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           REVOLVING CREDIT AND GUARANTY AGREEMENT
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                          Among

      ALLIANCE ENTERTAINMENT CORP., a Debtor-in-Possession,

                        as Borrower

                            and

          THE SUBSIDIARIES OF THE BORROWER NAMED HEREIN,

                        as Guarantors

                             and

                   THE BANKS PARTY HERETO,


                             and

                   THE CHASE MANHATTAN BANK,

                           as Agent


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                   Dated as of July 17, 1997
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<PAGE>

                     REVOLVING CREDIT AND GUARANTY AGREEMENT

                                TABLE OF CONTENTS

                                    Page No.

INTRODUCTORY STATEMENT....................................................1
         SECTION 1.  DEFINITIONS..........................................3
                  SECTION 1.1.  Defined Terms.............................3
                  SECTION 1.2.  Terms Generally..........................20
         SECTION 2.  AMOUNT AND TERMS OF CREDIT..........................21
                  SECTION 2.1.  Commitment of the Banks..................21
                  SECTION 2.2.  Borrowing Base...........................22
                  SECTION 2.3.  Letters of Credit........................23
                  SECTION 2.4.  Issuance. ...............................25
                  SECTION 2.5.  Nature of Letter of
                                Credit Obligations Absolute..............25
                  SECTION 2.6.  Making of Loans..........................25
                  SECTION 2.7.  Notes; Repayment of Loans................27
                  SECTION 2.8.  Interest on Loans........................27
                  SECTION 2.9.  Default Interest.........................27
                  SECTION 2.10. Optional Termination or Reduction of
                                Commitment; Mandatory Reduction of
                                Commitment...............................28
                  SECTION 2.11. Alternate Rate of Interest...............28
                  SECTION 2.12. Refinancing of Loans.....................28
                  SECTION 2.13. Mandatory Prepayment; Commitment
                                Termination; Cash Collateral.............30
                  SECTION 2.14. Optional Prepayment of Loans;
                                Reimbursement of Banks...................31
                  SECTION 2.15. Reserve Requirements; Change
                                in Circumstances.........................32
                  SECTION 2.16. Change in Legality.......................34
                  SECTION 2.17. Pro Rata Treatment, etc..................35
                  SECTION 2.18. Taxes....................................35
                  SECTION 2.19. Certain Fees.............................38
                  SECTION 2.20. Commitment Fee...........................38
                  SECTION 2.21. Letter of Credit Fees....................38
                  SECTION 2.22. Nature of Fees...........................38
                  SECTION 2.23. Priority and Liens.......................39
                  SECTION 2.24. Right of Set-Off.........................41
                  SECTION 2.25. Security Interest in Letter of Credit
                                Account..................................41
                  SECTION 2.26. Payment of Obligations...................42
                  SECTION 2.27. No Discharge; Survival of Claims.........42
         SECTION 3.  REPRESENTATIONS AND WARRANTIES......................42
                  SECTION 3.1.  Organization and Authority...............42
                  SECTION 3.2.  Due Execution............................42
                  SECTION 3.3.  Statements Made..........................43
                  SECTION 3.4.  Financial Statements.....................43
                  SECTION 3.5.  Ownership................................44
                  SECTION 3.6.  Liens....................................44
                  SECTION 3.7.  Compliance with Law......................44
                  SECTION 3.8.  Insurance................................45
                  SECTION 3.9.  The Order................................45
                  SECTION 3.10. Use of Proceeds..........................45
                  SECTION 3.11. Store Locations..........................46
                  SECTION 3.12. Litigation...............................46
         SECTION 4.  CONDITIONS OF LENDING...............................46
              SECTION 4.1. Conditions Precedent to Initial Loans
                                and Initial Letters of Credit............46
                  SECTION 4.2.  Conditions Precedent to Each Loan and
                                  Each Letter of Credit..................50
<PAGE>

         SECTION 5.  AFFIRMATIVE COVENANTS...............................51
                  SECTION 5.1.  Financial Statements, Reports, etc.......51
                  SECTION 5.2.  Corporate Existence......................53
                  SECTION 5.3.  Insurance................................53
                  SECTION 5.4.  Obligations and Taxes....................54
                  SECTION 5.5.  Notice of Event of Default, etc..........54
                  SECTION 5.6.  Borrowing Base Certificate...............54
                  SECTION 5.7.  Access to Books and Records..............54
                  SECTION 5.8.  Business Plan............................55
                  SECTION 5.9.  Concentration and Disbursement Accounts..55
                  SECTION 5.10. Employee Benefits........................55
                  SECTION 5.11. Repayment of Pre-Petition Real
                                   Estate Loans..........................56
                  SECTION 5.12. Post-Closing Date Obligations............56
                  SECTION 5.13. Pre-Petition Letters of Credit...........56
         SECTION 6.  NEGATIVE COVENANTS..................................57
                  SECTION 6.1.  Liens and Reclamation Claims.............57
                  SECTION 6.2.  Merger, etc..............................57
                  SECTION 6.3.  Indebtedness.............................57
                  SECTION 6.4.  Capital Expenditures.....................58
                  SECTION 6.5.  EBITDA...................................58
                  SECTION 6.6.  Inventory................................58
                  SECTION 6.7.  Guarantees and Other Liabilities.........59
                  SECTION 6.8.  Chapter 11 Claims........................59
                  SECTION 6.9.  Dividends; Capital Stock.................59
                  SECTION 6.10. Transactions with Affiliates.............60
                  SECTION 6.11. Investments, Loans and Advances..........60
                  SECTION 6.12. Disposition of Assets....................60
                  SECTION 6.13. Nature of Business.......................61
         SECTION 7.  EVENTS OF DEFAULT...................................61
                  SECTION 7.1.  Events of Default........................61
         SECTION 8.  THE AGENT...........................................66
                  SECTION 8.1.  Administration by Agent..................66
                  SECTION 8.2.  Advances and Payments....................66
                  SECTION 8.3.  Sharing of Setoffs.......................66
                  SECTION 8.4.  Agreement of Required Banks..............67
                  SECTION 8.5.  Liability of Agent.......................68
                  SECTION 8.6.  Reimbursement and Indemnification........68
                  SECTION 8.7.  Rights of Agent..........................69
                  SECTION 8.8.  Independent Banks........................69
                  SECTION 8.9.  Notice of Transfer.......................69
                  SECTION 8.10. Successor Agent..........................69
         SECTION 9.  GUARANTY............................................70
                  SECTION 9.1.  Guaranty.................................70
                  SECTION 9.2.  No Impairment of Guaranty................71
                  SECTION 9.3.  Subrogation..............................71
         SECTION 10.  MISCELLANEOUS......................................72
                  SECTION 10.1.  Notices.................................72
                  SECTION 10.2.  Survival of Agreement, Representations
                                   and Warranties, etc...................73
                  SECTION 10.3.  Successors and Assigns..................73
                  SECTION 10.4.  Confidentiality.........................76
                  SECTION 10.5.  Expenses; Documentary Taxes.............76
                  SECTION 10.6.  Indemnity...............................77
                  SECTION 10.7.  CHOICE OF LAW...........................78
                  SECTION 10.8.  No Waiver...............................78
                  SECTION 10.9.  Extension of Maturity...................78
                  SECTION 10.10. Amendments, etc.........................78
                  SECTION 10.11. Severability............................80
                  SECTION 10.12. Headings................................80
                  SECTION 10.13. Execution in Counterparts...............80
                  SECTION 10.14. Prior Agreements........................80
                  SECTION 10.15. Further Assurances......................80
                  SECTION 10.16. WAIVER OF JURY TRIAL....................80
<PAGE>

        SIGNATURES..........................................................

         ANNEX A           -       Commitment Amounts

         EXHIBIT A-1       -       Form of Interim Order

         EXHIBIT A-2       -       Form of Final Order

         EXHIBIT B         -       Form of Security and Pledge Agreement

         EXHIBIT C         -       Form of Opinion of Counsel to Borrower

         EXHIBIT D         -       Form of Assignment and Acceptance

         EXHIBIT E         -       Form of Borrowing Base Certificate

<PAGE>

         SCHEDULE 1.1      -       Existing Agreements

         SCHEDULE 3.4      -       Material Adverse Changes

         SCHEDULE 3.5      -       Subsidiaries

         SCHEDULE 3.6      -       Pre-Petition Liens

         SCHEDULE 3.6(b)   -       Primed Lenders

         SCHEDULE 3.11     -       Litigation

         SCHEDULE 3.12     -       Ad Valorem Taxes

         SCHEDULE 3.13-    -       Additional Vendors

         SCHEDULE 6.12     -       Assets to be Sold


<PAGE>




                    REVOLVING CREDIT AND GUARANTY AGREEMENT
                            Dated as of July 17, 1997

         REVOLVING  CREDIT AND  GUARANTY  AGREEMENT,  dated as of July 17,  1997
among Alliance  Entertainment Corp., a Delaware corporation (the "Borrower"),  a
debtor  and  debtor-in-possession  in a case  pending  under  Chapter  11 of the
Bankruptcy  Code,  each of the  Subsidiaries  of the  Borrower  designated  as a
Guarantor on Schedule  3.5 hereto  (each a  "Guarantor"  and  collectively,  the
"Guarantors");  each of which  Guarantors  referred  to in this  paragraph  is a
debtor and a  debtor-in-possession  in a case  pending  under  Chapter 11 of the
Bankruptcy Code (the cases of the Borrower and the Guarantors, each a "Case" and
collectively, the "Cases"), THE CHASE MANHATTAN BANK ("Chase") each of the other
financial  institutions from time to time party hereto (together with Chase, the
"Banks"),  and THE CHASE MANHATTAN BANK, as administrative  and collateral agent
(in such capacity, the "Agent") for the Banks.


                              INTRODUCTORY STATEMENT

         On July 14,  1997,  the  Borrower and the  Guarantors  filed  voluntary
petitions with the Bankruptcy  Court  initiating the Cases and have continued in
the  possession  of their  assets  and in the  management  of  their  businesses
pursuant to Sections 1107 and 1108 of the Bankruptcy Code.

         The Borrower has applied to the Banks for a revolving credit and letter
of credit facility in an aggregate  principal  amount not to exceed  $50,000,000
(subject to mandatory and optional  reductions in accordance  with Sections 2.10
and 2.13), all of the Borrower's  obligations  under which are guaranteed by the
Guarantors.

         The proceeds of the Loans will be used to provide  working  capital for
other general corporate purposes of, the Borrower and the Guarantors  (including
for the making of permitted  intercompany  loans and advances to the  Guarantors
and for Capital Expenditures), the payment of expenses included in the Carve-Out
and the making of certain indemnification payments.

         To provide  guarantees and security for the repayment of the Loans, the
reimbursement of any draft drawn under a Letter of Credit and the payment of the
other  Obligations  of the Borrower and the  Guarantors  hereunder and under the
other Loan Documents,  the Borrower and the Guarantors will provide to the Agent
and the Banks the following (each as more fully described herein):

                           (a) a guaranty  from each of the  Guarantors  of the
         due and punctual  payment and performance of the Obligations of the
         Borrower hereunder;

                           (b) with respect to the  Obligations  of the Borrower
         and the Guarantors hereunder,  an allowed  administrative expense claim
         in each of the Cases  pursuant to Section  364(c)(1) of the  Bankruptcy
         Code  having  priority  over all  administrative  expenses  of the kind
         specified in Sections 503(b) and 507(b) of the Bankruptcy Code;

                           (c) with respect to the  Obligations  of the Borrower
         and the  Guarantors,  a  perfected  first  priority  Lien,  pursuant to
         Section  364(c)(2) of the Bankruptcy  Code,  upon (x) all  unencumbered
         property of the Borrower and the  Guarantors  and (y) all cash and cash
         equivalents in the Letter of Credit Account;
<PAGE>

                           (d) with respect to the  Obligations  of the Borrower
         and the Guarantors,  a perfected Lien, pursuant to Section 364(c)(3) of
         the  Bankruptcy  Code,  upon  all  property  of the  Borrower  and  the
         Guarantors  (other than the  property  that is subject to the valid and
         perfected  Liens that currently  secure the Borrower's and  Guarantors'
         pre-petition  Indebtedness  under the Existing  Agreements and Liens in
         favor of the Primed Vendors (as  hereinafter  defined)) that is subject
         to valid  and  perfected  Liens in  existence  on the  Filing  Date and
         subject to other  Permitted  Liens,  junior to such valid and perfected
         Liens; and

                           (e) with respect to the  Obligations  of the Borrower
         and the Guarantors,  a perfected first priority priming Lien,  pursuant
         to Section  364(d)(1) of the Bankruptcy  Code, upon all property of the
         Borrower   and   the   Guarantors   (including,   without   limitation,
         Receivables, Inventory, intellectual property, the capital stock of all
         of the  Subsidiaries of the Borrower and all proceeds  thereof) that is
         subject to the  existing  Liens of the Primed  Vendors (as  hereinafter
         defined) in Inventory of the Borrower and certain of the Guarantors and
         to  the  existing  Liens  that  presently  secure  the  Borrower's  and
         Guarantors' pre-petition Indebtedness under the Existing Agreements and
         any Liens granted after the Filing Date to provide adequate  protection
         in  respect  thereof,  which  Lien in favor of the  Agent and the Banks
         shall be senior in all  respects to all of such  existing  Liens and to
         any Liens granted after the Filing Date to provide adequate  protection
         in respect thereof.

                  All of the claims and the Liens (a)  granted  hereunder  or in
any other Loan  Document  (notwithstanding  any provision to the contrary in any
Loan  Document) in the Cases to the Agent and the Banks shall (insofar as claims
against and assets of the Borrower and the Guarantors are concerned) and (b) all
replacement Liens and claims provided for in the Orders, shall be subject to the
Carve-Out and the Permitted Liens and  indemnification  payments provided for in
Section  6.7(iii) and shall not attach to the  Consignor  Property to the extent
provided in Section 2.23 and the Orders.

                  Accordingly, the parties hereto hereby agree as follows:

SECTION 1.           DEFINITIONS.

         SECTION 1.1.        Defined Terms.

                  As used in this Agreement,  the following terms shall have the
meanings specified below:

                  "ABR Borrowing" shall mean a Borrowing comprised of ABR Loans.

                  "ABR Loan"  shall  mean any Loan  bearing  interest  at a rate
determined  by  reference  to the  Alternate  Base Rate in  accordance  with the
provisions of Section 2.

                  "Accessory  Inventory"  shall mean Categories 22 through 99 as
historically  indicated  on One  Stop's or One Way's (as  applicable)  Inventory
Total Report by Category.

                  "Account Receivable" shall mean any right to payment for goods
sold,  regardless  of how such right is evidenced and whether or not it has been
earned by performance.

                  "Accrued  Returns  Reserve"  shall mean  Percentage  of Actual
Returns  multiplied  by the gross  sales  for the  immediately  preceding  three
months.

<PAGE>

                  "Additional Credit" shall have the meaning set forth in
Section 4.2(d).

                  "Adjusted   LIBOR  Rate"  shall  mean,  with  respect  to  any
Eurodollar  Borrowing  for any  Interest  Period,  an  interest  rate per  annum
(rounded upwards, if necessary, to the next 1/16 of 1%) equal to the quotient of
(a) the  LIBOR  Rate  in  effect  for  such  Interest  Period  divided  by (b) a
percentage (expressed as a decimal) equal to 100% minus Statutory Reserves.  For
purposes hereof, the term "LIBOR Rate" shall mean the rate (rounded upwards,  if
necessary,  to the next 1/16 of 1%) at which dollar deposits approximately equal
in principal amount to such Eurodollar  Borrowing and for a maturity  comparable
to such Interest Period are offered to the principal  London office of the Agent
in immediately  available funds in the London  interbank market at approximately
11:00 a.m.,  London time,  two Business Days prior to the  commencement  of such
Interest Period.

                  "Advertising  Due Customer  Reserve"  shall be  determined  in
accordance  with One Stop's or One Way's (as applicable)  historical  accounting
practices.

                  "Affiliate"  shall mean,  as to any Person,  any other  Person
which,  directly or indirectly,  is in control of, is controlled by, or is under
common control with such Person.  For purposes of this  definition,  a Person (a
"Controlled  Person")  shall be deemed to be  "controlled  by" another Person (a
"Controlling   Person")  if  the  Controlling  Person  possesses,   directly  or
indirectly,  power to  direct  or cause  the  direction  of the  management  and
policies  of the  Controlled  Person  whether  through the  ownership  of voting
securities, by contract or otherwise.

                  "Agent" shall have the meaning set forth in the Introduction.

                  "Agreement"  shall mean this  Revolving  Credit  and  Guaranty
Agreement  as  the  same  may  from  time  to  time  be  amended,   modified  or
supplemented.

                  "Alternate  Base  Rate"  shall  mean,  for any day, a rate per
annum  (rounded  upwards,  if  necessary,  to the next  1/16 of 1%) equal to the
greatest  of (a) the Prime  Rate in effect on such day,  (b) the Base CD Rate in
effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on
such day plus 1/2 of 1%. For purposes  hereof,  "Prime Rate" shall mean the rate
of interest per annum  publicly  announced from time to time by the Agent as its
prime rate in effect at its  principal  office in New York City;  each change in
the Prime Rate shall be effective on the date such change is publicly announced.
"Base CD Rate"  shall mean the sum of (a) the  quotient  of (i) the  Three-Month
Secondary CD Rate divided by (ii) a percentage  expressed as a decimal  equal to
100%  minus  Statutory  Reserves  and  (b)  the  Assessment  Rate.  "Three-Month
Secondary  CD Rate"  shall  mean,  for any day,  the  secondary  market rate for
three-month certificates of deposit reported as being in effect on such day (or,
if such day shall not be a Business Day, the next preceding Business Day) by the
Board through the public information  telephone line of the Federal Reserve Bank
of New York  (which  rate will,  under the current  practices  of the Board,  be
published  in Federal  Reserve  Statistical  Release  H.15(519)  during the week
following  such day),  or, if such rate shall not be so  reported on such day or
such next preceding Business Day, the average of the secondary market quotations
for three-month  certificates of deposit of major money center banks in New York
City received at approximately  10:00 a.m., New York City time, on such day (or,
if such day shall not be a Business Day, on the next preceding Business Day) by


<PAGE>

the Agent from three New York City negotiable  certificate of deposit dealers of
recognized  standing  selected by it. "Federal Funds Effective Rate" shall mean,
for any day,  the  weighted  average  of the rates on  overnight  Federal  funds
transactions  with  members of the Federal  Reserve  System  arranged by Federal
funds brokers,  as published on the next succeeding  Business Day by the Federal
Reserve Bank of New York, or, if such rate is not so published for any day which
is a  Business  Day,  the  average  of  the  quotations  for  the  day  of  such
transactions  received  by  the  Agent  from  three  Federal  funds  brokers  of
recognized  standing  selected  by it. If for any  reason  the Agent  shall have
determined (which  determination shall be conclusive absent manifest error) that
it is unable to ascertain the Base CD Rate or the Federal Funds  Effective  Rate
or both for any  reason,  including  the  inability  or  failure of the Agent to
obtain sufficient  quotations in accordance with the terms hereof, the Alternate
Base Rate shall be determined  without  regard to clause (b) or (c), or both, of
the first sentence of this definition,  as appropriate,  until the circumstances
giving rise to such inability no longer exist.  Any change in the Alternate Base
Rate due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the
Federal Funds  Effective  Rate shall be effective on the effective  date of such
change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds
Effective Rate, respectively.

                  "Amounts" shall have the meaning given such term in Section
2.18(a).

                  "Assessment  Rate"  shall  mean for any date the  annual  rate
(rounded upwards, if necessary, to the next 1/100 of 1%) most recently estimated
by the  Agent as the then  current  net  annual  assessment  rate  that  will be
employed in  determining  amounts  payable by the Agent to the  Federal  Deposit
Insurance  Corporation (or any successor) for insurance by such  Corporation (or
any successor) of time deposits made in dollars at the Agent's domestic offices.

                  "Assignment  and  Acceptance"  shall  mean an  assignment  and
acceptance entered into by a Bank and an Eligible Assignee,  and accepted by the
Agent, substantially in the form of Exhibit D.

                  "Bankruptcy  Code"  shall  mean The  Bankruptcy  Reform Act of
1978, as heretofore and hereafter amended, and codified as 11 U.S.C. Section 101
et seq.

                  "Bankruptcy  Court"  shall mean the United  States  Bankruptcy
Court  for the  Southern  District  of New  York,  or any  other  court,  having
jurisdiction over the Cases from time to time.

                  "Banks" shall have the meaning set forth in the Introduction.

                  "Board"  shall  mean the  Board of  Governors  of the  Federal
Reserve System of the United States.

                  "Borrower" shall have the meaning set forth in the
 Introduction.

                  "Borrowing"  shall  mean the  incurrence  of Loans of a single
Type  made  from  all the  Banks on a single  date  and  having,  in the case of
Eurodollar  Loans, a single  Interest Period (with any ABR Loan made pursuant to
Section  2.16 being  considered a part of the related  Borrowing  of  Eurodollar
Loans).

                  "Borrowing  Base" shall mean,  at any time, an amount equal to
the sum of (i) eighty-five  percent (85%) of (a) the face amount of all Accounts
Receivable  which are  Eligible  Accounts of One Stop minus the  applicable  (b)
Dilution Reserve at such time, (c) Accrued Returns Reserve,  (d) Customer Volume
Discount  Reserve and (e) Advertising Due Customer  Reserve plus (ii) __% of (a)
the face amount of all Accounts  Receivable  which are Eligible  Accounts of One
Way minus the applicable (b) Dilution  Reserve at such time, (c) Accrued Returns
Reserve,  (d) Customer Volume Discount  Reserve and (e) Advertising Due Customer
Reserve plus (iii) 50% of Eligible  Inventory  owned by One Stop as of such date
plus (iv) 30% of the  Eligible  Inventory  owned by One Way as of such date plus
(v) for One Stop only,  30% of Estimated  Inventory to be Returned at Cost.  The
Borrowing  Base at any time shall be  determined  by reference to the  Borrowing
Base Certificate most recently delivered according to Section 5.6.

                  "Borrowing   Base   Certificate"   shall  mean  a  certificate
substantially  in the form of Exhibit E,  executed and  certified by a Financial
Officer of the Borrower, and accompanied by appropriate supporting documentation
that verifies the amounts shown thereon.


<PAGE>

                  "Business  Day"  shall  mean any day  other  than a  Saturday,
Sunday or other  day on which  banks in the  State of New York are  required  or
permitted to close (and,  for a Letter of Credit,  other than a day on which the
Fronting Bank issuing such Letter of Credit is closed); provided,  however, that
when used in connection  with a Eurodollar  Loan,  the term "Business Day" shall
also exclude any day on which banks are not open for dealings in dollar deposits
on the London interbank market.

                  "Capital   Expenditures"  shall  mean,  for  any  period,  the
aggregate of all  expenditures  (whether paid in cash or accrued as  liabilities
during such period and  including  that portion of  Capitalized  Leases which is
capitalized  on  the  consolidated   balance  sheet  of  the  Borrower  and  the
Guarantors) net of cash amounts received by the Borrower and the Guarantors from
other Persons during such period in reimbursement of Capital  Expenditures  made
by the  Borrower  and the  Guarantors,  excluding  interest  capitalized  during
construction,  by the Borrower and the  Guarantors  during such period that,  in
conformity  with GAAP,  are  required  to be  included  in or  reflected  by the
property,  plant,  equipment or similar  fixed asset  accounts  reflected in the
consolidated  balance  sheet  of the  Borrower  and  the  Guarantors  (including
equipment  which is  purchased  simultaneously  with the  trade-in  of  existing
equipment  owned by the Borrower or any of the  Guarantors  to the extent of the
gross amount of such purchase  price less the book value of the equipment  being
traded in at such time), but excluding  expenditures made in connection with the
replacement or restoration of assets,  to the extent reimbursed or financed from
insurance  proceeds  paid on  account of the loss of or the damage to the assets
being  replaced or  restored,  or from awards of  compensation  arising from the
taking by condemnation or eminent domain of such assets being replaced.

                  "Capitalized  Lease" shall mean, as applied to any Person, any
lease of  property  by such Person as lessee  which  would be  capitalized  on a
balance sheet of such Person prepared in accordance with GAAP.

                  "Carve-Out" shall have the meaning set forth in Section 2.23.

                  "Cases"  shall mean the Chapter 11 Cases of the  Borrower  and
each of the Guarantors pending in the Bankruptcy Court.

                  "Chase" shall have the meaning set forth in the Introduction.

                  "Closing Date" shall mean the date on which this Agreement has
been  executed and the  conditions  precedent to the making of the initial Loans
set forth in Section 4.1 have been  satisfied or waived,  which date shall occur
promptly upon the entry of the Interim Order, but no later than July 24, 1997.

                  "Code"  shall  mean the  Internal  Revenue  Code of  1986,  as
amended from time to time.

                  "Collateral"  shall mean,  collectively,  the Collateral under
the Security and Pledge Agreement,  and the real estate collateral  described in
Section 2.23.

                  "Commitment"  shall  mean,  with  respect  to each  Bank,  the
commitment of each Bank  hereunder in the amount set forth  opposite its name on
Annex A hereto or as may  subsequently be set forth in the Register from time to
time, as the same may be reduced from time to time pursuant to Sections 2.10 and
2.13.

                  "Commitment Fee" shall have the meaning set forth in Section
2.20.

                  "Commitment  Letter"  shall mean that  certain  Commitment
Letter dated July 13, 1997 among the Agent, Chase Securities Inc. and the
Borrower.

                  "Commitment  Percentage"  shall mean at any time, with respect
to each Bank, the percentage obtained by dividing its Commitment at such time by
the Total Commitment at such time.

<PAGE>

                  "Consummation  Date"  shall  mean the date of the  substantial
consummation  (as defined in Section 1101 of the  Bankruptcy  Code including the
effective  date  of a  Reorganization  Plan)  of a  Reorganization  Plan  of the
Borrower or any of the  Guarantors  (other than the Red Ant  Entities)  which is
confirmed pursuant to an order of the Bankruptcy Court.

                  "Consignor Property" shall have the meaning set forth in
Section 2.23.


                  "Customer  Volume  Discount  Reserve"  shall be  determined in
accordance  with One Stop's or One Way's (as applicable)  historical  accounting
practices.

                  "Dilution Factor" shall mean the Dilution Percentage minus the
Percentage of Actual Returns. In no event shall the Dilution Factor be negative.
If the calculation  results in a negative number, the minimum Dilution Factor of
3% is to be used.

                  "Dilution  Percentage"  shall mean with respect to any period,
(a) the aggregate amount of all non-cash  deductions,  negative  contractual and
other  adjustments,   credit  memos  and  write-off  with  respect  to  Accounts
Receivable during the immediately preceding 3 month period, divided by (b) total
gross  sales  of One  Stop  and  One  Way (as  applicable)  for the  immediately
preceding 3 month period.

                  "Dilution  Reserve"  shall  mean,  as of  any  date,  (a)  the
Dilution  Factor  multiplied by (b) the Eligible  Accounts  before  applying the
Accrued Returns Reserve, the Customer Volume Discount Reserve, and the
Advertising Due Customer Reserve on such date.

                  "Dollars" and "$" shall mean lawful money of the United States
of America.

                  "EBITDA"  shall mean,  for any period,  all as  determined  in
accordance with GAAP, the  consolidated net income (or net loss) of the Borrower
and its  Subsidiaries  (other than Indi,  Castle  Communications  (U.S.),  Inc.,
Passport Music Distribution,  Inc.,  Passport Music Worldwide,  Inc. and the Red
Ant Entities)  for such period,  plus (a) the sum of (i)  depreciation  expense,
(ii) amortization  expense,  (iii) other non-cash charges,  (iv) a provision for
non-cash  foreign  exchange  adjustments  to net income,  (v) net total Federal,
state,  local and  foreign tax  expense,  (vi) gross  interest  expense for such
period less gross interest income for such period,  (vii) extraordinary  losses,
(viii) any non-recurring charge or restructuring charge which in accordance with
GAAP is excluded from operating income, (ix) the cumulative effect of any change
in accounting  principles,  (x) "Chapter 11 expenses" (or "administrative  costs
reflecting  Chapter  11  expenses")  as  shown  on the  Borrower's  consolidated
statement of income for such period less (b)  extraordinary  gains plus or minus
(c) the amount of cash  received  or  expended  in such period in respect of any
amount which,  under clause (viii) above,  was taken into account in determining
EBITDA for such or any prior period.

