<PAGE>   1

                                                                   EXHIBIT 10.25






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                       WHEREHOUSE SUBSIDIARY I CO., INC.
                       WHEREHOUSE SUBSIDIARY II CO., INC.
                      WHEREHOUSE SUBSIDIARY III CO., INC.


                                 Trade Creditors

                     --------------------------------------


                  INTERCREDITOR AND COLLATERAL AGENCY AGREEMENT

                     --------------------------------------


                          Dated as of October 26, 1998


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<PAGE>   2

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           Page
<S>   <C>                                                                  <C>
SECTION 1 - DEFINITIONS ............................................        2
  1.1 Defined Terms ................................................        2
  1.2 Other Definitional Provisions ................................        3

SECTION 2 - THE COLLATERAL AGENT ...................................        4
  2.1 Appointment ..................................................        4
  2.2 Control by the Collateral Agent and Required Trade Creditors .        4

SECTION 3 - NEW TRADE CREDITORS ....................................        5

SECTION 4 - MANNER OF DISTRIBUTIONS ................................        5
  4.1 Distributions of Proceeds Upon Exercise of Remedies ..........        5
  4.2 Address for Distributions ....................................        6
  4.3 Outstanding Trade Credit .....................................        6

SECTION 5 - RELEASE OF COLLATERAL; TERMINATION OF SECURITY AGREEMENT        7

SECTION 6 - CONCERNING THE COLLATERAL AGENT ........................        7
  6.1 Absence of Duties Not Specified, etc. ........................        8
  6.2 Reliance by Collateral Agent .................................        8
  6.3 Default Notices ..............................................        9
  6.4 Rights to Conduct Ordinary Business ..........................        9
  6.5 Failure to Act ...............................................        9
  6.6 Resignation or Removal of Collateral Agent ...................        9
  6.7 Additional or Separate Agents ................................       10
  6.8 Authorization ................................................       10

SECTION 7 - COVENANTS OF THE COMPANIES .............................       10
  7.1 Payment of Expenses and Taxes ................................       10
  7.2 Indemnity ....................................................       11
  7.3 Additional Secured Obligations ...............................       11
  7.4 Survival .....................................................       12

SECTION 8 - MISCELLANEOUS ..........................................       12
  8.1 Indemnification ..............................................       12
  8.2 Expenses as Obligations ......................................       12
  8.3 Governing Law ................................................       13
  8.4 Survival of Representations, Warranties and Covenants ........       13
  8.5 Counterparts .................................................       13
  8.6 Successors and Assigns .......................................       13
</TABLE>



<PAGE>   3

<TABLE>
<S>   <C>                                                                  <C>
  8.7 Table of Contents and Headings ...............................       13
  8.8 Waiver of Jury Trial .........................................       13
  8.9 Severability .................................................       13
  8.10 Entire Agreement ............................................       13
  8.11 Amendments, Etc. ............................................       13
  8.12 Waiver ......................................................       14
  8.13 Notices and Distribution ....................................       14
  8.14 Benefit of Covenants ........................................       14
</TABLE>



                                      -ii-
<PAGE>   4

                  INTERCREDITOR AND COLLATERAL AGENCY AGREEMENT

        INTERCREDITOR AND COLLATERAL AGENCY AGREEMENT (the "Agreement"), dated
as of October 26, 1998, between and among WHEREHOUSE SUBSIDIARY I Co., INC.
(formerly known as BLOCKBUSTER MUSIC RETAIL, INC.), a Delaware corporation,
WHEREHOUSE SUBSIDIARY II CO., INC. (formerly known as SHOW INDUSTRIES, INC.), a
California corporation, and WHEREHOUSE SUBSIDIARY III CO., INC. (formerly known
as BLOCKBUSTER SC MUSIC CORPORATION), a Delaware corporation (each a "Company,"
and collectively the "Companies"), each of the TRADE CREDITORS listed on the
signature pages hereof (the "Trade Creditors"), and UNITED STATES TRUST COMPANY
OF NEW YORK, a New York banking corporation, in its capacity as Collateral Agent
for the Trade Creditors. Capitalized terms used herein without other definition
have the respective meanings assigned or referred to in Section 1.

