<PAGE>

                                  SECURITY AGREEMENT

    THIS SECURITY AGREEMENT is made and dated as of January 20, 1997, and is 
granted to MELLON US LEASING, A DIVISION OF MELLON LEASING CORPORATION, a 
Pennsylvania corporation, successor to United States Leasing Corporation 
("Secured Party") having offices at 733 Front Street, San Francisco, 
California 94111 by REORGANIZED WHEREHOUSE, a Delaware corporation authorized 
to do business under the laws of the State of California, having offices at 
19701 Hamilton Avenue, Torrance, California, 90502.

    FOR GOOD AND VALUABLE CONSIDERATION, the receipt and adequacy of which are
hereby acknowledged, Debtor hereby agrees as follows:

    1.   GRANT OF SECURITY INTEREST.  Debtor hereby grants to Secured Party a
security interest under the Uniform Commercial Code, as enacted and from time to
time in effect in the State of California ("UCC"), in the property described in
Paragraph 2 below (the "Collateral") to secure payment and performance of the
obligations of Debtor to Secured Party described in Paragraph 3 below (the
"Obligations").

    2.   COLLATERAL; DOCUMENTATION.  The Collateral shall consist of the
following:

    (a)  All Equipment listed on the Collateral List, attached as Exhibit A
hereto, any and all additions or accessions thereto or substitutions therefor
(individually an "Item" and collectively the "Equipment"); and

    (b)  Any and all proceeds of the conversion, voluntary or involuntary, of
all or any portion of the Equipment now or from time to time hereafter subject
or required or intended to be subject to the lien of this Agreement and any form
of proceeds (including proceeds of insurance and of any governmental takings)
arising therefrom or in connection therewith.

    The lien of this Agreement is the only lien permitted by this Agreement to
exist on or in respect of the Collateral.  Debtor will provide to Secured Party
such UCC-1 Financing Statements as Secured Party may reasonably require to
perfect its interest in the Collateral, the Collateral List attached as Exhibit
A hereto, the Waiver of Security Interest attached as Exhibit B hereto, the
Promissory Note (the "Note"), a form of which is attached as Exhibit C hereto,
and an amortization schedule which is attached as Exhibit D hereto, all executed
by the appropriate parties.

    3.   OBLIGATIONS.  The Obligations of Debtor secured by this Agreement
shall consist of any and all debts, obligations and liabilities of Debtor to
Secured Party arising out of, connected with or related to this Agreement,
including, without limitation, Debtor's Obligations under the Note from Debtor
to Secured Party, dated January 20, 1997.  The Obligations shall also include
interest, penalties, damages, costs and expenses (including reasonable
attorneys' fees and court costs) incurred or suffered by Secured Party as the
result of any default by Debtor under or in connection with any of the
Obligations.


<PAGE>

    4.   REPRESENTATIONS AND WARRANTIES.  Debtor hereby represents and warrants
that:

    (a)  As to the Note and this Agreement, and the performance thereof,
(i) the execution by Debtor thereof has been duly authorized by all necessary
corporate or other action, (ii) they constitute legal, valid and binding
obligations of the Debtor enforceable in accordance with their terms, (iii) they
do not violate any agreement to which Debtor is a party, (iv) no agreement
(other than this Agreement) to which Debtor is a party or by which its property
may be bound or affected, creates or imposes any lien on the Collateral, and
(v) the execution by Debtor thereof is not inconsistent with the Debtor's First
Amended Chapter 11 Plan as Revised for Technical Corrections on October 4, 1996
in the United States Bankruptcy Court for the District of Delaware, Case No.
95-911 (HSB) (the "Plan");

    (b)  Debtor is the owner of the Equipment and no person, entity, agency or
government (other than Secured Party) has any right, title, claim or interest
(by way of security interest or other lien or charge or otherwise) in, against
or to the Collateral;

    (c)  With respect to the transaction covered by this Agreement and
associated Note, each and every material representation made in this Agreement,
in the associated Note and in every certificate, schedule or report submitted to
Secured Party by or on behalf of Debtor is true and correct;

    (d)  The Contracts are the only agreements between Debtor and Vendors
respecting the Equipment; and

    (e)  The security interest granted in the Collateral, when perfected by the
filing of a financing statement, will create a valid perfected first priority
lien in the Collateral securing the Note.

