give Borrowers and each holder of
                  a security interest in the Collateral who has filed with
                  Foothill a written request for notice, a notice in writing of
                  the time and place of public sale, or, if the sale is a
                  private sale or some other disposition other than a public
                  sale is to be made of the Collateral, then the time on or
                  after which the private sale or other disposition is to be
                  made;

                           (2) The notice shall be personally delivered or
                  mailed, postage prepaid, to Borrowers as provided in Section
                  12, at least 5 days before the date fixed for the sale, or at
                  least 5 days before the date on or after which the private
                  sale or other disposition is to be made; no notice needs to be
                  given prior to the disposition of any portion of the
                  Collateral that is perishable or threatens to decline speedily
                  in value or that is of a type customarily sold on a recognized
                  market. Notice to Persons other than Borrowers claiming an
                  interest in the Collateral shall be sent to such addresses as
                  they have furnished to Foothill;

                           (3) If the sale is to be a public sale, Foothill also
                  shall give notice of the time and place by publishing a notice
                  one time at least 5 days before the date of the sale in a
                  newspaper of general circulation in the county in which the
                  sale is to be held;

                  (l) Foothill may credit bid and purchase at any public sale;
         and

                  (m) Any deficiency that exists after disposition of the
         Collateral as provided above will be paid immediately by Borrowers. Any
         excess will be returned, without interest and subject to the rights of
         third Persons, by Foothill to Borrowers.

         9.2 REMEDIES CUMULATIVE. Foothill's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Foothill shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Foothill of one
right or remedy shall be deemed an election, and no waiver by Foothill of any
Event of Default shall be deemed a continuing waiver. No delay by Foothill shall
constitute a waiver, election, or acquiescence by it.


<PAGE>


         10. TAXES AND EXPENSES.

         If any Borrower fails to pay any monies (whether taxes, assessments,
insurance premiums, or, in the case of leased properties or assets, rents or
other amounts payable under such leases) due to third Persons, or fails to make
any deposits or furnish any required proof of payment or deposit, all as
required under the terms of this Agreement, then, to the extent that Foothill
determines that such failure by such Borrower could result in a Material Adverse
Change, in its discretion and without prior notice to Borrowers, Foothill may do
any or all of the following: (a) make payment of the same or any part thereof;
(b) set up such reserves in Borrowers' Loan Account as Foothill deems necessary
to protect Foothill from the exposure created by such failure; or (c) obtain and
maintain insurance policies of the type described in Section 6.10, and take any
action with respect to such policies as Foothill deems prudent. Any such amounts
paid by Foothill shall constitute Foothill Expenses. Any such payments made by
Foothill shall not constitute an agreement by Foothill to make similar payments
in the future or a waiver by Foothill of any Event of Default under this
Agreement. Foothill need not inquire as to, or contest the validity of, any such
expense, tax, or Lien and the receipt of the usual official notice for the
payment thereof shall be conclusive evidence that the same was validly due and
owing.

         11. WAIVERS; INDEMNIFICATION.

         11.1 DEMAND; PROTEST; ETC. Each Borrower waives demand, protest, notice
of protest, notice of default or dishonor, notice of payment and nonpayment,
nonpayment at maturity, release, compromise, settlement, extension, or renewal
of accounts, documents, instruments, chattel paper, and guarantees at any time
held by Foothill on which such Borrower may in any way be liable.

         11.2 FOOTHILL'S LIABILITY FOR COLLATERAL. So long as Foothill complies
with its obligations, if any, under Section 9207 of the Code, Foothill shall not
in any way or manner be liable or responsible for: (a) the safekeeping of the
Collateral; (b) any loss or damage thereto occurring or arising in any manner or
fashion from any cause; (c) any diminution in the value thereof; or (d) any act
or default of any carrier, warehouseman, bailee, forwarding agency, or other
Person. All risk of loss, damage, or destruction of the Collateral shall be
borne by Borrowers.