                             W I T N E S S E T H :

        WHEREAS, Wherehouse Entertainment, Inc. ("Wherehouse") has acquired all
the outstanding capital stock of Wherehouse Holding Corporation I (formerly
known as Blockbuster Music Holding Corporation) and Wherehouse Holding
Corporation II (formerly known as Blockbuster SC Holding Corporation)
(collectively the "Subsidiary Holding Companies"); and

        WHEREAS, the Subsidiary Holding Companies own all of the capital stock
of the Companies; and

        WHEREAS, Companies and the Trade Creditors have entered into certain
agreements, documents and instruments pursuant to which the Trade Creditors have
agreed to extend certain trade financing to the Companies on the terms and
conditions set forth therein and, as a condition to such trade financing,
Companies have granted security interests in certain Collateral to the
Collateral Agent for the benefit of the Trade Creditors pursuant to that certain
Security Agreement of even date herewith (the "Security Agreement"); and

        WHEREAS, Congress Financial Corporation (Western) ("Congress") and
Companies have entered into various agreements, including that certain Loan and
Security Agreement and other agreements, documents and instruments, of even date
herewith, as amended or modified from time to time (collectively, the "Senior
Loan Agreement"), pursuant to which Congress has agreed to extend certain loans
and financial accommodations to Companies, and, as a condition to such facility,
Companies have granted security interests in certain Collateral to Congress; and



<PAGE>   5

        WHEREAS, the Collateral Agent, the Trade Creditors and Congress have
entered into that certain Intercreditor and Subordination Agreement, of even
date herewith (the "Congress Intercreditor Agreement") relating to the parties'
respective interests in Collateral of Borrowers; and

        WHEREAS, the Trade Creditors desire to approve the Collateral Agent and
agree upon the parties' respective rights in and to the Collateral, subject to
the security interest of the Collateral Agent.

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

                                    SECTION 1
                                   DEFINITIONS

        1.1 Defined Terms. All capitalized terms used herein and not otherwise
defined herein shall have the meaning assigned to such terms in the Security
Agreement. For purposes of this Agreement, the following terms shall have the
following respective meanings:

        "Accelerated Secured Principal" shall mean any Secured Principal which
shall have been declared or become due and payable prior to its scheduled
maturity because of an Event of Default.

        "Affiliate" of any Person shall mean such Person, any subsidiary of such
Person, and any entity directly or indirectly controlled by or under common
control with such Person, including without limitation any entity in which such
Person holds, directly or indirectly, 20% or more of the voting securities or
other equity interests.

        "Agreement" shall mean this Intercreditor and Collateral Agency
Agreement, including all and any amendments hereto and modifications hereof and
all schedules and exhibits hereto and thereto.

        "Acceptance Instrument" shall mean an agreement entered into by a
prospective Trade Creditor substantially in the form of Exhibit A hereto.

        "Business Day" shall mean each day other than Saturdays, Sundays and
each day on which national banking institutions in California are permitted or
required to be closed.

        "Collateral Agent" shall mean United States Trust Company of New York, a
New York banking corporation, solely in its role as collateral agent for the
Trade Creditors under this Agreement, or any successor collateral agent
hereunder.



                                       -2-
<PAGE>   6
     "Company" shall have the meaning set forth in the introductory paragraph
of this Agreement.

     "Congress Intercreditor Agreement" shall have the meaning set forth in the
recitals.

     "Event of Default" shall mean any event or condition which, under the
terms of any agreement with a Trade Creditor, allows such Trade Creditor to
accelerate the obligations of any of the Companies thereunder.

     "Indemnified Liabilities" shall have the meaning set forth in Section 7.2
hereof.

     "Lien" shall mean any mortgage, lien, pledge, charge, lease, claim,
security interest or encumbrance of any kind, including, without limitation,
the interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement.

     "Obligations" shall mean all obligations and liabilities of the Companies,
the payment or performance of which is secured or is purported to be secured
under the Security Agreement.

     "Person" shall mean any individual, corporation, partnership, trust, joint
venture, unincorporated association or other enterprise or any government or
any agency, instrumentality or political subdivision thereof.

     "Required Trade Creditors" shall mean Trade Creditors that have extended
trade credit in a principal amount at least equal to 66.6% in dollar amount of
the aggregate trade credit then extended by all Trade Creditors to the Company
or Companies, as applicable.

     "Security Agreement" shall have the meaning set forth in the recitals.

     "Secured Principal" shall mean at any time the principal amount of trade
credit extended by the Trade Creditors.

     1.2  Other Definitional Provisions.

     (a)  Definitions hereunder shall be equally applicable to the singular and
plural forms of the terms defined.

     (b)  The words "include," "includes" and "including" shall be deemed to be
followed by the words "without limitation" unless the context otherwise
requires.

     (c)  References to any Person shall include a reference to such Person's
permitted successors and assigns.


