<PAGE>

                                                                    EXHIBIT 10.7

                          AMENDMENT TO LOAN DOCUMENTS


     THIS AMENDMENT TO LOAN DOCUMENTS ("Amendment") is executed as of the 31st
day of December, 1998, by and among VIDEO CITY, INC., a Delaware corporation
(formerly known as Prism Entertainment Corporation)  ("Video City"), SULPIZIO
ONE, INC., a California corporation ("Sulpizio"), OLD REPUBLIC ENTERTAINMENT,
INC., a California corporation ("OREI"), VIDEO TYME, INC., a Nevada corporation
("VTI") and VIDEOLAND, INC., an Oregon corporation ("Videoland"; Sulpizio, OREI,
VTI and Videoland are sometimes individually and collectively referred to herein
as the "Subsidiaries"; the Subsidiaries and Video City are sometimes
individually and collectively referred to herein as the "Debtors"), and INGRAM
ENTERTAINMENT INC., a Tennessee corporation ("Secured Party");


                                  WITNESSETH:

     WHEREAS, Video City has granted certain liens and security interests to
Secured Party pursuant to (1) an Override Agreement, dated November 19, 1996, by
and between Video City and Secured Party, and (2) a Security Agreement dated
January 8, 1997, by and between Video City and Secured Party, both as amended
from time to time (all of the foregoing documents are sometimes hereinafter
referred to as the "VCI Documents"), all in order to secure certain indebtedness
and obligations of Video City to Secured Party; and

     WHEREAS, Cianci's Videoland, Inc. (an entity to which Videoland is the
successor by merger) ("Cianci's Videoland") has granted certain liens and
security interests to Secured Party pursuant to a Security Agreement dated June
19, 1996, by and between Cianci's Videoland and Secured Party (the "Cianci's
Videoland Security Agreement"), all in order to secure certain indebtedness and
obligations of Cianci's Videoland to Secured Party.

     WHEREAS, Sulpizio, OREI and certain others have granted certain liens and
security interests to Secured Party pursuant to a Security Agreement dated March
24, 1998, executed by Sulpizio, OREI and certain others in favor of Secured
Party (the "Original Subsidiary Security Agreement"), all in order to secure
certain indebtedness and obligations of such parties to Secured Party.

     WHEREAS, Videoland and VTI have granted certain liens and security
interests to Secured Party pursuant to a Security Agreement of even date
herewith, executed by Videoland and VTI in favor of Secured Party (the
"Subsequent Subsidiary Security Agreement"; the VCI Documents, the Cianci's
Videoland Security Agreement, the Original Subsidiary Security Agreement and the
Subsequent Subsidiary Security Agreement are sometimes individually and
collectively referred to herein as the "Loan Documents"), all in order to secure
certain indebtedness and obligations of such parties to Secured Party.

     WHEREAS, certain indebtednesses of the Debtors have been consolidated
pursuant to that certain Demand Secured Promissory Note of even date herewith,
in the original principal
<PAGE>

amount of $3,623,903, made and executed by Debtors payable to the order of
Secured Party (together with any and all extensions, renewals, replacements or
modifications thereof, the "Note");

     WHEREAS, in connection with the execution of the Note, Video City has also
issued and delivered to Secured Party that certain Warrant to Purchase Common
Stock No. 2 dated December 31, 1998 (the "Warrant");

     WHEREAS, Debtor and Secured Party desire to (a) amend the Loan Documents in
order to confirm that the indebtedness evidenced by the Note is secured thereby
and to confirm and clarify certain other agreements and understandings, and (b)
make certain covenants, representations and warranties relating to the issuance
of the Note and the Warrant, all as more particularly hereinafter described;

     NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

     1.   Without limiting any provision of the Loan Documents, and
notwithstanding any provision of the Loan Documents to the contrary, the parties
hereto represent, agree and acknowledge that (a) the indebtedness evidenced by
the Note, together with any and all other indebtedness and obligations of any
Debtor to Secured Party, whether now existing or hereafter incurred, direct or
contingent, however evidenced or denominated, including without limitation, all
of Debtor's obligations arising under that certain Supply Agreement dated
January 8, 1997, by and between Video City and Secured Party, as amended from
time to time, and all other trade debt of Debtors to Secured Party
(collectively, the "Obligations"), are, and hereafter shall be, secured by each
of the Loan Documents, and (b) the liens and security interests granted to
Secured Party pursuant to the Loan Documents are, and hereafter shall be, second
in priority only to the liens and security interests granted to BankBoston
Retail Finance, Inc. ("BankBoston"), all as more particularly described in that
certain Subordination Agreement dated December 28, 1998, by and between Secured
Party and BankBoston and, in the case of Sulpizio and VTI, subordinate in
priority to the security interests of Mortco, Inc.  The Loan Documents are
hereby amended in all respects necessary to reflect the foregoing.