<PAGE>

                 "Eligible  Account" shall mean an Account  Receivable  owing to
One Stop or One Way now existing or hereafter arising,  which Account Receivable
met  the  following  specifications  at the  time  it came  into  existence  and
continues to meet the same until it is collected in full:

     (1) The  invoice on such  Account  Receivable  is not more than ninety (90)
days (or, in the case of Accounts  Receivable  in which Barnes & Noble,  Inc. or
Borders Bookstores, Inc. is the account debtor, 150 days) have elapsed since the
invoice on such Account Receivable was issued;

     (2) The Account  Receivable  arose from the outright sale of goods and such
goods have been  shipped to the  account  debtor;  such  Account  Receivable  is
evidenced by such invoices,  shipping documents, or other instruments ordinarily
used in the trade; and no return,  rejection or repossession  has occurred;  and
such goods or services have been finally  accepted by the account debtor without
dispute,  except for such account debtor's right to return  inventory  purchased
either (a) in the ordinary course of business, or (b) in any one month Inventory
with a purchase  price of up to fifteen  percent (15%) of the purchase  price of
all Inventory purchased by such account debtor during the immediately  preceding
month;

     (3) The Account  Receivable  is not subject to any Lien,  including but not
limited to,  Liens of vendors on the  proceeds of goods sold to One Stop and One
Way, except (a) Liens in favor of Primed Vendors that are junior and subordinate
to the  Liens  and  claims in favor of the  Agent,  the  Banks and the  Existing
Lenders,  (b) Liens in favor of the Existing Lenders,  and (c) Liens in favor of
the Agent for the benefit of the Banks;

     (4) The Account Receivable is a valid and legally enforceable obligation of
the account  debtor and is not subject to credit,  allowance,  defense,  offset,
counterclaim  or  adjustment  by the  account  debtor,  other than any  discount
allowed for prompt payment and except for such account  debtor's right to return
Inventory purchased either (a) in the ordinary course of business, or (b) in any
one month  Inventory with a purchase price of up to fifteen percent (15%) of the
purchase  price of all  Inventory  purchased by such account  debtor  during the
immediately preceding month;

     (5) The Account  Receivable arose in the ordinary course of business and no
notice or knowledge of the  bankruptcy,  insolvency,  failure,  or suspension or
termination of business of the account debtor has been received by the Borrower,
One Stop or One Way;

     (6) The account debtor is not an Affiliate;

     (7) The account  debtor is not a supplier of goods or  services,  except to
the extent such  Accounts  Receivable  are greater  than all  offsetting  claims
against such Accounts Receivable;

     (8) The  Account  Receivable  otherwise  conforms  to all  representations,
warranties  and other  provisions of this  Agreement and the Security and Pledge
Agreement;

<PAGE>

     (9) The account debtor is not a cash-on-delivery Account Receivable;

     (10) The account debtor is not a Governmental Authority;

     (11) The account debtor is a resident of the United States,  or in the case
where the account debtor is not a resident of the United States, the obligations
of the account debtor on such Account  Receivable is fully secured by either (a)
letters of credit  denominated  in Dollars issued for the benefit of One Stop or
One Way (i) by banks either (A)  acceptable  to the Agent,  or (B) with a credit
rating of at least "A" by Moody's and (ii) in the form and substance  acceptable
to the Agent, or (b) acceptable credit insurance  policies in form and substance
acceptable to the Agent;

     (12) The  Account  Receivable  is not from an  account  debtor if more than
fifty  percent  (50%) of the  aggregate  dollar  amount of invoices  billed with
respect to such account  debtor is more than 90 days (or, in the case of Account
Receivable  for which Barnes & Noble,  Inc. or Borders  Bookstores,  Inc. is the
account debtor, 150 days) past invoice date;

     (13) If the account  debtor owes greater than fifteen  percent (15%) (other
than with respect to Barnes & Noble,  Inc., for which such  percentage  shall be
25%) of the Dollar value of total Accounts  Receivable  owed to One Stop and One
Way, then all Account  Receivable  owed by such account debtor in excess of such
fifteen  percent  (15%)  or 25% for  Barnes & Noble,  Inc.  limitation  shall be
ineligible, unless and to the extent such excess is fully secured by a letter of
credit denominated in Dollars, issued for the benefit of One Stop or One Way (as
applicable)  by banks either (a)  acceptable to the Agent,  or (b) with a credit
rating of at least "A" by Moody's  or  Standard  and  Poor's on its  outstanding
long-term debt, and in form and substance acceptable to the Agent;

     (14)  Accounts  Receivable  with  respect  to which the  account  debtor is
located in New Jersey, Minnesota,  Indiana or Tennessee,  unless One Stop or One
Way (as  applicable)  (a) has received a certificate of authority to do business
and is in good  standing  in such  state,  or (b) has filed a Notice of Business
Activities  Report or similar  report with the proper  authorities of such state
for the then current year; and

     (15) The Agent in its sole discretion has not deemed the Account Receivable
to be  ineligible  for any other  reason  generally  accepted in the  commercial
finance business as a reason for ineligibility.

                  "Eligible  Assignee"  shall mean (i) a commercial  bank having
total  assets in excess of  $1,000,000,000;  (ii) a finance  company,  insurance
company or other financial  institution or fund acceptable to the Agent which in
the  ordinary  course of business  extends  credit of the type  evidenced by the
Agreement and has total assets in excess of  $200,000,000  and whose becoming an
assignee  would not  constitute a prohibited  transaction  under Section 4975 of
ERISA;  and (iii) any other financial  institution  satisfactory to the Borrower
and the Agent.

                  "Eligible  Inventory"  means all Inventory of One Stop and One
Way valued in  accordance  with GAAP and located in the United States of America
which is owned  by One Stop or One Way and held for sale or under  contracts  of
sale which meet all of the following specifications:

<PAGE>

     (1) The Inventory is lawfully owned by One Stop or One Way (as  applicable)
and is not (a) subject to any Lien,  except (i) Liens in favor of Primed Vendors
that are junior and  subordinate  to the Liens and claims in favor of the Agent,
the Banks and the Existing Lenders,  (ii) Liens in favor of the Existing Lenders
and (iii)  Liens in favor of the Agent for the  benefit  of the  Banks,  and (b)
Consignor Property;

     (2) One Stop or One Way (as applicable) has the right of assignment thereof
and the power to grant Liens thereon;

     (3) The Inventory arose or was acquired in the ordinary course of business,
and no portion thereof represents  rejected or damaged goods or goods which have
been  returned  and which are not in the scope of  clause  (8)  below,  it being
understood  that for purposes of this provision it is in the ordinary  course of
business to acquire Inventory in bulk from other Persons;

     (4) No Account  Receivable  or document of title has been created or issued
with respect to such Inventory;

     (5) The Inventory does not represent work-in-process;

     (6) The Inventory does not represent Return to Vendor Inventory;

     (7) The Inventory is not damaged or unmarketable;

     (8) The Inventory does not represent Accessories Inventory;

     (9) The Inventory is not in transit;

     (10) All such Inventory is covered by insurance in accordance  with Section
5.3 hereof; and

     (11) It is  anticipated  that the  Inventory  will be used in the  ordinary
course of business.

     "Environmental  Lien"  shall  mean  a Lien  in  favor  of any  Governmental
Authority for (i) any liability  under  federal or state  environmental  laws or
regulations, or (ii) damages arising from or costs incurred by such Governmental
Authority in response to a release or threatened release of a hazardous or toxic
waste, substance or constituent, or other substance into the environment.

     "ERISA" shall mean the Employee  Retirement Income Security Act of 1974, as
amended from time to time, and the  regulations  promulgated  and rulings issued
thereunder.

     "ERISA  Affiliate"  shall  mean  any  trade  or  business  (whether  or not
incorporated) which is a member of a group of which the Borrower is a member and
which is under common control within the meaning of Section 414(b) or (c) of the
Code and the regulations promulgated and rulings issued thereunder.

     "Estimated  Inventory to be Returned at Cost" shall mean for One Stop only,
the Accrued Returns Reserve  multiplied by the cost percentage as calculated for
the immediately preceding 12 months.

     "Eurocurrency  Liabilities"  shall  have the  meaning  assigned  thereto in
Regulation D issued by the Board, as in effect from time to time.

     "Eurodollar  Borrowing"  shall mean a  Borrowing  comprised  of  Eurodollar
Loans.

     "Eurodollar Loan" shall mean any Loan bearing interest at a rate determined
by reference to the Adjusted  LIBOR Rate in  accordance  with the  provisions of
Section 2.

<PAGE>

     "Event of Default" shall have the meaning set forth in Section 7.

     "Excess,  Obsolete and Slow-move  Inventory Reserve" shall be calculated in
accordance  with One Stop's or One Way's (as applicable)  historical  accounting
practices.

     "Existing  Agreements"  shall mean the  agreements  listed on Schedule  1.1
hereto, any notes delivered pursuant thereto, and all of the agreements granting
security  interests  and liens in property  and assets of the  Borrower  and the
Guarantors  to or for the benefit of the  Existing  Lenders,  including  without
limitation, the security agreements,  pledge agreements, and mortgages listed on
Schedule 1.1 hereto,  each of which  documents was executed and delivered by the
Borrower and (to the extent party  thereto) the  Guarantors  prior to the Filing
Date, as each may have been amended or modified from time to time.

     "Existing  Lenders"  shall  mean the  financial  institutions  party to the
Existing Agreements.

     "Fees" shall  collectively  mean the Commitment  Fee, Letter of Credit Fees
and other fees referred to in Section 2.19.

     "Filing Date" shall mean July 14, 1997.

     "Final Order" shall mean the Final Order of the  Bankruptcy  Court referred
to in Section 4.2(d).

     "Financial  Officer" shall mean the Chief Financial Officer,  Controller or
the Treasurer of the Borrower.

     "Foreign  Subsidiaries"  shall mean the direct or indirect  Subsidiaries of
the  Borrower  set forth on  Schedule  3.5  listed  under the  heading  "Foreign
Subsidiaries".

     "Fronting  Bank"  shall  mean  one or  more  Banks  which  Banks  shall  be
reasonably  satisfactory  to the Borrower) as may agree with the Agent to act in
such capacity.

     "GAAP" shall mean generally  accepted  accounting  principles  applied on a
consistent basis.

     "Governmental  Authority" shall mean any Federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality or
any court, in each case whether of the United States or foreign.

     "Guarantors" shall have the meaning set forth in the Introduction.

<PAGE>

     "Indebtedness"  shall mean, at any time and with respect to any Person, (i)
all  indebtedness  of such Person for borrowed money,  (ii) all  indebtedness of
such Person for the deferred  purchase price of property or services (other than
property, including inventory, and services purchased, and trade payables, other
expense accruals and deferred compensation items arising, in the ordinary course
of business),  (iii) all obligations of such Person  evidenced by notes,  bonds,
debentures  or other similar  instruments  (other than  performance,  surety and
appeal bonds arising in the ordinary course of business),  (iv) all indebtedness
of such  Person  created or arising  under any  conditional  sale or other title
retention  agreement  with  respect to property  acquired  by such Person  (even
though the rights and remedies of the seller or lender  under such  agreement in
the event of default are limited to repossession or sale of such property),  (v)
all  obligations  of such Person  under  leases which have been or should be, in
accordance with GAAP,  recorded as capital leases,  to the extent required to be
so recorded,  (vi) all  reimbursement,  payment or similar  obligations  of such
Person, contingent or otherwise,  under acceptance,  letter of credit or similar
facilities,  (vii) all Indebtedness of others referred to in clauses (i) through
(vi) above  guaranteed  directly  or  indirectly  by such  Person,  or in effect
guaranteed directly or indirectly by such Person through an agreement (A) to pay
or purchase such  Indebtedness  or to advance or supply funds for the payment or
purchase  of such  Indebtedness,  (B) to  purchase,  sell or lease (as lessee or
lessor) property, or to purchase or sell services,  primarily for the purpose of
enabling the debtor to make payment of such Indebtedness or to assure the holder
of such Indebtedness against loss in respect of such Indebtedness, (C) to supply
funds to or in any other manner invest in the debtor (including any agreement to
pay for property or services  irrespective  of whether such property is received
or such  services are  rendered) or (D)  otherwise to assure a creditor  against
loss in respect of such Indebtedness, and (viii) all Indebtedness referred to in
clauses  (i)  through  (vii)  above  secured by (or for which the holder of such
Indebtedness has an existing right,  contingent or otherwise,  to be secured by)
any Lien  upon or in  property  (including,  without  limitation,  accounts  and
contract  rights) owned by such Person,  even though such Person has not assumed
or become liable for the payment of such Indebtedness.

     "Indi"  shall mean  Independent  National  Distributors,  Inc.,  a Delaware
corporation.

     "Insufficiency"  shall mean, with respect to any Plan, the amount,  if any,
of its unfunded benefit liabilities within the meaning of Section 4001(a)(18) of
ERISA.

     "Interest  Expense" shall mean interest expense as determined in accordance
with GAAP.

     "Interest  Payment Date" shall mean (i) as to any Eurodollar Loan having an
Interest Period of 1 or 3 months,  the last day of such Interest Period and (ii)
as to all ABR Loans,  the last calendar day of each March,  June,  September and
December  and the date on which  any ABR Loans are  refinanced  with  Eurodollar
Loans pursuant to Section 2.12.

     "Interest  Period" shall mean, as to any Borrowing of Eurodollar Loans, the
period  commencing  on the date of such  Borrowing  (including  as a result of a
refinancing  of ABR Loans) or on the last day of the preceding  Interest  Period
applicable to such Borrowing and ending on the numerically corresponding day (or
if there is no corresponding  day, the last day) in the calendar month that is 1
or 3  months  thereafter,  as the  Borrower  may  elect  in the  related  notice
delivered pursuant to Sections 2.6(b) or 2.12;  provided,  however,  that (i) if
any Interest  Period would end on a day which shall not be a Business  Day, such
Interest  Period  shall be extended to the next  succeeding  Business Day unless
such next  succeeding  Business Day would fall in the next  calendar  month,  in
which case such Interest  Period shall end on the next  preceding  Business Day,
and (ii) no Interest Period shall end later than the Termination Date.

     "Interim  Order"  shall  mean the  Interim  Order of the  Bankruptcy  Court
referred to in Section 4.1(b).


<PAGE>

     "Inventory"  shall  mean all goods  held for sale by the  Borrower  and the
Guarantors in the normal course of business; solely in calculating the amount of
Inventory for purposes of computing  the value of Eligible  Inventory but for no
other purposes  hereunder,  there shall be deducted,  without  duplication,  the
Excess,  Obsolete and Slow-move  Inventory  Reserve and Inventory Shrink Reserve
and such  other  reserves  as may be  required  by the  Agent,  in each  case as
reasonably determined in the discretion of the Agent after consultation with the
Borrower.

     "Inventory  Shrink  Reserve"  shall be calculated  in  accordance  with One
Stop's or One Way's (as applicable) historical accounting practices.

     "Letter of Credit"  shall mean any letter of credit  (including in the case
of any documentary  letters of credit,  any related letter of indemnity or other
similar credit  accommodation)  issued  pursuant to Section 2.3, which letter of
credit shall be (i) a standby or commercial  documentary letter of credit,  (ii)
issued for the general  corporate  purposes of the Borrower  and the  Guarantors
(other  than in  connection  with the  purchase of  Inventory,  except as may be
agreed to by the Agent), (iii) denominated in Dollars and (iv) otherwise in such
form as may be  reasonably  approved  from  time to  time by the  Agent  and the
applicable Fronting Bank.

     "Letter  of Credit  Account"  shall  mean the  account  established  by the
Borrower  under the sole and  exclusive  control of the Agent  maintained at the
office of the Agent at 270 Park Avenue,  New York, New York 10017  designated as
the "Alliance Entertainment Corp. Debtor-in-Possession Letter of Credit Account"
or  similar  title  that  shall be used  solely  for the  purposes  set forth in
Sections 2.3(b) and 2.13(a).

     "Letter of Credit  Fees" shall mean the fees  payable in respect of Letters
of Credit pursuant to Section 2.21.

     "Letter of Credit Outstandings" shall mean, at any time, the sum of (i) the
aggregate  stated amount of all Letters of Credit then outstanding plus (ii) all
amounts theretofore drawn under Letters of Credit and not then reimbursed.

     "Lien" shall mean any mortgage,  pledge,  security  interest,  encumbrance,
lien or charge of any kind whatsoever  (including any conditional  sale or other
title retention agreement or any lease in the nature thereof).

     "Loan" shall have the meaning given such term in Section 2.1.

     "Loan  Documents"  shall  mean this  Agreement,  the  Security  and  Pledge
Agreement,  the Borrowing Base Certificate and any other instrument or agreement
executed and delivered in connection  herewith  (including,  without limitation,
any mortgage executed pursuant to Section 2.23(b)).

<PAGE>

     "Maturity Date" shall mean January 31, 1999.

     "Multiemployer  Plan"  shall  mean a  "multiemployer  plan" as  defined  in
Section  4001(a)(3)  of ERISA to which the  Borrower or any ERISA  Affiliate  is
making or accruing an obligation to make contributions, or has within any of the
preceding five plan years made or accrued an obligation to make contributions.

     "Multiple  Employer Plan" shall mean a Single  Employer Plan,  which (i) is
maintained for employees of the Borrower or an ERISA  Affiliate and at least one
Person  other  than  the  Borrower  and its  ERISA  Affiliates  or  (ii)  was so
maintained and in respect of which the Borrower or an ERISA Affiliate could have
liability under Section 4064 or 4069 of ERISA in the event such Plan has been or
were to be terminated.

     "Net Cash  Proceeds"  shall mean,  with respect to the sale of any asset by
the Borrower or any Guarantor,  the gross amount paid or received by such Person
less taxes and the reasonable, usual and customary fees and expenses paid (or to
be paid) by such Person in connection  with such sales,  which fees and expenses
(or estimates  thereof) shall be set forth on an itemized schedule  furnished to
the Agent simultaneously upon such sale; provided,  that (x) the Borrower shall,
promptly  upon the  request  of the Agent,  furnish  detailed  documentation  in
support of any claimed fee or expense and (y) the Agent shall have the right, at
any time, to challenge  the  appropriateness,  reasonableness  and amount of any
claimed fee or expense.

     "Obligations"  shall mean (a) the due and punctual  payment of principal of
and  interest  on the Loans and the  reimbursement  of all  amounts  drawn under
Letters  of  Credit,  and (b) the due and  punctual  payment of the Fees and all
other  present  and  future,  fixed  or  contingent,  obligations  (monetary  or
otherwise)  of the Borrower and the  Guarantors to the Banks and the Agent under
the Loan Documents.

     "One Stop" shall mean AEC One Stop Group, Inc.

     "One Way" shall mean One Way Records, Inc.

     "Orders" shall mean the Interim Order and the Final Order.

     "Other Taxes" shall have the meaning given such term in Section 2.18.

     "PBGC"  shall  mean  the  Pension  Benefit  Guaranty  Corporation,  or  any
successor agency or entity performing substantially the same functions.

<PAGE>

     "Pension  Plan" shall mean a defined  benefit  pension or  retirement  plan
which meets and is subject to the requirements of Section 401(a) of the Code.

     "Percentage of Actual Returns" shall mean the sum of actual returns divided
by gross sales for the immediately preceding 12 months.

     "Permitted Investments" shall mean:

     (a) direct  obligations of, or obligations the principal of and interest on
which are unconditionally guaranteed by, the United States of America (or by any
agency thereof to the extent such  obligations  are backed by the full faith and
credit of the United  States of America),  in each case  maturing  within twelve
months from the date of acquisition thereof;

     (b) without limiting the provisions of paragraph (d) below,  investments in
commercial paper maturing within six months from the date of acquisition thereof
and  having,  at such date of  acquisition,  a rating  of at least  "A-2" or the
equivalent  thereof from Standard & Poor's Rating  Services or of at least "P-2"
or the equivalent thereof from Moody's Investors Service, Inc.;

     (c) investments in certificates of deposit,  banker's  acceptances and time
deposits maturing within six months from the date of acquisition  thereof issued
or guaranteed by or placed with (i) any domestic office of the Agent or the bank
with whom the Borrower and the Guarantors maintain their cash management system,
provided,  that if such  bank is not a Bank  hereunder,  such  bank  shall  have
entered into an agreement  with the Agent pursuant to which such bank shall have
waived  all  rights of setoff and  confirmed  that such bank does not have,  nor
shall it claim, a security  interest  therein or (ii) any domestic office of any
other  commercial  bank of recognized  standing  organized under the laws of the
United  States of America or any State  thereof that has a combined  capital and
surplus and undivided profits of not less than $250,000,000 and is the principal
banking  Subsidiary of a bank holding company having a long-term  unsecured debt
rating of at least "A" or the equivalent  thereof from Standard & Poor's Ratings
Services or of at least "A2" or the  equivalent  thereof from Moody's  Investors
Service, Inc.;

     (d)  investments in commercial  paper  maturing  within six months from the
date of acquisition  thereof and issued by (i) the holding  company of the Agent
or (ii) the holding company of any other commercial bank of recognized  standing
organized  under the laws of the United  States of America or any State  thereof
that has (A) a combined  capital and surplus in excess of  $250,000,000  and (B)
commercial paper rated at least "A-2" or the equivalent  thereof from Standard &
Poor's  Ratings  Services or of at least "P-2" or the  equivalent  thereof  from
Moody's Investors Service, Inc.;

     (e)  investments  in  repurchase  obligations  with a term of not more than
seven days for underlying  securities of the types described in clause (a) above
entered  into  with  any  office  of  a  bank  or  trust  company   meeting  the
qualifications specified in clause (c) above;

<PAGE>

     (f) investments in money market funds substantially all the assets of which
are comprised of  securities  of the types  described in clauses (a) through (e)
above; and

     (g) to the extent  owned on the Filing  Date,  investments  in the  capital
stock of any direct or indirect Subsidiary of the Borrower.

     "Permitted  Liens"  shall  mean  (i)  Liens  imposed  by  law  (other  than
Environmental Liens and any Lien imposed under ERISA) for taxes,  assessments or
charges of any Governmental  Authority for claims not yet due or which are being
contested  in good faith by  appropriate  proceedings  and with respect to which
adequate  reserves  or other  appropriate  provisions  are being  maintained  in
accordance  with GAAP;  (ii) statutory Liens of landlords and Liens of carriers,
warehousemen,  customs agents or authorities,  mechanics,  materialmen and other
Liens (other than Environmental  Liens and any Lien imposed under ERISA) imposed
by law created in the  ordinary  course of  business  for amounts not yet due or
which are being  contested  in good faith by  appropriate  proceedings  and with
respect to which  adequate  reserves or other  appropriate  provisions are being
maintained in accordance with GAAP; (iii) Liens securing surety and appeal bonds
in the ordinary  course of business and Liens (other than any Lien imposed under
ERISA)  incurred  or  deposits  made  in the  ordinary  course  of  business  in
connection with workers' compensation, unemployment insurance and other types of
social security benefits or to secure the performance of tenders,  bids, leases,
contracts  (other than for the repayment of  Indebtedness),  utility and similar
obligations, statutory obligations and other similar obligations or arising as a
result  of  progress  payments  under  government   contracts;   (iv)  easements
(including,  without  limitation,  reciprocal  easement  agreements  and utility
agreements),  rights-of-way,  covenants, consents, reservations,  encroachments,
variations and zoning and other restrictions,  charges or encumbrances  (whether
or not recorded), which do not interfere materially with the ordinary conduct of
the business of the Borrower or any Guarantor,  as the case may be, and which do
not  materially  detract  from the value of the property to which they attach or
materially impair the use thereof to the Borrower or any Guarantor,  as the case
may be; (v) purchase money Liens upon or in any property  (other than Inventory)
acquired or held in the ordinary course of business to secure the purchase price
of such property or to secure Indebtedness  permitted by Section 6.3(iii) solely
for the purpose of financing the  acquisition  of such property and  Capitalized
Leases   permitted  by  Section  6.3(iv)  and  (vi)   extensions,   renewals  or
replacements  of any Lien  referred  to in  paragraphs  (i)  through  (v) above,
provided  that the principal  amount of the  obligation  secured  thereby is not
increased and that any such extension,  renewal or replacement is limited to the
property originally encumbered thereby.

     "Person"  shall  mean  any  natural  person,  corporation,  division  of  a
corporation,  partnership,  trust, joint venture, association,  company, estate,
unincorporated organization or government or any agency or political subdivision
thereof.

     "Plan"  shall  mean  any  employee  pension  benefit  plan  (other  than  a
Multiemployer  Plan)  subject to the  provisions of Title IV of ERISA or Section
412 of the Code that is  maintained  for  current  or former  employees,  or any
beneficiary thereof, of the Borrower or any ERISA Affiliate.

     "Prepayment  Date"  shall  mean  thirty  (30)  days  after the entry of the
Interim Order by the Bankruptcy Court if the Final Order has not been entered by
the Bankruptcy Court prior to the expiration of such thirty (30) day period.

     "Pre-Petition  Payment" shall mean a payment (by way of adequate protection
or  otherwise)  of  principal  or  interest  or  otherwise  on  account  of  any
pre-petition  Indebtedness  or  trade  payables  arising  from the  purchase  of
Inventory not otherwise permitted to be paid under this Agreement.

<PAGE>

     "Primed  Vendors" shall mean the  pre-petition  vendors of the Borrower and
the Grantors set forth on Schedule 3.6(b).

     "Red Ant Entities"  shall mean Red Ant Box, Inc.,  Red Ant Holdings,  Inc.,
Black Ant Music,  Inc., Army Ant Music, Inc., Velvet Ant Music, Inc. and Red Ant
LLC.

     "Register" shall have the meaning set forth in Section 10.3(d).

     "Reorganization  Plan"  shall mean a plan of  reorganization  in any of the
Cases.

     "Reportable  Event" shall mean any  reportable  event as defined in Section
4043 of ERISA or the regulations issued thereunder with respect to a Plan.

     "Required Banks" shall mean, at any time, Banks holding Loans  representing
at least 51% of the aggregate  principal amount of such Loans outstanding or, if
no such Loans are outstanding,  Banks having  Commitments  representing at least
51% of the Total Commitment.

     "Responsible  Officer" of any corporation  shall mean any executive officer
or  Financial  Officer  of such  corporation  and any other  officer  or similar
official thereof  responsible for the  administration of the obligations of such
corporation in respect of this Agreement.

     "Return  to Vendor  Inventory"  shall mean  total  amounts  from the "Daily
Inventory Movement Control,  Returns  Department" report for Basin Distributors,
Abbey Road  Distributors,  and CD One Stop.  Specifically,  total amounts of the
"Autos Daily Balance" and "SIS Daily Balance".  The Autos Daily Balance total is
comprised of (i) Open Bin Contents;  (ii) Pending  Return  Stock;  (iii) Pending
Return Vendor Unassigned;  (iv) Status #1, Pending Return Vendor Requested;  and
(v) Status #2,  Pending  Return  Vendor  Authorized.  The Daily Balance total is
comprised of (i) Status #1, SIS Vendor Return Requested; and (ii) Status #2, SIS
Vendor Return Authorized.

     "Security and Pledge Agreement" shall have the meaning set forth in Section
4.1(c).

     "Statutory Reserves" shall mean on any date the percentage  (expressed as a
decimal)  established by the Board and any other banking  authority which is (i)
for purposes of the  definition of Base CD Rate, the then stated maximum rate of
all reserves  (including,  but not limited to, any  emergency,  supplemental  or
other marginal  reserve  requirement)  for a member bank of the Federal  Reserve
System  in New York  City,  for new  three  month  negotiable  nonpersonal  time
deposits in dollars of $100,000 or more or (ii) for  purposes of the  definition
of Adjusted LIBOR Rate, the then stated maximum rate for all reserves (including
but not  limited  to any  emergency,  supplemental  or  other  marginal  reserve
requirements)  applicable  to any member bank of the Federal  Reserve  System in
respect of Eurocurrency  Liabilities  (or any successor  category of liabilities
under  Regulation D issued by the Board,  as in effect from time to time).  Such
reserve percentages shall include, without limitation, those imposed pursuant to
said Regulation.  The Statutory Reserves shall be adjusted  automatically on and
as of the effective date of any change in such percentage.

     "Subsidiary"  shall mean, with respect to any Person (herein referred to as
the "parent"),  any  corporation,  association or other business entity (whether
now  existing  or  hereafter  organized)  of which at  least a  majority  of the
securities or other  ownership  interests  having  ordinary voting power for the
election of  directors  is, at the time as of which any  determination  is being
made,  owned or  controlled  by the  parent or one or more  subsidiaries  of the
parent or by the parent and one or more subsidiaries of the parent.

     "Super-majority  Banks"  shall have the meaning  given such term in Section
10.10(b).

     "Superpriority  Claim"  shall mean a claim  against  the  Borrower  and any
Guarantor in any of the Cases which is an  administrative  expense  claim having
priority  over  any or all  administrative  expenses  of the kind  specified  in
Sections 503(b) or 507(b) of the Bankruptcy Code.



<PAGE>

     "Taxes" shall have the meaning given such term in Section 2.18.

     "Termination  Date" shall mean the earliest to occur of (i) the  Prepayment
Date,  (ii)  the  Maturity  Date,  (iii)  the  Consummation  Date  and  (iv) the
acceleration  of the  Loans  and the  termination  of the  Total  Commitment  in
accordance with the terms hereof.

     "Total  Commitment"  shall mean, at any time, the sum of the Commitments at
such time.

     "Transferee" shall have the meaning given such term in Section 2.18.

     "Type"  when used in respect of any Loan or  Borrowing  shall  refer to the
rate of interest  by  reference  to which  interest on such Loan or on the Loans
comprising such Borrowing is determined.  For purposes hereof, "Rate" shall mean
the Adjusted LIBOR Rate and the Alternate Base Rate.

     "Unused Total Commitment" shall mean, at any time, (i) the Total Commitment
less (ii) the sum of (x) the aggregate outstanding principal amount of all Loans
and (y) the aggregate Letter of Credit Outstandings.

     "Withdrawal  Liability" shall have the meaning given such term under Part I
of Subtitle E of Title IV of ERISA.

         SECTION 1.2.  Terms  Generally.  The  definitions  in Section 1.1 shall
apply  equally  to both the  singular  and  plural  forms of the terms  defined.
Whenever the context may require,  any pronoun shall  include the  corresponding
masculine,  feminine  and  neuter  forms.  All  references  herein to  Sections,
Exhibits and Schedules  shall be deemed  references to Sections of, and Exhibits
and Schedules to, this  Agreement  unless the context shall  otherwise  require.
Except as otherwise  expressly  provided  herein,  all terms of an accounting or
financial  nature shall be construed in accordance  with GAAP, as in effect from
time to time;  provided,  however,  that for purposes of determining  compliance
with any  covenant  set forth in  Section 4, such terms  shall be  construed  in
accordance  with GAAP as in effect on the date of this  Agreement  applied  on a
basis consistent with the application used in the Borrower's  audited  financial
statements referred to in Section 3.4.

SECTION 2.           AMOUNT AND TERMS OF CREDIT.

     SECTION 2.1. Commitment of the Banks.