                                      -3-






<PAGE>   7

                                    SECTION 2

                              THE COLLATERAL AGENT

        2.1 Appointment. The Trade Creditors appoint and authorize United States
Trust Company of New York, a New York banking corporation, (or its successor as
appointed hereunder) to act as Collateral Agent hereunder with such powers as
are specifically granted to the Collateral Agent by the terms of this Agreement
or by the Security Agreement. The Collateral Agent accepts the appointment
contained in the preceding sentence and agrees to serve as "Collateral Agent"
hereunder and as "Secured Party" under the Security Agreement. The Collateral
Agent shall be entitled to all of the benefits and immunities set forth herein.

        2.2 Control by the Collateral Agent and Required Trade Creditors.

        (a) Subject to the provisions of this Section 2.2 and of Section 6.5
hereof and the Congress Intercreditor Agreement, the Collateral Agent shall take
only those actions (i) which it is expressly required to take by the terms of
this Agreement; or (ii) as it may from time to time be directed in writing by
the Required Trade Creditors for the Company or Companies, as applicable, such
direction to be evidenced by an instrument or instruments in writing executed by
the Required Trade Creditors and delivered to the Collateral Agent.
Notwithstanding the provisions of clause (ii) above, the Collateral Agent may in
its discretion refrain from acting pursuant to any directions from the Required
Trade Creditors unless and until it shall have received an opinion of counsel,
reasonably satisfactory to it, to the effect that such direction is not in
conflict with the terms of this Agreement, the Security Agreement, the Congress
Intercreditor Agreement or other applicable law. The Collateral Agent shall be
under no obligation to request or obtain such an opinion of counsel and shall be
fully protected if it acts or refrains from acting as instructed by the Required
Trade Creditors. Any action taken by or failure to act of the Collateral Agent
pursuant to directions given to the Collateral Agent in accordance with this
Section 2.2(a) shall be binding on all Trade Creditors.

        (b) The Collateral Agent shall maintain a list of the names and
addresses for notices of all Trade Creditors and shall provide such list on
request to any Trade Creditor.

        (c) Any direction by the Required Trade Creditors shall state the
principal amount of trade credit extended by each such Trade Creditor providing
such direction. Each Company will supply to the Collateral Agent upon request a
schedule of the Trade Credit then extended by each Trade Creditor and the
aggregate Trade Credit then extended by all Trade Creditors, upon which the
Collateral Agent shall be entitled to rely except to the extent any Trade
Creditor states that its Trade Credit differs from such schedule.



                                       -4-
<PAGE>   8

                                    SECTION 3

                               NEW TRADE CREDITORS

        Each Company may, from time to time, request that additional trade
creditors of such Company be added as Trade Creditors hereunder and be entitled
to the benefits of this Agreement. Such request shall be in writing delivered to
the Collateral Agent and each Trade Creditor, and shall include a representation
that the proposed Trade Creditor has extended to the Companies in the aggregate
open trade credit in an amount not less than $ 1,000,000. Upon receipt of such
notice, and upon execution by the proposed Trade Creditor of an Acceptance
Instrument and delivery thereof to the Collateral Agent, such Person shall be
deemed to be a Trade Creditor for all purposes of this Agreement and the
Security Agreement, and shall have all of the rights and shall be bound by all
of the obligations of a Trade Creditor hereunder and a Secured Party under the
Security Agreement.

                                    SECTION 4

                             MANNER OF DISTRIBUTIONS

        4.1 Distributions of Proceeds Upon Exercise of Remedies. The proceeds of
any collection, sale or other realization of all or any part of the Collateral,
and of all proceeds of the enforcement of any Lien created under the Security
Agreement, shall be applied in the following order of priority:

                FIRST: To the Collateral Agent in an amount equal to the fees,
        indemnities, costs and expenses incurred by the Collateral Agent in the
        taking of any actions required by or pursuant to this Agreement, the
        Security Agreement, or the Congress Intercreditor Agreement including,
        without limitation, reasonable compensation for and expenses of the
        Collateral Agent's representatives and counsel, and all charges,
        expenses, liabilities and advances incurred or made by the Collateral
        Agent whether provided for under the Security Agreement, this Agreement
        or otherwise;

                SECOND: To the Trade Creditors in an aggregate amount equal to
        the sum of the unpaid interest incurred through the date of such
        distribution, with respect to obligations owed by the Company that owned
        the Collateral, provided that if such proceeds (after distribution of a
        portion thereof as provided in paragraph FIRST of this Section 4.1)
        shall be insufficient to pay in full such aggregate amount owed to the
        Trade Creditors, then such payment shall be made to each Trade Creditor
        on a pro rata basis in the proportion the respective amounts of such
        interest owed to each Trade Creditor on such date bear to the total
        amount of such interest then owed;