     2.   Any provision of any of the VCI Documents that provides for the
release of any of the collateral described therein upon the reduction of the
Remaining Debt (as defined therein) by a specified amount is hereby deleted, it
being agreed that all liens and security interests granted therein as to all
collateral described therein shall not be terminated, but shall continue in full
force and effect until repayment of the Obligations in full.

     3.   Debtors represent and warrant that no default or Event of Default
exists under any of the Loan Documents.  In addition, Debtors hereby
additionally represent and warrant to Secured Party the following:

                                       2
<PAGE>

          (a) Corporate Status.  Each of the Debtors is a corporation duly
              ----------------
     organized and validly existing under the laws of the state of its
     incorporation, and has the corporate power to own and  operate its
     properties, to carry on its business as now conducted and to enter into and
     to perform its obligations under the Warrant, the Note and the other
     documents executed in connection with the Note and this Warrant (the
     "Transaction Documents") to which such entity is a party.  Each of the
     Debtors is duly qualified to do business and in good standing in each state
     in which a failure to be so qualified would have a material adverse effect
     on such entity's financial position or its ability to conduct its business
     in the manner now conducted.

          (b) Authorization.  Each of the Debtors has full legal right, power
              -------------
     and authority to conduct its business and affairs in the manner
     contemplated by the Transaction Documents, and to enter into and perform
     its obligations thereunder, without the consent or approval of any other
     person, firm, governmental agency or other legal entity.  The execution and
     delivery of the Warrant, the Note, the borrowing thereunder, the execution
     and delivery of each Transaction Document to which each such entity is a
     party and the performance by such entity of its obligations thereunder are
     within the corporate powers of such entity and have been duly authorized by
     all necessary corporate action properly taken, have received all necessary
     governmental approvals, if any were required, and do not and will not
     contravene or conflict with any provision of law, any applicable judgment,
     ordinance, regulation or order of any court or governmental agency, the
     charter or by-laws of such entity or any agreement binding upon such entity
     or its properties.  The officer(s) executing the Warrant, the Note and all
     of the other Transaction Documents to which Video City and/or its
     Subsidiaries is a party are duly authorized to act on behalf of such
     entity.

          (c) Validity and Binding Effect.  The Warrant, the Note and the other
              ---------------------------
     Transaction Documents are the legal, valid and binding obligations of the
     Debtors, enforceable in accordance with their respective terms.

          (d) Capitalization of Video City. The authorized equity securities of
              ----------------------------
     Video City consist of 30,000,000 shares of common stock, par value $.01 per
     share ("Common Stock") and 2,000,000 shares of preferred stock (consisting
     of Series A preferred stock, which is convertible into Common Stock at a
     price of $2.00 per share, as more particularly described in the Series A
     Certificate of Designations (as hereinafter defined) and Series B preferred
     stock, which is convertible into Common Stock at a price of $3.1667 per
     share, as more particularly described in the Series B Certificate of
     Designations (as hereinafter defined)), par value $.01 per share
     ("Preferred Stock"), of which 13,474,191 shares of Common Stock and 83,000
     shares of Preferred Stock (7,000 of which are Series A Preferred Stock and
     76,000 of which are Series B Preferred Stock) are issued and outstanding as
     of the date of this Amendment; Debtors hereby represent that the foregoing
     amount of issued and outstanding shares includes, without limitation, all
     shares of Common Stock and Preferred Stock issued by the Company on
     December 31, 1998;  provided, however, that certain additional shares are
                         --------  -------
     reserved for issuance as

                                       3
<PAGE>

     described on Schedule 3(d)(i) attached hereto. All of the outstanding
                  ----------------
     equity securities of Video City have been duly authorized and validly
     issued, are fully paid and nonassessable and are free from preemptive
     rights, except the preemptive rights described on Schedule 3(d)(ii)
     attached hereto. Except as set forth on Schedule 3(d)(i) and 3(d)(ii),
                                             -----------------------------
     there are no agreements or understandings relating to the issuance, sale,
     or transfer of any equity securities or other securities of Video City. The
     shares of Common Stock issuable upon the exercise by Secured Party of its
     rights under the Warrant have been duly authorized and reserved and, when
     issued upon the exercise of said rights, will be validly issued, fully paid
     and nonassessable and free of preemptive rights. If the holders of all of
     the shares of the Series A Preferred Stock that are issued and outstanding
     as of the date hereof (i.e., 7,000 shares) exercised their conversion
     rights described in Section 5 of the Series A Certificate of Designations,
     such Series A Preferred Stock would be convertible (after making any
     adjustments under Section 8 of the Series A Certificate of Designations
     that may be required as a result of any transactions or events occurring on
     or prior to the date hereof) into 350,000 shares of Common Stock. If the
     holders of all of the shares of the Series B Preferred Stock that are
     issued and outstanding as of the date hereof (i.e., 76,000 shares)
     exercised their conversion rights described in Section 5 of the Series B
     Certificate of Designations, such Series B Preferred Stock would be
     convertible (after making any adjustments under Section 9 of the Series B
     Certificate of Designations that may be required as a result of any
     transactions or events occurring on or prior to the date hereof) into
     2,400,000 shares of Common Stock.