     (a) Each Bank  severally and not jointly with the other Banks agrees,  upon
the terms and subject to the  conditions  herein set forth  (including,  without
limitation,  the  provisions of Section 2.28),  to make  revolving  credit loans
(each a "Loan" and  collectively,  the  "Loans") to the Borrower at any time and
from time to time during the period  commencing on the date hereof and ending on
the  Termination  Date  (or  the  earlier  date  of  termination  of  the  Total
Commitment) in an aggregate  principal amount not to exceed,  when added to such
Bank's Commitment Percentage of the then aggregate Letter of Credit Outstandings
(in  excess of the  amount of cash  then  held in the  Letter of Credit  Account
pursuant to Sections  2.3(b) and 2.13(a)),  the  Commitment of such Bank,  which
Loans may be repaid and  reborrowed  in accordance  with the  provisions of this
Agreement.  At no time shall the sum of the then outstanding aggregate principal
amount of the Loans plus the then aggregate Letter of Credit Outstandings exceed
the lesser of (i) the Total Commitment of $50,000,000 as the same may be reduced
from time to time  pursuant  to Sections  2.10 or 2.13,  as the case may be, and
(ii) the sum of the  Borrowing  Base plus cash then held in the Letter of Credit
Account pursuant to Sections 2.3(b) and 2.13(a).



<PAGE>

     (b) Each Borrowing  shall be made by the Banks pro rata in accordance  with
their respective Commitments; provided, however, that the failure of any Bank to
make any Loan shall not in itself  relieve the other Banks of their  obligations
to lend.

     SECTION 2.2. Borrowing Base.

     (a)  Notwithstanding any other provision of this Agreement to the contrary,
the aggregate  principal amount of all outstanding Loans plus the then aggregate
Letter  of  Credit  Outstandings  (less an  amount  equal to the face  amount of
Letters of Credit  which have been cash  collateralized  through  the deposit of
cash in the Letter of Credit  Account  pursuant  to Section  2.3(b) or  2.13(a))
shall not at any time  exceed  the  Borrowing  Base and no Loan shall be made or
Letter of Credit issued in violation of the foregoing.

     (b) Cash held in the Letter of Credit  Account  shall not be available  for
use by the  Borrower or any  Guarantor,  whether  pursuant to Section 363 of the
Bankruptcy Code or otherwise.

     SECTION 2.3. Letters of Credit.

     (a) Upon the terms and  subject to the  conditions  herein  set forth,  the
Borrower  may request a Fronting  Bank,  at any time and from time to time after
the date hereof and prior to the Termination  Date, to issue, and subject to the
terms and conditions  contained herein (including,  without limitation,  Section
4.2(e)),  such Fronting Bank shall issue, for the account of the Borrower one or
more  Letters of Credit,  provided  that no Letter of Credit  shall be issued if
after  giving  effect  to such  issuance  (i) the  aggregate  Letter  of  Credit
Outstandings  shall  exceed  $5,000,000,  (ii) the  aggregate  Letter  of Credit
Outstandings,  when added to the aggregate  outstanding  principal amount of the
Loans, would exceed the lesser of the Total Commitment and the amount calculated
in accordance  with Section  2.2(a) or (iii) the provisions of Section 2.2 would
be violated  thereby;  provided further that no Letter of Credit shall be issued
if the Fronting Bank shall have  received  notice from the Agent or the Required
Banks that the conditions to such issuance have not been met.

     (b) No Letter of Credit  shall  expire later than the earlier of (x) twelve
months  from the date of  issuance of such Letter of Credit or (y) 60 days after
the Maturity Date, provided that if any Letter of Credit shall be outstanding on
the Termination  Date, the Borrower shall, at or prior to the Termination  Date,
(i) cause all Letters of Credit which expire  after the  Termination  Date to be
returned to the  Fronting  Bank  undrawn and marked  "cancelled"  or (ii) if the
Borrower  is  unable  to  do so in  whole  or in  part,  either  (x)  provide  a
"back-to-back"  letter  of  credit  to  one or  more  Fronting  Banks  in a form
satisfactory  to such  Fronting  Bank and the  Agent  (in its sole  discretion),
issued by a bank  satisfactory  to such Fronting Bank and the Agent (in its sole
discretion), in an amount equal to 105% of the then undrawn stated amount of all
outstanding  Letters of Credit issued by such Fronting  Banks and/or (y) deposit
cash in the  Letter of  Credit  Account  in an amount  equal to 105% of the then
undrawn  stated  amount of all  outstanding  Letters  of  Credit  as  collateral
security for the Borrower's  reimbursement  obligations in connection therewith,
such cash to be remitted to the Borrower upon the  expiration,  cancellation  or
other termination or satisfaction of such reimbursement obligations.

     (c) The Borrower shall pay to each Fronting Bank, in addition to such other
fees and charges as are specifically  provided for in Section 2.21 hereof,  such
fees and charges in connection  with the issuance and  processing of the Letters
of Credit  issued  by such  Fronting  Bank as are  customarily  imposed  by such
Fronting  Bank  from  time  to  time  in   connection   with  letter  of  credit
transactions.



<PAGE>

     (d) Drafts drawn and paid under each Letter of Credit  shall be  reimbursed
by the Borrower in Dollars not later than the first  Business Day  following the
date of draw and  shall  bear  interest  from the date of draw  until  the first
Business  Day  following  the  date of draw at a rate  per  annum  equal  to the
Alternate  Base Rate plus 1-1/2% and  thereafter  until  reimbursed in full at a
rate per annum equal to the  Alternate  Base Rate plus 3-1/2%  (computed  on the
basis of the  actual  number of days  elapsed  over any year of 360  days).  The
Borrower  shall effect such  reimbursement  (x) if such draw occurs prior to the
Termination  Date (or the earlier date of termination of the Total  Commitment),
in cash or  through a  Borrowing  without  the  satisfaction  of the  conditions
precedent set forth in Section 4.2 and which Borrowing shall be effected without
the need for a request  therefor from the Borrower or (y) if such draw occurs on
or after the  Termination  Date (or the earlier date of termination of the Total
Commitment), in cash. Each Bank agrees to make the Loans described in clause (x)
of the preceding  sentence  notwithstanding  a failure to satisfy the applicable
lending  conditions  thereto or the  provisions  of Sections  2.1 and 2.2 or the
occurrence of the Termination Date.

     (e)  Immediately  upon the issuance of any Letter of Credit by any Fronting
Bank,  such  Fronting  Bank shall be deemed to have sold to each Bank other than
such Fronting Bank and each such other Bank shall be deemed  unconditionally and
irrevocably  to have  purchased  from such Fronting  Bank,  without  recourse or
warranty, an undivided interest and participation,  to the extent of such Bank's
Commitment Percentage, in such Letter of Credit, each drawing thereunder and the
obligations of the Borrower and the Guarantors under this Agreement with respect
thereto.  Upon any change in the  Commitments  pursuant to Section  10.3,  it is
hereby  agreed  that with  respect to all Letter of Credit  Outstandings,  there
shall be an automatic adjustment to the participations hereby created to reflect
the new Commitment  Percentages of the assigning and assignee Banks.  Any action
taken or  omitted by a Fronting  Bank  under or in  connection  with a Letter of
Credit,  if taken or  omitted  in the  absence  of gross  negligence  or willful
misconduct,  shall not create for such Fronting Bank any resulting  liability to
any other Bank.

     (f) In the event that a Fronting Bank makes any payment under any Letter of
Credit and the Borrower  shall not have  reimbursed  such amount in full to such
Fronting Bank pursuant to this Section,  the Fronting Bank shall promptly notify
the Agent, which shall promptly notify each Bank of such failure,  and each Bank
shall  promptly  and  unconditionally  pay to the Agent for the  account  of the
Fronting  Bank  the  amount  of  such  Bank's  Commitment   Percentage  of  such
unreimbursed  payment in Dollars and in same day funds.  If the Fronting Bank so
notifies the Agent, and the Agent so notifies the Banks prior to 11:00 a.m. (New
York City time) on any  Business  Day,  such Banks shall make  available  to the
Fronting Bank such Bank's Commitment Percentage of the amount of such payment on
such  Business  Day in same day funds.  If and to the extent such Bank shall not
have so made its Commitment  Percentage of the amount of such payment  available
to the Fronting Bank,  such Bank agrees to pay to such Fronting Bank,  forthwith
on demand such amount,  together with interest  thereon,  for each day from such
date  until the date such  amount is paid to the Agent for the  account  of such
Fronting Bank at the Federal Funds  Effective  Rate.  The failure of any Bank to
make  available to the Fronting  Bank its  Commitment  Percentage of any payment
under any Letter of Credit  shall not relieve  any other Bank of its  obligation
hereunder to make  available to the Fronting Bank its  Commitment  Percentage of
any payment under any Letter of Credit on the date required, as specified above,
but no Bank  shall be  responsible  for the  failure  of any other  Bank to make
available to such Fronting Bank such other Bank's  Commitment  Percentage of any
such payment.  Whenever a Fronting  Bank  receives a payment of a  reimbursement
obligation as to which it has received any payments  from the Banks  pursuant to
this  paragraph,  such  Fronting  Bank shall pay to each Bank which has paid its
Commitment Percentage thereof, in Dollars and in same day funds, an amount equal
to such Bank's Commitment Percentage thereof. The Borrower and each of the Banks
agree to hold  harmless  and  indemnify  such  Fronting  Bank  (except  for such
Fronting  Bank's own gross  negligence or willful  misconduct)  for all damages,
losses, costs and expenses,  including legal fees and disbursements  incurred by
such Fronting Bank in connection  with any dishonor of payment under a Letter of
Credit  issued by such Fronting Bank for which an air release has been issued by
such Fronting Bank.



<PAGE>

     SECTION 2.4.  Issuance.  Whenever the Borrower  desires a Fronting  Bank to
issue a Letter of Credit,  it shall give to such  Fronting Bank and the Agent at
least two Business Days' prior written (including telegraphic,  telex, facsimile
or cable communication)  notice (or such shorter period as may be agreed upon by
the Agent,  the Borrower and the Fronting Bank) specifying the date on which the
proposed  Letter of Credit is to be issued (which shall be a Business  Day), the
stated amount of the Letter of Credit so requested,  the expiration date of such
Letter of Credit and the name and address of the beneficiary thereof.

     SECTION  2.5.  Nature  of  Letter  of  Credit  Obligations  Absolute.   The
obligations  of the Borrower to reimburse  the Banks for drawings made under any
Letter  of  Credit  shall be  unconditional  and  irrevocable  and shall be paid
strictly in accordance with the terms of this Agreement under all circumstances,
including,  without limitation (it being understood that any such payment by the
Borrower  shall be without  prejudice to, and shall not  constitute a waiver of,
any rights the Borrower  might have or might  acquire as a result of the payment
by the Fronting Bank of any draft or the reimbursement by the Borrower thereof):
(i) any lack of validity  or  enforceability  of any Letter of Credit;  (ii) the
existence of any claim, setoff, defense or other right which the Borrower or any
Guarantor may have at any time against a beneficiary  of any Letter of Credit or
against  any of the  Banks,  whether  in  connection  with this  Agreement,  the
transactions contemplated herein or any unrelated transaction;  (iii) any draft,
demand,  certificate  or other  document  presented  under any  Letter of Credit
proving to be forged, fraudulent,  invalid or insufficient in any respect or any
statement  therein being untrue or inaccurate in any respect;  (iv) payment by a
Fronting Bank of any Letter of Credit against presentation of a demand, draft or
certificate  or other  document  which  does not  comply  with the terms of such
Letter of Credit; (v) any other circumstance or happening  whatsoever,  which is
similar  to any of the  foregoing;  or (vi) the fact that any  Event of  Default
shall have occurred and be continuing.

     SECTION 2.6. Making of Loans.

     (a) Except as  contemplated by Section 2.9, Loans shall be either ABR Loans
or  Eurodollar  Loans as the Borrower may request  subject to and in  accordance
with this Section,  provided that all Loans made pursuant to the same  Borrowing
shall, unless otherwise specifically provided herein, be Loans of the same Type.
Each Bank may fulfill its Commitment  with respect to any Eurodollar Loan or ABR
Loan by causing any lending office of such Bank to make such Loan; provided that
any such use of a lending office shall not affect the obligation of the Borrower
to repay such Loan in  accordance  with the terms of this  Agreement.  Each Bank
shall, subject to its overall policy considerations, use reasonable efforts (but
shall not be obligated) to select a lending  office which will not result in the
payment of increased costs by the Borrower pursuant to Section 2.15.  Subject to
the other  provisions  of this  Section  and the  provisions  of  Section  2.12,
Borrowings  of Loans of more  than one Type may be  incurred  at the same  time,
provided  that no more  than  five (5)  Borrowings  of  Eurodollar  Loans may be
outstanding at any time.

<PAGE>

     (b) The  Borrower  shall  give the Agent  prior  notice  of each  Borrowing
hereunder of at least three Business Days for Eurodollar  Loans and one Business
Day for ABR Loans; such notice shall be irrevocable and shall specify the amount
of the proposed  Borrowing  (which shall not be less than $5,000,000 in the case
of Eurodollar  Loans and $500,000 in the case of ABR Loans or, in any such case,
in such lesser amount as represents the available  Unused Total  Commitment) and
the date thereof (which shall be a Business Day) and shall contain  disbursement
instructions.  Such notice,  to be effective,  must be received by the Agent not
later than 12:00 noon, New York City time, on the third Business Day in the case
of  Eurodollar  Loans  and the  first  Business  Day in the  case of ABR  Loans,
preceding  the date on which such  Borrowing is to be made except as provided in
the last sentence of this Section 2.6(b).  Such notice shall specify whether the
Borrowing  then being  requested is to be a Borrowing of ABR Loans or Eurodollar
Loans and, if Eurodollar Loans, the Interest Period with respect thereto.  If no
election of Interest  Period is  specified in any such notice for a Borrowing of
Eurodollar  Loans,  such notice shall be deemed a request for an Interest Period
of one month.  If no election is made as to the Type of Loan,  such notice shall
be deemed a request for Borrowing of ABR Loans.  The Agent shall promptly notify
each  Bank of its  proportionate  share  of  such  Borrowing,  the  date of such
Borrowing,  the Type of  Borrowing  or Loans being  requested  and the  Interest
Period or Interest Periods applicable thereto, as appropriate.  On the borrowing
date  specified in such notice,  each Bank shall make its share of the Borrowing
available  at the  office of the Agent at 270 Park  Avenue,  New York,  New York
10017,  no later than 12:00 noon, New York City time, in  immediately  available
funds.  Upon  receipt  of the  funds  made  available  by the  Banks to fund any
borrowing hereunder, the Agent shall disburse such funds in the manner specified
in the notice of borrowing  delivered  by the Borrower and shall use  reasonable
efforts to make the funds so received  from the Banks  available to the Borrower
no later  than 2:00  p.m.  New York City time  (other  than as  provided  in the
following  sentence).  With respect to ABR Loans of  $5,000,000 or less (but not
less than  $500,000),  the Banks shall make such Loans available to the Borrower
by 4:00 p.m.,  New York City time,  on the same  Business  Day that the Borrower
gives notice to the Agent of such Borrowing by 12:00 p.m., New York City time.

     SECTION 2.7.  Evidence of Loans;  Repayment of Loans. (a) The Loans made by
each Bank  shall be  evidenced  by this  Agreement.  The  outstanding  principal
balance of all of the Loans, as evidenced by this Agreement, shall be payable on
the Termination Date. Each Loan shall bear interest from the date thereof on the
outstanding principal balance thereof as set forth in Section 2.8.

     (b) Each Bank shall,  and is hereby  authorized by the Borrower to maintain
in  accordance  with its usual  practice an account or accounts  evidencing  the
Indebtedness  to such Bank  resulting from each Loan made by such Bank from time
to time  including  each  payment  of  interest  on any such  Loan and the other
information provided for on such schedule.

     (c) The Agent  shall  maintain  accounts  in which it will  record  (i) the
amount of each Loan made hereunder,  the Type of each Loan made and the Interest
Period applicable thereto,  (ii) the amount of any principal or interest due and
payable or to become due and payable  from the  Borrower to each Bank  hereunder
and  (iii) the  amount  of any sum  received  by the  Agent  hereunder  from the
Borrower and each Bank's share thereof.

     (d) The entries made in the accounts  maintained pursuant to paragraphs (b)
and (c) of this Section 2.7 shall, to the extent permitted by applicable law and
in the absence of manifest  error,  be prima facie evidence of the existence and
amounts of the obligations thereto recorded; provided, however, that the failure
to any Bank or the Agent to maintain  such  accounts or any error  therein shall
not in any manner affect the  obligations  of the Borrower to repay the Loans in
accordance with their terms.

     (e) Notwithstanding any other provision of this Agreement, in the event any
Bank shall  request and receive a  promissory  note payable to such Bank and its
registered assigns in accordance with Section 10.3(e), the interests represented
by such  promissory note shall at all times  (including  after any assignment of
all or part of such interests pursuant to Section 10.3(e)) be represented by one
or more  promissory  notes payable to the payee named therein or its  registered
assigns.

<PAGE>

     SECTION 2.8. Interest on Loans.

     (a)  Subject to the  provisions  of Section  2.9,  each ABR Loan shall bear
interest (computed on the basis of the actual number of days elapsed over a year
of 360 days) at a rate per annum equal to the Alternate Base Rate plus 1-1/2%.

     (b) Subject to the  provisions of Section 2.9, each  Eurodollar  Loan shall
bear interest (computed on the basis of the actual number of days elapsed over a
year of 360  days)  at a rate per  annum  equal,  during  each  Interest  Period
applicable  thereto,  to the  Adjusted  LIBOR Rate for such  Interest  Period in
effect for such Borrowing plus 2-3/4%.

     (c)  Accrued  interest  on all Loans  shall be  payable  in arrears on each
Interest Payment Date applicable  thereto,  at maturity (whether by acceleration
or  otherwise),  after such  maturity on demand and (with  respect to Eurodollar
Loans) upon any repayment or prepayment thereof (on the amount prepaid).

     SECTION 2.9.  Default  Interest.  If the Borrower or any Guarantor,  as the
case may be, shall default in the payment of the principal of or interest on any
Loan or in the payment of any other amount  becoming due  hereunder  (including,
without  limitation,  the reimbursement  pursuant to Section 2.3(d) of any draft
drawn under a Letter of Credit),  whether at stated maturity, by acceleration or
otherwise,  the Borrower or such Guarantor,  as the case may be, shall on demand
from  time to  time  pay  interest,  to the  extent  permitted  by law,  on such
defaulted  amount up to (but not including) the date of actual payment (after as
well as  before  judgment)  at a rate per  annum  (computed  on the basis of the
actual  number of days elapsed over a year of 360 days) equal to (i) in the case
of the  principal of the Loans,  the interest  rate  applicable  thereto plus an
additional  2% per  annum,  and  (ii)  in the  case  of any  other  amounts  due
hereunder, the Alternate Base Rate plus 3-1/2%.

     SECTION 2.10 Optional Termination or Reduction of Commitment. Upon at least
two Business  Days' prior written  notice to the Agent,  the Borrower may at any
time in whole  permanently  terminate,  or from time to time in part permanently
reduce,  the  Unused  Total  Commitment.  Each  such  partial  reduction  of the
Commitments  shall be in the  principal  amount of  $5,000,000  or any  integral
multiple of $500,000.  Simultaneously  with each reduction or termination of the
Commitment, the Borrower shall pay to the Agent for the account of each Bank the
Commitment  Fee  accrued  on the  amount  of the  Commitment  of  such  Bank  so
terminated  or reduced  through the date  thereof.  Any  reduction  of the Total
Commitment pursuant to this Section 2.10 shall be applied pro rata to reduce the
Commitment of each Bank.

     SECTION  2.11.  Alternate  Rate  of  Interest.  In the  event,  and on each
occasion,  that on the day two Business  Days prior to the  commencement  of any
Interest Period for a Eurodollar  Loan, the Agent shall have  determined  (which
determination  shall be conclusive and binding upon the Borrower absent manifest
error)  that  reasonable  means do not exist  for  ascertaining  the  applicable
Adjusted LIBOR Rate, the Agent shall,  as soon as practicable  thereafter,  give
written or  telegraphic  notice of such  determination  to the  Borrower and the
Banks,  and any request by the  Borrower  for a Borrowing  of  Eurodollar  Loans
(including  pursuant to a refinancing with Eurodollar Loans) pursuant to Section
2.6 or 2.12 shall be deemed a request for a Borrowing  of ABR Loans.  After such
notice  shall have been given and until the  circumstances  giving  rise to such
notice no longer exist,  each request for a Borrowing of Eurodollar  Loans shall
be deemed to be a request for a Borrowing of ABR Loans.

<PAGE>

     SECTION 2.12.  Refinancing of Loans.  The Borrower shall have the right, at
any time, on three Business Days' prior  irrevocable  notice to the Agent (which
notice,  to be  effective,  must be  received  by the Agent not later than 12:00
noon,  New York City time,  on the third  Business Day preceding the date of any
refinancing),  (x) to refinance any outstanding Borrowing or Borrowings of Loans
of one Type (or a portion  thereof)  with a Borrowing of Loans of the other Type
or  (y)  to  continue  an  outstanding  Borrowing  of  Eurodollar  Loans  for an
additional Interest Period, subject to the following:

     (a) no Event of Default  shall have  occurred and be continuing at the time
of such refinancing or continuation;

     (b) if  less  than  a full  Borrowing  of  Loans  shall  be  refinanced  or
continued,  such  refinancing or  continuation  shall be made pro rata among the
Banks  in  accordance  with  the  respective  principal  amounts  of  the  Loans
comprising  such  Borrowing  held  by  the  Banks   immediately  prior  to  such
refinancing or continuation;

     (c) the aggregate  principal  amount of Loans being refinanced or continued
shall  be  at  least  $5,000,000,   provided  that  no  partial  refinancing  or
continuation  of a Borrowing of Eurodollar  Loans shall result in the Eurodollar
Loans  remaining   outstanding  pursuant  to  such  Borrowing  being  less  than
$5,000,000 in aggregate principal amount;

     (d) each Bank shall effect each refinancing or continuation by applying the
proceeds of its new Eurodollar Loan or ABR Loan, as the case may be, to its Loan
being refinanced or continued;

     (e) the Interest  Period with respect to a Borrowing  of  Eurodollar  Loans
effected by a refinancing  or in respect to the  Borrowing of  Eurodollar  Loans
being continued as Eurodollar Loans shall commence on the date of refinancing or
the  expiration of the current  Interest  Period  applicable to such  continuing
Borrowing, as the case may be;

     (f) a Borrowing of Eurodollar  Loans may be refinanced or continued only on
the last day of an Interest Period applicable thereto; and

     (g) each request for a  refinancing  with a Borrowing of  Eurodollar  Loans
which  fails to state an  applicable  Interest  Period  shall be  deemed to be a
request for an Interest Period of one month.

     In the event  that the  Borrower  shall not give  notice to  refinance  any
Borrowing of  Eurodollar  Loans,  or to continue  such  Borrowing as  Eurodollar
Loans, in each case as provided above,  such Borrowing  shall  automatically  be
refinanced  with a Borrowing of ABR Loans at the expiration of the  then-current
Interest  Period.  The Agent shall,  after it receives notice from the Borrower,
promptly give each Bank notice of any refinancing, in whole or part, of any Loan
made by such Bank.

     SECTION  2.13.   Mandatory   Prepayment;   Commitment   Termination;   Cash
Collateral. The outstanding Obligations shall be subject to mandatory prepayment
as follows:

     (a) if at any time the aggregate  principal amount of the outstanding Loans
plus the aggregate Letter of Credit  Outstandings  exceeds the lesser of (x) the
Total  Commitment  and (y) the sum of the Borrowing  Base plus cash deposited in
the Letter of Credit  Account  pursuant  to  Sections  2.3(b) and  2.13(a),  the
Borrower  will  within  three  Business  Days (i)  prepay the Loans in an amount
necessary to cause the aggregate  principal amount of the outstanding Loans plus
the aggregate  Letter of Credit  Outstandings in excess of the amount of cash so
held in the  Letter  of  Credit  Account  to be equal to or less  than the Total
Commitment and/or the Borrowing Base, as the case may be, and (ii) if, after

<PAGE>

giving effect to the  prepayment in full of the Loans,  the aggregate  Letter of
Credit  Outstandings  in excess of the  amount of cash so held in the  Letter of
Credit Account  exceeds the Total  Commitment  and/or the Borrowing Base, as the
case may be,  deposit into the Letter of Credit  Account an amount equal to 105%
of the amount by which the aggregate Letter of Credit  Outstandings in excess of
the amount of cash so held in the Letter of Credit  Account so exceeds the Total
Commitment or Borrowing  Base, as the case may be (with such cash to be released
to the  Borrower  to the  extent  that  the  Borrower  is  thereafter  again  in
compliance  with  the  Borrowing  Base)  provided  that,  with  respect  to  the
foregoing,  so long as no Event of Default has occurred and is  continuing,  the
sale  of  assets  permitted  by  Section  6.12(ii)  will  not  give  rise to any
prepayment of the Loans or reduction of the Total Commitment;

     (b) Upon the Termination  Date, the Total Commitment shall be terminated in
full and the  Borrower  shall pay the Loans in full and, if any Letter of Credit
remains outstanding,  deposit into the Letter of Credit Account an amount which,
when added to funds then held in such account equals 105% of the amount by which
the sum of the  aggregate  Letter of Credit  Outstandings  exceeds the amount of
cash held in the  Letter  of Credit  Account,  such cash to be  remitted  to the
Borrower upon the expiration, cancellation, satisfaction or other termination of
such reimbursement obligations.

     SECTION 2.14. Optional Prepayment of Loans; Reimbursement of Banks. (a) The
Borrower  shall  have the right at any time and from time to time to prepay  any
Loans, in whole or in part, (x) with respect to Eurodollar  Loans, upon at least
three Business Days' prior written,  telex or facsimile  notice to the Agent and
(y) with  respect to ABR Loans on the same  Business  Day if  written,  telex or
facsimile  notice is received  by the Agent  prior to 12:00 noon,  New York City
time,  and thereafter  upon at least one Business Day's prior written,  telex or
facsimile  notice to the Agent;  provided,  however,  that (i) each such partial
prepayment  shall be in integral  multiples of $500,000,  (ii) no  prepayment of
Eurodollar Loans shall be permitted  pursuant to this Section 2.14(a) other than
on the last day of an Interest  Period  applicable  thereto  unless the Borrower
shall pay the breakage fees required  under Section  2.14(b) in connection  with
such  prepayment,  and (iii) no partial  prepayment of a Borrowing of Eurodollar
Loans shall result in the aggregate  principal  amount of the  Eurodollar  Loans
remaining  outstanding  pursuant to such Borrowing  being less than  $5,000,000.
Each notice of  prepayment  shall  specify the  prepayment  date,  the principal
amount of the  Loans to be  prepaid  and in the case of  Eurodollar  Loans,  the
Borrowing or Borrowings  pursuant to which made,  shall be irrevocable and shall
commit the  Borrower  to prepay  such Loans by the amount and on the date stated
therein.  The Agent shall,  promptly  after  receiving  notice from the Borrower
hereunder,  notify each Bank of the  principal  amount of the Loans held by such
Bank which are to be prepaid,  the prepayment date and the manner of application
of the prepayment.

     (b) The Borrower shall  reimburse each Bank on demand for any loss incurred
or to be incurred by it in the  reemployment of the funds released (i) resulting
from any prepayment (for any reason whatsoever,  including,  without limitation,
refinancing  with ABR Loans) of any Eurodollar  Loan required or permitted under
this  Agreement,  if such  Loan is  prepaid  other  than on the  last day of the
Interest  Period  for  such  Loan  (including,   without  limitation,  any  such
prepayment in connection with the  syndication of the credit facility  evidenced
by this  Agreement)  or (ii) in the event  that  after the  Borrower  delivers a
notice of borrowing under Section 2.6 in respect of Eurodollar Loans, such Loans
are not made on the first day of the Interest Period specified in such notice of
borrowing  for any  reason  other  than a breach by any Bank of its  obligations
hereunder.  Such loss shall be the amount as reasonably  determined by such Bank
as the excess, if any, of (A) the amount of interest which would have accrued to
such Bank on the amount so paid or not  borrowed at a rate of interest  equal to
the  Adjusted  LIBOR  Rate for such Loan,  for the period  from the date of such
payment  or  failure  to borrow to the last day (x) in the case of a payment  or
refinancing with ABR Loans other than on the last day of the Interest Period for
such Loan, of the then current Interest Period for such Loan, or (y) in the case
of such failure to borrow, of the Interest Period for such Loan which would have
commenced on the date of such failure to borrow, over (B) the amount of interest
which would have  accrued to such Bank on such amount by placing  such amount on
deposit for a  comparable  period  with  leading  banks in the London  interbank
market.  Each Bank shall  deliver to the Borrower  from time to time one or more
certificates setting forth the amount of such loss as determined by such Bank.

<PAGE>

     (c) In the  event  the  Borrower  fails  to  prepay  any  Loan on the  date
specified in any prepayment  notice delivered  pursuant to Section 2.14(a),  the
Borrower  on demand by any Bank  shall pay to the Agent for the  account of such
Bank any amounts  required to compensate such Bank for any loss incurred by such
Bank as a result of such failure to prepay, including,  without limitation,  any
loss,  cost or  expenses  incurred by reason of the  acquisition  of deposits or
other funds by such Bank to fulfill deposit obligations incurred in anticipation
of such  prepayment.  Each Bank shall  deliver to the Borrower from time to time
one or more certificates  setting forth the amount of such loss as determined by
such Bank.

     (d) Any partial prepayment of the Loans by the Borrower pursuant to Section
2.13 or 2.14 shall be applied as specified by the Borrower or, in the absence of
such  specification,  as determined by the Agent,  provided that in each case no
Eurodollar  Loan shall be prepaid  pursuant  to Section  2.13 to the extent that
such Loan has an Interest  Period  ending after the required  date of prepayment
unless and until all  outstanding  ABR Loans and Eurodollar  Loans with Interest
Periods ending on such date have been repaid in full.

     SECTION 2.15. Reserve Requirements; Change in Circumstances.