                                       -5-
<PAGE>   9

                THIRD: To the Trade Creditors in an aggregate amount equal to
        the sum of the then unpaid principal amount of trade credit then
        extended as of the date of such distribution to the Company that owned
        the Collateral, provided that if such proceeds (after distribution of a
        portion thereof as provided in paragraphs FIRST and SECOND of this
        Section 4.1) shall be insufficient to pay in full such aggregate amount
        owed to the Trade Creditors, then such payment shall be made to each
        Trade Creditor on a pro rata basis in the proportion the outstanding
        principal amount of its trade credit extended on such date to the
        Company that owned the Collateral bear to the total outstanding
        principal amount of trade credit then owed to the Trade Creditors; and

                FOURTH: Any surplus then remaining to the applicable Company or
        Companies or the Person who may be lawfully entitled to receive the same
        or as a court of competent jurisdiction may direct.

        4.2 Address for Distributions. All distributions under Section 4.1 to be
made by the Collateral Agent to any Trade Creditor shall be made to it at its
address for payments set forth on the signature page hereto or in the applicable
Acceptance Instrument, or as otherwise provided in writing by such Trade
Creditor to the Collateral Agent.

        4.3 Outstanding Trade Credit. Prior to making any distribution under
Section 4.1 or at such other time or times as is deemed advisable in its sole
discretion by the Collateral Agent, the Collateral Agent may request an
officer's certificate from each Trade Creditor setting forth the aggregate
amount owed to such Trade Creditor, and may request from each Company an
officer's certificate setting forth the amount owed to each Trade Creditor. The
Collateral Agent shall be entitled to conclusively rely on the amount provided
by each Trade Creditor. If any Trade Creditor fails to provide such officer's
certificate within 10 days of the request therefor, the Collateral Agent shall
be entitled to rely upon the officer's certificate of each Company with respect
to such Trade Creditor.

                                    SECTION 5

                             RELEASE OF COLLATERAL;
                        TERMINATION OF SECURITY AGREEMENT

        Except as expressly provided herein, without the prior written consent
of all of the Trade Creditors, the Collateral Agent shall not consent to or
permit the termination of the Lien of the Security Agreement or the release of
any of the Collateral from any such Lien except for sales or returns of
Collateral in the ordinary course of business. The Collateral Agent shall
release its Lien on all or any portion of the Collateral (i) upon the written
request of the Company or Companies, which request will be provided
simultaneously by the applicable Company or Companies to each Trade Creditor;
(ii) receipt by the Collateral Agent of a direction in writing by the Trade
Creditors holding 66.6% of the trade credit to the Company



                                       -6-
<PAGE>   10

or Companies, as the case may be, extended by the Trade Creditors to release
said Lien; and (iii) if the Collateral Agent has not received written notice
from any Trade Creditor that an Event of Default has occurred and is continuing
or would exist as a result of such release. In such case the Collateral Agent
shall execute for recordation in public offices, at the expense of the
applicable Company or Companies, such instrument or instruments in writing as
reasonably shall be requested by the Company in order to release the Lien of the
Security Agreement as to, and to make clear upon public records such Company's
title to, all or such portion of the Collateral under the law of any
jurisdiction. After the conditions set forth in this Section 5 have been
satisfied as to all of the Collateral, title to all Collateral shall vest in the
applicable Company or Companies, free and clear of any Lien of the Collateral
Agent. Any direction by the Trade Creditors under this Section 5 shall comply
with Section 2.2(c) hereof.

                                    SECTION 6

                         CONCERNING THE COLLATERAL AGENT

        The Collateral Agent shall be entitled to the rights and privileges set
forth in this Section 6.

        6.1 Absence of Duties Not Specified, etc.

        (a) The Collateral Agent (which term as used in this sentence and in
Section 6.4 hereof shall include reference to its officers, directors,
employees, agents, Affiliates and its Affiliates' officers, directors, employees
and agent(s)) (i) shall have no duties or responsibilities except those
expressly set forth in this Agreement, in the Security Agreement, and the
Congress Intercreditor Agreement and shall not by reason of this Agreement, the
Security Agreement or the Congress Intercreditor Agreement, be a trustee for any
Trade Creditor; (ii) shall not be responsible to any Trade Creditor for any
recitals, statements, representations or warranties contained in this Agreement,
the Security Agreement or the Congress Intercreditor Agreement or for the value,
validity, effectiveness, genuineness, enforceability or sufficiency of this
Agreement, or the Security Agreement or the Collateral thereunder (other than
the due authorization of the Collateral Agent to execute this Agreement or the
Security Agreement) or for any failure by any Company or any Person other than
the Collateral Agent to perform any of its obligations hereunder or thereunder;
and (iii) shall not be responsible for any action taken or omitted to be taken
by it hereunder, except for its own gross negligence or willful misconduct.