          (e) Other Transactions.  Consummation of the transactions hereby
              ------------------
     contemplated and the performance of the obligations of the Debtors under
     and by virtue of the Transaction Documents will not result in any breach
     of, or constitute a default under, any loan or credit agreement, indenture,
     mortgage, deed of trust, security deed or agreement, lease, corporate
     charter or by-laws, license, franchise or other instrument or agreement to
     which any Debtor is a party or by which any Debtor or its properties may be
     bound or affected.

          (f) Litigation.  There are no material actions, suits or proceedings
              ----------
     pending, or, to the knowledge of the Debtors, threatened, against or
     affecting the Debtors.  There are no actions, suits or proceedings pending
     or, to the knowledge of the Debtors, threatened, involving the validity or
     enforceability of any of the Transaction Documents or the priority of the
     liens thereof, at law or in equity, or before any governmental or
     administrative agency.  To the Debtors' knowledge, none of the Debtors is
     in material default with respect to any material order, writ, injunction,
     decree or demand of any court or any governmental authority.

          (g) Financial Statements.  The financial statement(s) of the Debtors
              --------------------
     heretofore delivered to Secured Party are true and correct in all material
     respects, have been prepared in accordance with generally accepted
     accounting principles consistently applied, and fairly present in all
     material respects the financial conditions of the subject(s) thereof as of
     the date(s) thereof.  No material adverse change has occurred in the
     financial condition

                                       4
<PAGE>

     of the Debtors since the date(s) thereof other than as disclosed in a
     subsequent financial statement delivered by Debtors to Secured Party, and
     no additional borrowings have been made or liabilities incurred by the
     Debtors (other than the borrowing of the Senior Indebtedness (as
     hereinafter defined) and other than indebtedness incurred to acquire
     inventory and otherwise in the ordinary course of business) since the
     date(s) thereof other than as disclosed in a subsequent financial statement
     delivered by Debtors to Secured Party.

          (h) No Defaults.  No default or event of default by the Debtors exists
              -----------
     under the Warrant or any of the other Transaction Documents, or under any
     other instrument or agreement evidencing or securing indebtedness of
     $100,000 or more to which any Debtor is a party or by which any Debtor or
     its properties may be bound or affected, and no event has occurred and is
     continuing that with notice or the passage of time or both would constitute
     a default or event of default under any of the foregoing.

          (i) Compliance With Law.  Each of the Debtors has obtained all
              -------------------
     necessary and material licenses, permits and governmental approvals and
     authorizations necessary or proper in order to conduct its business and
     affairs as heretofore conducted and as hereafter intended to be conducted.
     The Debtors are in compliance with all material laws, regulations, decrees
     and orders applicable to them (including but not limited to laws,
     regulations, decrees and orders relating to environmental, occupational and
     health standards and controls, antitrust, monopoly, restraint of trade or
     unfair competition).  The Debtors have not received, nor do they expect to
     receive, any order or notice of any violation or claim of violation of any
     such law, regulation, decree, rule, judgment or order of any governmental
     authority or agency relating to the ownership and/or operation of their
     properties other than such order, notice or claim that will not have a
     material adverse effect on the business of the Debtors.

          (j) [Intentionally Deleted]

          (k) Taxes.  The Debtors have filed or caused to be filed all tax
              -----
     returns that, to the Debtors' knowledge, are required to be filed (except
     for returns that have been appropriately extended), and have paid all taxes
     shown to be due and payable on said returns and all other taxes,
     impositions, assessments, fees or other charges imposed on them by any
     governmental authority, agency or instrumentality, prior to any delinquency
     with respect thereto (other than taxes, impositions, assessments, fees and
     charges currently being contested in good faith by appropriate proceedings,
     for which appropriate amounts have been reserved and which have been
     reflected in the financial statements and records of the Debtors, as
     applicable).  No tax liens have been filed against the Debtors or any of
     the property thereof.