    5.   RIGHTS OF DEBTOR.  In addition to all covenants and agreements of
Debtor set forth in Obligations or made in connection therewith, which are
incorporated herein by this reference, Debtor hereby agrees:

    (a)  to do all acts that may be necessary to maintain, preserve and protect
the Collateral;

    (b)  not to use or permit any Collateral to be used unlawfully or in
violation of any provision of this Agreement, or any applicable statute,
regulation or ordinance or any policy of insurance covering the Collateral;

    (c)  to pay promptly when due all taxes (including sales, use and property
taxes) assessments, charges, encumbrances and liens which may now or hereafter
be imposed or levied upon or in respect of the sale, purchase, ownership,
leasing, possession or use of the Collateral;

    (d)  that Debtor will execute, acknowledge and deliver to Secured Party
such financing statements and other forms of notice relating to this Agreement
and any amendment thereto to

                                       2
<PAGE>

be filed or recorded in such other places within or without the United States 
as Secured Party may reasonably request and Debtor further will from time to 
time do and perform any acts and obtain, execute, acknowledge, and deliver 
any and all other instruments required by law or reasonably requested for the 
purpose of protecting Secured Party's security interest in the Collateral or 
any Item to the satisfaction of Secured Party;

    (e)  that Secured Party or its representative shall have the right to
inspect the Collateral and all records pertaining to the use, operation or
condition of the Equipment at such reasonable times as Secured Party may request
and Debtor shall cooperate to make the Equipment and such records available for
such inspection;

    (f)  to appear in and defend any action or proceeding which may affect its
title to or Secured Party's interest in the Collateral, and to take all actions
necessary to keep the Collateral free from liens or claims of any nature;

    (g)  to assure that the Equipment will remain personal property regardless
of how and to what degree it may be attached or affixed to any building or
structure, or for what use the Equipment or structure may be used; and

    (h)  as long as Debtor has outstanding obligations under the Note or this
Agreement, to maintain its corporate existence and will not merge, consolidate
or sell all or a substantial portion of its assets without the prior written
consent of Secured Party.

    6.   AUTHORIZED ACTION BY SECURED PARTY.  Debtor hereby irrevocably
appoints Secured Party as its attorney-in-fact to do (but Secured Party shall
not be obligated to and shall incur no liability to Debtor or any third party
for failure to do so) any act which Debtor is obligated by this Agreement to do,
and to exercise such rights and powers as Debtor might exercise with respect to
the Collateral for the account of and at the sole cost and expense of Debtor.

    7.   RELEASES.  When the Note is paid in full and all Obligations of Debtor
performed either at maturity of the Note or earlier, if allowed by the terms of
the Note, Secured Party shall release its security interest in the Collateral by
appropriate instrument.

    8.   EVENTS OF DEFAULT.  Upon occurrence of any of the following (herein
referred to as "Event of Default"), the entire principal amount outstanding
under the Note, and all accrued interest thereon and other amounts due
thereunder shall at once become due and payable at the option of Secured Party:

    (a)  Debtor defaults in the payment of any sums due under the Note as and
when due and payable, and such default continues uncured for ten (10) days after
receipt of written notice of such default;

    (b)  Debtor fails to observe and perform each and every condition, covenant
and obligation stated in this Agreement or the Obligations which are to be
observed or performed

                                       3
<PAGE>

by them at the time and in the manner it is so required to be observed or 
performed, and such default continues uncured for ten (10) days after receipt 
of written notice of such default;

    (c)  Debtor shall be or become insolvent or any proceeding by or against
Debtor shall be further instituted under the federal bankruptcy laws, as now or
hereafter constituted, or any other applicable federal or state bankruptcy,
insolvency or other similar law and the same is not discussed within thirty (30)
days, or Debtor shall consent to the appointment of or taking possession by a
receiver, liquidator, assignee, trustee, custody sequestrator (or other similar
official) of itself or of any substantial part of its property, or the making by
Debtor of any assignment for the benefit of creditors or the failure of Debtor
generally to pay its debts as such debts become due or the taking of corporate
action by Debtor in furtherance of any of the foregoing;

    (d)  Debtor defaults in any manner under any agreement with Secured Party
or under any material loan, financing, conditional sale, security or lease
agreement as and when due and payable, subject to any applicable grace or cure
periods;

    (e)  Secured Party discovers the falsehood, of any material respect, of any
representation or warranty made by the Debtor to Secured Party with respect to
the subject manner of this Agreement and the Note.