     (a)  Notwithstanding  any other provision herein, if after the date of this
Agreement any change in applicable law or regulation or in the interpretation or
administration   thereof  by  any  Governmental   Authority   charged  with  the
interpretation  or  administration  thereof  (whether or not having the force of
law) shall change the basis of taxation of payments to any Bank of the principal
of or  interest  on any  Eurodollar  Loan made by such Bank or any fees or other
amounts payable  hereunder (other than changes in respect of Taxes,  Other Taxes
and taxes imposed on, or measured by, the net income or overall  gross  receipts
or franchise  taxes of such Bank by the  jurisdiction in which such Bank has its
principal office or by any political subdivision or taxing authority therein, or
by any other  jurisdiction or by any political  subdivision or taxing  authority
therein other than a jurisdiction in which such Bank would not be subject to tax
but for the  execution  and  performance  of this  Agreement),  or shall impose,
modify or deem applicable any reserve,  special  deposit or similar  requirement
against  assets of,  deposits  with or for the account of or credit  extended by
such  Bank  (except  any such  reserve  requirement  which is  reflected  in the
Adjusted LIBOR Rate) or shall impose on such Bank or the London interbank market
any other  condition  affecting this  Agreement or the Eurodollar  Loans made by
such Bank, and the result of any of the foregoing  shall be to increase the cost
to such Bank of making  or  maintaining  any  Eurodollar  Loan or to reduce  the
amount of any sum  received or  receivable  by such Bank  hereunder  (whether of
principal,  interest  or  otherwise)  by an  amount  deemed  by such  Bank to be
material,  then the Borrower will pay to such Bank in accordance  with paragraph
(c) below such  additional  amount or amounts as will  compensate  such Bank for
such additional costs incurred or reduction suffered.

     (b) If any Bank shall have determined that the  applicability of any change
in any law, rule,  regulation or guideline adopted pursuant to or arising out of
the  July  1988  report  of the  Basel  Committee  on  Banking  Regulations  and
Supervisory Practices entitled "International Convergence of Capital Measurement
and Capital  Standards," or the adoption or effectiveness  after the date hereof
of any law, rule,  regulation or guideline  regarding capital  adequacy,  or any
change after the date hereof in any of the foregoing or in the interpretation or
administration  of any of the foregoing by any Governmental  Authority,  central
bank or comparable  agency  charged with the  interpretation  or  administration
thereof,  or compliance by any Bank (or any lending  office of such Bank) or any
Bank's holding company with any request or directive  regarding capital adequacy
(whether or not having the force of law) of any such authority,  central bank or
comparable  agency,  has or would have the effect of reducing the rate of return
on such Bank's capital or on the capital of such Bank's holding company, if any,
as a consequence of this Agreement, the Loans made by such Bank pursuant hereto,
such Bank's  Commitment  hereunder or the issuance of, or participation  in, any
Letter  of Credit by such Bank to a level  below  that  which  such Bank or such
Bank's  holding  company  could have achieved but for such  adoption,  change or
compliance  (taking into account Bank's policies and the policies of such Bank's
holding  company with respect to capital  adequacy) by an amount  deemed by such
Bank to be material,  then from time to time the Borrower shall pay to such Bank
such  additional  amount or amounts as will  compensate such Bank or such Bank's
holding company for any such reduction suffered.

<PAGE>

     (c) A  certificate  of each Bank  setting  forth such  amount or amounts as
shall be necessary to compensate  such Bank or its holding  company as specified
in  paragraph  (a) or (b) above,  as the case may be,  shall be delivered to the
Borrower and shall be conclusive  absent manifest error.  The Borrower shall pay
each Bank the amount shown as due on any such certificate delivered to it within
10 days after its receipt of the same. Any Bank receiving any such payment shall
promptly make a refund thereof to the Borrower if the law, regulation, guideline
or change in circumstances giving rise to such payment is subsequently deemed or
held to be invalid or inapplicable.

     (d)  Failure  on the  part  of any  Bank  to  demand  compensation  for any
increased  costs or reduction in amounts  received or receivable or reduction in
return on capital with  respect to any period  shall not  constitute a waiver of
such  Bank's  right to demand  compensation  with  respect to such period or any
other  period.  The  protection  of this Section shall be available to each Bank
regardless of any possible  contention of the invalidity or  inapplicability  of
the law, rule,  regulation,  guideline or other change or condition  which shall
have occurred or been imposed.

     SECTION 2.16. Change in Legality.

     (a)  Notwithstanding  anything to the contrary contained  elsewhere in this
Agreement,  if after the date hereof (x) any change in any law or  regulation or
in the  interpretation  thereof by any Governmental  Authority  charged with the
administration  thereof  shall make it unlawful for a Bank to make or maintain a
Eurodollar Loan or to give effect to its obligations as contemplated hereby with
respect to a  Eurodollar  Loan or (y) at any time any Bank  determines  that the
making or continuance of any of its Eurodollar Loans has become impracticable as
a result of a  contingency  occurring  after  the date  hereof  which  adversely
affects the London interbank market or the position of such Bank in such market,
then,  by  written  notice  to the  Borrower,  such  Bank may (i)  declare  that
Eurodollar  Loans will not thereafter be made by such Bank hereunder,  whereupon
any request by the Borrower for a Eurodollar  Borrowing  shall,  as to such Bank
only,  be deemed a request  for an ABR Loan  unless  such  declaration  shall be
subsequently  withdrawn;  and (ii) require that all outstanding Eurodollar Loans
made by it be converted to ABR Loans, in which event all such  Eurodollar  Loans
shall be  automatically  converted to ABR Loans as of the effective date of such
notice as provided in paragraph (b) below.  In the event any Bank shall exercise
its rights  under  clause (i) or (ii) of this  paragraph  (a),  all payments and
prepayments  of principal  which would  otherwise have been applied to repay the
Eurodollar  Loans  that  would  have  been  made by such  Bank or the  converted
Eurodollar  Loans of such Bank  shall  instead be applied to repay the ABR Loans
made by such  Bank in lieu  of,  or  resulting  from  the  conversion  of,  such
Eurodollar Loans.

     (b) For purposes of this Section 2.16, a notice to the Borrower by any Bank
pursuant  to  paragraph  (a) above  shall be  effective,  if lawful,  and if any
Eurodollar Loans shall then be outstanding,  on the last day of the then-current
Interest  Period,  otherwise,  such  notice  shall be  effective  on the date of
receipt by the Borrower.

     SECTION  2.17.  Pro Rata  Treatment,  etc. All payments and  repayments  of
principal  and interest in respect of the Loans  (except as provided in Sections
2.15 and 2.16)  shall be made pro rata  among the Banks in  accordance  with the
then outstanding  principal amount of the Loans and/or  participations in Letter
of Credit  Outstandings  and all outstanding  undrawn Letters of Credit (and the
unreimbursed  amount of drawn  Letters of Credit)  hereunder and all payments of
Commitment  Fees and all Letter of Credit Fees  (other  than those  payable to a
Fronting  Bank) shall be made pro rata among the Banks in accordance  with their
Commitments.  All payments by the Borrower hereunder shall be (i) net of any tax
applicable to the Borrower or Guarantor and (ii) made in Dollars in  immediately
available funds at the office of the Agent by 12:00 noon, New York City time, on
the date on which such  payment  shall be due.  Interest  in respect of any Loan
hereunder shall accrue from and including the date of such Loan to but excluding
the  date on  which  such  Loan is  paid  in  full or  converted  to a Loan of a
different Type.

<PAGE>

     SECTION 2.18. Taxes.

     (a) Any and all payments by the Borrower or any Guarantor  hereunder  shall
be made free and  clear of and  without  deduction  for any and all  current  or
future taxes,  levies,  imposts,  deductions,  charges or withholdings,  and all
liabilities with respect thereto,  excluding (i) taxes imposed on or measured by
the net  income  or  overall  gross  receipts  of the  Agent or any Bank (or any
transferee  or  assignee  thereof,  including a  participation  holder (any such
entity being called a "Transferee")) and franchise taxes imposed on the Agent or
any Bank (or Transferee) by the United States or any jurisdiction under the laws
of which  either of the Agent or any such Bank (or  Transferee)  is organized or
any  political  subdivision  thereof  or by  any  other  jurisdiction  or by any
political  subdivision or taxing authority  therein other than a jurisdiction in
which the Agent or such Bank would not be  subject to tax but for the  execution
and performance of this Agreement and (ii) taxes, levies,  imposts,  deductions,
charges or withholdings  ("Amounts") with respect to payments hereunder or under
the Notes or under any Loan  Documents to a Bank (or  Transferee)  in accordance
with laws in effect on the later of the date of this Agreement and the date such
Bank (or Transferee) becomes a Bank (or Transferee, as the case may be), but not
excluding,  with  respect to such Bank (or  Transferee),  any  increase  in such
Amounts solely as a result of any change in such laws occurring after such later
date or any Amounts that would not have been imposed but for actions (other than
actions contemplated by this Agreement or the Notes) taken by the Borrower after
such  later  date (all such  nonexcluded  taxes,  levies,  imposts,  deductions,
charges, withholdings and liabilities being hereinafter referred to as "Taxes").
If the  Borrower or any  Guarantor  shall be required by law to deduct any Taxes
from or in respect of any sum payable hereunder to the Banks (or any Transferee)
or the Agent,  (i) the sum payable shall be increased by the amount necessary so
that after making all required deductions  (including  deductions  applicable to
additional  sums payable under this Section)  such Bank (or  Transferee)  or the
Agent (as the case may be)  shall  receive  an amount  equal to the sum it would
have received had no such  deductions  been made,  (ii) the Borrower  shall make
such deductions and (iii) the Borrower shall pay the full amount deducted to the
relevant  taxing  authority or other  Governmental  Authority in accordance with
applicable law.

     (b) In addition,  the Borrower agrees to pay any current or future stamp or
documentary taxes or any other excise or property taxes, charges, assessments or
similar levies that arise from any payment made hereunder or from the execution,
delivery or registration of, or otherwise with respect to, this Agreement or any
other Loan Document (hereinafter referred to as "Other Taxes").

     (c) The Borrower will indemnify each Bank (or Transferee) and the Agent for
the full  amount of Taxes and Other Taxes paid by such Bank (or  Transferee)  or
the Agent, as the case may be, and any liability (including penalties,  interest
and expenses)  arising  therefrom or with respect  thereto,  whether or not such
Taxes or Other Taxes were correctly or legally  asserted by the relevant  taxing
authority or other Governmental  Authority.  Such indemnification  shall be made
within 30 days after the date any Bank (or Transferee) or the Agent, as the case
may be, makes written demand  therefor.  If a Bank (or  Transferee) or the Agent
shall  become  aware that it is entitled to receive a refund in respect of Taxes
or Other Taxes as to which it has been  indemnified by the Borrower  pursuant to
this Section,  it shall promptly notify the Borrower of the availability of such
refund and shall,  within 30 days  after  receipt of a request by the  Borrower,
apply for such refund at the Borrower's  expense. If any Bank (or Transferee) or
the Agent  receives a refund in respect of any Taxes or Other  Taxes as to which
it has been  indemnified  by the  Borrower  pursuant to this  Section,  it shall
promptly  notify the  Borrower  of such  refund and shall,  within 30 days after
receipt of a request by the Borrower (or promptly upon receipt,  if the Borrower
has requested application for such refund pursuant hereto), repay such refund to
the Borrower (to the extent of amounts that have been paid by the Borrower under
this Section with respect to such refund plus  interest  that is received by the
Bank (or Transferee) as part of the refund),  net of all out-of-pocket  expenses
of such  Bank  and  without  additional  interest  thereon;  provided  that  the
Borrower,  upon the request of such Bank (or Transferee) or the Agent, agrees to
return such refund (plus penalties,  interest or other charges) to such Bank (or
Transferee) or Agent in the event such Bank (or Transferee) or Agent is required
to repay such refund. Nothing contained in this subsection (c) shall require any
Bank (or  Transferee)  or the Agent to make available any of its tax returns (or
any other information relating to its taxes that it deems to be confidential).

<PAGE>

     (d)  Within 30 days after the date of any  payment of Taxes or Other  Taxes
withheld by the  Borrower in respect of any payment to any Bank (or  Transferee)
or the Agent, the Borrower will furnish to the Agent, at its address referred to
on the  signature  pages hereof,  the original or a certified  copy of a receipt
evidencing payment thereof.

     (e) Without  prejudice  to the  survival of any other  agreement  contained
herein,  the agreements and obligations  contained in this Section shall survive
the  payment  in  full  of the  principal  of and  interest  on all  Loans  made
hereunder.

     (f)  Each  Bank  (or  Transferee)  that is  organized  under  the laws of a
jurisdiction outside the United States shall, if legally able to do so, prior to
the  immediately  following  due date of any payment by the Borrower  hereunder,
deliver to the  Borrower  such  certificates,  documents or other  evidence,  as
required by the Code or Treasury Regulations issued pursuant thereto,  including
(A) Internal  Revenue  Service Form W-8 or W-9 and (B) Internal  Revenue Service
Form 1001 or Form 4224 and any  other  certificate  or  statement  of  exemption
required by Treasury Regulation Section 1.1441-1, 1.1441-4 or 1.1441-6(c) or any
subsequent  version thereof or successors  thereto,  properly completed and duly
executed by such Bank (or Transferee)  establishing that such payment is (i) not
subject to United  States  Federal  withholding  tax under the Code because such
payment is effectively  connected with the conduct by such Bank (or  Transferee)
of a trade or business in the United  States or (ii) totally  exempt from United
States Federal  withholding tax or subject to a reduced rate of such tax under a
provision of an  applicable  tax treaty.  Unless the Borrower and the Agent have
received forms or other  documents  satisfactory  to them  indicating  that such
payments  hereunder or under the Notes are not subject to United States  Federal
withholding  tax or are subject to such tax at a rate  reduced by an  applicable
tax treaty, the Borrower or the Agent shall withhold taxes from such payments at
the applicable statutory rate.

     (g) The Borrower shall not be required to pay any additional amounts to any
Bank (or  Transferee)  in  respect  of United  States  Federal  withholding  tax
pursuant  to  subsection  (a)  above if the  obligation  to pay such  additional
amounts would not have arisen but for a failure by such Bank (or  Transferee) to
comply with the provisions of subsection (f) above.

     (h) Any  Bank (or  Transferee)  claiming  any  additional  amounts  payable
pursuant to this  Section 2.18 shall use  reasonable  efforts  (consistent  with
legal and regulatory restrictions) to file any certificate or document requested
by the Borrower or to change the  jurisdiction of its applicable  lending office
if the making of such a filing or change  would avoid the need for or reduce the
amount of any such additional  amounts that may thereafter accrue and would not,
in the sole  reasonable  determination  of such Bank,  be  otherwise  materially
disadvantageous to such Bank (or Transferee).

     SECTION 2.19.  Certain Fees. The Borrower  shall pay to the Agent,  for the
respective  accounts  of the  Agent  and the  Banks,  the fees set forth in that
certain letter dated July 13, 1997 among the Agent,  Chase  Securities  Inc. and
the Borrower.

     SECTION  2.20.  Commitment  Fee.  The  Borrower  shall  pay to the  Banks a
commitment fee (the "Commitment  Fee") for the period commencing on the date the
Commitment  Letter was executed to the  Termination  Date or the earlier date of
termination  of the  Commitment,  computed (on the basis of the actual number of
days  elapsed  over a year of 360 days) at the rate of  one-half  of one percent
1/2% per annum on the average  daily Unused Total  Commitment.  Such  Commitment
Fee, to the extent then accrued, shall be payable (x) monthly in arrears, on the
last calendar day of each month, (y) on the Termination Date and (z) as provided
in Section 2.10 hereof, upon any reduction or termination in whole or in part of
the Total Commitment.

<PAGE>

     SECTION 2.21. Letter of Credit Fees. The Borrower shall pay with respect to
each  Letter of Credit (i) to the Agent on behalf of the Banks a fee  calculated
(on the basis of the actual  number of days  elapsed over a year of 360 days) at
the rate of (x) one and one half percent (1-1/2%) per annum on the daily average
face amount of outstanding  Letters of Credit and (ii) to the Fronting Bank such
Fronting  Bank's  customary  fees for  issuance  and  processing  referred to in
Section 2.3. In addition,  the Borrower agrees to pay each Fronting Bank for its
account a  fronting  fee in  respect  of each  Letter  of Credit  issued by such
Fronting  Bank,  for the period from and  including the date of issuance of such
Letter of Credit to and  including  the date of  termination  of such  Letter of
Credit,  computed at a rate,  and  payable at times,  to be  determined  by such
Fronting  Bank and the  Borrower.  Accrued  fees  described in clause (i) of the
first  sentence of this  paragraph  in respect of each Letter of Credit shall be
due and  payable  monthly in arrears on the last  calendar  day of each month of
each  year  and on the  Termination  Date,  or such  earlier  date as the  Total
Commitment  is  terminated.  Accrued fees  described in clause (ii) of the first
sentence of this  paragraph in respect of each Letter of Credit shall be payable
at times to be determined by the Fronting Bank, the Borrower and the Agent.

     SECTION 2.22.  Nature of Fees.  All Fees shall be paid on the dates due, in
immediately  available  funds,  to the Agent for the respective  accounts of the
Agent and the Banks, as provided  herein and in the letter  described in Section
2.19. Once paid, none of the Fees shall be refundable under any circumstances.

     SECTION 2.23. Priority and Liens; Adequate Protection.

     (a) The Borrower and each of the Guarantors  hereby  covenants,  represents
and  warrants  that,  upon entry of the  Interim  Order (i)  pursuant to Section
364(c)(1)  of the  Bankruptcy  Code,  the  Obligations  of the  Borrower and the
Guarantors  hereunder and under the Loan Documents shall at all times constitute
allowed  administrative  expense  claims in the Cases having  priority  over all
administrative  expenses of the kind  specified in Sections  503(b) or 507(b) of
the Bankruptcy Code, (ii) pursuant to Section  364(c)(2) of the Bankruptcy Code,
the Obligations of the Borrower and the Guarantors  hereunder and under the Loan
Documents  shall at all times be secured by a perfected  first  priority Lien on
(x) all  unencumbered  property of the Borrower and the  Guarantors  and (y) all
cash  maintained in the Letter of Credit  Account and any direct  investments of
the  funds  contained  therein,  (iii)  pursuant  to  Section  364(c)(3)  of the
Bankruptcy  Code, the  Obligations of the Borrower and the Guarantors  hereunder
and under the Loan  Documents  shall be  secured  by a  perfected  Lien upon all
property of the Borrower  and the  Guarantors  (other than the property  that is
subject to existing  Liens in Inventory of the Primed Vendors and existing Liens
that currently  secure the obligations of the Borrower and the Guarantors  under
the  Existing  Agreements,  as to which  the Lien in favor of the  Agent and the
Banks will be as described in clause (iv) of this  sentence)  that is subject to
valid  and  perfected  Liens  in  existence  on the  Filing  Date  or  perfected
thereafter  pursuant to Section 362(b)(18) of the Bankruptcy Code (to the extent
that under State or federal law,  such Liens are senior to the Liens  granted to
the Agent and the Banks hereunder and prime existing Liens), Permitted Liens and
property subject to Liens for ad valorem taxes permitted pursuant to the Section
6.1(a)(iv),  junior to such  valid and  perfected  Liens  and  claims,  and (iv)
pursuant to Section  364(d)(1) of the Bankruptcy  Code,  the  Obligations of the
Borrower and the Guarantors hereunder and under the Loan Documents shall be


<PAGE>

secured by a perfected  first  priority,  senior priming Lien on all property of
the Borrower and the  Guarantors  (including  without  limitation,  Receivables,
Inventory,   intellectual   property  and  the  capital  stock  of  all  of  the
Subsidiaries  of the  Borrower  and the  proceeds  thereof)  that is  subject to
existing  Liens on Inventory in favor of the Primed  Vendors and existing  Liens
that  presently   secure  the  Borrower's  and  the   Guarantors'   pre-petition
Indebtedness  under the  Existing  Agreements  and any Liens  granted  after the
Filing Date to provide  adequate  protection to the Primed Vendors or in respect
of the Existing Agreements,  subject in each case with respect to subclauses (i)
through (iv) above,  only to (x) in the event of the  occurrence  and during the
continuance of an unwaived Event of Default or an event that would constitute an
Event of Default with the giving of notice or lapse of time or both, the payment
of unpaid  professional  fees and  disbursements  incurred by the Borrower,  the
Guarantors,  and any statutory  committees  appointed in the Cases,  as and when
allowed,  and any  disbursements of any member of such committee in an aggregate
amount not in excess of  $2,500,000  and (y) the payment of unpaid fees pursuant
to 28 U.S.C. ss.1930  (collectively,  the "Carve-Out"),  provided that following
the  Termination  Date  amounts  in the  Letter of Credit  Account  shall not be
subject to the  Carve-Out.  The Banks agree that the Borrower and the Guarantors
shall be permitted to pay compensation and reimbursement of expenses allowed and
payable  under 11 U.S.C.  ss. 330 and 11 U.S.C.  ss. 331, as the same may be due
and  payable,  and so long as no Event of Default or event which with the giving
of notice or lapse of time or both would  constitute  an Event of Default  shall
have occurred,  the same shall not reduce the Carve-Out.  Goods held for sale by
the Borrower and the Guarantors on consignment or under any licensing  agreement
(under which neither the Borrower nor the Guarantors obtain title to such goods)
and the proceeds thereof  (collectively,  the "Consignor Property") shall not be
subject to the Liens or Superpriority Claims granted hereunder.  The indemnities
permitted  pursuant  to  Section  6.7(iii)  shall not be subject to the Liens or
Superpriority Claims granted hereunder. Notwithstanding anything to the contrary
contained  herein,  all claims and Liens granted  hereunder and under the Orders
(including  those  granted in favor of the Existing  Lenders  under the Existing
Agreements),  shall be senior in all  respects to all claims  granted to Vendors
pursuant to Section 546(g)* of the Bankruptcy  Code, to the extent  permitted by
this Agreement.

     (b) As to all real  property  the title to which is held by the Borrower or
any  Guarantor,  or the  possession  of  which  is held by the  Borrower  or any
Guarantor  pursuant  to  leasehold  interest,  each  of  the  Borrower  and  the
Guarantors  hereby assigns and conveys as security,  grants a security  interest
in, hypothecates,  mortgages,  pledges and sets over unto the Agent on behalf of
the  Banks  all of the  right,  title  and  interest  of the  Borrower  and such
Guarantor  in all of  such  owned  real  property  and  in  all  such  leasehold
interests,  together in each case with all of the right,  title and  interest of
the  Borrower  and each  Guarantor in and to all  buildings,  improvements,  and
fixtures related thereto, any lease or sublease thereof, all general intangibles
relating  thereto and all proceeds  thereof.  The  Borrower  and each  Guarantor
acknowledges  that,  pursuant to the Orders,  the Liens in favor of the Agent on
behalf of the Banks in all of such real property and leasehold  interests  shall
be  perfected  without  the  recordation  of  any  instruments  of  mortgage  or
assignment.  Each of the Borrower and the Guarantors further agrees that (i) the
Agent on behalf of the Banks shall have  rights and  remedies in respect of such
real  property  and  leasehold  interests  substantially  as  set  forth  in the
mortgages described in Schedule 1.1, and (ii) if requested by the Agent, each of
the  Borrower and the  Guarantors  shall enter into  separate fee and  leasehold
mortgages  with  respect to such  properties  substantially  in the form of such
mortgages and leasehold  mortgages  and otherwise on terms  satisfactory  to the
Agent, the Borrower and such Guarantor.

<PAGE>

     (c) The Borrower and each of the Guarantors  acknowledge and agree that, as
adequate  protection for the interests of the Existing Lenders in the Liens that
are being primed as set forth in Section 2.23(a)(iv),  the holders of such Liens
shall  receive (i) a priority  claim as  contemplated  by Section  507(b) of the
Bankruptcy Code, (ii) a Lien on substantially  all of the assets of the Borrower
and the  Guarantors  having a priority  junior to the  priming  and other  Liens
granted in favor of the Agent and the Banks  hereunder  and under the other Loan
Documents (subject and subordinate, in the case of clause (i) and (ii) above, to
the Carve-Out,  the Consignor  Property,  the Permitted  Liens,  the indemnities
permitted  pursuant to Section  6.7(iii) and other valid and perfected  Liens in
existence  on the Filing  Date),  (iii) the making of current  monthly  interest
payments in respect of the  principal  amounts  outstanding  under the  Existing
Agreements at the  applicable  non-default  rate  interest rate  (including on a
LIBOR  basis  at the  option  of the  Borrower  in the  absence  of an  Event of
Default), the making of current letter of credit fees and the reimbursement on a
monthly  basis of the  reasonable  expenses  incurred  by the  Agent  under  the
Existing  Agreements  prior to and after the Filing Date in connection  with the
enforcement of its rights under the Existing Agreements.  It shall be understood
and agreed that in the event the Existing Lenders receive the payment in full of
the  principal  and  non-default  interest  under the Existing  Agreements,  the
Existing  Lenders  shall be deemed to have waived any claim for  interest at the
default rate.

     (d) The Borrower and each of the Guarantors  acknowledge and agree that, as
adequate  protection  for the interests of the Primed  Vendors in the Liens that
are being primed as set forth in Section 2.23(a)(iv),  the holders of such Liens
shall  receive (x) a priority  claim as  contemplated  by Section  507(b) of the
Bankruptcy Code and (y) a Lien on the Inventory of the Primed Vendors and on all
other non-Inventory  assets of the Borrower and the Guarantors having a priority
junior  and  subordinate  to the Liens and  claims in favor of the Agent and the
Banks and the Liens and claims in favor of the Existing Lenders, and subject and
subordinate to the Carve-Out,  the Consignor Property,  the Permitted Liens, the
indemnities permitted pursuant to Section 6.7(iii) and other valid and perfected
Liens in existence on the Filing Date.

     (e) So long as any Commitment shall be in effect or any Loans or any Letter
of Credit shall remain  outstanding or any other amount shall remain outstanding
under this  Agreement,  the  Existing  Lenders  shall not take any action in the
Bankruptcy  Court or  otherwise  seeking  payment of the  obligations  under the
Existing  Agreements  or related to the  enforcement  of rights or remedies with
respect to Liens on the assets of the  Borrower or any of the  Guarantors  ("the
Proscribed  Actions"),  provided that upon the occurrence of a material  adverse
change in the  business,  operations,  properties  or  condition  (financial  or
otherwise) of the Borrower and the Guarantors,  taken as a whole,  subsequent to
the Filing  Date,  the  Existing  Lenders  shall be permitted to seek further or
other adequate  protection not inconsistent with the Proscribed  Actions or seek
to terminate the Borrower's or the  Guarantors' use of cash collateral (in every
case on not less than five (5) Business Days notice) to the Borrower.

     SECTION 2.24.  Right of Set-Off.  Subject to the  provisions of Section 7.1
(which for the purposes  hereof shall apply to the Banks),  upon the  occurrence
and during the  continuance of any Event of Default,  the Agent and each Bank is
hereby  authorized  at any time and from  time to time,  to the  fullest  extent
permitted by law and without  further order of or  application to the Bankruptcy
Court,  to set off and apply any and all deposits  (general or special,  time or
demand,  provisional  or final) at any time held and other  indebtedness  at any
time owing by the Agent and each such Bank to or for the  credit or the  account
of the Borrower or any Guarantor  against any and all of the obligations of such
Borrower  or  Guarantor  now or  hereafter  existing  under the Loan  Documents,
irrespective  of whether  or not such Bank shall have made any demand  under any
Loan Document and although such obligations may be unmatured.  Each Bank and the
Agent  agrees  promptly to notify the  Borrower  and  Guarantors  after any such
set-off and  application  made by such Bank or by the Agent,  provided  that the
failure to give such notice  shall not affect the  validity of such  set-off and
application.  The rights of each Bank and the Agent  under this  Section  are in
addition  to other  rights and  remedies  which such Bank and the Agent may have
upon the occurrence and during the continuance of any Event of Default.

<PAGE>

     SECTION 2.25.  Security  Interest in Letter of Credit Account.  Pursuant to
Section 364(c)(2) of the Bankruptcy Code, the Borrower and the Guarantors hereby
assign and pledge to the Agent,  for its benefit and for the ratable  benefit of
the Banks,  and hereby  grant to the Agent,  for its benefit and for the ratable
benefit of the Banks, a first priority  security  interest,  senior to all other
Liens,  if any, in all of the Borrower's and the  Guarantors'  right,  title and
interest in and to the Letter of Credit Account and any direct investment of the
funds contained therein.

     SECTION  2.26.  Payment  of  Obligations.  Upon the  maturity  (whether  by
acceleration or otherwise) of any of the obligations under this Agreement or any
of the other Loan Documents of the Borrower and the Guarantors,  the Banks shall
be entitled to immediate payment of such obligations without further application
to or order of the Bankruptcy Court.

     SECTION 2.27. No  Discharge;  Survival of Claims.  Each of the Borrower and
the Guarantors agrees that (i) its obligations hereunder shall not be discharged
by the entry of an order  confirming a Plan of  Reorganization  (and each of the
Borrower and the  Guarantors  pursuant to Section  1141(d)(4) of the  Bankruptcy
Code, hereby waives any such discharge) and (ii) the Superpriority Claim granted
to the Agent and the Banks  pursuant to the Orders and described in Section 2.23
and the Lien  granted  to the Agent  pursuant  to the Orders  and  described  in
Section  2.25  shall  not be  affected  in any  manner  by the entry of an order
confirming a Plan of Reorganization.

     SECTION  2.28.  Use of Cash  Collateral.  Notwithstanding  anything  to the
contrary  contained  herein,  the  Borrower  shall not be permitted to request a
Borrowing  of Loans under  Section 2.6 unless the  Borrower  and the  Guarantors
shall at that time have used all cash  collateral  subject to the Interim  Order
and the Final Order for the purposes described in Section 3.10.