          (l) Senior Indebtedness.  As of the date hereof, the total outstanding
              -------------------
     principal amount of the indebtedness of Video City (the "Senior
     Indebtedness") to BankBoston

                                       5
<PAGE>

     Retail Finance, Inc. (the "Senior Lender") is no more than $24,000,000. No
     default, event of default or event that with the giving of notice, the
     passage of time or both would constitute an event of default has occurred
     and is continuing under any document, instrument or agreement evidencing,
     securing or otherwise relating to the Senior Indebtedness. The copies of
     all documents, instruments and agreements relating to the Senior
     Indebtedness heretofore delivered to Secured Party are true and accurate
     copies of the same, and such documents, instruments and agreements have not
     been modified or amended in any manner.

          (m) Affiliates.  Each corporation, partnership, limited liability
              ----------
     company or other entity in which Video City and/or its Subsidiaries, or any
     combination thereof, own or control, directly or indirectly, at least 5% of
     the outstanding ownership interests of such entity is listed on Schedule
                                                                     --------
     3(m) attached hereto, and the percentage ownership of Video City and such
     ----
     Subsidiaries in each such entity is accurately described on Schedule 3(m).
                                                                 -------------
     The Subsidiaries are wholly-owned subsidiaries of Video City.

          (n) Year 2000 Compliance.  The Debtors have (i) initiated a review and
              --------------------
     assessment of all areas within their business operations that could be
     materially and adversely affected by the "Year 2000 Problem" (that is, the
     risk that computer applications used by the Debtors may be unable to
     recognize and perform properly date-sensitive functions involving certain
     dates prior to and any date after December 31, 1999), (ii) developed a plan
     and time line for addressing the Year 2000 Problem on a timely basis, and
     (iii) to date, implemented that plan in accordance with that timetable.
     Based on the foregoing, the Debtors believe that all computer applications
     that are material to their business and operations are reasonably expected
     on a timely basis to be able to perform properly date-sensitive functions
     for all dates before and after January 1, 2000 (that is, be "Year 2000
     Compliant"), except to the extent that a failure to do so could not
     reasonably be expected to have a material adverse effect on the business
     and operations of the Debtors.

          (o) Locations.  The only locations in which Debtors have video stores
              ---------
     or other   operations or in which assets of the Debtors are located are the
     locations described on Schedule 3(o) attached hereto.
                            -------------

     4.   In connection with the amendments effected hereby and the transactions
described in the recitals of this instrument, Debtors hereby covenant and agree
with Secured Party as follows:

          (a) Financial Statements.  The Debtors will furnish to Secured Party:
              --------------------

              (i)    As soon as practicable and in any event within one hundred
          five (105) days after the end of each fiscal year of Video City, a
          consolidated balance sheet of Video City and its Subsidiaries as of
          the close of such fiscal year, the

                                       6
<PAGE>

          related statements of income, cash flow and shareholders' equity for
          such fiscal year and all notes to such financial statements, all in
          reasonable detail, prepared in accordance with generally accepted
          accounting principles consistently applied, audited in accordance with
          generally accepted auditing standards by independent certified public
          accountants reasonably satisfactory to Secured Party;

              (ii)   As soon as practicable and in any event within fifty (50)
          days after the end of each fiscal quarter, a consolidated balance
          sheet of Video City and its Subsidiaries as of the close of such
          fiscal quarter, and the related statements of income, cash flow and
          shareholders' equity for such fiscal quarter, all in reasonable
          detail, and prepared in accordance with generally accepted accounting
          principles consistently applied, certified by the chief executive or
          chief financial officer of Video City;

              (iii)  Within thirty (30) days after the end of each fiscal
          quarter, a certificate of Video City's chief executive or chief
          financial officer, showing the then-outstanding principal balance of
          the Senior Indebtedness;

              (iv)   Promptly upon receipt thereof, copies of all accountants'
          reports, accompanying financial reports and internal control or
          management letters submitted to Video City or its Subsidiaries by
          independent accountants in connection with each annual examination of
          Video City and/or its Subsidiaries;

              (v)    Copies of all management reports, certificates, notices and
          other documents from time to time delivered, or required to be
          delivered, to the Senior Lender with respect to the Senior
          Indebtedness; and

              (vi)   With reasonable promptness, such other financial data as
          Secured Party reasonably may request.

          (b) Maintenance of Books and Records; Inspection.   Each Debtor will
              --------------------------------------------
     maintain its books, accounts and records in accordance with generally
     accepted accounting principles consistently applied, and permit any person
     designated by Secured Party in writing to visit and inspect any of its
     properties, corporate books and financial records, and to discuss its
     accounts, affairs and finances with Video City, its Subsidiaries or the
     principal officers of such entities during reasonable business hours, all
     at such times as Secured Party reasonably may request.