    9.   REMEDIES OF SECURED PARTY.  Upon the occurrence of any Event of
Default, Secured Party may, at its option, in addition to its other rights
hereunder, and without notice to or demand on Debtor and in addition to all
rights and remedies otherwise available to Secured Party under the UCC, do any
one or more of the following:

    (a)  declare the unpaid balance on the Note due and payable;

    (b)  foreclose or otherwise enforce Secured Party's security interest in
any manner permitted by law, or provided for in this Agreement;

    (c)  sell, lease or otherwise dispose of any Collateral at one or more
public or private sales, whether or not such Collateral is present at the place
of sale, for cash or credit or future delivery, on such terms and in such manner
as Secured Party may determine;

    (d)  recover from Debtor all costs and expenses, including, without
limitation, reasonable attorneys' fees, incurred or paid by Secured Party in
exercising any right, power or remedy provided by this Agreement or by law;

    (e)  require Debtor to deliver the Collateral or assemble the Collateral
and make it available to Secured Party at a place to be designated by Secured
Party and store the Collateral, all at Debtor's risk and without charge to
Secured Party;

    (f)  enter onto property where any Collateral is located and take
possession thereof with or without judicial process;

                                       4
<PAGE>

    (g)  prior to the disposition of the Collateral, store, process, repair or
recondition it or otherwise prepare it for disposition in any reasonable manner
and to the extent Secured Party deems appropriate; and

    (h)  to the extent permitted by, and subject to compliance with any
mandatory requirements of, applicable law then in effect, as a matter of right
and without regard to the adequacy of the security, to appoint or have appointed
a receiver or receivers (or other similar officials) for all or any portion of
the Collateral and for the rents, products, revenues and other income therefrom,
with such rights, powers, privileges and immunities as applicable law or the
court or other entity making such appointment shall confer.

    The obligation of Debtor to assemble and deliver the Collateral pursuant to
part (d) above, is a basic provision of this Agreement and Secured Party may
apply to a court of competent jurisdiction for and obtain specific performance
of such Obligations.

    10.  In addition to the above, and not in substitution thereof, should
Debtor default during the first twenty-four (24) months from the date of this
Agreement, Secured Party shall have the right to additional damages per the
following schedule against Reorganized Wherehouse for claim:


             DATE                             ADDITIONAL CLAIM AMOUNT
             ----                             -----------------------
          1-6 months                                  $150,000
          7-9 months                                  $120,000
         10-12 months                                 $100,000
         13-15 months                                 $ 80,000
         16-18 months                                 $ 60,000
         19-21 months                                 $ 40,000
         22-24 months                                 $ 20,000
        After 24 months                               $  -0-   


    11.  CUMULATIVE RIGHTS.  The rights, powers and remedies of Secured Party
under this Agreement shall be in addition to all rights, powers and remedies
given to Secured Party by virtue of the UCC or any other statute or rule of law,
or any other agreement, all of which rights, powers and remedies shall be
cumulative and may be exercised successively or concurrently without impairing
Secured Party's security interest in the Collateral.

    12.  WAIVER.  Any forbearance or failure or delay by Secured Party in
exercising any right, power or remedy shall not preclude the further exercise
thereof, and every right, power or remedy of Secured Party shall continue in
full force and effect until such right, power or remedy is specifically waived
in a writing executed by Secured Party.  Debtor waives any right to require
Secured Party to proceed against any person or to exhaust any Collateral or to
pursue any remedy in Secured Party's power.

    13.  BINDING UPON ASSIGNMENT.  All rights of Secured Party under this
Agreement shall inure to the benefit of its successors and assigns, and all
Obligations of Debtor shall bind

                                       5
<PAGE>

its heirs, executors, administrators, successors and assigns.  Secured Party 
may assign its rights under this Agreement, the Note, and any other related 
documents without notice to Debtor, but Debtor shall not assign any of its 
rights and obligations under such agreements without Secured Party's prior 
written consent.