         11.3 INDEMNIFICATION. Borrowers shall pay, indemnify, defend, and hold
Foothill, and each of its officers, directors, employees, counsel, agents, and
attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest
extent permitted by law) from and against any and all claims, demands, suits,
actions, investigations, proceedings, and damages, and all reasonable attorneys
fees and disbursements and other costs and expenses actually incurred in
connection therewith (as and when they are incurred and irrespective of whether
suit is brought), at any time asserted against, imposed upon, or incurred by any
of them in connection with or as a result of or related to the execution,
delivery, enforcement, performance, and administration (including any of the
foregoing arising out of the administration of the


<PAGE>


credit facilities hereunder on a joint borrowing basis) of this Agreement and
any other Loan Documents or the transactions contemplated herein, and with
respect to any investigation, litigation, or proceeding related to this
Agreement, any other Loan Document, or the use of the proceeds of the credit
provided hereunder (irrespective of whether any Indemnified Person is a party
thereto), or any act, omission, event or circumstance in any manner related
thereto (all the foregoing, collectively, the "Indemnified Liabilities").
Borrowers shall have no obligation to any Indemnified Person under this Section
11.3 with respect to any Indemnified Liability that a court of competent
jurisdiction finally determines to have resulted from the gross negligence or
willful misconduct of such Indemnified Person. This provision shall survive the
termination of this Agreement and the repayment of the Obligations.

         11.4 JOINT BORROWERS.

                  (a) Each Borrower agrees that it is jointly and severally,
         directly and primarily liable to Foothill for payment in full of all
         Obligations, whether for principal, interest or otherwise and that such
         liability is independent of the duties, obligations, and liabilities of
         the other Borrowers. Foothill may bring a separate action or actions on
         each, any, or all of the Obligations against any Borrower, whether
         action is brought against the other Borrowers or whether the other
         Borrowers are joined in such action. In the event that any Borrower
         fails to make any payment of any Obligations on or before the due date
         thereof, the other Borrowers immediately shall cause such payment to be
         made or each of such Obligations to be performed, kept, observed, or
         fulfilled.

                  (b) The Loan Documents are a primary and original obligation
         of each Borrower, are not the creation of a surety relationship, and
         are an absolute, unconditional, and continuing promise of payment and
         performance which shall remain in full force and effect without respect
         to future changes in conditions, including any change of law or any
         invalidity or irregularity with respect to the Loan Documents. Each
         Borrower agrees that its liability under the Loan Documents shall be
         immediate and shall not be contingent upon the exercise or enforcement
         by Foothill of whatever remedies it may have against the other
         Borrowers, or the enforcement of any lien or realization upon any
         security Foothill may at any time possess. Each Borrower consents and
         agrees that Foothill shall be under no obligation (under Section 2899
         or 3433 of the California Civil Code or otherwise) to marshal any
         assets of any Borrower against or in payment of any or all of the
         Obligations.

                  (c) Each Borrower acknowledges that it is presently informed
         as to the financial condition of the other Borrowers and of all other
         circumstances which a diligent inquiry would reveal and which bear upon
         the risk of nonpayment of the Obligations. Each Borrower hereby
         covenants that it will continue to keep informed as to the financial
         condition of the other Borrowers, the status of the other Borrowers and
         of all circumstances which bear upon the risk of nonpayment of the
         Obligations. Absent a written request from any Borrower to Foothill for
         information, such Borrower hereby waives any and all rights it may have
         to require Foothill to disclose to such Borrower

<PAGE>


         any information which Foothill may now or hereafter acquire concerning
         the condition or circumstances of the other Borrowers.