          (c) Insurance.  Without limiting any of the requirements of any of the
              ---------
     other Transaction Documents, each Debtor will maintain insurance, all in
     amounts reasonably satisfactory to Secured Party, as follows:

              (i)    Comprehensive public liability insurance;

                                       7
<PAGE>

              (ii)   Worker's compensation insurance (or maintain a legally
          sufficient amount of self insurance against worker's compensation
          liabilities, with adequate reserves, under a plan approved by Secured
          Party);

              (iii)  "All-risk" property/casualty insurance on its properties
          against such hazards as are customary in the business of Video City
          and its Subsidiaries; and

              (iv)   Rent or business interruption insurance against loss of
          income arising out of damage or destruction by such hazards as
          presently are included in so-called "all-risk coverage".

          At the request of Secured Party from time to time, the Debtors will
     deliver to Secured Party certificates issued by the insurer(s), specifying
     the details of such insurance in effect.  All policies of property/casualty
     insurance shall name Secured Party as an additional insured or loss payee
     (as appropriate) and shall provide that such insurance shall be payable to
     Video City, its Subsidiaries and Secured Party as their respective
     interests may appear, and that at least thirty (30) days' prior written
     notice of cancellation or modification of the policy shall be given to
     Secured Party by the insurer.  Each Debtor agrees that there shall be no
     recourse against Secured Party for the payment of premiums, commissions,
     assessments or advances in respect of any such policy, and at Secured
     Party's request, the Debtors will provide Secured Party with the agreement
     of the insurer(s) to this effect.  At the request of Secured Party, all
     such policies (or duplicate original counterparts thereof) shall be
     delivered to and held by Secured Party.  During the continuance of any
     event of default under the Transaction Documents, Secured Party may, at its
     option, act as attorney-in-fact for Video City and/or its Subsidiaries in
     obtaining, adjusting, settling and canceling such insurance and endorsing
     any drafts with respect thereto, and this power, being coupled with an
     interest, shall be irrevocable prior to payment in full of the Note and
     performance of all of the obligations of the Debtors to Secured Party in
     connection therewith.

          (d) Taxes and Assessments; Tax Indemnity.  Each Debtor shall (i) file
              ------------------------------------
     all tax returns and appropriate schedules thereto that are required to be
     filed under applicable law, prior to the date of delinquency, (ii) pay and
     discharge all taxes, assessments and governmental charges or levies imposed
     upon it, upon its income and profits or upon any properties belonging to
     it, prior to the date on which penalties attach thereto, and (iii) pay all
     taxes, assessments and governmental charges or levies that, if unpaid,
     might become a lien or charge upon any of its properties.  If any tax is or
     may be imposed by any governmental entity in respect of sales by the
     Debtors of any inventory or the merchandise that is the subject of such
     sales, or as a result of any other transaction of the Debtors, which tax
     Secured Party is or may be required to withhold or pay, the Debtors agree
     to indemnify Secured Party and hold Secured Party harmless in connection
     with such taxes, and the Debtors will immediately reimburse Secured Party
     for any such taxes

                                       8
<PAGE>

     paid by Secured Party. Notwithstanding the foregoing, any Debtor may
     contest any taxes or assessments described above by appropriate proceedings
     diligently conducted and pursued by such Debtor in good faith so long as
     (i) such Debtor gives prior written notice of such contest to Secured
     Party, and (ii) such contest does not impose any material risk that any
     collateral security for the Note or any material asset of such Debtor shall
     be subject to forfeiture.

          (e) Corporate Existence.  Each Debtor will maintain its corporate
              -------------------
     existence and good standing in the state of its incorporation, and its
     qualification and good standing as a foreign corporation in each
     jurisdiction in which such qualification is necessary pursuant to
     applicable law.

          (f) Compliance with Law and Other Agreements.  Each Debtor shall
              ----------------------------------------
     maintain its business operations and property owned or used in connection
     therewith in material compliance with (i) all applicable federal, state and
     local laws, regulations and ordinances governing such business operations
     and the use and ownership of such property, and (ii) all material
     agreements, licenses, franchises, indentures and mortgages to which it is a
     party or by which it or any of its properties is bound.  Without limiting
     the foregoing, each Debtor will pay all of its material indebtedness
     promptly in accordance with the terms thereof.  Notwithstanding the
     foregoing, any Debtor may contest any law, regulation or ordinance
     described above by appropriate proceedings diligently conducted and pursued
     by such Debtor in good faith so long as (i) such Debtor gives prior written
     notice of such contest to Secured Party, and (ii) such contest does not
     impose any material risk that any collateral security for the Note or any
     material asset of such Debtor shall be subject to forfeiture.