     SECTION 3. REPRESENTATIONS AND WARRANTIES

     In order to induce the Banks to make Loans and issue and/or  participate in
Letters of Credit hereunder, the Borrower and each of the Guarantors jointly and
severally represent and warrant as follows:

     SECTION  3.1.  Organization  and  Authority.  Each of the  Borrower and the
Guarantors (i) is a corporation  duly  organized and validly  existing under the
laws of the  State  of its  incorporation  and is duly  qualified  as a  foreign
corporation and is in good standing in each jurisdiction in which the failure to
so qualify  would have a material  adverse  effect on the  financial  condition,
operations,  business,  properties or assets of the Borrower and the  Guarantors
taken as a whole;  (ii)  subject  to the  entry by the  Bankruptcy  Court of the
Orders,  has  the  requisite   corporate  power  and  authority  to  effect  the
transactions  contemplated  hereby,  and by the other Loan Documents,  and (iii)
subject to the entry by the  Bankruptcy  Court of the  Orders has all  requisite
corporate power and authority and the legal right to own,  pledge,  mortgage and
operate its properties, and to conduct its business as now or currently proposed
to be conducted.

<PAGE>

     SECTION 3.2. Due Execution. The execution, delivery and performance by each
of the Borrower and the  Guarantors of each of the Loan Documents to which it is
a party (i) are within the respective  corporate  powers of each of the Borrower
and the Guarantors, have been duly authorized by all necessary corporate action,
including the consent of shareholders where required,  and do not (A) contravene
the charter or by-laws of any of the Borrower or the Guarantors, (B) violate any
law  (including,  without  limitation,  the Securities  Exchange Act of 1934) or
regulation (including, without limitation,  Regulation G, T, U or X of the Board
of Governors of the Federal Reserve System), or any order or decree of any court
or governmental instrumentality,  (C) conflict with or result in a breach of, or
constitute a default under,  any material  indenture,  mortgage or deed of trust
entered  into after the Filing Date or any  material  lease,  agreement or other
instrument  entered  into after the Filing Date  binding on the  Borrower or the
Guarantors or any of their properties,  or (D) result in or require the creation
or imposition of any Lien upon any of the property of any of the Borrower or the
Guarantors  other than the Liens granted pursuant to this Agreement or the other
Loan Documents or the Orders;  and do not require the consent,  authorization by
or  approval  of or notice to or filing or  registration  with any  Governmental
Authority  other  than the entry of the  Orders.  This  Agreement  has been duly
executed  and  delivered  by  each of the  Borrower  and  the  Guarantors.  This
Agreement  is, and each of the other Loan  Documents  to which the  Borrower and
each of the  Guarantors  is or will be a  party,  when  delivered  hereunder  or
thereunder,  will be, a legal,  valid and binding obligation of the Borrower and
each  Guarantor,  as the case may be,  enforceable  against the Borrower and the
Guarantors,  as the case may be, in accordance  with its terms and in accordance
with and subject to the terms of the Orders.

     SECTION 3.3.  Statements Made. The statements,  written or oral, which have
been made by the  Borrower  or any of the  Guarantors  to the Agent,  any of the
Banks (solely in their capacity as a Bank hereunder) or to the Bankruptcy  Court
in connection  with any Loan  Document,  and any financial  statement  delivered
pursuant  hereto or thereto  (other than to the extent that any such  statements
constitute  projections),  taken as a whole and in light of the circumstances in
which made (including  circumstances  which customarily occur and as a result of
events  leading up to and  following  the  commencement  of a  proceeding  under
Chapter 11 of the Bankruptcy  Code),  contain no untrue  statement of a material
fact and do not omit to state a material fact necessary to make such  statements
not misleading;  and, to the extent that any such written statements  constitute
projections,  such  projections  were  prepared  in good  faith on the  basis of
assumptions,  methods,  data, tests and information  believed by the Borrower or
such  Guarantor to be valid and  accurate in all  material  respects at the time
such projections were furnished to the Banks.

     SECTION 3.4.  Financial  Statements.  The Borrower has  furnished the Banks
with copies of (i) the audited consolidated  financial statement of the Borrower
and its  consolidated  Subsidiaries  for the fiscal year ended December 31, 1996
and (ii) the  unaudited  consolidated  financial  statement and schedules of the
Borrower and its  consolidated  Subsidiaries  for the fiscal quarter ended March
31, 1997. Such financial  statements present fairly the financial  condition and
results of operations  of the Borrower and its  consolidated  Subsidiaries  on a
consolidated and consolidating basis as of such dates and for such periods; such
balance  sheets  and the  notes  thereto  disclose  all  liabilities,  direct or
contingent,  of the Borrower and its  consolidated  Subsidiaries as of the dates
thereof  required to be disclosed  by GAAP and such  financial  statements  were
prepared in accordance  with GAAP,  subject (in the case of such fiscal  quarter
statement) to normal year end  adjustments.  No material  adverse  change in the
financial condition,  operations, business, properties or assets of the Borrower
and the  Guarantors,  taken as a whole,  has occurred from that set forth in the
Borrower's  consolidated financial statements for the fiscal year ended December
31,  1996,  or the  fiscal  quarter  ended  March 31,  1997  other  than (w) the
bankruptcy filing of or litigation against any of the Foreign Subsidiaries,  (x)
events  occurring prior to the Closing Date as set forth on Schedule 3.4 hereto,
(y) those which  customarily  occur and as a result of events  leading up to and
following the  commencement  of a proceeding  under Chapter 11 of the Bankruptcy
Code and (z) the commencement of the Cases.

     SECTION  3.5.  Ownership.  Each of the Persons  listed on Schedule 3.5 is a
wholly-owned  direct or indirect  Subsidiary of the  Borrower,  and the Borrower
owns no other Subsidiaries,  whether directly or indirectly which (other than in
the  case of the  Foreign  Subsidiaries  and,  until  such  time as they  become
Guarantors pursuant to Section 5.14, the Red Ant Entities) (i) has not commenced
a Case and (ii) is not a Guarantor.

<PAGE>

     SECTION  3.6.  Liens.  There are no Liens of any nature  whatsoever  on any
assets of the Borrower or any of the  Guarantors  other than: (i) Liens in favor
of the Existing Lenders in respect of the Existing  Agreements,  (ii) pledges of
the capital stock of the Subsidiaries pursuant to the Existing Agreements; (iii)
Liens  existing on the Filing Date as  reflected  on  Schedule  3.6;  (iv) Liens
permitted  pursuant  to  Section  6.1(a)(iv)  and (v) and  Section  6.1(c);  (v)
Permitted Liens; and (vi) Liens in favor of the Agent and the Banks. Neither the
Borrower nor the  Guarantors  are parties to any contract,  agreement,  lease or
instrument  entered into after the Filing Date the performance of which,  either
unconditionally or upon the happening of an event, will result in or require the
creation of a Lien on any assets of the  Borrower or any  Guarantor or otherwise
result in a  violation  of this  Agreement  other than the Liens  granted to the
Agent and the Banks as provided for in this Agreement.

     SECTION 3.7. Compliance with Law.

     (a) (i) The  operations  of the Borrower and the  Guarantors  comply in all
material respects with all applicable environmental,  health and safety statutes
and regulations,  including,  without limitation,  regulations promulgated under
the Resource Conservation and Recovery Act (42 U.S.C.  ss.ss.6901 et seq.); (ii)
to the Borrower's and each of the Guarantor's knowledge,  none of the operations
of the  Borrower  or the  Guarantors  is the  subject  of any  Federal  or state
investigation  evaluating  whether  any  remedial  action  involving  a material
expenditure  by the Borrower or any  Guarantor is needed to respond to a release
of any Hazardous Waste or Hazardous  Substance (as such terms are defined in any
applicable  state  or  Federal   environmental  law  or  regulations)  into  the
environment;  and (iii) to the Borrower's and each of the Guarantor's knowledge,
the Borrower and the Guarantors do not have any material contingent liability in
connection with any release of any Hazardous  Waste or Hazardous  Substance into
the environment.

     (b)  Neither  the  Borrower  nor  any  Guarantor  is,  to the  best  of its
knowledge,  in  violation  of any law,  rule or  regulation,  or in default with
respect  to any  judgment,  writ,  injunction  or  decree  of  any  Governmental
Authority the violation of which, or a default with respect to which, would have
a material  adverse  effect on the financial  condition,  operations,  business,
properties or assets of the Borrower and the Guarantors taken as a whole.

     SECTION  3.8.  Insurance.  All  policies of insurance of any kind or nature
owned by or  issued  to the  Borrower  and the  Guarantors,  including,  without
limitation,  policies of life, fire, theft, product liability, public liability,
property  damage,  other casualty,  employee  fidelity,  workers'  compensation,
employee health and welfare,  title,  property and liability  insurance,  are in
full  force and  effect  and are of a nature and  provide  such  coverage  as is
sufficient and as is customarily  carried by companies of the size and character
of the Borrower and the Guarantors.
<PAGE>

     SECTION 3.9. The Orders.  On the date of the making of any Loan) (including
the initial Loan) or the issuance of any Letter of Credit (including the initial
Letter of Credit) whichever first occurs,  the Interim Order or the Final Order,
as the case may be,  will  have  been  entered  and will not have  been  stayed,
amended,  vacated,  reversed or  rescinded  in any  respect.  Upon the  maturity
(whether by the  acceleration  or  otherwise) of any of the  obligations  of the
Borrower and the Guarantors  hereunder and under the other Loan  Documents,  the
Banks shall,  subject to the provisions of Section 7.1, be entitled to immediate
payment of such obligations, and to enforce the remedies provided for hereunder,
without further application to or order by the Bankruptcy Court.

     SECTION 3.10. Use of Proceeds.  The proceeds of the Loans shall be used (i)
for general  working  capital of the Borrower and the  Guarantors,  and (ii) for
other general corporate  purposes of the Borrower and the Guarantors  (including
among such general  corporate  purposes,  the making of  permitted  intercompany
loans and advances to the  Guarantors,  and the making of Capital  Expenditures,
subject to the limitations provided for in Section 6.4), the payment of expenses
included in the Carve-Out and the making of  indemnification  payments permitted
pursuant to Section 6.7 (iii).

     SECTION 3.11.  Litigation.  Except as set forth on Schedule 3.11, as of the
Closing Date there are no unstayed actions,  suits or proceedings pending or, to
the knowledge of the Borrower or the Guarantors, threatened against or affecting
the Borrower or the  Guarantors  or any of its  properties,  before any court or
governmental department,  commission,  board, bureau, agency or instrumentality,
domestic or foreign,  which is reasonably  likely to be determined  adversely to
the Borrower or the Guarantors  and, if so determined  adversely to the Borrower
or the  Guarantors  would  have  a  material  adverse  effect  on the  financial
condition, business, properties, prospects, operations or assets of the Borrower
and the Guarantors, taken as a whole (other than the bankruptcy filing of or the
litigation against any of the Foreign Subsidiaries).

     SECTION 3.12. Ad Valorem  Taxes.  Schedule 3.12 sets forth the amount of ad
valorem taxes reasonably anticipated to be incurred as of the Filing Date, which
such amount shall not exceed $500,000 in the aggregate.

     SECTION 3.13.  Additional Vendor Obligations.  Schedule 3.13 sets forth the
obligations,  as of the Filing Date,  of the Borrower and the  Guarantors to the
vendors listed thereon.

     SECTION 4. CONDITIONS OF LENDING

     SECTION 4.1.  Conditions  Precedent to Initial Loans and Initial Letters of
Credit.  The  obligation  of the Banks to make the initial Loans or the Fronting
Bank to issue the  initial  Letter of  Credit,  whichever  may occur  first,  is
subject to the following conditions precedent:

     (a)  Supporting  Documents.  The Agent shall have  received for each of the
Borrower and the Guarantors:

     (i) a copy of the certificate of  incorporation of the Borrower and each of
the  Guarantors,  as amended,  certified as of a recent date by the Secretary of
State of the state or jurisdiction of its incorporation;

     (ii) a certificate of such  Secretary of State,  dated as of a recent date,
as to the good  standing  of and  payment of taxes by,  that entity set forth in
clause (i) above and as to the charter  documents  on file in the office of such
Secretary of State or Governmental Authority; and

<PAGE>

     (iii) a  certificate  of the  Secretary or an  Assistant  Secretary of that
entity set forth in clause (i) above dated the date of the initial  Loans or the
initial Letter of Credit hereunder,  whichever first occurs,  and certifying (A)
that attached  thereto is a true and complete copy of the by-laws of that entity
as in effect on the date of such  certification,  (B) that attached thereto is a
true and complete copy of resolutions  adopted by the Board of Directors of that
entity authorizing the Borrowings and Letter of Credit extensions hereunder, the
execution, delivery and performance in accordance with their respective terms of
this Agreement, the Notes to be executed by it, the Loan Documents and any other
documents  required or contemplated  hereunder or thereunder and the granting of
the security interest in the Letter of Credit Account  contemplated  hereby, (C)
that the certificate of  incorporation of that entity has not been amended since
the date of the last  amendment  thereto  indicated  on the  certificate  of the
Secretary of State or Governmental  Authority  furnished  pursuant to clause (i)
above and (D) as to the  incumbency  and  specimen  signature of each officer of
that  entity  executing  this  Agreement,  and the Loan  Documents  or any other
document  delivered by it in connection  herewith or therewith (such certificate
to  contain  a  certification  by  another  officer  of  that  entity  as to the
incumbency and signature of the officer signing the  certificate  referred to in
this clause (iii)).

     (b) Interim Order. At the time of the making of the initial Loans or at the
time of the issuance of the initial  Letter of Credit,  whichever  first occurs,
but not later than fifteen (15) days  following  the Filing Date,  the Agent and
the Banks  shall have  received a certified  copy of an order of the  Bankruptcy
Court in substantially  the form of Exhibit A-1 (the "Interim Order")  approving
the Loan  Documents  and  granting  the  Superpriority  Claim  status  and Liens
described in Section 2.23 and the use by the Borrower and the  Guarantors of any
cash collateral in which the Existing  Lenders or the Primed Vendors may have an
interest  which (i) shall have been entered upon an  application of the Borrower
satisfactory  in form  and  substance  to the  Agent,  on no less  than  two (2)
Business Days' prior notice to each of the Existing Lenders, the Primed Vendors,
counsel to the Official  Committee of Unsecured  Creditors (if  appointed),  the
United  States  Trustee,  any party who has filed a notice  with the  Bankruptcy
Court requesting  service of papers and any other parties in interest which have
been designated by the Bankruptcy  Court to receive  pleadings in the case, (ii)
shall have authorized extensions of credit under this Agreement of not less than
$20,000,000 in the aggregate,  (iii) shall be in full force and effect, and (iv)
shall not have been stayed, reversed, vacated, rescinded, modified or amended in
any respect and, if the Interim Order is the subject of a pending  appeal in any
respect,  neither  the making of such Loans nor the  issuance  of such Letter of
Credit nor the  performance  by the Borrower or any of the  Guarantors of any of
their respective  obligations hereunder or under the Loan Documents or under any
other  instrument  or  agreement  referred  to herein  shall be the subject of a
presently effective stay pending appeal.
<PAGE>

     (c) Security and Pledge  Agreement.  The Borrower and the Guarantors  shall
have duly executed and delivered to the Agent a Security and Pledge Agreement in
substantially the form of Exhibit B (the "Security and Pledge Agreement").

     (d) Opinion of Counsel to the Borrower.  The Agent and the Banks shall have
received  the  favorable  written  opinion of counsel  to the  Borrower  and the
Guarantors   reasonably  acceptable  to  the  Agent,  dated  the  Closing  Date,
substantially in the form of Exhibit C.

     (e)  Payment of Fees.  The  Borrower  shall have paid to the Agent the then
unpaid  balance of all  accrued  and  unpaid  Fees and  expenses  owed under and
pursuant to this Agreement and the letter referred to in Section 2.19.

     (f)  Corporate  and  Judicial  Proceedings.   All  corporate  and  judicial
proceedings   and  all   instruments  and  agreements  in  connection  with  the
transactions  among  the  Borrower,  the  Guarantors,  the  Agent  and the Banks
contemplated  by this  Agreement  shall be reasonably  satisfactory  in form and
substance to the Agent,  and the Agent shall have received all  information  and
copies of all documents and papers,  including records of corporate and judicial
proceedings,  which  the  Agent  may have  reasonably  requested  in  connection
therewith, such documents and papers where appropriate to be certified by proper
corporate, governmental or judicial authorities.

     (g) Information.  The Agent shall have received such information (financial
or otherwise) as may be reasonably requested by the Agent.

     (h)  Environmental  Compliance.  The Borrower and the Guarantors shall have
granted  the Agent  access to and the right to inspect all  reports,  audits and
other  internal  information  of the  Borrower  and the  Guarantors  relating to
environmental  matters,  and any third  party  verification  of certain  matters
relating to compliance with environmental laws and regulations  requested by the
Agent, and the Agent shall be satisfied that the Borrower and the Guarantors are
in compliance in all material  respects with all applicable  environmental  laws
and regulations and be satisfied with the costs of maintaining such compliance.

     (i) UCC  Searches.  The Agent  shall have  received  the  results of UCC-11
searches  conducted in  jurisdictions  in which the Borrower and the  Guarantors
conduct  business,  which searches shall be  satisfactory  to the Agent (in each
case dated as of a date reasonably satisfactory to the Agent).

     (j) Appraisal; Reporting and Control Systems. The Agent shall have received
(i) an appraisal of the  Inventory of the Borrower  prepared (at the  Borrower's
expense) by Universal  Asset-Based  Services,  Inc. and such appraisal  shall be
satisfactory  in form and  substance to the Agent and (ii) a report with respect
to the  Borrower's  and the  Guarantor's  reporting  and  Inventory  control and
accounts  receivable systems prepared (at the Borrower's expense) by the Agent's
Specialized  Due Diligence  Group and such report shall be  satisfactory in form
and substance to the Agent.

<PAGE>

     (k)  Inventory.  The Agent shall be  satisfied  that the  Inventory  of the
Borrower  and the  Guarantors  is located at such  places and is in the  amounts
heretofore represented by the Borrower to the Agent.

     (l)  First  Day  Orders.  All of the  "first  day  orders"  entered  by the
Bankruptcy  Court  at  the  time  of the  commencement  of the  Cases  shall  be
reasonably satisfactory in form and substance to the Agent.

     (m) Closing Documents. The Agent shall have received all documents required
by this Agreement satisfactory in form and substance to the Agent.

     SECTION 4.2.  Conditions  Precedent to Each Loan and Each Letter of Credit.
The  obligation of the Banks to make each Loan and of the Fronting Bank to issue
each  Letter of Credit,  including  the initial  Loan and the initial  Letter of
Credit, is subject to the following conditions precedent:

     (a)  Notice.  The Agent shall have  received a notice with  respect to such
borrowing or issuance, as the case may be, as required by Section 2.

     (b)  Representations  and Warranties.  All  representations  and warranties
contained in this  Agreement and the other Loan  Documents or otherwise  made in
writing in  connection  herewith or  therewith  shall be true and correct in all
material  respects on and as of the date of each  Borrowing  or the  issuance of
each  Letter of Credit  hereunder  with the same  effect as if made on and as of
such date except to the extent such  representations  and  warranties  expressly
relate to an earlier date.

     (c) No Default.  On the date of each Borrowing hereunder or the issuance of
each Letter of Credit,  the Borrower and Guarantors  shall be in compliance with
all of the terms and provisions set forth herein to be observed or performed and
no Event of  Default or event  which upon  notice or lapse of time or both would
constitute an Event of Default shall have occurred and be continuing.

     (d) Orders.  The Interim  Order shall be in full force and effect and shall
not have been stayed,  reversed,  modified or amended in any respect without the
prior written consent of the Agent and the Required Banks, provided, that at the
time of the  making of any Loan or the  issuance  of any  Letter  of Credit  the
aggregate  amount of either of  which,  when  added to the sum of the  principal
amount of all Loans  then  outstanding  and the  Letter of Credit  Outstandings,
would exceed the amount thereof which was authorized by the Bankruptcy  Court in
the Interim Order (collectively, the "Additional Credit"), the Agent and each of
the Banks  shall have  received a certified  copy of an order of the  Bankruptcy
Court in  substantially  the form of Exhibit A-2 (the "Final Order"),  which, in
any event, shall have been entered by the Bankruptcy Court no later than 30 days
after the entry of the Interim  Order,  and at the time of the  extension of any
Additional  Credit the Final Order shall be in full force and effect,  and shall
not have been stayed,  reversed,  modified or amended in any respect without the
prior  written  consent of the Agent and the Required  Banks;  and if either the
Interim  Order or the Final  Order is the  subject  of a  pending  appeal in any
respect,  neither  the  making of the Loans nor the  issuance  of any  Letter of
Credit nor the  performance  by the  Borrower or any  Guarantor  of any of their
respective obligations under any of the Loan Documents shall be the subject of a
presently effective stay pending appeal.

<PAGE>

     (e) Borrowing  Base  Certificate.  The Agent shall have received the timely
delivery of the most recent Borrowing Base Certificate (dated no more than seven
(7)  calendar  days prior to the making of a Loan or the issuance of a Letter of
Credit) required to be delivered hereunder.

     (f)  Payment of Fees.  The  Borrower  shall have paid to the Agent the then
unpaid  balance of all accrued and unpaid Fees and expenses  then payable  under
and pursuant to this Agreement and the letter referred to in Section 2.19.

     The request by the  Borrower  for, and the  acceptance  by the Borrower of,
each extension of credit  hereunder shall be deemed to be a  representation  and
warranty by the Borrower that the conditions specified in this Section have been
satisfied or waived at that time and that after giving effect to such  extension
of credit the Borrower  shall  continue to be in  compliance  with the Borrowing
Base.

     SECTION 5. AFFIRMATIVE COVENANTS

     From the date hereof and for so long as any  Commitment  shall be in effect
or any Letter of Credit shall remain  outstanding (in a face amount in excess of
the  amount of cash  then held in the  Letter  of  Credit  Account  pursuant  to
Sections 2.3(b) or 2.13(a)),  or any amount shall remain  outstanding under this
Agreement,  the  Borrower  and each of the  Guarantors  agree  that,  unless the
Required Banks shall otherwise consent in writing, it will:

     SECTION  5.1.  Financial  Statements,  Reports,  etc.  In the  case  of the
Borrower and the Guarantors, deliver to the Agent and each of the Banks:

     (a)  within  90 days  after the end of each  fiscal  year,  the  Borrower's
consolidated  and  consolidating   balance  sheets  and  related  statements  of
operations, stockholders' equity and cash flows, showing the financial condition
of  the  Borrower  and  its  consolidated  Subsidiaries  on a  consolidated  and
consolidating basis as of the close of such fiscal year and the results of their
operations  during such year,  audited by Coopers & Lybrand or other independent
public  accountants of recognized  national standing  acceptable to the Required
Banks and  accompanied  by an opinion of such  accountants  (which  shall not be
qualified  in any material  respect  other than with respect to the Cases or the
maturity of the Loans on January 31, 1999) to the effect that such  consolidated
and consolidating  financial  statements fairly present the financial  condition
and results of operations of the Borrower and its consolidated Subsidiaries on a
consolidated  and  consolidating  basis in  accordance  with  GAAP  consistently
applied and certified by a Financial Officer as fairly presenting the results of
operation of the Borrower and its  consolidated  Subsidiaries  on a consolidated
and consolidating basis, in accordance with GAAP consistently applied;

     (b)  within  45 days  after  the end of the  first  three  fiscal  quarters
(commencing  with the Borrower's first fiscal quarter ended September 30, 1997),
the Borrower's consolidated balance sheets and related statements of operations,
stockholders'  equity and cash flows,  showing the  financial  condition  of the
Borrower and its consolidated  Subsidiaries on a consolidated and  consolidating
basis as of the close of such fiscal quarter and the results of their operations
during such  fiscal  quarter and the then  elapsed  portion of the fiscal  year,
certified by a Financial  Officer as fairly presenting the results of operations
of  the  Borrower  and  its  consolidated  Subsidiaries  on a  consolidated  and
consolidating  basis in accordance with GAAP  consistently  applied,  subject to
normal  year-end  audit  adjustments  in  accordance  with  generally   accepted
accounting statements;

<PAGE>

     (c) within 30 days after the end of each fiscal month,  other than the last
month of any fiscal quarter (commencing with the fiscal month ending on or about
August 31, 1997),  (i) the  Borrower's  consolidated  balance sheets and related
statements  of  operations,  stockholders'  equity  and cash flows  showing  the
financial  condition  of the  Borrower and its  consolidated  Subsidiaries  on a
consolidated  basis  as of the  close of such  month  and the  results  of their
operations  during such month and the then  elapsed  portion of the fiscal year,
certified by a Financial Officer as fairly  presenting the financial  conditions
and results of operations of (x) the Borrower and its consolidated  Subsidiaries
on a consolidated basis in accordance with GAAP consistently applied, subject to
normal year-end audit adjustments;

     (d) concurrently with any delivery of financial statements under (a) or (b)
above,  (i) a  certificate  of the  accounting  firm (which  certificate  may be
limited  to   accounting   matters  and   disclaim   responsibility   for  legal
interpretations) or Financial Officer,  opining on or certifying such statements
(A)  certifying  that no Event of Default or event which upon notice or lapse of
time or both would  constitute an Event of Default has occurred,  or, if such an
Event of Default or event has occurred, specifying the nature and extent thereof
(and the  Certificate of Financial  Officer shall specify any corrective  action
taken or  proposed  to be taken with  respect  thereto)  and (B)  setting  forth
computations  in  reasonable  detail  satisfactory  to the  Agent  demonstrating
compliance with the provisions of Sections 6.4, 6.5, 6.6 and 6.13;

     (e) no later  than 90 days  after the  Closing  Date,  the  Borrower's  and
Guarantors'   balance  sheet  as  of  the  Filing  Date  in  detail   reasonably
satisfactory to the Agent;

     (f) as soon as possible, and in any event within 45 days of the end of each
fiscal quarter  (commencing with the fiscal quarter ending on or about September
30, 1997),  monthly  financial  projections  for the next  succeeding six fiscal
month period, in detail reasonably satisfactory to the Agent;

     (g)  promptly  after  the same  become  publicly  available,  copies of all
periodic and other reports,  proxy  statements and other  materials  filed by it
with the  Securities  and Exchange  Commission,  or any  Governmental  Authority
succeeding  to any of or all the  functions  of  said  commission,  or with  any
national securities exchange, as the case may be;

     (h)  promptly,  from time to time,  such other  information  regarding  the
operations,  business  affairs and  financial  condition  of the Borrower or any
Guarantor,  or  compliance  with the  terms of any  material  loan or  financing
agreements, as the Agent or any Bank may reasonably request;

     (i) to counsel to the Agent,  promptly after the same is available,  copies
of  all  pleadings,  motions,  applications,   judicial  information,  financial
information  and other documents filed by or on behalf of the Borrower or any of
the Guarantors  with the Bankruptcy  Court in the Cases, or distributed by or on
behalf  of the  Borrower  or any of the  Guarantors  to any  official  committee
appointed in the Cases; and

<PAGE>

     (j) as soon as possible,  and in any event,  within 5 Business  Days of the
end of each fiscal month, the supporting documentation required on Schedule 1 to
the Borrowing Base Certificate.

     SECTION 5.2. Corporate Existence.  Do or cause to be done and cause each of
the Guarantors to do or cause to be done all things necessary to preserve, renew
and keep in full force and  effect its  corporate  existence,  material  rights,
licenses,  permits and franchises  and comply in all material  respects with all
laws and regulations applicable to it.

     SECTION 5.3. Insurance.

     (a) Keep its insurable properties insured at all times, against such risks,
including  fire and other  risks  insured  against by extended  coverage,  as is
customary  with  companies  of the same or  similar  size in the same or similar
businesses;  and maintain in full force and effect  public  liability  insurance
against claims for personal injury or death or property  damage  occurring upon,
in, about or in connection  with the use of any  properties  owned,  occupied or
controlled  by the  Borrower  or any  Subsidiary,  as the case  may be,  in such
amounts and with such deductibles as are customary with companies of the same or
similar size in the same or similar  businesses and in the same geographic area;
and (b) maintain  such other  insurance or self  insurance as may be required by
law.

     SECTION 5.4.  Obligations and Taxes.  With respect to the Borrower and each
Guarantor,  pay all its  material  obligations  arising  after the Closing  Date
promptly and in accordance  with their terms and pay and discharge  promptly all
material taxes,  assessments and governmental  charges or levies imposed upon it
or upon its income or profits or in respect of its  property  arising  after the
Closing Date,  before the same shall become in default,  as well as all material
lawful claims for labor,  materials and supplies or otherwise  arising after the
Closing Date which claims, taxes or obligations,  if unpaid, might become a Lien
or charge upon such properties or any part thereof; provided,  however, that the
Borrower  and each  Guarantor  shall not be required to pay and  discharge or to
cause to be paid and discharged any such tax, assessment,  charge, levy or claim
so long as the  validity or amount  thereof  shall be contested in good faith by
appropriate proceedings (if the Borrower and the Guarantors shall have set aside
on their books adequate reserves therefor).

     SECTION 5.5.  Notice of Event of Default,  etc.  Promptly give to the Agent
notice in  writing of any Event of  Default  or the  occurrence  of any event or
circumstance  which  with the  passage of time or giving of notice or both would
constitute an Event of Default.

     SECTION 5.6.  Borrowing Base  Certificate.  Furnish to the Agent as soon as
available and in any event on or before  Wednesday of each week a Borrowing Base
Certificate for the last day of the immediately  preceding week substantially in
the form of Exhibit E, each such Borrowing  Base  Certificate to be certified as
complete  and correct on behalf of the  Borrower  by a Financial  Officer of the
Borrower.

<PAGE>

     SECTION  5.7.  Access  to  Books  and  Records.  Maintain  or  cause  to be
maintained  at all times true and  complete  books and records of the  financial
operations  of the  Borrower and the  Guarantors;  and provide the Agent and its
representatives  access to all such books and records  during  regular  business
hours,  in order that the Agent may examine and make  abstracts from such books,
accounts, records and other papers (including, but not limited to the conduct of
audits with respect to Inventory and Receivables included in the Borrowing Base)
for the purpose of verifying  the accuracy of the various  reports  delivered by
the  Borrower  or the  Guarantors  to the  Agent or the Banks  pursuant  to this
Agreement or for otherwise ascertaining  compliance with this Agreement;  and at
any reasonable time and from time to time during regular  business  hours,  upon
reasonable   notice,   permit  the  Agent  and  any  agents  or  representatives
(including,  without limitation,  appraisers) thereof to visit the properties of
the Borrower with a view to, among other things,  ascertaining  compliance  with
the Borrowing Base.