                  (d) The liability of each Borrower under the Loan Documents
         includes Obligations arising under successive transactions continuing,
         compromising, extending, increasing, modifying, releasing, or renewing
         the Obligations, changing the interest rate, payment terms, or other
         terms and conditions thereof, or creating new or additional Obligations
         after prior Obligations have been satisfied in whole or in part. To the
         maximum extent permitted by law, each Borrower hereby waives any right
         to revoke its liability under the Loan Documents as to future
         indebtedness, and in connection therewith, each Borrower hereby waives
         any rights it may have under Section 2815 of the California Civil Code.
         If such a revocation is effective notwithstanding the foregoing waiver,
         each Borrower acknowledges and agrees that (a) no such revocation shall
         be effective until written notice thereof has been received by
         Foothill, (b) no such revocation shall apply to any Obligations in
         existence on such date (including, any subsequent continuation,
         extension, or renewal thereof, or change in the interest rate, payment
         terms, or other terms and conditions thereof), (c) no such revocation
         shall apply to any Obligations made or created after such date to the
         extent made or created pursuant to a legally binding commitment of
         Foothill in existence on the date of such revocation, (d) no payment by
         such Borrower or from any other source prior to the date of such
         revocation shall reduce the maximum obligation of the other Borrowers
         hereunder, and (e) any payment by such Borrower or from any source
         other than Borrowers, subsequent to the date of such revocation, shall
         first be applied to that portion of the Obligations as to which the
         revocation is effective and which are not, therefore, guaranteed
         hereunder, and to the extent so applied shall not reduce the maximum
         obligation of each Borrower hereunder.

                  (e) (i) Each Borrower absolutely, unconditionally, knowingly,
         and expressly waives:

                           (1) (A) notice of acceptance hereof; (B) notice of
                  any loans or other financial accommodations made or extended
                  under the Loan Documents or the creation or existence of any
                  Obligations; (C) notice of the amount of the Obligations,
                  subject, however, to each Borrower's right to make inquiry of
                  Foothill to ascertain the amount of the Obligations at any
                  reasonable time; (D) notice of any adverse change in the
                  financial condition of the other Borrowers or of any other
                  fact that might increase such Borrower's risk hereunder; (E)
                  notice of presentment for payment, demand, protest, and notice
                  thereof as to any instruments among the Loan Documents; and
                  (F) all notices (except if such notice is specifically
                  required to be given to Borrowers hereunder or under the Loan
                  Documents) and demands to which such Borrower might otherwise
                  be entitled.

                           (2) its right, under Sections 2845 or 2850 of the
                  California Civil Code, or otherwise, to require Foothill to
                  institute suit against, or to exhaust any rights and remedies
                  which Foothill has or may have against, the


<PAGE>


                  other Borrowers or any third party, or against any Collateral
                  provided by the other Borrowers, or any third party. In this
                  regard, each Borrower agrees that it is bound to the payment
                  of all Obligations, whether now existing or hereafter
                  accruing, as fully as if such Obligations were directly owing
                  to Foothill by such Borrower. Each Borrower further waives any
                  defense arising by reason of any disability or other defense
                  (other than the defense that the Obligations shall have been
                  fully and finally performed and indefeasibly paid) of the
                  other Borrowers or by reason of the cessation from any cause
                  whatsoever of the liability of the other Borrowers in respect
                  thereof.

                           (3) (A) any rights to assert against Foothill any
                  defense (legal or equitable), set-off, counterclaim, or claim
                  which such Borrower may now or at any time hereafter have
                  against the other Borrowers or any other party liable to
                  Foothill; (B) any defense, set-off, counterclaim, or claim, of
                  any kind or nature, arising directly or indirectly from the
                  present or future lack of perfection, sufficiency, validity,
                  or enforceability of the Obligations or any security therefor;
                  (C) any defense such Borrower has to performance hereunder,
                  and any right such Borrower has to be exonerated, provided by
                  Sections 2819, 2822, or 2825 of the California Civil Code, or
                  otherwise, arising by reason of: the impairment or suspension
                  of Foothill's rights or remedies against the other Borrowers;
                  the alteration by Foothill of the Obligations; any discharge
                  of the other Borrowers' obligations to Foothill by operation
                  of law as a result of Foothill's intervention or omission; or
                  the acceptance by Foothill of anything in partial satisfaction
                  of the Obligations; (D) the benefit of any statute of
                  limitations affecting such Borrower's liability hereunder or
                  the enforcement thereof, and any act which shall defer or
                  delay the operation of any statute of limitations applicable
                  to the Obligations shall similarly operate to defer or delay
                  the operation of such statute of limitations applicable to
                  such Borrower's liability hereunder.