    14.  ENTIRE AGREEMENT.  This Agreement contains the entire security
agreement between Secured Party and Debtor.

    15.  NOTICES.  Any written notice, consent or other communication provided
for in this Agreement shall be considered received when delivered via overnight
or other express carrier or five (5) days after being sent by certified U.S.
mail, with postage prepaid, return receipt requested to the following addresses:


         SECURED PARTY:
         --------------
         MELLON US Leasing
         733 Front Street, Mail Stop 380
         San Francisco, California  94111
         Attn:  Litigation Specialist

         On or after April 1, 1997 to:
         MELLON US Leasing
         525 Market Street, 35th Floor
         San Francisco, California  94105
         Attn:  Litigation Specialist

         DEBTOR:
         -------
         Reorganized Wherehouse
         19701 Hamilton Avenue
         Torrance, California 90502
         Attn:  Eliot Cobb, Executive VP & Treasurer


Such addresses may be changed by written notice given as provided herein.

    16.  LAWS APPLICABLE.  This Agreement is to be governed by and construed in
accordance with the laws of the State of California.

    17.  TIME OF THE ESSENCE.  Time is of the essence with respect to each and
every provision of this Agreement and the Note.

    18.  SEVERABILITY.  Any provision of this Agreement which shall be held
invalid or unenforceable shall be ineffective without invalidating the remaining
provisions hereof.

    19.  AMENDMENT.  This Agreement may not be amended or supplemented, except
by a writing signed by authorized representatives of Secured Party and Debtor.

                                       6
<PAGE>

    20.  DESCRIPTIVE HEADINGS.  The descriptive headings which are used in this
Agreement are for the convenience of the parties only and shall not affect the
meaning of any provision of this Agreement.

    IN WITNESS WHEREOF, Debtor has executed this Agreement on the day and year
first written above.


Reorganized Wherehouse, DEBTOR


By: /s/ Eliot Cobb
   ------------------------
Its: VP/Treasurer
    -----------------------
Dated: 3/25/97
      ---------------------

Accepted by:

MELLON US Leasing, SECURED PARTY


By: /s/ Authorized Signatory
   -------------------------
Its: Director, Operations
    ------------------------
Dated: 4/2/97
      ----------------------

                                       7
<PAGE>

                                  EXHIBIT "A"

                                COLLATERAL LIST

Equipment Description:

1.  Mantissa Series 6000 Tilt-Tray Sortation System including Drive, Chutes,
    Trays, Tippers, Chain, Guards, Curves, Supports, Mezzanine, Controls, and
    Software Installation.

2.  The location of the above Equipment is 2230 East Carson Street, Carson,
    California 90746.

3.  The Equipment has a cost value of $1,074,133.70.

4.  The above may be referred to as "the Collateral" or "the Equipment".














                                                        Debtor's initials:______

                                      A-1
<PAGE>

                                  EXHIBIT "B"

                          WAIVER OF SECURITY INTEREST

    Eliot Cobb, Executive Vice President and Treasurer, Wherehouse
Entertainment, Inc., being duly sworn according to law does depose and hereby
state as follows:

    1.   That he is Senior Vice President and Chief Financial Officer of
Reorganized Wherehouse, a Delaware corporation, and a corporation authorized to
do business under the laws of the State of California (the "Corporation").

    2.   That the Corporation is obligated to pay Mellon US Leasing, a division
of Mellon Leasing Corporation, a Pennsylvania corporation, and successor to
United States Leasing Corporation ("Secured Party") the sum of $417,163.36 under
a certain obligation and restructured agreement resulting in converting a true
lease contract to a conditional sales contract and the Secured Party having a
security interest in a Mantissa Series 6000 Tilt-Tray Sortation System,
including various equipment as more particularly set forth in Exhibit A and
identified as the Collateral List attached to the aforementioned Security
Agreement (the "Equipment").

    3.   That the Corporation warrants and insures that the Secured Party's
security interest in the Equipment as a perfected priority interest and will
provide all necessary releases from any and all lienholders, including blanket
lienholders, and such other lienholders that may have made demand in security
position against the Equipment and shall provide the necessary documentation to
the satisfaction of Secured Party hereunder evidence such as termination,
including UCC financing statement termination filings, as may be required by
Secured Party.

    4.   That all potential lienholders, including mechanic's lien claimants
and landlords, have released any potential claims against any of the Secured
Party's collateral and that the Corporation shall indemnify and hold harmless
Secured Party from any such claims.