     SECTION 5.8. Business Plan. As soon as practicable,  furnish to the Agent a
report with respect to any material  modifications to the Borrower's Projections
and Assumptions  dated July 2, 1997 heretofore  delivered to the Agent, and make
its senior officers available to discuss the same with the Agent.

     SECTION 5.9.  Concentration and Disbursement Accounts. The Borrower and the
Guarantors  shall  continue to maintain  (i) with Chase in its capacity as Agent
the existing  account or accounts owned by Chase, to be used by the Borrower and
the  Guarantors as the principal  concentration  accounts and (ii) with Chase in
its capacity as Agent their existing accounts to be used by the Borrower and the
Guarantors as their principal  disbursement  accounts for day-to-day  operations
conducted by the Borrower and the Guarantors.

     SECTION 5.10. Employee Benefits.

     (a) Comply in all material respects with the applicable provisions of ERISA
and the Code and (b) furnish to the Agent:

     (1) (i) as soon as  possible  after,  and in any event  (A)  within 30 days
after any  Responsible  Officer of the  Borrower or any of its ERISA  Affiliates
knows that any  Reportable  Event has occurred  that alone or together  with any
other  Reportable  Event could  reasonably be expected to result in liability of
the  Borrower  to the  PBGC  in an  aggregate  amount  exceeding  $5,000,000,  a
statement of a Financial  Officer of the Borrower  setting  forth  details as to
such Reportable  Event and the action,  if any, which the Borrower or such ERISA
Affiliate  proposes to take with respect  thereto,  together  with a copy of the
notice, if any, of such Reportable Event given to the PBGC;

     (ii) promptly after receipt thereof, a copy of any notice that the Borrower
or any ERISA  Affiliate  may receive from the PBGC  relating to the intention of
the PBGC to  terminate  any Plan or Plans or to appoint a trustee to  administer
any such Plan;

<PAGE>

     (iii)  within 10 days after the due date for filing with the PBGC  pursuant
to Section  412(n) of the Code a notice of failure of the Borrower or any of its
ERISA Affiliates to make a required installment or other payment with respect to
a Plan, a statement of a Financial Officer of the Borrower setting forth details
as to  such  failure  and the  action  that  the  Borrower  or any of its  ERISA
Affiliates  proposes to take with respect  thereto,  together with a copy of any
such notice given to the PBGC;

     (iv)  promptly and in any event with 30 days after  receipt  thereof by the
Borrower or any ERISA Affiliate from the sponsor of a Multiemployer Plan, a copy
of each notice received by the Borrower or any ERISA Affiliate from such sponsor
or the  PBGC  concerning  (A) the  imposition  of  Withdrawal  Liability,  (B) a
determination  by such sponsor or the PBGC that a  Multiemployer  Plan is, or is
expected  to be,  terminated  or in  reorganization,  both within the meaning of
Title IV of ERISA or (c) an  increase  in the  amount  or rate of  contributions
required to be made to a Multiemployer Plan.

     SECTION  5.11.  Asset  Sales.  Deliver  to the  Agent and the agent for the
Existing Lenders, by not later than 45 days following the Closing Date, an asset
disposition plan identifying all non-core assets and/or  businesses  proposed to
be sold by the Borrower and the Guarantors,  together with a proposed  timetable
for such dispositions.

     SECTION  5.12.  Investment  Banking  Firm.  Seek, by not later than 30 days
following the Closing Date, and thereafter  take all reasonable  steps to retain
an investment  banking firm,  acceptable to the Agent, to assist the Borrower in
the  disposition  of  the  assets  and  businesses  referred  to  in  the  asset
disposition  plan delivered  pursuant to Section 5.11, and for such other duties
as are  satisfactory  to the  Agent , and  make  such  investment  banking  firm
available to the Agent to discuss same.

     SECTION 5.13.  Employment  Contracts.  Within 15 days following the Closing
Date,  seek  Bankruptcy  Court  approval to implement  the  employment  contract
rejection and salary reduction plan previously delivered to the Agent.

     SECTION 5.14. Concerning The Red Ant Entities.  Contemporaneously  with the
commencement  of the Chapter 11 cases of the Red Ant Entities,  which will occur
within five (5) Business Days of the Filing Date (it being  understood  that the
failure  to so file will not result in an Event of  Default),  cause each of the
Red Ant  Entities  to  execute  and  deliver  to the  Agent  (i) an  instrument,
satisfactory in form and substance to the Agent, under which each of the Red Ant
Entities  assumes all of the obligations of a Guarantor  hereunder and (ii) such
additional  documents,  instruments,  agreements  and  statements  in  form  and
substance  satisfactory  to the Agent,  as  requested  (or as may be required by
applicable  law) in  order to grant to the  Agent  for its  benefit  and for the
benefit of the Banks the Liens and claims on the assets and  properties  of each
of the Red Ant Entities as are contemplated hereunder, under the Orders or under
the other Loan Documents.

<PAGE>


     SECTION 6. NEGATIVE COVENANTS

     From the date hereof and for so long as any  Commitment  shall be in effect
or any Letter of Credit shall remain  outstanding (in a face amount in excess of
the  amount of cash  then held in the  Letter  of  Credit  Account  pursuant  to
Sections  2.3(b) or 2.13(a)) or any amount shall remain  outstanding  under this
Agreement,  unless the Required Banks shall  otherwise  consent in writing,  the
Borrower  and  each of the  Guarantors  will  not  (and  will  not  apply to the
Bankruptcy Court for authority to):

     SECTION 6.1. Liens and Reclamation Claims.

     (a) Incur,  create,  assume or suffer to exist any Lien on any asset of the
Borrower or the Guarantors,  now owned or hereafter  acquired by the Borrower or
any of such  Guarantors  (or apply to the  Bankruptcy  Court for authority so to
do), other than (i) Liens described in clauses (i) and (ii) of Section 3.6; (ii)
Liens  existing on the Filing Date as reflected  on Schedule  3.6 hereto;  (iii)
Permitted  Liens;  (iv) Liens relating to ad valorem taxes described on Schedule
3.12 in an aggregate  amount not in excess of $500,000;  (v) other Liens arising
in the ordinary course of business (and not involving  Indebtedness for borrowed
money but including permitted  Capitalized Leases) in an aggregate amount not in
excess of $2,500,000;  (vi) adequate  protection  Liens in favor of the Existing
Lenders and the Primed Vendors pursuant to the Orders;  and (vii) Liens in favor
of the Agent and the Banks.

     (b) Make any  payments  or  transfer  any  property  on  account  of claims
asserted  by any of the  Borrower's  or  Guarantors'  pre-petition  vendors  for
reclamation  rights in accordance  with Section 2-702 of the Uniform  Commercial
Code and Section 546(c) of the Bankruptcy Code in an aggregate  amount in excess
of $50,000.

     (c) The return of goods and the granting of or claims  (which  claims shall
be junior  and  subordinate  to the Liens and claims  granted to the Agent,  the
Banks  and the  Existing  Lenders  pursuant  to the  Orders or  pursuant  to the
Agreement)  in favor of trade  vendors  in  amounts  not to exceed an  aggregate
amount  acceptable to the Required  Banks  pursuant to  Bankruptcy  Code Section
546(g)* Agreements in form and substance reasonably satisfactory to the Required
Banks  and which  have been  approved  by one or more  orders of the  Bankruptcy
Court.

     SECTION 6.2. Merger, etc. Consolidate or merge with or into another Person,
or apply to the  Bankruptcy  Court for  authority  so to do,  other than mergers
among any  Guarantor  and any other  Guarantor  or the Borrower  (provided,  the
Borrower is the surviving entity of such merger).

     SECTION 6.3.  Indebtedness.  Contract,  create,  incur, assume or suffer to
exist any Indebtedness, or apply to the Bankruptcy Court for authority so to do,
except for (i) Indebtedness  under this Agreement,  (ii)  Indebtedness  incurred
prior  to  the  Filing  Date  (including  existing  Capitalized  Leases),  (iii)
Indebtedness  incurred  subsequent to the Filing Date secured by purchase  money
Liens  (exclusive of  Capitalized  Leases) in an aggregate  amount not to exceed
$2,500,000 at any one time  outstanding,  (iv) Capitalized  Leases to the extent
permitted by Section 6.4, (v) guarantees  permitted  under Section 6.7, and (vi)
inter-company  Indebtedness  among the  Borrower  and the  Guarantors  permitted
pursuant to Section 6.11.

     SECTION 6.4. Capital  Expenditures.  Make Capital Expenditures in an amount
not to exceed $1,500,000 in any fiscal quarter of the Borrower (after the Filing
Date) or in an aggregate amount in excess of $6,000,000.

     SECTION 6.5. EBITDA. Permit cumulative EBITDA for period commencing on July
1, 1997 and ending on or about the dates listed below to be less than the amount
specified opposite such period:

                Period Ended                                     EBITDA
                ------------                                     ------
              September 30, 1997                               ($10,000,000)
              December 31, 1997                                ($12,000,000)
              March 31, 1998                                   ($ 9,000,000)
              June 30, 1998                                    ($ 6,000,000)
              September 30, 1998                               ($ 1,000,000)
              December 31, 1998                                 $ 6,000,000

<PAGE>

     provided,  that upon the sale or other  disposition of AEC Holdings  (U.K.)
Ltd.  and/or Concord  Records,  Inc. in calculating  EBITDA for any period,  the
projected  EBITDA set forth on the Borrowers  Projections and Assumptions  dated
July 2, 1997 for AEC  Holdings  (U.K.) Ltd.  and/or  Concord  Records,  Inc. (as
applicable) will be added back for purposes of the calculation of EBITDA for any
subsequent period.


     SECTION  6.6.  Inventory.  Permit the amount of  Inventory  of the Borrower
(valued  on a FIFO  basis in  accordance  with GAAP and shown on the  Borrower's
financial statements) at any time to be less than $55,000,000.


     SECTION 6.7.  Guarantees and Other Liabilities.  Purchase or repurchase (or
agree,  contingently  or otherwise,  so to do) the  Indebtedness  of, or assume,
guarantee  (directly  or  indirectly  or by an  instrument  having the effect of
assuring  another's payment or performance of any obligation or capability of so
doing,  or  otherwise),   endorse  or  otherwise  become  liable,   directly  or
indirectly,  in  connection  with the  obligations,  stock or  dividends  of any
Person,  or permit any Subsidiary so to do, or apply to the Bankruptcy Court for
authority  so to do,  except  (i) for any  guaranty  of  Indebtedness  or  other
obligations  of any Borrower or Guarantor if the  guarantor  could have incurred
such  Indebtedness or obligations  under this Agreement,  (ii) by endorsement of
negotiable  instruments  for deposit or  collection  in the  ordinary  course of
business,  and  (iii)  for the  indemnification  (pursuant  to the  terms  of an
indemnity  agreement or  agreements  reasonably  acceptable to the Agent) of the
directors of the Foreign  Subsidiaries,  in an amount not to exceed  $500,000 in
the aggregate,  for legal and  professional  fees and settlement  costs directly
incurred by such  directors in  connection  with any  litigation  threatened  or
commenced against or liability incurred by such directors in respect of "trading
while  insolvent"  claims (it being  understood that such  indemnities  shall be
senior to the  Carve-Out  and Liens and claims in favor of the Agent,  the Banks
and the Existing  Lenders,  and the Primed  Vendors,  and the current payment of
which shall be permitted  notwithstanding  the existence of an Event of Default)
and (iv) as permitted under this Agreement.

     SECTION 6.8. Chapter 11 Claims.  Incur, create,  assume, suffer to exist or
permit any other  Super-Priority Claim which is pari passu with or senior to the
claims of the  Agent  and the Banks  against  the  Borrower  and the  Guarantors
hereunder,  or apply to the Bankruptcy  Court for authority so to do, except for
the Carve-Out.

     SECTION  6.9.  Dividends;  Capital  Stock.  Declare  or  pay,  directly  or
indirectly,  any dividends or make any other distribution or payment, whether in
cash, property, securities or a combination thereof, with respect to (whether by
reduction of capital or otherwise)  any shares of capital stock (or any options,
warrants,  rights or other  equity  securities  or  agreements  relating  to any
capital stock), or set apart any sum for the aforesaid  purposes,  provided that
any Guarantor may pay dividends to the Borrower or to another  Guarantor that is
its parent corporation.

     SECTION 6.10.  Transactions with Affiliates.  Sell or transfer any property
or assets to, or otherwise  engage in any other  transactions  with,  any of its
Affiliates  (provided that the Borrower and the  Guarantors  shall not be deemed
Affiliates  for this  purpose),  except that the Borrower or any  Guarantor  may
engage in any of the foregoing  transactions  in the ordinary course of business
at prices and on terms and conditions not less favorable to the Borrower or such
Guarantor than could be obtained on an  arm's-length  basis from unrelated third
parties.


<PAGE>

     SECTION 6.11.  Investments,  Loans and Advances.  Purchase, hold or acquire
any capital stock,  evidences of  indebtedness  or other  securities of, make or
permit  to exist  any  loans or  advances  to,  or make or  permit  to exist any
investment  or any other  interest in, any other  Person (all of the  foregoing,
"Investments"),  except for (i)  ownership  of the capital  stock of each of the
Guarantors listed on Schedule 3.5 by the Borrower and any other entity set forth
on Schedule  3.5,  (ii)  Permitted  Investments,  and (iii)  advances  among the
Borrower and the  Guarantors  (other than the Red Ant  Entities) in the ordinary
course,  (iv)  advances  to Foreign  Subsidiaries  but only for the  indemnities
permitted by Section  6.7(iii),  (v) any  Investments  received upon the sale or
other  liquidation  of asset  dispositions  permitted  hereunder,  provided such
Investments are pledged to the Agent as security for the  Obligations,  and (vi)
advances to the Red Ant Entities during the thirty (30) day period following the
date on which they have filed cases under Chapter 11 of the Bankruptcy  Code and
have become Guarantors pursuant to Section 5.14, in weekly amounts not to exceed
$312,500 or $1,250,000 in the aggregate.

     SECTION 6.12 Disposition of Assets. Sell or otherwise dispose of any assets
(including,  without  limitation,  the capital  stock of any  Subsidiary  or any
copyrights or intellectual property) except for (i) sales of Inventory,  leases,
fixtures and  equipment in the  ordinary  course of business,  (ii) sales of the
assets set forth on  Schedule  6.12  hereto for fair  market  value and on terms
reasonably  satisfactory  to the Agent and the  Required  Banks,  (iii) sales or
dispositions  among any of the  Guarantors and the Borrower and (iv) other sales
of assets  having a fair market value not exceeding  $500,000 in the  aggregate,
provided,  as to clauses  (ii),  (iii) and (iv) of this  Section 6.12 that after
giving effect to any such  transaction,  no Event of Default or event which with
the giving of notice or lapse of time, or both, would become an Event of Default
shall have occurred and be continuing,  provided,  further, that with respect to
clause (ii) above,  upon the  execution  of a "claw  back"  agreement  among the
Agent, the Banks and the Existing Lenders in form and substance  satisfactory to
the Agent and the Banks in the exercise of their sole discretion (the "Claw Back
Agreement"),  the Banks shall consent to the payment of the Net Cash Proceeds of
sales of assets  listed on Schedule 6.12 hereto (other than with respect to Indi
and the Red Ant  Entities)  for  application  to amounts  outstanding  under the
Existing  Agreements,  provided  (x)  that  with  respect  to the  sale or other
liquidation  of the Red Ant Entities,  the Borrower shall promptly apply the Net
Cash Proceeds  thereof to any Loans then  outstanding and (y) the Borrower shall
apply an amount equal to 25% of the Net Cash  Proceeds  thereof to the principal
under the  Existing  Agreements  on December 31, 1997 and an  additional  amount
equal  to 25% of such Net Cash  Proceeds  thereof  to the  principal  under  the
Existing  Agreements on March 31, 1998 (or if the sale or other  liquidation  of
Indi shall have  occurred  subsequent to December 31, 1997,  the Borrower  shall
have  applied  an amount  equal to 50% of the Net Cash  Proceeds  thereof to the
principal under the Existing  Agreements on March 31, 1998), it being understood
that,  prior to any  required  repayment  hereunder  with respect to the sale of
Indi, the Borrower  shall be permitted to use the Net Cash Proceeds  thereof for
working  capital  purposes not  inconsistent  with the terms of this  Agreement,
provided,  that in the event that,  upon the Termination  Date,  there exist any
Loans or Letters of Credit  outstanding,  each of the  Existing  Lenders  shall,
within  two  Business  Days of receipt of notice  from the  Agent,  remit  their
pro-rata  share  of the  aggregate  amount  of  Loans  outstanding  and  amounts
necessary to cash collateralize outstanding Letters of Credit in an amount equal
to 105% of the face  amount of  outstanding  Letters  of  Credit in  immediately
available funds. Any such amounts which are not paid by any Existing Lender when
due shall  accrue  interest  at the rates  provided  for in Section  2.8 but the
aggregate amount paid by any Lender shall not exceed the aggregate amount of Net
Cash Proceeds paid to such Existing Lender.  The Borrower hereby agrees that, to
the extent any  amounts  are  remitted  to the Banks  pursuant  to the Claw Back
Agreement,  the claims of the Existing  Lenders  shall be  reinstated  in a like
amount. All assignments of pre-petition  interests and claims under the Existing
Agreements shall, in addition to existing provisions, require the consent of the
Agent in the exercise of its sole discretion.

     Notwithstanding anything to the contrary contained in this Section 6.12, in
the absence of the execution of a Claw Back Agreement,  all Net Cash Proceeds of
the sale of assets set forth on  Schedule  6.12  (other than the sale of the Red
Ant  Entities,  which shall be applied to the Loans as provided  above) shall be
deposited into an  interest-bearing  segregated escrow account with the Agent as
collateral security for the Obligations.

<PAGE>

     SECTION 6.13 SG&A Expenses.  Permitted selling,  general and administrative
operating expenses (exclusive of bad debt expense) of Indi and expenses incurred
in a  liquidation  of Indi,  for each period  commencing  on the Filing Date and
ending on the date listed  below to exceed,  on a  cumulative  basis the amounts
opposite such dates set forth below:

 Date                                                 Amount
 September 30,1997                                    $ 4,500,000
 December 31, 1997                                    $ 8,500,000
 March 31, 1998                                       $10,500,000
 each fiscal quarter thereafter                       $11,500,000

     SECTION 6.14 Nature of Business. Modify or alter in any material manner the
nature and type of its  business as conducted at or prior to the Closing Date or
the manner in which such  business  is  conducted  (except  as  required  by the
Bankruptcy Code).

     SECTION 7. EVENTS OF DEFAULT

     SECTION 7.1. Events of Default.  In the case of the happening of any of the
following  events and the  continuance  thereof beyond the applicable  period of
grace if any (each, an "Event of Default"):

     (a) any  material  representation  or warranty  made by the Borrower or any
Guarantor in this  Agreement or in any Loan Document or in connection  with this
Agreement  or the credit  extensions  hereunder  or any  material  statement  or
representation  made in any report,  financial  statement,  certificate or other
document  furnished by the Borrower or any  Guarantors  to the Banks under or in
connection with this Agreement,  shall prove to have been false or misleading in
any material respect when made or delivered; or

     (b) default shall be made in the payment of any (i) Fees or interest on the
Loans when due, and such default shall continue unremedied for more than two (2)
Business  Days or (ii)  principal of the Loans or other  amounts  payable by the
Borrower hereunder (including, without limitation,  reimbursement obligations or
cash  collateralization  in respect of Letters of Credit),  when and as the same
shall become due and payable, whether at the due date thereof or at a date fixed
for prepayment thereof or by acceleration thereof or otherwise, or (iii) amounts
payable pursuant to Section  2.23(c),  Section 6.12 and the Orders in respect of
amounts outstanding under the Existing Agreements, including current interest or
principal or fees and expenses under the Existing  Agreements which are required
to be made  pursuant to Section  2.23(c) and the Orders,  and such default shall
continue unremedied for more than five (5) Business Days; or

     (c)  default  shall be made by the  Borrower  or any  Guarantor  in the due
observance or performance of any covenant,  condition or agreement  contained in
Section 6 hereof; or

<PAGE>

     (d)  default  shall be made by the  Borrower  or any  Guarantor  in the due
observance or  performance of any other  covenant,  condition or agreement to be
observed  or  performed  pursuant to the terms of this  Agreement  or any of the
other Loan  Documents and such default shall  continue  unremedied for more than
ten (10) days  (provided  that such period shall be three  Business  Days in the
case of the weekly  Borrowing  Base  Certificate  to be  delivered  pursuant  to
Section 5.6); or

     (e) the  Borrower's or any of the  Guarantors'  Cases shall be dismissed or
converted to a case under Chapter 7 of the  Bankruptcy  Code (other than (i) Red
Ant Entities and (ii) any  Guarantor  having assets of less than  $5,000.00);  a
trustee under Chapter 7 or Chapter 11 of the Bankruptcy  Code shall be appointed
in any of the Cases and the order  appointing such trustee shall not be reversed
or vacated  within 30 days after the entry thereof;  or an application  shall be
filed  by  the  Borrower  or  any  Guarantor  for  the  approval  of  any  other
Super-Priority  Claim  (other than the  Carve-Out)  in any of the Cases which is
pari passu with or senior to the claims of the Agent and the Banks  against  the
Borrower or any Guarantor hereunder, or there shall arise any such pari passu or
senior Super-Priority Claim; or

     (f) the  Bankruptcy  Court shall enter an order or orders  granting  relief
from the automatic stay  applicable  under Section 362 of the Bankruptcy Code to
the holder or holders of any  security  interest to permit  foreclosure  (or the
granting  of a deed in lieu of  foreclosure  or the  like) in any  assets of the
Borrower or any of the  Guarantors  (other than the Coral  Springs  distribution
center subject to the existing industrial revenue bond Liens) which have a value
in excess of $300,000 in the aggregate; or

     (g) any person or group (as defined in the Securities Exchange Act of 1934,
as amended),  other than Wasserstein & Co., and its Affiliates,  BT Capital L.P.
and its Affiliates,  Joseph J. Bianco and Alvin N. Teller, shall acquire for the
first time the direct or indirect ownership (constructive or otherwise),  or the
direct or indirect power to vote more than 30% of the  outstanding  voting stock
of the Borrower; or

     (h) any material  provision  of any Loan  Document  shall,  for any reason,
cease to be valid and binding on the Borrower or any of the  Guarantors,  or the
Borrower or any of the  Guarantors  shall so assert in any pleading filed in any
court; or

     (i) an order of the  Bankruptcy  Court shall be entered in any of the Cases
of the Borrower or any of the  Guarantors  appointing  an examiner with enlarged
powers relating to the operation of the business  (powers beyond those set forth
in Section  1106(a)(3) and (4) of the Bankruptcy  Code) under Section 1106(b) of
the  Bankruptcy  Code and such order shall not be reversed or vacated  within 30
days after the entry thereof; or

     (j) an order of the Bankruptcy Court shall be entered reversing,  amending,
supplementing,  staying for a period in excess of 10 days, vacating,  rescinding
or otherwise modifying the Orders; or

     (k) any  judgment  or order as to a  liability  or debt for the  payment of
money  (arising  after the Filing Date in the case of the Borrower or any of the
Guarantors) in excess of $500,000 (net of insurance  payments) shall be rendered
against  the  Borrower  or any of the  Guarantors  and  either  (i)  enforcement
proceedings  shall have been  commenced  and shall be continuing by any creditor
upon such judgment or order or (ii) there shall be any period of 30  consecutive
days during which a stay of enforcement of such judgment or order,  by reason of
a pending appeal or otherwise, shall not be in effect; or

<PAGE>

     (l) any  non-monetary  judgment  or order with  respect to a  post-petition
event shall be rendered against the Borrower or any of the Guarantors which does
or would  reasonably be expected to (i) cause a material  adverse  change in the
financial  condition,  business,  operations  or assets of the  Borrower and the
Guarantors  taken as a whole  on a  consolidated  basis,  (ii)  have a  material
adverse  effect on the ability of the  Borrower  and the  Guarantors  to perform
their respective  obligations under any Loan Document,  or (iii) have a material
adverse  effect on the  rights and  remedies  of the Agent or any Bank under any
Loan Document, and there shall be any period of 10 consecutive days during which
a stay of enforcement  of such judgment or order,  by reason of a pending appeal
or otherwise, shall not be in effect; or

     (m) the  Borrower or the  Guarantors  shall make any  Pre-Petition  Payment
other than (i) as permitted under the "first day orders"  referred to in Section
4.1(l), (ii) as permitted under the Orders or Section 2.23(c), (iii) payments of
interest in respect of the existing Liens securing  industrial  revenue bonds on
the Coral Springs distribution center, or (iv) other Pre-Petition Payments in an
aggregate amount in excess of $50,000 since the Filing Date or such other amount
as may be mutually agreed to between the Borrower and the Agent,  and authorized
by one or more orders of the Bankruptcy Court; or

     (n) any (i) provision of a notice of intent to terminate a Plan pursuant to
Section  4041(c) of ERISA or the treatment of a Plan  amendment as a termination
under Section 4041 of ERISA,  or (ii)  institution of proceedings to terminate a
Plan by the  PBGC  under  Section  4042  of  ERISA  (each  of (i)  and  (ii),  a
"Termination  Event")  shall have  occurred  with  respect to any Plan and shall
continue unremedied for more than 10 days and the sum (determined as of the date
of occurrence of such  Termination  Event) of the  Insufficiency  of the Plan in
respect of which such  Termination  Event shall have  occurred and be continuing
and the  Insufficiency  of any and all other Plans with  respect to which such a
Termination Event shall have occurred and then exist is equal to or greater than
$5,000,000; or

     (o) (i) the  Borrower  or any  ERISA  Affiliate  thereof  shall  have  been
notified by the sponsor of a Multiemployer Plan that it has incurred  Withdrawal
Liability to such Multiemployer  Plan, (ii) the Borrower or such ERISA Affiliate
does not have reasonable grounds to contest such Withdrawal Liability and is not
in fact contesting such Withdrawal Liability in a timely and appropriate manner,
and (iii) the amount of such Withdrawal Liability specified in such notice, when
aggregated with all other amounts required to be paid to Multiemployer  Plans in
connection  with  Withdrawal  Liabilities  (determined  as of the  date  of such
notification),  exceeds  $5,000,000  allocable to  post-petition  obligations or
requires payments  exceeding $500,000 per annum in excess of the annual payments
made with  respect to such  Multiemployer  Plans by the  Borrower  or such ERISA
Affiliate  for the plan year  immediately  preceding the plan year in which such
notification is received; or

     (p) the Borrower or any ERISA Affiliate thereof shall have been notified by
the  sponsor  of a  Multiemployer  Plan  that  such  Multiemployer  Plan  is  in
reorganization or is being terminated,  within the meaning of Title IV of ERISA,
if as a result  of such  reorganization  or  termination  the  aggregate  annual
contributions  of the Borrower  and its ERISA  Affiliates  to all  Multiemployer
Plans that are then in  reorganization  or being terminated have been or will be
increased over the amounts  contributed to such Multiemployer Plans for the plan
years that include the date hereof by an amount exceeding $5,000,000; or

<PAGE>

     (q) the  Borrower  or any ERISA  Affiliate  shall have  committed a failure
described  in Section  302(f)(1)  of ERISA  (other  than the failure to make any
contribution accrued and unpaid as of the Filing Date) and the amount determined
under Section 302(f)(3) of ERISA is equal to or greater than $5,000,000; or

     (r) it shall be determined (whether by the Bankruptcy Court or by any other
judicial or administrative forum) that the Borrower is liable for the payment of
claims  arising  out  of any  failure  to  comply  (or to  have  complied)  with
applicable  environmental  laws or regulations  the payment of which will have a
material  adverse  effect  on the  financial  condition,  business,  properties,
operations or assets of the Borrower or the Guarantors, taken as a whole;

     (s) then,  and in every  such event and at any time  thereafter  during the
continuance  of such event,  and without  further order of or application to the
Bankruptcy  Court,  the Agent may, and at the request of the Required Banks, the
Agent shall,  by notice to the Borrower (with a copy to counsel for the Official
Creditors' Committee appointed in the Cases and to the United States Trustee for
the Southern District of New York),  take one or more of the following  actions,
at the same or different times (provided, that with respect to clause (iv) below
and the  enforcement  of Liens or other  remedies with respect to the Collateral
under clause (v) below,  the Agent shall  provide the  Borrower  (with a copy to
counsel for the Official Creditors'  Committee appointed in the Cases and to the
United States Trustee for the Southern  District of New York) with five Business
Days'  written  notice  prior to taking  the  action  contemplated  thereby  and
provided,  further,  that upon receipt of notice  referred to in the immediately
preceding clause with respect to the accounts  referred to in clause (iv) below,
the  Borrower  may  continue to make  ordinary  course  disbursements  from such
accounts  (other  than the Letter of Credit  Account)  but may not  withdraw  or
disburse any other  amounts from such  accounts):  (i)  terminate  forthwith the
Total  Commitment;  (ii) declare the Loans then  outstanding to be forthwith due
and payable, whereupon the principal of the Loans together with accrued interest
thereon and any unpaid  accrued Fees and all other  liabilities  of the Borrower
accrued hereunder and under any other Loan Document,  shall become forthwith due
and payable,  without  presentment,  demand,  protest or any other notice of any
kind,  all of  which  are  hereby  expressly  waived  by the  Borrower  and  the
Guarantors,  anything  contained  herein or in any other  Loan  Document  to the
contrary  notwithstanding;  (iii) require the Borrower and the  Guarantors  upon
demand to  forthwith  deposit in the Letter of Credit  Account cash in an amount
equal to the sum of 105% of the then  outstanding  Letters  of Credit and to the
extent the  Borrower  and the  Guarantors  shall  fail to furnish  such funds as
demanded by the Agent,  the Agent shall be  authorized  to debit the accounts of
the Borrower and the Guarantors  maintained with the Agent in such amount;  (iv)
set-off amounts in the Letter of Credit Account or any other accounts maintained
with the Agent and apply such amounts to the obligations of the Borrower and the
Guarantors  hereunder and in the other Loan Documents;  and (v) exercise any and
all remedies under the Loan Documents and under  applicable law available to the
Agent and the Banks.