                                    (ii) Each Borrower absolutely,
                           unconditionally, knowingly, and expressly waives any
                           defense arising by reason of or deriving from (i) any
                           claim or defense based upon an election of remedies
                           by Foothill including any defense based upon an
                           election of remedies by Foothill under the provisions
                           of Sections 580a, 580b, 580d, and 726 of the
                           California Code of Civil Procedure or any similar law
                           of California or any other jurisdiction; or (ii) any
                           election by Foothill under Bankruptcy Code Section
                           1111(b) to limit the amount of, or any collateral
                           securing, its claim against the Borrowers. Pursuant
                           to California Civil Code Section 2856(b):

                                    "Each Borrower waives all rights and
                           defenses arising out of an election of remedies by
                           the creditor, even though that election of remedies,
                           such as a nonjudicial foreclosure with respect to
                           security for a guaranteed obligation, has destroyed
                           such Borrower's rights of subrogation and
                           reimbursement against the other Borrowers by the
                           operation of Section 580(d) of the California Code of
                           Civil Procedure or otherwise."

<PAGE>


                           If any of the Obligations at any time is secured by a
                           mortgage or deed of trust upon real property,
                           Foothill may elect, in its sole discretion, upon a
                           default with respect to the Obligations, to foreclose
                           such mortgage or deed of trust judicially or
                           nonjudicially in any manner permitted by law, before
                           or after enforcing the Loan Documents, without
                           diminishing or affecting the liability of any
                           Borrower hereunder except to the extent the
                           Obligations are repaid with the proceeds of such
                           foreclosure. Each Borrower understands that (a) by
                           virtue of the operation of California's
                           antideficiency law applicable to nonjudicial
                           foreclosures, an election by Foothill nonjudicially
                           to foreclose such a mortgage or deed of trust
                           probably would have the effect of impairing or
                           destroying rights of subrogation, reimbursement,
                           contribution, or indemnity of such Borrower against
                           the other Borrowers or other guarantors or sureties,
                           and (b) absent the waiver given by such Borrower,
                           such an election would prevent Foothill from
                           enforcing the Loan Documents against such Borrower.
                           Understanding the foregoing, and understanding that
                           such Borrower is hereby relinquishing a defense to
                           the enforceability of the Loan Documents, such
                           Borrower hereby waives any right to assert against
                           Foothill any defense to the enforcement of the Loan
                           Documents, whether denominated "estoppel" or
                           otherwise, based on or arising from an election by
                           Foothill nonjudicially to foreclose any such mortgage
                           or deed of trust. Each Borrower understands that the
                           effect of the foregoing waiver may be that each
                           Borrower may have liability hereunder for amounts
                           with respect to which such Borrower may be left
                           without rights of subrogation, reimbursement,
                           contribution, or indemnity against the other Borrower
                           or other guarantors or sureties. Each Borrower also
                           agrees that the "fair market value" provisions of
                           Section 580a of the California Code of Civil
                           Procedure shall have no applicability with respect to
                           the determination of such Borrower's liability under
                           the Loan Documents.

                                    (iii) Until such time as all Obligations
                           have been fully, finally, and indefeasibly paid in
                           full, in cash, each Borrower hereby absolutely,
                           unconditionally, knowingly, and expressly postpones:
                           (1) any right of subrogation such Borrower has or may
                           have as against the other Borrowers with respect to
                           the Obligations; (2) any right to proceed against the
                           other Borrowers or any other Person, now or
                           hereafter, for contribution, indemnity,
                           reimbursement, or any other suretyship rights and
                           claims, whether direct or indirect, liquidated or
                           contingent, whether arising under express or implied
                           contract or by operation of law, which such Borrower
                           may now have or hereafter have as against the other
                           Borrowers with respect to the Obligations; and (3)
                           any right to proceed or seek recourse against or with
                           respect to any property or asset of the other
                           Borrowers.

                                    (iv) WITHOUT LIMITING THE GENERALITY OF ANY
                           OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS
                           SECTION 11.4, EACH BORROWER HEREBY ABSOLUTELY,
                           KNOWINGLY, UNCONDITIONALLY, AND EXPRESSLY WAIVES AND
                           AGREES NOT TO ASSERT ANY AND ALL BENEFITS OR DEFENSES
                           ARISING DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE
                           OF CALIFORNIA CIVIL CODE SECTIONS 2799, 2808, 2809,
                           2810, 2815, 2819, 2820, 2821, 2822, 2825, 2839, 2845,
                           2848, 2849, AND 2850, CALIFORNIA CODE OF CIVIL
                           PROCEDURE


<PAGE>


                           SECTIONS 580a, 580b, 580c, 580d, AND 726, AND CHAPTER
                           2 OF TITLE 14 OF THE CALIFORNIA CIVIL CODE.