          (g) Notice of Default.  The Debtors will give written notice to
              -----------------
     Secured Party of the occurrence of any default or event of default under
     this Agreement or any other Transaction Document promptly upon the
     discovery thereof by the Debtors.

          (h) Notice of Litigation.  The Debtors will give notice, in writing,
              --------------------
     to Secured Party of (i) any actions, suits or proceedings that are required
     to be disclosed in public filings filed with the Securities and Exchange
     Commission and that are instituted by any persons whomsoever against Video
     City or its Subsidiaries, or that affect any of the assets of Video City or
     any of its Subsidiaries, and (ii) any dispute, not resolved within sixty
     (60) days of the commencement thereof, between Video City or any of its
     Subsidiaries on the one hand and any governmental regulatory body on the
     other hand, which dispute might interfere with the normal operations of
     Video City and/or its Subsidiaries.  With respect to any dispute,
     litigation or other matter of which the Debtors are required to give notice
     to Secured Party pursuant to the foregoing sentence, the Debtors shall
     further provide Secured Party with such updates and additional information
     regarding the same from time to time as Secured Party may reasonably
     request.

                                       9
<PAGE>

          (i) ERISA Plan.  If any Debtor has in effect, or hereafter institutes
              ----------
     (with Secured Party's consent, as hereinafter provided), a pension plan
     that is subject to the requirements of Title IV of the Employee Retirement
     Income Security Act of 1974, Pub. L. No. 93-406, September 2, 1974, 88
     Stat. 829, 29 U.S.C.A. (S) 1001 et seq. (1975), as amended from time to
     time ("ERISA"), then the following warranty and covenants shall be
     applicable during such period as any such plan (the "Plan") shall be in
     effect:  (i) the Debtors hereby warrant that no fact that might constitute
     grounds for the involuntary termination of the Plan, or for the appointment
     by the appropriate United States District Court of a trustee to administer
     the Plan, exists at the time of execution of this Agreement, (ii) the
     Debtors hereby covenant that throughout the existence of the Plan, the
     contributions of the Debtors under the Plan will meet the minimum funding
     standards required by ERISA and the Debtors will not institute a distress
     termination of the Plan, (iii) the Debtors hereby covenant that the Plan's
     annual financial and actuarial statements and the Plan's annual Form 5500
     information return will be timely filed with the Internal Revenue Service
     and a copy delivered to Secured Party within thirty (30) days of the
     preparation thereof, and (iv) the Debtors covenant that they will send to
     Secured Party a copy of any notice of any Reportable Event (as defined in
     ERISA) required by ERISA to be filed with the Labor Department or the
     Pension Benefit Guaranty Corporation, at the time that such notice is so
     filed.  No Plan shall be instituted by the any Debtor unless Secured Party
     shall have given its written consent thereto.

          (j) Mergers, Consolidations, Acquisitions and Sales.  In no event
              ------------------------------------------------
     shall any Debtor (a) enter into any transaction of merger or consolidation
     or contemplating the sale or transfer of all or substantially all of its
     assets; or (b) make any material change in the nature of its business as
     conducted and presently proposed to be conducted; or (c) change the form of
     organization of its business; provided, however, that nothing herein shall
     prevent a Debtor from entering into a transaction of merger where (i) such
     Debtor is the surviving party; (ii) upon the consummation of such merger,
     50% or more in interest of the stockholders of such Debtor own and control
     50% or more of the voting equity of the combined company; (iii) a majority
     of the board of directors of the combined company consist of directors of
     such Debtor immediately prior to such merger; and (iv) the terms of the
     Supply Agreement (as hereinafter defined) will continue to apply.

          (k) Management; Ownership.  Video City will not permit any significant
              ---------------------
     change in the executive management of Video City without the prior written
     consent of Secured Party.  The executive management of the Video City is a
     material factor in Secured Party's willingness to enter into the
     transactions contemplated by the Transaction Documents.  As used in this
     Section 4(k), the term "executive management" refers to Robert Lee and
     Craig Kelly in substantially the same managerial capacities in which they
     serve as of the date hereof.

          (l) Dividends, Etc.  The Debtors will not declare or pay any dividend
              --------------
     of any kind (other than payments of dividends by the Subsidiaries to Video
     City and payments of