     SECTION 8. THE AGENT


     SECTION 8.1.  Administration  by Agent. The general  administration  of the
Loan Documents shall be by the Agent.  Each Bank hereby  irrevocably  authorizes
the Agent,  at its  discretion,  to take or refrain  from taking such actions as
agent on its behalf and to exercise or refrain from exercising such powers under
the Loan  Documents  and the  Notes as are  delegated  by the  terms  hereof  or
thereof, as appropriate,  together with all powers reasonably incidental thereto
(including the release of Collateral in connection with any transaction  that is
expressly  permitted by the Loan  Documents).  The Agent shall have no duties or
responsibilities  except as set forth in this  Agreement and the remaining  Loan
Documents.

<PAGE>

     SECTION 8.2. Advances and Payments.

     (a) On the  date of each  Loan,  the  Agent  shall be  authorized  (but not
obligated) to advance,  for the account of each of the Banks,  the amount of the
Loan to be made by it in accordance  with its Commitment  hereunder.  Should the
Agent do so,  each of the  Banks  agrees  forthwith  to  reimburse  the Agent in
immediately  available  funds for the  amount so  advanced  on its behalf by the
Agent,  together  with interest at the Federal  Funds  Effective  Rate if not so
reimbursed  on the date due from and  including  such date but not including the
date of reimbursement.

     (b) Any amounts  received by the Agent in connection with this Agreement or
the  Notes  (other  than  amounts  to which the Agent is  entitled  pursuant  to
Sections 2.19,  8.6, 10.5 and 10.6),  the  application of which is not otherwise
provided for in this Agreement shall be applied,  first, in accordance with each
Bank's Commitment Percentage to pay accrued but unpaid Commitment Fees or Letter
of Credit Fees, and second, in accordance with each Bank's Commitment Percentage
to pay accrued but unpaid interest and the principal balance outstanding on each
Note and all unreimbursed Letter of Credit drawings. All amounts to be paid to a
Bank by the Agent shall be credited to that Bank, after collection by the Agent,
in immediately available funds either by wire transfer or deposit in that Bank's
correspondent account with the Agent, as such Bank and the Agent shall from time
to time agree.

     SECTION 8.3. Sharing of Setoffs. Each Bank agrees that if it shall, through
the exercise of a right of banker's  lien,  setoff or  counterclaim  against the
Borrower,  including,  but not limited to, a secured  claim under Section 506 of
the Bankruptcy  Code or other security or interest  arising from, or in lieu of,
such secured  claim and received by such Bank under any  applicable  bankruptcy,
insolvency or other similar law, or otherwise,  obtain payment in respect of its
Loans as a result of which the unpaid  portion  of its Loans is  proportionately
less  than  the  unpaid  portion  of the  Loans of any  other  Bank (a) it shall
promptly purchase at par (and shall be deemed to have thereupon  purchased) from
such other Bank a  participation  in the Loans of such other  Bank,  so that the
aggregate unpaid principal amount of each Bank's Loans and its  participation in
Loans of the other Banks shall be in the same proportion to the aggregate unpaid
principal  amount of all Loans then  outstanding as the principal  amount of its
Loans prior to the obtaining of such payment was to the principal  amount of all
Loans  outstanding  prior to the  obtaining  of such  payment and (b) such other
adjustments shall be made from time to time as shall be equitable to ensure that
the Banks share such payment  pro-rata,  provided that if any such  non-pro-rata
payment  is  thereafter  recovered  or  otherwise  set aside  such  purchase  of
participations  shall be rescinded  (without  interest).  The Borrower expressly
consents to the  foregoing  arrangements  and agrees  that any Bank  holding (or
deemed to be holding) a participation  in a Loan may exercise any and all rights
of banker's lien, setoff (in each case, subject to the same notice  requirements
as  pertain  to  clause  (iv) of the  remedial  provisions  of  Section  7.1) or
counterclaim  with  respect to any and all moneys  owing by the Borrower to such
Bank as fully as if such Bank was the original obligee thereon, in the amount of
such participation.

     SECTION 8.4.  Agreement of Required Banks.  Upon any occasion  requiring or
permitting an approval, consent, waiver, election or other action on the part of
the  Required  Banks,  action shall be taken by the Agent as provided for herein
for and on behalf or for the  benefit  of all Banks  upon the  direction  of the
Required Banks, and any such action shall be binding on all Banks. No amendment,
modification,  consent,  or waiver shall be effective  except in accordance with
the provisions of Section 10.10.

<PAGE>

     SECTION 8.5. Liability of Agent.

     (a) The Agent when  acting on behalf of the Banks,  may  execute any of its
duties  under this  Agreement  by or through any of its  officers,  agents,  and
employees,  and  neither  the  Agent nor its  directors,  officers,  agents,  or
employees  shall be liable to the Banks or any of them for any  action  taken or
omitted to be taken in good faith,  or be  responsible to the Banks or to any of
them for the  consequences  of any  oversight or error of  judgment,  or for any
loss,  unless the same shall  happen  through  its gross  negligence  or willful
misconduct.  The Agent and its directors,  officers, agents, and employees shall
in no event be  liable to the  Banks or to any of them for any  action  taken or
omitted to be taken by them pursuant to  instructions  received by them from the
Required Banks or in reliance upon the advice of counsel selected by it. Without
limiting  the  foregoing,  neither  of the  Agent,  nor  any  of its  directors,
officers,  employees,  or agents  shall be  responsible  to any Bank for the due
execution, validity, genuineness, effectiveness,  sufficiency, or enforceability
of, or for any statement,  warranty,  or representation in, this Agreement,  any
Loan Document or any related agreement,  document or order, or shall be required
to ascertain or to make any inquiry  concerning the performance or observance by
the Borrower of any of the terms,  conditions,  covenants, or agreements of this
Agreement or any of the Loan Documents.

     (b) Neither the Agent nor any of its  directors,  officers,  employees,  or
agents  shall have any  responsibility  to the  Borrower  or the  Guarantors  on
account of the failure or delay in  performance  or breach by any Bank or by the
Borrower or the  Guarantors of any of their  respective  obligations  under this
Agreement or the Notes or any of the Loan Documents or in connection herewith or
therewith.

     (c) The Agent, in its capacities as Agent  hereunder,  shall be entitled to
rely on any communication,  instrument,  or document reasonably believed by such
person to be genuine or correct  and to have been  signed or sent by a person or
persons  believed  by such person to be the proper  person or persons,  and such
person shall be entitled to rely on advice of legal counsel,  independent public
accountants,  and other  professional  advisers  and  experts  selected  by such
person.

     SECTION 8.6.  Reimbursement  and  Indemnification.  Each Bank agrees (i) to
reimburse  (x) the Agent for such Bank's  Commitment  Percentage of any expenses
and fees incurred for the benefit of the Banks under this  Agreement,  the Notes
and any of the Loan Documents,  including, without limitation,  counsel fees and
compensation of agents and employees paid for services rendered on behalf of the
Banks,  and any other  expense  incurred in  connection  with the  operations or
enforcement thereof not reimbursed by the Borrower or the Guarantors and (y) the
Agent  for such  Bank's  Commitment  Percentage  of any  expenses  of the  Agent
incurred  for the benefit of the Banks that the Borrower has agreed to reimburse
pursuant to Section  10.5 and has failed to so  reimburse  and (ii) to indemnify
and hold harmless the Agent and any of its directors,  officers,  employees,  or
agents, on demand,  in the amount of its  proportionate  share, from and against
any and all  liabilities,  obligations,  losses,  damages,  penalties,  actions,
judgments,  suits,  costs,  expenses,  or  disbursements  of any kind or  nature
whatsoever  which may be imposed on, incurred by, or asserted  against it or any
of them in any way  relating to or arising out of this  Agreement,  the Notes or
any of the Loan  Documents  or any action  taken or omitted by it or any of them
under this  Agreement,  the Notes or any of the Loan Documents to the extent not
reimbursed by the Borrower or the  Guarantors  (except such as shall result from
their respective gross negligence or willful misconduct).

     SECTION 8.7.  Rights of Agent. It is understood and agreed that Chase shall
have the same  rights and  powers  hereunder  (including  the right to give such
instructions)  as the other Banks and may  exercise  such rights and powers,  as
well as its rights and powers under other agreements and instruments to which it
is or may be party,  and engage in other  transactions  with the Borrower or any
Guarantor, as though it were not the Agent of the Banks under this Agreement.

     SECTION 8.8.  Independent Banks. Each Bank acknowledges that it has decided
to enter into this  Agreement and to make the Loans  hereunder  based on its own
analysis of the transactions  contemplated hereby and of the creditworthiness of
the  Borrower  and the  Guarantors  and  agrees  that the  Agent  shall  bear no
responsibility therefor.

<PAGE>

     SECTION 8.9. Notice of Transfer.  The Agent may deem and treat a Bank party
to this  Agreement  as the  owner of such  Bank's  portion  of the Loans for all
purposes,  unless  and until a  written  notice of the  assignment  or  transfer
thereof executed by such Bank shall have been received by the Agent.

     SECTION 8.10.  Successor  Agent. The Agent may resign at any time by giving
written notice thereof to the Banks and the Borrower. Upon any such resignation,
the Required Banks shall have the right to appoint a successor Agent which shall
be reasonably  satisfactory  to the Borrower.  If no successor  Agent shall have
been  so  appointed  by  the  Required   Banks  and  shall  have  accepted  such
appointment,  within 30 days  after  the  retiring  Agent's  giving of notice of
resignation, the retiring Agent may, on behalf of the Banks, appoint a successor
Agent,  which shall be a commercial  bank organized under the laws of the United
States of America or of any State  thereof  and  having a combined  capital  and
surplus of a least $100,000,000,  which shall be reasonably  satisfactory to the
Borrower.  Upon  the  acceptance  of any  appointment  as Agent  hereunder  by a
successor  Agent,  such successor  Agent shall  thereupon  succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations under
this Agreement.  After any retiring Agent's resignation  hereunder as Agent, the
provisions  of this Section 8 shall inure to its benefit as to any actions taken
or omitted to be taken by it while it was Agent under this Agreement.

     SECTION 9. GUARANTY

     SECTION 9.1. Guaranty.

     (a) Each of the Guarantors  unconditionally and irrevocably  guarantees the
due and punctual  payment and  performance  by the Borrower of the  Obligations.
Each of the Guarantors  further agrees that the  Obligations  may be extended or
renewed,  in whole or in part,  without notice to or further assent from it, and
it will remain bound upon this guaranty notwithstanding any extension or renewal
of any of the Obligations.  The Obligations of the Guarantors shall be joint and
several.

     (b) Each of the Guarantors waives  presentation to, demand for payment from
and protest to the Borrower or any other  Guarantor,  and also waives  notice of
protest for nonpayment. The Obligations of the Guarantors hereunder shall not be
affected by (i) the failure of the Agent or a Bank to assert any claim or demand
or to enforce any right or remedy  against the  Borrower or any other  Guarantor
under the  provisions of this Agreement or any other Loan Document or otherwise;
(ii) any  extension  or renewal of any  provision  hereof or thereof;  (iii) any
rescission, waiver, compromise,  acceleration,  amendment or modification of any
of the  terms or  provisions  of any of the Loan  Documents;  (iv) the  release,
exchange,  waiver  or  foreclosure  of any  security  held by the  Agent for the
Obligations  or any of them;  (v) the failure of the Agent or a Bank to exercise
any  right or  remedy  against  any  other  Guarantor;  or (vi) the  release  or
substitution of any Guarantor or any other Guarantor.

     (c) Each of the Guarantors further agrees that this guaranty  constitutes a
guaranty of performance and of payment when due and not just of collection,  and
waives any right to require that any resort be had by the Agent or a Bank to any
security held for payment of the  Obligations  or to any balance of any deposit,
account  or credit on the books of the Agent or a Bank in favor of the  Borrower
or any other Guarantor, or to any other Person.

     (d) Each of the  Guarantors  hereby  waives any defense  that it might have
based on a failure to remain informed of the financial condition of the Borrower
and of any other  Guarantor and any  circumstances  affecting the ability of the
Borrower to perform under this Agreement.

     (e) Each  Guarantor's  guaranty  shall not be affected by the  genuineness,
validity,  regularity or  enforceability  of the Obligations,  or any instrument
evidencing  any  Obligations,  or by the  existence,  validity,  enforceability,
perfection,  or extent of any collateral  therefor or by any other  circumstance
relating to the Obligations  which might otherwise  constitute a defense to this
Guaranty.  Neither the Agent, nor any of the Banks makes any  representation  or
warranty  in  respect  to any  such  circumstances  or  shall  have  any duty or
responsibility  whatsoever  to any  Guarantor in respect of the  management  and
maintenance of the Obligations.

<PAGE>

     (f)  Subject  to the  grace  periods  provided  by  Section  7.1,  upon the
Obligations  becoming due and payable (by acceleration or otherwise),  the Banks
shall be entitled to immediate  payment of such  Obligations  by the  Guarantors
upon written demand by the Agent, without further application to or order of the
Bankruptcy Court.

     SECTION 9.2. No Impairment of Guaranty.  The  obligations of the Guarantors
hereunder  shall not be  subject to any  reduction,  limitation,  impairment  or
termination  for any reason  (other than  payment in full),  including,  without
limitation, any claim of waiver, release,  surrender,  alteration or compromise,
and shall not be subject to any defense or set-off, counterclaim,  recoupment or
termination   whatsoever   by   reason   of  the   invalidity,   illegality   or
unenforceability  of the  Obligations.  Without  limiting the  generality of the
foregoing,  the obligations of the Guarantors  hereunder shall not be discharged
or  impaired  or  otherwise  affected  by the  failure of the Agent or a Bank to
assert any claim or demand or to enforce any remedy under this  Agreement or any
other agreement,  by any waiver or modification of any provision thereof, by any
default,  failure or delay,  willful or  otherwise,  in the  performance  of the
Obligations,  or by any other act or thing or  omission or delay to do any other
act or thing  which may or might in any manner or to any extent vary the risk of
the Guarantors or would otherwise  operate as a discharge of the Guarantors as a
matter of law, unless and until the Obligations are paid in full.

     SECTION 10. MISCELLANEOUS

     SECTION 10.1. Notices. Notices and other communications provided for herein
shall  be  in  writing  (including   telegraphic,   telex,  facsimile  or  cable
communication) and shall be mailed, telegraphed, telexed, transmitted, cabled or
delivered to the Borrower or any Guarantor at 110 East 59th Street,  18th Floor,
New York, New York 10022,  Attention:  Chief Financial  Officer and to a Bank or
the  Agent  to it at its  address  set  forth  on the  signature  pages  of this
Agreement,  or such other address as such party may from time to time  designate
by giving written notice to the other parties  hereunder.  All notices and other
communications  given to any party hereto in accordance  with the  provisions of
this  Agreement  shall be deemed to have been  given on the fifth  Business  Day
after the date when sent by  registered  or  certified  mail,  postage  prepaid,
return  receipt  requested,  if by  mail;  or when  delivered  to the  telegraph
company, charges prepaid, if by telegram; or when receipt is acknowledged, if by
any telegraphic  communications  or facsimile  equipment of the sender;  in each
case  addressed to such party as provided in this Section 10.1 or in  accordance
with the latest unrevoked written direction from such party; provided,  however,
that in the case of  notices  to the Agent  notices  pursuant  to the  preceding
sentence and pursuant to Section 2 shall be effective  only when received by the
Agent. Copies of all notices and other  communications  given to the Agent shall
go to Zalkin,  Rodin & Goodman LLP, 750 Third Avenue,  New York, New York 10017,
Attn:  Richard S. Toder,  Esq.  Copies of all  notices and other  communications
given to the  Borrower  shall go to  Willkie,  Farr &  Gallagher,  One  Citicorp
Center, 153 East 53rd Street, New York, New York 10022-4677,  Attn: Marc Abrams,
Esq.

     SECTION 10.2. Survival of Agreement,  Representations and Warranties,  etc.
All  warranties,  representations  and  covenants  made by the  Borrower  or any
Guarantor herein or in any certificate or other instrument delivered by it or on
its behalf in connection  with this  Agreement  shall be considered to have been
relied  upon by the Banks  and  shall  survive  the  making of the Loans  herein
contemplated  and the issuance and delivery to the Banks of the Notes regardless
of any  investigation  made by any Bank or on its behalf and shall  continue  in
full force and effect so long as any  amount due or to become due  hereunder  is
outstanding and unpaid and so long as the Commitments  have not been terminated.
All statements in any such  certificate  or other  instrument  shall  constitute
representations and warranties by the Borrower and the Guarantors hereunder with
respect to the Borrower.

<PAGE>

     SECTION 10.3. Successors and Assigns.

     (a) This  Agreement  shall be binding  upon and inure to the benefit of the
Borrower,  the Agent and the Banks and their respective  successors and assigns.
Neither the  Borrower  nor any of the  Guarantors  may assign or transfer any of
their rights or obligations  hereunder  without the prior written consent of all
of the Banks. Each Bank may sell  participations to any Person in all or part of
any Loan,  or all or part of its Note or  Commitment,  in which  event,  without
limiting  the  foregoing,  the  provisions  of Section  2.15 shall  inure to the
benefit of each purchaser of a  participation  (provided  that such  participant
shall look solely to the seller of such  participation for such benefits and the
Borrower's and the Guarantors'  liability,  if any, under Sections 2.15 and 2.18
shall not be  increased as a result of the sale of any such  participation)  and
the pro rata  treatment of payments,  as  described  in Section  2.17,  shall be
determined  as if such  Bank had not sold such  participation.  In the event any
Bank shall  sell any  participation,  such Bank shall  retain the sole right and
responsibility  to  enforce  the  obligations  of the  Borrower  and each of the
Guarantors relating to the Loans,  including,  without limitation,  the right to
approve any amendment, modification or waiver of any provision of this Agreement
other  than  amendments,  modifications  or  waivers  which (i)  reduce any Fees
payable  hereunder  to the  Banks,  (ii)  reduce  the  amount  of any  scheduled
principal  payment on any Loan or reduce the principal amount of any Loan or the
rate  of  interest  payable  hereunder  or  (iii)  extend  the  maturity  of the
Borrower's obligations  hereunder.  The sale of any such participation shall not
alter  the  rights  and  obligations  of the  Bank  selling  such  participation
hereunder with respect to the Borrower.

     (b) Each Bank may assign to one or more Banks or Eligible  Assignees all or
a  portion  of its  interests,  rights  and  obligations  under  this  Agreement
(including,  without limitation, all or a portion of its Commitment and the same
portion of the related Loans at the time owing to it,  provided,  however,  that
(i) other  than in the case of an  assignment  to a Person at least 50% owned by
the assignor  Bank, or by a common parent of both, or to another Bank, the Agent
and the Fronting Bank must give their respective  prior written  consent,  which
consent will not be  unreasonably  withheld,  (ii) the  aggregate  amount of the
Commitment  and/or Loans of the assigning  Bank subject to each such  assignment
(determined as of the date the  Assignment  and Acceptance  with respect to such
assignment  is  delivered to the Agent)  shall,  unless  otherwise  agreed to in
writing by the Borrower and the Agent,  in no event be less than  $5,000,000 (or
$1,000,000  in the case of an  assignment  between  Banks  or their  Affiliates)
provided,  that it shall be a condition  precedent to the assignment of all or a
portion of any Bank's interest under this Agreement that if such Bank is also an
Existing Lender, such assignment shall also include an assignment of such Bank's
interests  under the Existing  Agreements in the same percentage of interests as
is being assigned in respect of the Commitments  hereunder and (iii) the parties
to each  such  assignment  shall  execute  and  deliver  to the  Agent,  for its
acceptance and recording in the Register (as defined  below),  an Assignment and
Acceptance with blanks appropriately completed, and a processing and recordation
fee of $3,500  (for  which the  Borrower  shall  have no  liability).  Upon such
execution, delivery, acceptance and recording, from and after the effective date
specified in each  Assignment  and  Acceptance,  which  effective  date shall be
within ten Business Days after the execution thereof (unless otherwise agreed to
in writing by the Agent),  (A) the assignee  thereunder  shall be a party hereto
and, to the extent provided in such  Assignment and Acceptance,  have the rights
and  obligations of a Bank hereunder and (B) the Bank  thereunder  shall, to the
extent  provided  in such  Assignment  and  Acceptance,  be  released  from  its
obligations  under  this  Agreement  (and,  in the  case  of an  Assignment  and
Acceptance  covering all or the remaining  portion of an assigning Bank's rights
and  obligations  under  this  Agreement,  such Bank  shall  cease to be a party
hereto).

<PAGE>

     (c) By executing  and  delivering an Assignment  and  Acceptance,  the Bank
assignor  thereunder and the assignee  thereunder confirm to and agree with each
other and the other parties hereto as follows: (i) other than the representation
and warranty  that it is the legal and  beneficial  owner of the interest  being
assigned  thereby free and clear of any adverse claim,  such Bank assignor makes
no representation or warranty and assumes no responsibility  with respect to any
statements,  warranties or  representations  made in or in connection  with this
Agreement  or  any of the  other  Loan  Documents  or the  execution,  legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement or
any of the other Loan Documents; (ii) such Bank assignor makes no representation
or  warranty  and  assumes  no  responsibility  with  respect  to the  financial
condition of the Borrower or any Guarantor or the  performance  or observance by
the Borrower or any Guarantor of any of its obligations  under this Agreement or
any of the other Loan  Documents or any other  instrument or document  furnished
pursuant  hereto;  (iii) such  assignee  confirms that it has received a copy of
this  Agreement  and the  other  Loan  Documents,  together  with  copies of the
financial  statements  referred to in Section 3.4 and such other  documents  and
information  as it has deemed  appropriate  to make its own credit  analysis and
decision to enter into such Assignment and Acceptance;  (iv) such assignee will,
independently  and without  reliance  upon the Agent,  such Bank assignor or any
other  Bank and  based  on such  documents  and  information  as it  shall  deem
appropriate at the time,  continue to make its own credit decisions in taking or
not  taking  action  under  this  Agreement;  (v)  such  assignee  appoints  and
authorizes the Agent to take such action as agents on its behalf and to exercise
such powers  under this  Agreement  as are  delegated  to the Agent by the terms
thereto, together with such powers as are reasonably incidental hereof; and (vi)
such  assignee  agrees that it will perform in  accordance  with their terms all
obligations  that by the terms of this Agreement are required to be performed by
it as a Bank.

     (d) The Agent shall  maintain at its office a copy of each  Assignment  and
Acceptance  delivered to it and a register for the  recordation of the names and
addresses of the Banks and the Commitments of, and principal amount of the Loans
owing to,  each Bank from time to time  (the  "Register").  The  entries  in the
Register  shall  be  conclusive,  in the  absence  of  manifest  error,  and the
Borrower,  the  Guarantors,  the Agent and the Banks shall treat each Person the
name of which is recorded in the Register as a Bank  hereunder  for all purposes
of this  Agreement.  The  Register  shall be  available  for  inspection  by the
Borrower  or any  Bank at any  reasonable  time  and  from  time  to  time  upon
reasonable prior notice.

     (e) Upon  its  receipt  of an  Assignment  and  Acceptance  executed  by an
assigning  Bank and the  assignee  thereunder  and the fee  payable  in  respect
thereto,  the Agent shall,  if such Assignment and Acceptance has been completed
with blanks  appropriately  filled,  (i) accept such  Assignment and Acceptance,
(ii) record the  information  contained  therein in the  Register and (iii) give
prompt written  notice  thereof to the Borrower  (together with a copy thereof).
Any Bank may at any time  assign all or any  portion  of its  rights  under this
Agreement  to a  Federal  Reserve  Bank to secure  extensions  of credit by such
Federal  Reserve  Bank to such  Bank,  provided  that no such  assignment  shall
release a Bank from any of its obligations hereunder or substitute any such Bank
for such Bank as a party hereto.  In order to facilitate such an assignment to a
Federal  Reserve Bank, the Borrower shall, at the request of the assigning Bank,
and without further order of the Bankruptcy  Court,  duly execute and deliver to
the assigning Bank a promissory  note or notes  evidencing the Loans made to the
Borrower to the assigning Bank hereunder.

     (f) Any Bank may, in connection  with any  assignment or  participation  or
proposed assignment or participation  pursuant to this Section 10.3, disclose to
the assignee or participant or proposed assignee or participant, any information
relating to the Borrower or any of the  Guarantors  furnished to such Bank by or
on behalf of the Borrower or any of the  Guarantors;  provided that prior to any
such  disclosure,  each such  assignee or  participant  or proposed  assignee or
participant  shall  agree in  writing to be bound by the  provisions  of Section
10.4.

<PAGE>

     (g) The Borrower  hereby agrees,  to the extent set forth in the Commitment
Letter to actively assist and cooperate with the Agent in the Agent's efforts to
sell  participations  herein (as described in Section 10.3(a)) and assign to one
or more  Banks or  Eligible  Assignees  a portion of its  interests,  rights and
obligations under this Agreement (as set forth in Section 10.3(b)).

     SECTION  10.4.  Confidentiality.  Each Bank agrees to keep any  information
delivered  or made  available  by the  Borrower or any of the  Guarantors  to it
confidential  from anyone other than  persons  employed or retained by such Bank
who are or are expected to become engaged in evaluating,  approving, structuring
or administering the Loans;  provided that nothing herein shall prevent any Bank
from disclosing such information (i) to any other Bank, (ii) to any other person
if reasonably  incidental  to the  administration  of the Loans,  (iii) upon the
order of any court or administrative  agency, (iv) upon the request or demand of
any regulatory agency or authority,  (v) which has been publicly disclosed other
than as a result of a disclosure by the Agent or any Bank which is not permitted
by this  Agreement,  (vi) in connection  with any litigation to which the Agent,
any Bank, or their  respective  Affiliates  may be a party,  (vii) to the extent
reasonably  required in  connection  with the exercise of any remedy  hereunder,
(viii) to such Bank's legal counsel and  independent  auditors,  and (ix) to any
actual  or  proposed  participant  or  assignee  of all or  part  of its  rights
hereunder subject to the proviso in Section 10.3(f) provided that in the case of
clauses (iii),  (iv) and (vi) above, the Agent shall give the Borrower notice of
such disclosure.

     SECTION 10.5. Expenses.  Documentary Taxes. Whether or not the transactions
hereby contemplated shall be consummated,  the Borrower and the Guarantors agree
to pay all reasonable  out-of-pocket  expenses  incurred by the Agent (including
but not limited to the  reasonable  fees and  disbursements  of Zalkin,  Rodin &
Goodman LLP, and any other counsel that the Agent, shall retain and any internal
or third-party  consultants and auditors advising the Agent, or Chase Securities
Inc.) in connection with the preparation,  execution,  delivery,  administration
of, and  protection  of their  rights and the rights of any of the Banks  under,
this Agreement, and the other Loan Documents (and any amendments,  modifications
or waivers of the provisions of this Agreement,  and the other Loan  Documents),
the  making  of the  Loans  and the  issuance  of the  Letters  of  Credit,  the
syndication  of  the  transactions   contemplated  hereby,  the  reasonable  and
customary costs,  fees and expenses of the Agent in connection with its initial,
monthly and other periodic  field audits,  monitoring of Inventory and publicity
expenses,  and all reasonable  out-of-pocket expenses incurred by the Banks, the
Fronting Bank,  and the Agent in the  enforcement or protection of the rights of
any one or more of the Banks, the Fronting Bank, or the Agent in connection with
this Agreement, the Notes or the other Loan Documents, including but not limited
to the  reasonable  fees and  disbursements  of any counsel  for the Banks,  the
Fronting Bank, or the Agent.  The obligations of the Borrower and the Guarantors
under this Section shall survive the  termination of this  Agreement  and/or the
payment of the Loans.

     SECTION 10.6.  Indemnity.  The Borrower and each of the Guarantors agree to
indemnify  and hold  harmless  the Agent  and the  Banks  and  their  directors,
officers,  employees and agents (each an  "Indemnified  Party") from and against
any and all expenses,  losses,  claims, damages and liabilities incurred by such
Indemnified  Party  arising out of claims made by any Person in any way relating
to the transactions  contemplated  hereby, but excluding therefrom all expenses,
losses,  claims,  damages,  and liabilities arising out of or resulting from the
gross negligence or willful misconduct of such Indemnified Party.

     SECTION 10.7.  CHOICE OF LAW. THIS AGREEMENT,  THE NOTES AND THE OTHER LOAN
DOCUMENTS  SHALL IN ALL RESPECTS BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE  LAWS OF THE  STATE  OF NEW  YORK  APPLICABLE  TO  CONTRACTS  MADE AND TO BE
PERFORMED WHOLLY WITHIN SUCH STATE AND BY THE BANKRUPTCY CODE.

<PAGE>

     SECTION 10.8. No Waiver.  No failure on the part of the Agent or any of the
Banks to  exercise,  and no delay in  exercising,  any  right,  power or  remedy
hereunder or under the Notes or any of the other Loan Documents shall operate as
a waiver  thereof,  nor shall any single or partial  exercise of any such right,
power or remedy preclude any other or further  exercise  thereof or the exercise
of any other right,  power or remedy.  All remedies hereunder are cumulative and
are not exclusive of any other remedies provided by law.

     SECTION 10.9. Extension of Maturity.  Should any payment of principal of or
interest on the Notes or any other amount due  hereunder  become due and payable
on a day other than a Business  Day, the maturity  thereof  shall be extended to
the next succeeding  Business Day and, in the case of principal,  interest shall
be payable thereon at the rate herein specified during such extension.

     SECTION 10.10. Amendments, etc.