                  (f) Each Borrower consents and agrees that, without notice to
         or by such Borrower, and without affecting or impairing the liability
         of such Borrower hereunder, Foothill may, by action or inaction:

                           (i) compromise, settle, extend the duration or the
                  time for the payment of, or discharge the performance of, or
                  may refuse to or otherwise not enforce the Loan Documents, or
                  any part thereof, with respect to the other Borrowers;

                           (ii) release the other Borrowers or grant other
                  indulgences to the other Borrowers in respect thereof; or

                           (iii) release or substitute any guarantor, if any, of
                  the Obligations, or enforce, exchange, release, or waive any
                  security for the Obligations or any guaranty of the
                  Obligations, or any portion thereof.

                  (g) Foothill shall have the right to seek recourse against
         each Borrower to the fullest extent provided for herein, and no
         election by Foothill to proceed in one form of action or proceeding, or
         against any party, or on any obligation, shall constitute a waiver of
         Foothill's right to proceed in any other form of action or proceeding
         or against other parties unless Foothill has expressly waived such
         right in writing. Specifically, but without limiting the generality of
         the foregoing, no action or proceeding by Foothill under the Loan
         Documents shall serve to diminish the liability of any Borrower
         thereunder except to the extent that Foothill finally and
         unconditionally shall have realized indefeasible payment by such action
         or proceeding.

                  (h) The Obligations shall not be considered indefeasibly paid
         for purposes of this Section 11.4 unless and until all payments to
         Foothill are no longer subject to any right on the part of any person,
         including any Borrower, any Borrower as a debtor in possession, or any
         trustee (whether appointed pursuant to 11 U.S.C., or otherwise) of any
         Borrower's assets to invalidate or set aside such payments or to seek
         to recoup the amount of such payments or any portion thereof, or to
         declare same to be fraudulent or preferential. Upon such full and final
         performance and indefeasible payment of the Obligations, Foothill shall
         have no obligation whatsoever to transfer or assign its interest in the
         Loan Documents to any Borrower. In the event that, for any reason, any
         portion of such payments to Foothill is set aside or restored, whether
         voluntarily or involuntarily, after the making thereof, then the
         obligation intended to be satisfied thereby shall be revived and
         continued in full force and effect as if said payment or payments had
         not been made, and each Borrower shall be liable for the full amount
         Foothill is required to repay plus any and all costs and expenses
         (including attorneys'


<PAGE>


         fees and attorneys' fees incurred pursuant to 11 U.S.C.) paid by
         Foothill in connection therewith.

                  Borrowers and each of them warrant and agree that each of the
         waivers and consents set forth herein are made after consultation with
         legal counsel and with full knowledge of their significance and
         consequences, with the understanding that events giving rise to any
         defense or right waived may diminish, destroy or otherwise adversely
         affect rights which Borrowers otherwise may have against other
         Borrowers, the Lender Group or others, or against Collateral. If any of
         the waivers or consents herein are determined to be contrary to any
         applicable law or public policy, such waivers and consents shall be
         effective to the maximum extent permitted by law.

         12. NOTICES.

         Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other Loan Document shall be in
writing and (except for financial statements and other informational documents
which may be sent by first-class mail, postage prepaid) shall be personally
delivered or sent by registered or certified mail (postage prepaid, return
receipt requested), overnight courier, or telefacsimile to Borrower or to
Foothill, as the case may be, at its address set forth below:

         IF TO BORROWERS:          C/O K-TEL INTERNATIONAL (USA), INC.
                                   2605 Fernbrook Lane North
                                   Minneapolis, Minnesota 55447
                                   Attn: Mark Dixon, Chief Operating Officer
                                   Fax No. 612.559.6822