        (b) The Collateral Agent may consult with counsel, accountants and other
skilled Persons selected by it in good faith prior to taking any act or
refraining to act under this Agreement, the Security Agreement and the Congress
Intercreditor Agreement, and shall not be liable for anything done, suffered or
omitted in good faith by it in accordance with the advice or opinion of any such
counsel, accountant or other skilled Person so long as such advice or opinion is
within the scope of such Person's professional competence.



                                       -7-
<PAGE>   11

        (c) The Collateral Agent may employ agents and attorneys-in-fact and
shall not be responsible for the negligence or misconduct of any such agents or
attorneys-in-fact selected by the Collateral Agent except to the extent such
selection is the result of gross negligence or willful misconduct of the
Collateral Agent.

        (d) The obligations of the Collateral Agent hereunder are only those
expressly set forth herein, in the Security Agreement and in the Congress
Intercreditor Agreement. Without limiting the generality of the foregoing and
subject to the provisions of Section 2.2, the Collateral Agent shall not be
required to take any action with respect to any Event of Default unless it
receives a written direction from the Required Trade Creditors.

        6.2 Reliance by Collateral Agent. The Collateral Agent shall be entitled
to rely conclusively upon any certification, notice or other communication
(including any thereof by telephone, telecopy, telex, telegram or cable)
believed by it in good faith to be genuine and correct and to have been signed
or sent by or on behalf of the proper Person or Persons, and upon advice and
statements of legal counsel, independent accountants and other experts selected
by the Collateral Agent. The Collateral Agent shall in all cases be fully
protected in acting, or in refraining from acting, hereunder in accordance with
written instructions signed by the Required Trade Creditors and such
instructions and any action taken or failure to act pursuant thereto shall be
binding on all of the Trade Creditors. The Collateral Agent shall be entitled to
rely conclusively upon an officer's certificate of a Trade Creditor as to the
principal amount of trade credit then outstanding to that Trade Creditor and, in
the absence of such certificate, shall be entitled to rely upon a certificate of
an officer of each Company as to the principal amount of any such trade credit
then outstanding.

        6.3 Default Notices. The Collateral Agent shall not be deemed to have
knowledge of the occurrence of an Event of Default unless the Collateral Agent
has received a written notice of such Event of Default from a Trade Creditor or
a Company. If the Collateral Agent receives such a written notice of such Event
of Default, the Collateral Agent shall give prompt notice thereof to the Trade
Creditors.

        6.4 Rights to Conduct Ordinary Business. The Collateral Agent and its
Affiliates may (without having to account therefor to any Trade Creditor) accept
deposits from, lend money to, act as warrant, stock exchange or distribution
agent for and generally engage in any kind of banking, trust or other business
with any Company and any of its Affiliates as if it were not acting as the
Collateral Agent.

        6.5 Failure to Act. The Collateral Agent shall in all cases be fully
justified in failing or refusing to act under this Agreement, the Security
Agreement and the Congress Intercreditor Agreement unless it shall have received
assurances to its satisfaction from the Trade Creditors of their indemnification
obligations under Section 8.1 hereof in respect of any liability and expense
which may be incurred by the Collateral Agent by reason of taking or continuing
to take any such action.