                                       10
<PAGE>

     dividends required to be paid by Video City to the holders of its Preferred
     Stock pursuant to Section 2 of Video City's Certificate of Designations
     dated May 27, 1998, respecting the Series A Preferred Stock (the "Series A
     Certificate of Designations") and Section 2 of Video City's Certificate of
     Designations dated December 16, 1998, respecting the Series B Preferred
     Stock (the "Series B Certificate of Designations")), in cash or in
     property, on any class of the common or preferred stock, nor purchase,
     redeem, retire or otherwise acquire for value any shares of such stock, nor
     make any distribution of any kind in respect thereof, nor make any return
     of capital to shareholders, nor make any payments in respect of any
     pension, profit sharing, retirement, stock option, stock bonus, incentive
     compensation or similar plan (except as required or permitted hereunder),
     without the prior written consent of Secured Party; provided, however, that
                                                         --------  -------
     (i) Debtors may make payments in respect of any stock bonus or incentive
     compensation plan to its employees in the ordinary course of business so
     long as the amount(s) thereof are fair and reasonable and do not exceed the
     amount(s) of stock bonuses and incentive compensation paid by companies of
     similar size to employees having similar duties and responsibilities, and
     (ii) Secured Party shall not unreasonably withhold its consent to the
     creation of a new series of Preferred Stock upon which the payment of
     certain dividends shall be required or to the payment of such dividends
     upon Debtor's request.

          (m) Guaranties; Loans.  The Debtors will not guarantee nor be liable
              -----------------
     in any manner, whether directly or indirectly, or become contingently
     liable, after the date hereof, in connection with the obligations or
     indebtedness of any person or persons whomsoever (other than Video City and
     its Subsidiaries), except for the indorsement of negotiable instruments for
     deposit or collection in the ordinary course of business.  The Debtors will
     not make any loan, advance or extension of credit (i) to any employee,
     except for advances to cover work-related travel expenses incurred by an
     employee in the ordinary course of business, or (ii) to any person other
     than in the normal course of their respective businesses.

          (n) Debt.  Without the express prior written consent of Secured Party,
              ----
     the Debtors will not create, incur, assume or suffer to exist indebtedness
     of any description whatsoever in an aggregate amount in excess of
     $1,000,000 (excluding the indebtedness evidenced by the Note, indebtedness
     existing as of the date hereof that is disclosed in financial statements
     heretofore delivered by Debtors to Secured Party, Senior Indebtedness in
     compliance with Section 4(o) below, trade accounts payable, accrued
     expenses incurred in the ordinary course of business and the indorsement of
     negotiable instruments for deposit or collection in the ordinary course of
     business).

          (o) Senior Indebtedness.  In no event shall Video City allow the
              -------------------
     aggregate principal amount of the Senior Indebtedness to exceed
     $30,000,000.  Video City shall promptly provide and deliver to Secured
     Party any and all notices received from the holder(s) of the Senior
     Indebtedness of any default or event of default under the

                                       11
<PAGE>

     documents, instruments and agreements evidencing, securing or otherwise
     relating to the Senior Indebtedness.

          (p) Maintenance of Property.  Each Debtor shall maintain its property
              -----------------------
     (whether real, personal or mixed, or tangible or intangible) in good and
     workable condition at all times, and make all material repairs,
     replacements, additions and improvements to its property reasonably
     necessary and proper to insure that the business carried on in connection
     with its property may be conducted properly and efficiently at all times.

          (q) Nature of Business.  The Debtors shall not suffer or permit any
              ------------------
     material changes to be made in the character of their businesses as carried
     on as of the date hereof.

          (r) Right of Inspection.  Each Debtor shall permit any officer,
              -------------------
     employee or agent of Secured Party to visit and inspect any of its
     property, to examine its books, records and accounts, to take copies and
     extracts from such books, records and accounts, and to discuss its affairs,
     finances and accounts with its officers, accountants, and auditors, all at
     such reasonable times and as often as Secured Party may reasonably desire
     and upon reasonable advance notice in the absence of an event of default.
     Without limiting Secured Party's right to obtain equitable relief as to any
     other appropriate right herein or in any of the other Transaction
     Documents, the Debtors agree that the rights in this Section 4(r) may be
     enforced by affirmative injunction and, to the extent that the right to
     review records may be denied, the right may be enforced by a restraining
     order prohibiting the interference by the Debtors with Secured Party's
     exercise of its right to review of the records.

          (s) Compensation.  The Debtors shall not pay any salary, bonuses or
              ------------
     other compensation to Robert Lee or any other officer or director to the
     extent the same is in excess of the salary, bonuses and other compensation
     customarily paid by companies of similar size to officers or directors, as
     applicable, having similar duties and responsibilities.

          (t) Agreements with Secured Party.  In the event that Secured Party
              -----------------------------
     terminates or cancels that certain Supply Agreement dated January 8, 1997,
     by and between Video City and Secured Party, as amended from time to time
     (the "Supply Agreement"), or any other supply agreement or other agreement
     between Secured Party and Video City as a result (directly or indirectly)
     of a breach thereof by Video City or its Subsidiaries, or a default
     thereunder or failure to perform with respect thereto, Video City and its
     Subsidiaries shall immediately prepay the Note in full.