         WITH COPIES TO:           K-TEL INTERNATIONAL, INC.
                                   23801 Calabasas Road, No. 2000
                                   Calabasas, California 91302
                                   Attn: Corey Fischer, Chief Financial Officer
                                   Fax No. 818.223.4200

         WITH COPIES TO:           KAPLAN, STRANGIS AND KAPLAN, P.A.
                                   5500 Norwest Center
                                   90 S. Seventh Street
                                   Minneapolis, Minnesota  55402
                                   Attn: Bruce J. Parker, Esq.
                                   Fax No. 612.375.1143


<PAGE>


         IF TO FOOTHILL:           FOOTHILL CAPITAL CORPORATION
                                   11111 Santa Monica Boulevard
                                   Suite 1500
                                   Los Angeles, California 90025-3333
                                   Attn:  Business Finance Division Manager
                                   Fax No. 310.478.9788

         WITH COPIES TO:           BUCHALTER, NEMER, FIELDS & YOUNGER
                                   601 South Figueroa, Suite 2400
                                   Los Angeles, California 90017
                                   Attn:  Robert C. Colton, Esq.
                                   Fax No. 213.896.0400

         The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other. All notices or demands sent in accordance with this Section 12, other
than notices by Foothill in connection with Sections 9504 or 9505 of the Code,
shall be deemed received on the earlier of the date of actual receipt or 3 days
after the deposit thereof in the mail. Each Borrower acknowledges and agrees
that notices sent by Foothill in connection with Sections 9504 or 9505 of the
Code shall be deemed sent when deposited in the mail or personally delivered,
or, where permitted by law, transmitted by telefacsimile or other similar method
set forth above.


<PAGE>


         13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.

         THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS
EXPRESSLY PROVIDED TO THE CONTRARY IN AN ANOTHER LOAN DOCUMENT), THE
CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS
OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER
OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE
PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE
STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF
CALIFORNIA OR, AT THE SOLE OPTION OF FOOTHILL, IN ANY OTHER COURT IN WHICH
FOOTHILL SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT
MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH BORROWER AND FOOTHILL
WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO
ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT
ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13. EACH BORROWER AND
FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF
THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH
BORROWER AND FOOTHILL REPRESENTS THAT THEY HAVE REVIEWED THIS WAIVER AND EACH
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE
FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

         14. DESTRUCTION OF BORROWERS' DOCUMENTS.

                  All documents, schedules, invoices, agings, or other papers
delivered to Foothill may be destroyed or otherwise disposed of by Foothill four
months after they are delivered to or received by Foothill, unless Borrowers
request, in writing, the return of said documents, schedules, or other papers
and makes arrangements, at Borrowers' expense, for their return.


<PAGE>


         15. GENERAL PROVISIONS.

         15.1 EFFECTIVENESS. This Agreement shall be binding and deemed
effective when executed by Borrowers and Foothill.

         15.2 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the
benefit of the respective successors and assigns of each of the parties;
provided, however, that no Borrower may assign this Agreement or any rights or
duties hereunder without Foothill's prior written consent and any prohibited
assignment shall be absolutely void. No consent to an assignment by Foothill
shall release the assigning Borrower from its Obligations. Foothill may assign
this Agreement and its rights and duties hereunder and no consent or approval by
Borrowers is required in connection with any such assignment. Foothill reserves
the right to sell, assign, transfer, negotiate, or grant participations in all
or any part of, or any interest in Foothill's rights and benefits hereunder. In
connection with any such assignment or participation, Foothill may disclose all
documents and information which Foothill now or hereafter may have relating to
any Borrower or any Borrower's business. To the extent that Foothill assigns its
rights and obligations hereunder to a third Person, Foothill thereafter shall be
released from such assigned obligations to Borrowers and such assignment shall
effect a novation between Borrowers and such third Person.

         15.3 SECTION HEADINGS. Headings and numbers have been set forth herein
for convenience only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Agreement.

         15.4 INTERPRETATION. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against Foothill or Borrowers,
whether under any rule of construction or otherwise. On the contrary, this
Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.

         15.5 SEVERABILITY OF PROVISIONS. Each provision of this Agreement shall
be severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.