                                      -8-
<PAGE>   12

        6.6 Resignation or Removal of Collateral Agent. Subject to the
appointment and acceptance of a successor Collateral Agent as provided below,
the Collateral Agent may resign at any time by giving at least 30 days' written
notice thereof to the Trade Creditors and each Company, such resignation to be
effective upon the acceptance of the position of Collateral Agent by a successor
Collateral Agent. The Collateral Agent may be removed at any time with or
without cause by written notice from the Required Trade Creditors (measured for
all Companies combined), and shall be so removed at any time the Collateral
Agent ceases to be the Secured Party under the Security Agreement. Upon any such
resignation or removal, the Required Trade Creditors (measured for all Companies
combined) shall have the right to appoint a successor Collateral Agent which
shall be a bank or trust company selected by the Required Trade Creditors
(measured for all Companies combined) and, so long as no Default shall have
occurred and be continuing, reasonably acceptable to the Companies, if there be
such an institution willing, able and legally qualified to perform the duties of
the Collateral Agent hereunder upon reasonable or customary terms. If, within 90
days of notice of resignation of the Collateral Agent, a successor Collateral
Agent shall not have been appointed, the Collateral Agent may petition a court
of competent jurisdiction for the appointment of a successor Collateral Agent.
Upon the acceptance of any appointment as Collateral Agent hereunder by a
successor Collateral Agent, such successor Collateral Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the resigning or removed Collateral Agent, and the resigning or removed
Collateral Agent shall be discharged from its duties and obligations hereunder.
After any resigning or removed Collateral Agent's resignation or removal
hereunder as Collateral Agent, the provisions of this Section 6 shall continue
in effect for its benefit in respect of any actions taken or omitted to be taken
by it while it was acting as the Collateral Agent. Any successor Collateral
Agent shall also be appointed as successor Secured Party under the Security
Agreement.

        6.7 Additional or Separate Agents. At any time or times, in order to
comply with any legal requirement in any jurisdiction, the Collateral Agent may
appoint another bank or trust company or one or more other persons, either to
act as co-agent or co-agents, jointly with the Collateral Agent, or to act as
separate agent or agents on behalf of the Trade Creditors, or subclasses
thereof, with such power and authority as may be necessary for the effectual
operation of the provisions hereof and may be specified in the instrument of
appointment (which may, in the discretion of the Collateral Agent, include
provisions for the protection of such co-agent or separate agent similar to the
provisions of this Section 6).

        6.8 Authorization. The Collateral Agent is duly authorized to (a) act on
behalf of the Trade Creditors in accordance with the terms of this Agreement,
(b) execute and deliver the Security Agreement and the Congress Intercreditor
Agreement and (c) perform in accordance with the terms of this Agreement, the
Security Agreement and the Congress Intercreditor Agreement.



                                       -9-
<PAGE>   13

                                    SECTION 7

                           COVENANTS OF THE COMPANIES

        7.1 Payment of Expenses and Taxes. The Companies will:

        (a) pay or reimburse the Collateral Agent for all of its reasonable
out-of-pocket costs and expenses incurred in connection with the preparation,
execution and delivery of, and any amendment, consent or waiver, supplement or
modification to, this Agreement, the Security Agreement, and the Congress
Intercreditor Agreement and other documents prepared in connection with this
Agreement, the Security Agreement, and the Congress Intercreditor Agreement and
the consummation of the transactions contemplated by this Agreement, the
Security Agreement, and the Congress Intercreditor Agreement, including the fees
and disbursements of counsel to the Collateral Agent, such payments or
reimbursements to be made, to the extent due and payable on the date hereof and,
thereafter, from time to time upon demand;

        (b) pay or reimburse the Collateral Agent on demand for all of its
reasonable costs and expenses incurred in connection with the interpretation,
enforcement or preservation of, or any waiver of or consent with respect to, any
rights under this Agreement, the Security Agreement, and the Congress
Intercreditor Agreement, including, without limitation, the fees and
disbursements of counsel of the Collateral Agent;

        (c) pay, indemnify, and hold the Collateral Agent harmless on demand
from any and all recording and filing fees and any and all liabilities with
respect to, or resulting from, any stamp, excise and other similar taxes, if
any, which may be payable or determined to be payable in connection with the
execution and delivery of, or consummation of any of the transactions
contemplated by, or any amendment, supplement or modification of, or any waiver
or consent under or in respect of, this Agreement, the Security Agreement and
the Congress Intercreditor Agreement; and

        (d) pay to the Collateral Agent a fee for its services provided
hereunder and under the Security Agreement as set forth on the Schedule 1
attached hereto.

        7.2 Indemnity. Each Company shall indemnify the Collateral Agent, the
Trade Creditors, their Affiliates, and any such party's officers, directors,
employees, agents, attorneys-in-fact, against any and all claims, suits, losses,
penalties, demands, causes of action and judgments of any nature whatsoever and
all liabilities and indebtedness of any and every kind and nature now or
hereafter owing, arising, due or payable, including all costs and expenses
(including, without limitation, attorneys' fees and expenses) (all of the
foregoing being herein collectively called "Indemnified Liabilities"), which may
be imposed on, incurred by or asserted against any of them and that in any way
relate to or arise out of this Agreement, the Security Agreement and the
Congress Intercreditor Agreement or the enforcement of any of the terms hereof
or thereof including without limitation all amounts payable by any Trade



                                      -10-
<PAGE>   14

Creditor under Section 8.1 hereof; provided, however, that no Company shall be
liable for any of the foregoing to the extent that the liability incurred by the
indemnitee has been determined by a court of competent jurisdiction to be the
result of gross negligence or willful misconduct of the party to be indemnified.