          (u) Transactions with Affiliates.  In no event shall any Debtor enter
              ----------------------------
     into any transaction or series of transactions, whether or not in the
     ordinary course of business,

                                       12
<PAGE>

     with any Affiliate (as hereinafter defined) of such entity, other than on
     terms and conditions as favorable to such Debtor, as would be attainable by
     such entity in a comparable arm's-length transaction with a person or
     entity other than an Affiliate. As used in this Agreement, the term
     "Affiliate" means, with respect to any person or entity, any other person
     or entity directly or indirectly controlling, controlled by or under direct
     or indirect common control with, such person or entity. A person or entity
     shall be deemed to control another person or entity if such person or
     entity possesses, directly or indirectly, the power to direct to cause the
     direction of the management and policies of such other person or entity,
     whether through the ownership of voting securities, by contract or
     otherwise.

          (v) Year 2000 Compliance.  The Debtor shall fully implement its plan
              --------------------
     to address the Year 2000 Problem and shall be and remain Year 2000
     Compliant.  The Debtors shall promptly notify Secured Party in the event
     they discover or determine that any computer application that is material
     to their businesses and operations will not be Year 2000 Compliant, except
     to the extent that such failure could not reasonably be expected to have a
     material adverse effect on the business and operations of the Company.

          (w) Further Assurances.  Debtors will take all reasonable actions
              ------------------
     requested by Secured Party to create and maintain in Secured Party's favor
     valid liens upon, security titles to and/or perfected security interests in
     the collateral security described in the Loan Documents and all other
     security for the Obligations now or hereafter held by or for Secured Party.
     Without limiting the foregoing, Debtors agree to execute such further
     instruments (including financing statements and continuation statements) as
     may be required or permitted by any law relating to notices of, or
     affidavits in connection with, the perfection of Secured Party's security
     interests, and to cooperate with Secured Party in the filing or recording
     and renewal thereof.

          (x) Duration of Covenants.  The covenants and agreements set forth in
              ---------------------
     this Section 4 shall continue for so long as any of indebtedness evidenced
     by the Note shall remain outstanding.

     5.   Except as amended hereby, the Loan Documents shall remain in full
force and effect.



        [The remainder of this page has been intentionally left blank.]

                                       13
<PAGE>

     IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
as of the date first above written.

                                    SECURED PARTY:

                                    INGRAM ENTERTAINMENT INC., a Tennessee
                                     corporation

                                    By: /s/ Thomas H. Lunn
                                        ----------------------------------
                                    Name:_________________________________
                                    Title: Vice Chairman
                                           -------------------------------

                                    DEBTORS:

                                    VIDEO CITY, INC., a Delaware corporation

                                    By: /s/ Robert Y. Lee
                                        ----------------------------------
                                    Name: ________________________________
                                    Title: Chief Executive
                                           -------------------------------

                                    SULPIZIO ONE, INC., a California corporation

                                    By: /s/ Robert Y. Lee
                                        ----------------------------------
                                    Name: ________________________________
                                    Title: President
                                           -------------------------------

                                    OLD REPUBLIC ENTERTAINMENT, INC.,
                                    a California corporation

                                    By: /s/ Robert Y. Lee
                                        ----------------------------------
                                    Name: ________________________________
                                    Title: President
                                          --------------------------------

                                    VIDEO TYME, INC., a Nevada corporation

                                    By: /s/ Robert Y. Lee
                                        ----------------------------------
                                    Name: ________________________________
                                    Title: President
                                          --------------------------------

                                    VIDEOLAND, INC., an Oregon corporation

                                    By: /s/ Robert Y. Lee
                                        ----------------------------------
                                    Name: ________________________________
                                    Title: President
                                          --------------------------------

                                       14
<PAGE>

                               SCHEDULE 3(d)(i)

                        [Shares Reserved for Issuance]

                                       15
<PAGE>

                               SCHEDULE 3(d)(ii)

                              [Preemptive Rights]

1.   Preemptive Rights have been granted in favor of Secured Party pursuant to a
Stockholders Agreement dated January 8, 1997, by and among Video City, Secured
Party, Robert Y. Lee, both individually and as Trustee, and Barry Collier, as
amended.

2.   Preemptive Rights have been granted in favor of Mortco, Inc. pursuant to a
Right of First Refusal and Co-Sale Agreement dated December 16, 1994, by and
among Video City, Robert Y. Lee and Mortco, Inc.

                                       16
<PAGE>

                                 SCHEDULE 3(m)

                                 [Affiliates]

1.   Video City owns 100% of the outstanding ownership interests of each of the
Subsidiaries.

                                       17
<PAGE>

                                 SCHEDULE 3(o)

                             [Business Locations]

                                       18