    5.   That the deponent is hereby duly authorized to execute and deliver
this instrument on behalf of Corporation.


                             ____________________________________
                             Eliot Cobb
                             Executive VP & Treasurer of Reorganized
                             Wherehouse, a Delaware corporation

    SWORN TO AND SUBSCRIBED before me this ____ day of __________, 1997.


                             ____________________________________
                             Notary Public
                             My Commission Expires:

                                      B-1
<PAGE>

                                  EXHIBIT "C"

                                PROMISSORY NOTE
$417,163.36                                                     January 20, 1997

    REORGANIZED Wherehouse (the "BORROWER"), for valuable consideration, hereby
promises to pay to the order of MELLON US Leasing ("HOLDER"), at its office
located at 733 Front Street, San Francisco, California  94111, or at such other
place or to such other party as the then holder hereof, including Holder, may
from time to time designate in writing, in lawful money of the United States of
America, the principal sum of Four Hundred Seventeen Thousand One Hundred
Sixty-three Dollars and Thirty-six Cents ($417,163.36) (the "Loan"), together
with interest thereon from and after the date hereof and until maturity at the
rates of interest set forth below.

    All payments on this Note shall, at the option of Holder, be applied first
to the payment of accrued interest, and any remainder shall be applied to
reduction of the principal balance.  All interest shall be computed on the basis
of a year consisting of three hundred sixty (360) days.

    This Note shall be payable in thirty-two (32) monthly installments of
$12,750.00 and a thirty-third installment of $59,865.70 commencing on the
Twentieth Day of January, 1997 and payable on the seventieth day of each month
thereafter until the note is paid (or if the payment date is not a Business Day,
on the next succeeding Business Day).  The interest due and payable on the
principal under this Note shall be eight percent (8%) per annum from the date
hereof.  "Business Day" shall mean any day other than Saturday, Sunday or any
other day on which federal savings banks in San Francisco are not open for
business.

    This Secured Note is the Note referred to in the Security Agreement dated
January 20, 1997 between Holder and Borrower, which agreement contains
additional rights of Holder, and provides the security for this Note.  This Note
is secured by the Collateral specified in the Security Agreement.  If an Event
of Default shall occur and be continuing, the unpaid balance hereon may be
declared and shall thereupon become due and payable in the manner and with the
effect provided in the Security Agreement.

    To the extent it may lawfully do so, Borrower waives presentment, notice of
nonpayment or dishonor, protest, notice of protest, demand and, other than as
expressly set forth herein, all other notices in connection with the delivery,
acceptance, performance, default or enforcement of this Note.  Payments of
interest and principal due under this Note shall be absolute and unconditional
and shall not be subject to abatement, reduction, set-off, defense,
counterclaim, interruption, deferment or recoupment for any reason whatsoever.

    If Borrower fails to pay any monthly installment due under this Note by the
tenth day after the date such installment is due, Borrower shall pay Holder, in
addition to such installment, a default amount equal to five percent of such
installment then due.

                                      C-1
<PAGE>

    All notices or other communications hereunder to either party shall be
(a) in writing and, if mailed, shall be deemed to be given on the third Business
Day after the date when deposited in the United States mail, by registered or
certified mail, postage prepaid, addressed as provided hereinafter, and (b)
addressed as follows:

    If to Borrower:     Reorganized Wherehouse
                        19701 Hamilton Avenue
                        Torrance, CA 90502
                        ATTN:  Eliot Cobb

    If to Holder:       MELLON US Leasing
                        733 Front Street, Mail Stop 380
                        San Francisco, CA  94111
                        ATTN:  Litigation Specialist

or to either party at such other addresses as such party may designate in a
written notice to the other party.

    Any provision of this Note that is illegal, invalid or unenforceable, shall
be ineffective to the extent of such illegality, invalidity or unenforceability
without rendering illegal, invalid or unenforceable the remaining provisions of
this Note.

    This secured Note is executed and delivered in, and shall in all respects
be governed by and construed in accordance with the laws of the State of
California, including all matters of validity and performance.

BORROWER:
Reorganized Wherehouse


By:
   --------------------------
Its:
    -------------------------

Attest:

By:
   --------------------------
Its:
    -------------------------



                                      C-2