        7.3 Additional Secured Obligations. All amounts payable by the Companies
to the Collateral Agent under this Section 7 shall constitute additional
Obligations of each of the Companies secured under the Security Agreement and
payable on demand.

        7.4 Survival. The obligations of each of the Companies under this
Section 7 shall survive the termination of this Agreement.

                                    SECTION 8

                                  MISCELLANEOUS

        8.1 Indemnification. Each Trade Creditor will indemnify the Collateral
Agent, its Affiliates, their respective officers, directors, employees, agents,
attorneys-in-fact (to the extent not reimbursed by any Company within 10 days of
demand therefor) in the proportion that the then outstanding principal amount of
Trade Credit extended by such Trade Creditor bears to the total outstanding
principal amount of all Trade Credit for any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind and nature whatsoever which may be imposed on,
incurred by or asserted against the Collateral Agent in any way relating to or
arising out of this Agreement or the Security Agreement (including, without
limitation, the costs and expenses which each Company is obligated to pay to the
Collateral Agent hereunder or under the Security Agreement for the enforcement
of any of the terms hereof or thereof); provided, however, that no Trade
Creditor shall be liable for any of the foregoing to the extent that the
liability incurred by such indemnitee has been determined by a court of
competent jurisdiction to be the result of gross negligence or willful
misconduct of the party to be indemnified.

        8.2 Expenses as Obligations. If at any time or times hereafter the
Collateral Agent incurs expenses pursuant to action taken pursuant to the
provisions of this Agreement, the Security Agreement, or the Congress
Intercreditor Agreement, or to intervene, file a petition, answer, complaint,
motion or other pleading in any suit or proceeding relating to this Agreement,
the Security Agreement, or the Congress Intercreditor Agreement or relating to
any Collateral, or to protect, take possession of, or liquidate any Collateral,
or to attempt to enforce any security interest in or lien on any Collateral, or
to enforce any rights of the Collateral Agent against any other person, firm or
corporation which may be obligated to the Collateral Agent by virtue of this
Agreement, the Security Agreement, or the Congress Intercreditor Agreement, or
any other agreements, instruments or documents contemplated hereby by the
Security Agreement now or hereafter delivered to the Collateral Agent by or for
the benefit of the Debtor, then in any of such events, all of the expenses
including, without



                                      -11-
<PAGE>   15

limitation, reasonable attorneys' fees arising from such services and any
expenses, costs and charges (including costs and expenses of servicing agents)
relating to any such actions, and interest on such sums at the prevailing
Interest Rate, shall become additional Obligations secured under the Security
Agreement by the Collateral, payable on demand.

        8.3 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California.

        8.4 Survival of Representations, Warranties and Covenants. The
representations, warranties and covenants of each of the Companies contained in
this Agreement and in any of the Security Agreement shall survive the date
hereof.

        8.5 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties thereto may execute this Agreement by signing
any such counterpart.

        8.6 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto, each party that is or shall
hereafter become a Trade Creditor hereunder and their respective successors and
permitted assigns; provided, however, that the no Company may assign its rights
or obligations under this Agreement or the Security Agreement to any Person
without the consent of the Collateral Agent and each Trade Creditor.

        8.7 Table of Contents and Headings. The table of contents to this
Agreement and the headings of the various sections herein are for convenience of
reference only and shall not define or limit any of the terms or provisions
hereof.

        8.8 WAIVER OF JURY TRIAL. EACH OF THE COMPANIES, THE COLLATERAL AGENT
AND THE TRADE CREDITORS HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN
ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE SECURITY AGREEMENT OR TRANSACTIONS CONTEMPLATED THEREBY.

        8.9 Severability. If any term, provision, covenant or condition of this
Agreement, or the application thereof to any person, place or circumstance,
shall be held by a court of competent jurisdiction to be invalid, unenforceable
or void, the remainder of this Agreement, or such term, provision, covenant or
condition as applied to other persons, places and circumstances, as applicable,
shall remain in full force and effect.

        8.10 Entire Agreement. This Agreement, the Security Agreement, and the
Congress Intercreditor Agreement set forth the entire understanding among the
parties with respect to the subject matter hereof and all prior agreements,
contracts, promises, representations and statements between them, if any,
whether written or oral, with respect thereto are merged into this Agreement.