         15.6 AMENDMENTS IN WRITING. This Agreement can only be amended by a
writing signed by both Foothill and Borrowers.

         15.7 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be
executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one and
the same Agreement. Delivery of an executed counterpart of this Agreement by
telefacsimile shall be equally as effective as delivery of an original executed
counterpart of this Agreement. Any party delivering an executed counterpart of
this Agreement by telefacsimile also shall deliver


<PAGE>


an original executed counterpart of this Agreement but the failure to deliver an
original executed counterpart shall not affect the validity, enforceability, and
binding effect of this Agreement.

         15.8 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the incurrence or
payment of the Obligations by any Borrower or any guarantor of the Obligations
or the transfer by either or both of such parties to Foothill of any property of
either or both of such parties should for any reason subsequently be declared to
be void or voidable under any state or federal law relating to creditors'
rights, including provisions of the Bankruptcy Code relating to fraudulent
conveyances, preferences, and other voidable or recoverable payments of money or
transfers of property (collectively, a "Voidable Transfer"), and if Foothill is
required to repay or restore, in whole or in part, any such Voidable Transfer,
or elects to do so upon the reasonable advice of its counsel, then, as to any
such Voidable Transfer, or the amount thereof that Foothill is required or
elects to repay or restore, and as to all reasonable costs, expenses, and
attorneys fees of Foothill related thereto, the liability of Borrowers or such
guarantor automatically shall be revived, reinstated, and restored and shall
exist as though such Voidable Transfer had never been made.

         15.9 INTEGRATION. This Agreement, together with the other Loan
Documents, reflects the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted or qualified by
any other agreement, oral or written, before the date hereof.

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in Los Angeles, California.

                                 K-TEL INTERNATIONAL (USA), INC.,
                                 a Minnesota corporation

                                 By ___________________________________

                                 Title: _______________________________

                                 DOMINION ENTERTAINMENT, INC.,
                                 a Minnesota corporation

                                 By ___________________________________

                                 Title: _______________________________


<PAGE>


                                 K-TEL CONSUMER PRODUCTS, INC.,
                                 a Minnesota corporation

                                 By ___________________________________

                                 Title: _______________________________

                                 K-TEL TV, INC.,
                                 a Minnesota corporation

                                 By ___________________________________

                                 Title: _______________________________

                                 K-TEL VIDEO, INC.,
                                 a Minnesota corporation

                                 By ___________________________________

                                 Title: _______________________________

                                 FOOTHILL CAPITAL CORPORATION,
                                 a California corporation

                                 By ___________________________________

                                 Title: _______________________________


<PAGE>


                       COMPLIANCE CERTIFICATE SAMPLE COPY

                    (LOAN AND SECURITY AGREEMENT SECTION 6.3)

Date _______________

FOOTHILL CAPITAL CORPORATION
111111 Santa Monica Boulevard, Suite 1500
Santa Monica, California 90025-3333
Attention:  ________________________

RE:      LOAN AND SECURITY AGREEMENT, DATED AS OF NOVEMBER 19, 1997 (THE
         "AGREEMENT") BY AND AMONG FOOTHILL CAPITAL CORPORATION ("FOOTHILL") AND
         K-TEL INTERNATIONAL (USA), INC., DOMINION ENTERTAINMENT, INC., K-TEL
         CONSUMER PRODUCTS, INC., K-TEL TV, INC. AND K-TEL VIDEO, INC.
         (COLLECTIVELY, "BORROWERS").

Dear _______________:

In accordance with Section 6.3 of the Agreement, this letter shall serve as
certification to Foothill that to the best of my knowledge: (i) all financial
statements have been prepared in accordance with GAAP and fairly represent the
financial condition of Borrowers, (ii) the representations and warranties of
Borrowers set forth in the Agreement and other Loan Documents are true and
correct in all material respects on and as of the date of this certification,
(iii) as demonstrated on Exhibit 1 attached hereto, Borrowers and Parent are in
compliance with each of their financial covenants set forth in Section 7.20 of
the Agreement as of the date of this certification, and (iv) there does not
exist any condition or event that constitutes a Default or Event of Default.
Such certification is made as of the fiscal month ending ________________.

Sincerely,



Chief Financial Officer