                                      -12-
<PAGE>   16

        8.11 Amendments, Etc. Except as expressly provided in this Agreement or
the Security Agreement, any provision of this Agreement may be amended only by
an instrument in writing signed by each of the Companies, the Collateral Agent
and the Required Trade Creditors (calculated for all Companies combined), and
any provision of this Agreement may be waived by the Collateral Agent and the
Required Trade Creditors (calculated for all Companies combined), acting
together; provided, however, that any amendment hereof that does not adversely
affect the rights, privileges, immunities, duties or obligations of any of the
Companies, shall not require the consent of the Companies.

        8.12 Waiver. No failure on the part of the Collateral Agent or any Trade
Creditor to exercise and no delay in exercising, and no course of dealing with
respect to, any right, power or privilege under this Agreement, the Security
Agreement, the Congress Intercreditor Agreement, any loan or any note shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power or privilege under this Agreement, the Security Agreement, the
Congress Intercreditor Agreement, any loan or any note preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The remedies provided herein are cumulative and not exclusive of any remedies
provided by law.

        8.13 Notices and Distribution. All notices, directions and other
communications provided for herein (including, without limitation, any waivers
or consents under this Agreement) shall be in writing, shall be sent by
telecopy, telex, personal delivery, courier or registered or certified mail,
return receipt requested, addressed to the party or parties for which intended,
at the address specified below its name on the signature pages hereto (or such
other address as any party may designate in a notice to each other party hereto
and shall be deemed to have been given when transmission is verified (if
telecopied), answered back (if telexed), so delivered (if by personal delivery
or courier) or five Business Days after deposit thereof, postage prepaid, in a
United States Postal depository or with an authorized employee of the United
States Postal Service (if by registered or certified mail, return receipt
requested), in each case given or addressed as aforesaid; provided that a notice
of a change of address shall not be deemed to have been given until actually
received by the party hereto distributing such communication.

        8.14 Benefit of Covenants. The covenants of each of the Companies and
the Collateral Agent set forth herein are solely for the benefit of the Trade
Creditors.



                                      -13-
<PAGE>   17

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

WHEREHOUSE SUBSIDIARY I                     EMI MUSIC DISTRIBUTION, a
CO., INC.                                   Division of Capitol Records, Inc.


By: /s/ R.S. KELLEHER
   -------------------------------
   Title: S.V.P. - Chief Financial          By: /s/ R.A. Cottrell
          Officer                              --------------------------------
                                               Title: President & CEO

WHEREHOUSE SUBSIDIARY II
CO., INC.                                   POLYGRAM GROUP DISTRIBUTION, INC.


By: /s/ R.S. KELLEHER
   -------------------------------
   Title: S.V.P. - Chief Financial          By: /s/ Robert M. Baker, Jr.
          Officer                              --------------------------------
                                               Title: Vice President, Credit

WHEREHOUSE SUBSIDIARY III
CO., INC.
                                            RELATIVITY ENTERTAINMENT
                                            DISTRIBUTORS, INC.

By: /s/ R.S. KELLEHER
   -------------------------------
   Title: S.V.P. - Chief Financial          By: /s/ Carl A. Schnock
          Officer                              --------------------------------
                                               Title: V.P. - Customer Financial 
                                                      Relations

BMG MUSIC aka BMG
DISTRIBUTION
                                            SONY MUSIC ENTERTAINMENT, INC.
By: /s/ ROBERT A. NOYES
   -------------------------------
   Title: Vice President, Credit            By: /s/ Carl A. Schnock
                                               --------------------------------
                                               Title: V.P. - Customer Financial
                                                      Relations



                                      -14-
<PAGE>   18
UNIVERSAL MUSIC & VIDEO
DISTRIBUTION, INC.


By: /s/ David Durchin
   --------------------------
   Title: VP NR Credit


WARNER/ELEKTRA/ATLANTIC
CORP.

By: /s/ Gregory B. Askey
   --------------------------
   Title: Sr. V.P. Credit


UNITED STATES TRUST COMPANY
OF NEW YORK, as Collateral Agent

By: /s/ Lou Young
   --------------------------
   Title: Vice President










                                      -15-
<PAGE>   19
                                   SCHEDULE 1

                         U.S. Trust Company of New York
                      Fees For Acting as Collateral Agent
    Re: Wherehouse Subsidiaries Formerly Doing Business as Blockbuster Music


<TABLE>
<S>                                <C>
Initial Acceptance Fee:           $5,000.00

Annual Fee, payable in advance:   $5,000.00
</TABLE>














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