     (a) No modification, amendment or waiver of any provision of this Agreement
or any other Loan  Document,  and no consent to any departure by the Borrower or
any Guarantor  therefrom,  shall in any event be effective unless the same shall
be in writing and signed by the Required Banks,  and then such waiver or consent
shall be effective  only in the specific  instance and for the purpose for which
given;  provided,  however, that no such modification or amendment shall without
the written consent of the Bank affected  thereby (x) increase the Commitment of
a Bank (it  being  understood  that a waiver  of an Event of  Default  shall not
constitute an increase in the Commitment of a Bank), or (y) reduce the principal
amount of any Loan or the rate of interest payable  thereon,  or extend any date
for the payment of interest  hereunder or reduce any Fees  payable  hereunder or
extend  the  final  maturity  of  the  Borrower's  obligations  hereunder;  and,
provided,  further,  that no such  modification  or amendment  shall without the
written consent of (A) all of the Banks (i) waive, amend or modify any provision
of this Agreement  which  provides for the unanimous  consent or approval of the
Banks,  (ii) amend this Section  10.10 or the  definition  of Required  Banks or
(iii) amend or modify the Super-Priority  Claim status of the Banks contemplated
by Section  2.23 or (B) the  Supermajority  Banks (i) approve the release of the
Liens  granted  to the  Agent and the Banks  hereunder  or under the other  Loan
Documents  or the Orders or (ii) approve the release of any  Guarantor.  No such
waiver,   amendment  or  modification   may  adversely  affect  the  rights  and
obligations  of the  Agent or any  Fronting  Bank  hereunder  without  its prior
written  consent.  No notice to or demand on the Borrower or any Guarantor shall
entitle the Borrower or any  Guarantor to any other or further  notice or demand
in the same,  similar or other  circumstances.  No amendment  to this  Agreement
shall be effective  against the Borrower or any  Guarantor  unless signed by the
Borrower or such Guarantor, as the case may be.

     (b) Notwithstanding anything to the contrary contained in Section 10.10(a),
in the event that the  Borrower  requests  that this  Agreement  be  modified or
amended in a manner  which  would  require the  unanimous  consent of all of the
Banks and such  modification  or  amendment  is agreed to by the  Super-majority
Banks (as  hereinafter  defined),  then with the consent of the Borrower and the
Super-majority  Banks,  the  Borrower  and the  Super-majority  Banks  shall  be
permitted to amend the Agreement  without the consent of the Bank or Banks which
did not agree to the  modification or amendment  requested by the Borrower (such
Bank or  Banks,  collectively  the  "Minority  Banks")  to  provide  for (w) the
termination of the Commitment of each of the Minority Banks, (x) the addition to
this Agreement of one or more other financial  institutions (each of which shall
be an Eligible Assignee), or an increase in the Commitment of one or more of the
Super-majority  Banks, so that the Total  Commitment after giving effect to such
amendment shall be in the same amount as the Total Commitment immediately before


<PAGE>

giving effect to such amendment, (y) if any Loans are outstanding at the time of
such  amendment,  the  making  of such  additional  Loans by such new  financial
institutions  or  Super-majority  Bank or  Banks,  as the case may be, as may be
necessary  to  repay  in  full  the  outstanding  Loans  of the  Minority  Banks
immediately   before  giving  effect  to  such  amendment  and  (z)  such  other
modifications to this Agreement as may be appropriate.  As used herein, the term
"Super-majority   Banks"  shall  mean,  at  any  time,   Banks,   holding  Loans
representing  at least  66-2/3% of the aggregate  principal  amount of the Loans
outstanding,   or  if  no  Loans  are  outstanding,   Banks  having  Commitments
representing  at least 66-2/3% of the Total  Commitment.  The Agent shall pay to
the Minority Banks their pro rata portion of all accrued and unpaid interest and
Fees in respect  of the Loans and  Letters  of Credit  through  the date of such
amendment  provided for in the first sentence hereof within two Business Days of
the dates on which such  interest and Fees are paid to the Agent by the Borrower
pursuant to the terms of this Agreement.

     SECTION  10.11.  Severability.  Any  provision of this  Agreement  which is
prohibited or unenforceable in any jurisdiction  shall, as to such jurisdiction,
be ineffective to the extent of such  prohibition  or  unenforceability  without
invalidating  the  remaining  provisions  hereof,  and any such  prohibition  or
unenforceability   in  any   jurisdiction   shall  not   invalidate   or  render
unenforceable such provision in any other jurisdiction.

     SECTION 10.12.  Headings.  Section headings used herein are for convenience
only and are not to affect the construction of or be taken into consideration in
interpreting this Agreement.

     SECTION 10.13. Execution in Counterparts. This Agreement may be executed in
any number of counterparts,  each of which shall constitute an original, but all
of which taken together shall constitute one and the same instrument.

     SECTION  10.14.  Prior  Agreements.  This  Agreement  represents the entire
agreement of the parties with regard to the subject  matter hereof and the terms
of any letters and other  documentation  entered  into between the Borrower or a
Guarantor  and any Bank or the Agent prior to the  execution  of this  Agreement
which  relate to Loans to be made  hereunder  shall be  replaced by the terms of
this Agreement  (except as otherwise  expressly  provided herein with respect to
the  Commitment  Letter and the Fee Letter,  including  without  limitation  the
Borrower's  agreement  to actively  assist the Agent in the  syndication  of the
transactions  contemplated  hereby  referred to in Section 10.3(g) and including
also the provisions of Section 2.22).

     SECTION  10.15.  Further  Assurances.  Whenever and so often as  reasonably
requested by the Agent,  the Borrower and the Guarantors  will promptly  execute
and deliver or cause to be  executed  and  delivered  all such other and further
instruments,  documents or  assurances,  and promptly do or cause to be done all
such other and further  things as may be necessary  and  reasonably  required in
order to further and more fully vest in the Agent all rights, interests, powers,
benefits,  privileges  and  advantages  conferred or intended to be conferred by
this Agreement and the other Loan Documents.

     SECTION 10.16. WAIVER OF JURY TRIAL. EACH OF THE BORROWER,  THE GUARANTORS,
THE AGENT AND EACH BANK HEREBY  IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN
ANY ACTION,  PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO ANY OF THE
LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY.



<PAGE>



     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
duly executed as of the day and the year first written.

                          ALLIANCE ENTERTAINMENT CORP.

                                   By: /s/Timothy Dahltorp
                                      -------------------------------------
                                      Title:

                                      GUARANTORS:

                                      CONCORD RECORDS, INC.
                                      INDEPENDENT NATIONAL DISTRIBUTORS,  INC.
                                      AEC ONE STOP GROUP, INC.
                                      PASSPORT MUSIC  DISTRIBUTION,  INC.
                                      FL ACQUISITION  CORP.
                                      ALLIANCE VENTURES,  INC.
                                      EXECUSOFT,  INC.
                                      AEC ACQUISITION  CORP.
                                      CASTLE  COMMUNICATIONS (U.S.), INC.
                                      PASSPORT MUSIC WORLDWIDE, INC.
                                      AEC AMERICAS, INC.
                                      A.E. LAND CORP.
                                      ONE WAY RECORDS, INC.
                                      MATRIX SOFTWARE, INC.


                                   By:/s/Timothy Dahltorp
                                      --------------------------------------
                                      Title: Vice President
                                      of each of the foregoing


<PAGE>

                                      RED ANT BOX, INC.
                                      RED ANT HOLDINGS, INC.
                                      BLACK ANT MUSIC, INC.
                                      ARMY ANT MUSIC, INC.
                                      VELVET ANT MUSIC, INC.

                                   By:
                                      --------------------------------------
                                      Title:  Chief Executive Officer
                                      of each of the foregoing

                                      RED ANT LLC


                                   By:
                                      --------------------------------------
                     Red Ant Box, Inc., its managing member


                                   By:
                                      -------------------------------
                                      Title:  Chief Executive Officer

                                      THE CHASE MANHATTAN BANK,
                                      Individually and as Agent

                                   By:/s/Jane B. Jacobs
                                      ------------------------------
                                      Title:Vice President
                                      270 Park Avenue
                                      New York, New York 10017


<PAGE>
                                ANNEX A TO
                           REVOLVING CREDIT AND
                            GUARANTY AGREEMENT

                                 ANNEX A

                                    to

                  REVOLVING CREDIT AND GUARANTY AGREEMENT

                          Dated as of July 17, 1997



                                     Commitment            Commitment
Bank                                   Amount              Percentage
The Chase Manhattan Bank             $50,000,000            100.0000%
------------------------             -----------            ---------

TOTAL                                $50,000,000            100.0000%
                                     ===========            =========


<PAGE>

                                                EXHIBIT A-1

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
-----------------------------------X

 In re
                                    :        Chapter 11

 ALLIANCE ENTERTAINMENT CORP.,      :        Case No. 97-B 44673 (BRL)
 et. al.,
                                             (Jointly Administered)
                  Debtors.          :

-----------------------------------X

                   INTERIM ORDER AUTHORIZING DEBTORS TO OBTAIN
               POST-PETITION FINANCING PURSUANT TO 11 U.S.C. ss.ss.364(c)(1),
               364(c)(2), 364(c)(3) and 364(d)(1), AND TO UTILIZE
             CASH COLLATERAL PURSUANT TO 11 U.S.C. ss.363; GRANTING
               ADEQUATE PROTECTION TO PRE-PETITION SECURED PARTIES
                          AND SCHEDULING FINAL HEARING

     Upon  the  motion   (the   "Motion")   dated  July  13,  1997  of  Alliance
Entertainment Corp., as Debtor and Debtor-in-Possession (the "Borrower"), and of
Independent  National  Distributors,  Inc.,  AEC One Stop Group,  Inc.,  One Way
Records,  Inc., Concord Records,  Inc., FL Acquisition Corp.,  Execusoft,  Inc.,
Castle  Communications   (U.S.),  Inc.,  AEC  Americas,   Inc.,  Passport  Music
Worldwide,  Inc.,  Passport Music  Distribution,  Alliance  Ventures,  Inc., AEC
Acquisitions  Corp.,  Alliance  Entertainment  Corp., and Matrix Softwear Corp.,
each as a Debtor and Debtor-in-Possession  (hereinafter referred to collectively
as the  "Guarantors";  the Borrower and the Guarantors  hereinafter  referred to
collectively as the "Debtors"),

     (i) seeking this  Court's  authorization,  pursuant to Sections  364(c)(1),
364(c)(2),  364(c)(3)  and 364(d)(1) of the United  States  Bankruptcy  Code, 11
U.S.C.  ss.ss.101,  et seq.  (the "Code"),  and  Bankruptcy  Rule 4001,  for the
Borrower to (1) obtain  post-petition  financing (the "Financing"),  and for the
Guarantors  to guaranty  the payment of such  obligations,  up to the  principal
amount of $50,000,000  from The Chase  Manhattan Bank ("Chase" or "Agent"),  270
Park Avenue, New York, New York 10017, with Chase acting as Agent for itself and
a syndicate of financial  institutions  to be arranged by Chase  (together  with
Chase, the "Banks"), (w) with priority over any and all administrative  expenses
of the kind  specified  in  Sections  503(b) and 507(b) of the Code  pursuant to
Section  364(c)(1) of the Code, (x) to be secured pursuant to Section  364(c)(2)
of the Code by a perfected first priority security interest in and lien upon all
(A) unencumbered  pre- and  post-petition  property of the Debtors that is held,
beneficially or of record, by the Borrower or any of the Guarantors and (B) cash
maintained in the Letter of Credit  Account (as defined in the Credit  Agreement
hereinafter  referred to) and any investment of the funds contained therein (all
of such property referred to in this clause (x) (B) being  hereinafter  referred
to as the "Credit  Agreement Cash  Collateral"),  (y) to be secured  pursuant to
Section 364(c)(3) of the Code by a perfected  security interest in and lien upon
all pre- and  post-petition  property  of the Debtors  (other than the  property
described in (z) below, as to which the liens and security interests in favor of
the Agent  will be as  described  in such  clause)  that is subject to valid and
perfected  liens in existence on the date of the  petitions  herein or perfected
post-petition  pursuant  to Section  362(b)(18)  of the Code (to the extent that
under State or federal  law,  such liens are senior to the liens  granted to the
Agent and the Banks herein and prime existing  liens),  junior to such valid and
perfected liens, and (z) to be secured pursuant to Section 364(d)(1) of the Code
by a perfected first priority senior priming security interest in and lien upon

<PAGE>

     all pre- and  post-petition  property of the  Borrower  and the  Guarantors
(including,  without  limitation,  inventory,  equipment,  accounts  receivable,
intellectual  property  and the  capital  stock of certain  subsidiaries  of the
Borrower  and the  proceeds  of all of the  foregoing)  that is  subject  to the
existing liens presently securing the Debtors' indebtedness owing to (i) certain
lenders (the  "Pre-Petition  Secured  Lenders") under or in connection with that
certain Third Amended and Restated Credit  Agreement,  dated as of July 25, 1995
and the Loan Documents referred to therein (as each has heretofore been amended,
collectively,  the  "Existing  Credit  Agreements"),  among  the  Borrower,  AEC
Holdings (UK) Limited, Castle Communications Limited and other institutions from
time to time parties thereto,  and The Chase Manhattan Bank, N.A., as agent, and
(ii)  pursuant to those certain  security  agreements  and vendor  subordination
agreements  (identified  on  Schedule  A  hereto)  among any of the  Debtors  or
Guarantors  and  Polygram  Group  Distribution,  Inc.,  ("Polygram"),  BMG Music
("BMG"),  Sony Discos, Inc. ("Sony"),  Sony Music  Entertainment,  Inc. ("SME"),
Relativity   Entertainment   Dist.,   Inc.   ("Relativity"),   c/o  Sony   Music
Entertainment,  Inc., Cema  Distribution,  a Division of Capitol  Records,  Inc.
("Cema"), UNI Distribution Corp. ("UNI"),  Warner/Electra/Atlantic Corp. ("WEA")
and TDK Electronics  Corporation  ("TDK" and together with Polygram,  BMG, Sony,
Relativity, SME, Cema, UNI and WEA, the "Vendors") (as each of the foregoing has
heretofore been amended,  collectively  the "Existing  Vendor  Agreements",  and
together with the Existing Credit Agreements,  the "Existing  Agreements"),  and
other  loan  documentation  executed  in  connection  therewith,  senior  in all
respects to such  existing  liens and to any liens granted after the date of the
petitions herein to provide adequate protection in respect of such liens (all of
the  foregoing  property  specified  in clauses  (x),  (y) and (z) above,  being
hereinafter  collectively referred to in this Order as the "Collateral") and (2)
provide adequate protection to the Pre-Petition  Secured Lenders and the Vendors
(and,  together with the Pre-Petition  Secured Lenders,  the "Primed  Parties"),
whose liens and security interests are being primed by the Financing,

     (ii) seeking this Court's  authorization,  pursuant to Section 363(c)(2) of
the Code,  for the use of cash  collateral (as such term is defined in the Code)
in which the Primed  Parties have an interest and for the  provision of adequate
protection to the Primed Parties,

     (iii) requesting, pursuant to Bankruptcy Rule 4001, that an interim hearing
(the "Interim  Hearing") on the Motion be held on  Wednesday,  July 16, 1997 for
this Court to consider  entry of an interim  order  authorizing  the Borrower to
forthwith  borrow or obtain  letters of credit up to an aggregate of $20,000,000
of the  Financing  from the Banks,  authorizing  the use by the  Debtors of cash
collateral and granting the adequate protection hereinafter described, and

     (iv)  requesting that a final hearing (the "Final  Hearing")  thereafter be
held for this Court to consider entry of an order authorizing the balance of the
Financing, as set forth in the Motion and the loan documentation filed with this
Court; and pursuant to Bankruptcy Rule 4001(c)(1),  and as otherwise provided in
the Order to Show Cause in Respect of Motion for Orders  Pursuant to  Bankruptcy
Code Sections 105, 361,  362, 363 and 364 and  Bankruptcy  Rules 2002,  4001 and
9014:  (A)  Authorizing  Debtors In  Possession  to Obtain (i) Interim and Final
Secured Postpetition  Financing with Priority Over All Other Indebtedness,  (ii)
Emergency,  Interim and Final Use of Cash  Collateral;  (B)  Providing  Adequate
Protection;  (C)  Approving  Agreements  Related to  Foregoing;  (D)  Scheduling
Interim and Final Hearings and  Prescribing  Form and Manner of Notice;  and (E)
Granting  Related  Relief  dated July 14, 1997 (the  "Order to Show  Cause") due
notice under the circumstances of the Motion having been given by the Debtors to
the thirty largest  unsecured  creditors of the Debtors on a combined basis, the
Primed  Parties and the United States  Trustee for the Southern  District of New
York  and  upon  all of the  pleadings  filed  with  this  Court  and all of the
proceedings  had before this Court,  and upon the record of the Hearing  held on
this matter on July 16, 1997 and after due  deliberation and  consideration  and
sufficient cause appearing therefor; <PAGE>

     IT IS, FOUND,  DETERMINED,  ORDERED AND  ADJUDGED,  that:

     1. This Court has core  jurisdiction over these proceedings and the parties
and property affected hereby pursuant to 28 U.S.C.  ss.ss.157(b) and 1334.

     2. No other or further notice of the Motion's  request for interim approval
of the  Financing  and  of  the  Interim  Hearing  need  be  provided,  and  any
requirement  for such  other or  further  notice  is hereby  dispensed  with and
waived.

     3. Without  prejudice  to the rights of any other party to  challenge  such
findings  for a period  of  sixty  days  from the date of entry of this  Interim
Order,  the Debtors  admit that,  in  accordance  with the terms of the Existing
Credit Agreements, the Borrower and the Guarantors are truly and justly indebted
to the Pre-Petition Secured Lenders,  without defense,  counterclaim,  offset or
recoupment of any kind, and that as of the date of the petitions  herein (i) the
Borrower and the Guarantors were liable to the  Pre-Petition  Secured Lenders in
the aggregate  principal  amount of  approximately  $187,492,945,  in respect of
loans made and  letters of credit  issued by the  Pre-Petition  Secured  Lenders
pursuant to the Existing Credit Agreements, plus interest thereon, plus fees and
expenses (including  reasonable attorneys fees) incurred in connection therewith
as provided in the  Existing  Credit  Agreements  and (ii) the  Guarantors  were
contingently  liable to the  Pre-Petition  Secured  Lenders  in  respect  of the
guarantees by the Guarantors in respect of the Existing Agreements.

     4. Without  prejudice  to the rights of any other party to  challenge  such
findings  for a period  beginning  upon the earlier of (x) seventy days from the
date of entry of this Interim Order and (y) sixty days from the  appointment  of
an official committee for unsecured  creditors,  the Debtors further admit that,
by reason of the Existing Credit  Agreements,  their obligations  thereunder are
secured by enforceable and perfected liens and security interests granted by the
Borrower and the Guarantors to the Pre-Petition  Secured Lenders upon and in all
of the Borrower's and the Guarantors' right, title and interest in, to and under
the property of each described in the Existing  Credit  Agreements to which they
are party  (including  the  set-off  rights  described  in  paragraph  5 below),
including,  without  limitation,   inventory,  equipment,  accounts  receivable,
intellectual  property  and the  capital  stock of certain  subsidiaries  of the
Borrower and the proceeds of all of the foregoing. <PAGE>

     5. As of the date of the  petitions  herein,  funds on deposit at Chase and
various of the other  Pre-Petition  Secured  Lenders  were  subject to rights of
set-off under applicable law and the Existing  Agreements and, by virtue of such
set-off  rights,  are  subject to a lien in favor of such  Pre-Petition  Secured
Lenders  pursuant  to  Sections  506(a)  and 553 of the  Code.  Pursuant  to the
Existing Credit Agreements,  such Pre-Petition  Secured Lenders are obligated to
share the benefit of such lien with the other Pre-Petition Secured Lenders party
to such Existing Credit  Agreements  based upon their respective pro rata shares
of the  obligations  under such  agreements.  Accordingly,  any  proceeds of the
pre-petition  collateral  (including cash on deposit at the Pre-Petition Secured
Lenders  as of the date of the  petitions  herein)  are cash  collateral  of the
Pre-Petition  Secured  Lenders  within  the  meaning  of  Section  363(a) of the
Code("Cash Collateral"). The Pre-Petition Secured Lenders are entitled, pursuant
to Sections 361,  363(e) and  364(d)(1) of the Code,  to adequate  protection of
their interest in the  pre-petition  collateral,  including the Cash Collateral,
for any diminution in value of the pre-petition collateral,  including,  without
limitation, resulting from the use of the Cash Collateral, the incurrence by the
Debtors of post-petition  financing secured by priming liens on the pre-petition
collateral,  the use, sale or lease of the pre-petition  collateral  (other than
the Cash Collateral) and the imposition of the automatic stay.

     6. The  Borrower  has an  immediate  need to obtain  financing  in order to
permit,  among other things,  the orderly  continuation  of the operation of its
business  and  the   businesses  of  the   Guarantors,   to  maintain   business
relationships  with vendors and  suppliers,  to make certain  strategic  capital
expenditures  and investments  and to satisfy other working  capital needs.  The
Borrower is unable to obtain adequate  unsecured  credit allowable under Section
503(b)(1)  of the Code as an  administrative  expense.  A facility in the amount
provided by the Financing is  unavailable  to the Borrower  without the Borrower
and the  Guarantors  granting to the Banks (i) pursuant to Section  364(c)(1) of
the Code,  allowed claims,  with respect to all  indebtedness and obligations of
the Borrower and the Guarantors under the Credit Agreement, having priority over
any and all administrative expenses of the kind specified in Sections 503(b) and
507(b) of the Code, (ii) pursuant to Section 364(c)(2) of the Code, security for
such  obligations by the granting of a perfected  first priority senior security
interest in and lien upon (x) all of the  Collateral  that is not  encumbered by
liens in favor of the Primed  Parties  or any other  party or entity and (y) the
Credit  Agreement Cash  Collateral,  (iii) pursuant to Section  364(c)(3) of the
Code,  security  for such  obligations  by the  granting of a  perfected  junior
priority  security  interest in and lien upon all of the Collateral  (other than
the Collateral  that is described in clause (iv) below, as to which the security
interest  and lien in favor of the Agent shall be as  described  in such clause)
that is subject to valid and  perfected  liens in  existence  on the date of the
petitions herein or perfected  post-petition  pursuant to Section  362(b)(18) of
the Code (to the extent  that under  State and federal law such liens are senior
to the liens granted to the Agent and the Banks herein and prime existing liens)
and  (iv)  pursuant  to  Section  364(d)(1)  of  the  Code,  security  for  such
obligations by the granting of a first priority senior priming security interest
in and lien upon all of the  Collateral  that is  subject to  existing  liens in
favor of the Primed  Parties,  senior in all respects to such existing liens and
to any liens granted after the date of the petitions  herein to provide adequate
protection  in  respect of such  liens,  subject,  in the cases of  clauses  (i)
through (iv) above,  to the  Carve-Out,  as defined  herein.  The ability of the
Borrower and the Guarantors to obtain  sufficient  working capital and liquidity
through  the  incurrence  of new  indebtedness  for  borrowed  money  and  other
financial  accommodations  is  vital to the  Borrower  and the  Guarantors.  The
preservation and maintenance of the going concern values of the Borrower and the
Guarantors is integral to a successful reorganization of the Debtors pursuant to
the provisions of Chapter 11 of the Code. <PAGE>

     7. The terms of the Financing are fair and reasonable, reflect the Debtors'
exercise of prudent business  judgment  consistent with their fiduciary duty and
are  supported  by  reasonably  equivalent  value  and fair  consideration.  The
Financing  has been  negotiated  in good faith and at  arm's-length  between the
Debtors  and the Agent and any credit  extended,  letters  of credit  issued and
loans made to the  Debtors by the Banks  pursuant  to the  Revolving  Credit and
Guaranty  Agreement  dated as of July 17,  1997  shall be  deemed  to have  been
extended by the Banks in good faith,  as that term is used in Section  364(e) of
the Code.

     8. The Documents (as defined below) are hereby approved in their entireties
and the Borrower is immediately authorized to borrow or obtain letters of credit
pursuant  to  the  Credit  Agreement,  and  the  Guarantors  may  guaranty  such
borrowings, up to an aggregate of $_________. Notwithstanding anything herein to
the  contrary,  no Loans or Letters of Credit under the Credit  Agreement,  Cash
Collateral  or any portion of the  Carve-Out  (as defined  below) may be used to
object to or contest in any  manner,  or raise any  defenses  to, the  validity,
perfection, priority, enforceability or amount of the obligations of the Debtors
under the Existing Credit Agreements or any security interests or liens securing
such obligations,  or to investigate (other than by professionals of an official
committee  during the period permitted by this order, as set forth in paragraphs
3 and  4  herein)  or  assert  any  claims  or  causes  of  action  against  the
Pre-Petition Secured Lenders or any agent under the Existing Credit Agreements.

     9. The  Debtors  are  expressly  authorized  and  empowered  to execute and
deliver, among other documents, the Credit Agreement and the Security and Pledge
Agreement  to which such  Debtors are party (as each such term is defined in the
Credit  Agreement) in  substantially  the forms heretofore filed with this Court
(the "Documents").  The Debtors are hereby authorized to perform and do all acts
that may be  required in  connection  with the  Documents.  Upon  execution  and
delivery of the  Documents,  the Documents  shall  constitute  valid and binding
obligations of the Debtors party thereto,  enforceable against each Debtor party
thereto in accordance with their terms.

     10. For all of the Debtors'  obligations and indebtedness arising under the
Financing  and the  Documents,  the Agent and the Banks are granted  pursuant to
Section  364(c)(1) of the Code an allowed claim having priority over any and all
administrative  expenses of the kind specified in Sections  503(b) and 507(b) of
the Code,  subject only in the event of the  occurrence and  continuation  of an
unwaived Event of Default (as defined in the Credit  Agreement) or an event that
would  constitute an Event of Default with the giving of notice or lapse of time
or  both  to the  payment  of  (x)  accrued  and  unpaid  and  future  fees  and
disbursements incurred by the Debtors' professionals and any statutory committee
professionals  appointed  in the Debtors'  Chapter 11 cases (the  "Cases") in an
aggregate amount not in excess of $2,500,000, (y) certain indemnification claims
of  directors  of foreign  subsidiaries  of  Borrower in an amount not to exceed
$500,000,  all as more fully  described  in the Credit  Agreement,  and (z) fees
pursuant to 28 U.S.C. ss.1930 (collectively, the "Carve-Out"), provided that (i)
following the Termination Date (as defined in the Credit  Agreement)  amounts in
the Letter of Credit  Account shall not be subject to the Carve-Out and (ii) the
Carve-Out shall not include any professional  fees or disbursements  incurred in
connection  with  investigating  or  asserting  any  claims  or causes of action
against the Banks,  the  Pre-Petition  Secured  Lenders,  the Agent or the agent
under  the  Existing  Credit  Agreements  (including  discovery  proceedings  in
anticipation   thereof)  and/or   investigating  or  challenging  the  validity,
perfection,  priority,  enforceability,  avoidance,  extent  or  amount  of  any
security  interest,  lien or claim of the  Pre-Petition  Secured  Lenders or the
agent under the Existing Credit  Agreements  (provided that an  investigation by
professionals  of a single  statutory  committee  with respect to the  validity,
perfection,  priority,  enforceability,  avoidance,  extent  or  amount  of  any
security  interest,  lien or claim of the  Pre-Petition  Secured  Lenders or the
Agent under the Existing Credit  Agreements  during the period permitted by this
Order,  as set forth in paragraphs 3 and 4 herein is covered by the  Carve-Out).
No other claim  having a priority  superior  or pari passu with that  granted by
this Order to the Agent and the Banks shall be granted  while any portion of the
Financing or the commitment thereunder remains outstanding.
<PAGE>

     11. Debtors shall be permitted to pay  administrative  expenses allowed and
payable  under  Sections  330 and 331 of the  Code,  as the  same may be due and
payable, and so long as an unwaived Event of Default or an event with the giving
of notice or lapse of time or both would  constitute  an Event of Default  shall
not have  occurred,  such payments  shall not be applied  against the Carve-Out.
Except to the extent of the  Carve-Out,  no  expenses of  administration  of the
Cases or any future  proceeding  or case which may result  therefrom,  including
liquidation in bankruptcy or other  proceedings under the Code, shall be charged
against the  Collateral,  pursuant to Section  506(c) of the Code or  otherwise,
without the prior written  consent of the Agent and the Required  Banks referred
to in the Credit Agreement  granted pursuant to the Credit Agreement and no such
consent shall be implied from any other action, inaction, or acquiescence by the
Agent or the Banks.

     12.  As  security  for all of the  Debtors'  obligations  and  indebtedness
arising under the Financing and the Documents,  the Agent on behalf of the Banks
is hereby  granted  (effective  immediately  and  without the  necessity  of the
execution by the Debtors of mortgages,  security  agreements or otherwise),  (x)
pursuant to Section  364(c)(2) of the Code, a perfected  first  priority  senior
security interest in and lien upon all unencumbered Collateral and on the Credit
Agreement  Cash  Collateral,  (y)  pursuant to Section  364(c)(3) of the Code, a
perfected  junior  priority  security  interest  in  and  lien  upon  encumbered
Collateral (other than the Collateral described in clause (z) below, as to which
the  security  interest  and lien in favor of the Agent will be as  described in
such  clause) that is subject to valid and  perfected  liens in existence on the
date of the petitions  herein or which are perfected  post-petition  pursuant to
Section  362(b)(18)  of the Code and (z)  pursuant to Section  364(d)(1)  of the
Code, a perfected  first priority senior priming  security  interest in and lien
upon all of the  Collateral  that is subject to  existing  liens in favor of the
Primed Parties,  such security  interests and liens being senior in all respects
to any and all present and future liens,  if any,  which encumber the Collateral
referred  to in this  clause (z) and any liens  granted  after the filing of the
petitions to provide  adequate  protection in respect of such existing liens, in
each case subject only to the Carve-Out, provided that following the Termination
Date (as  defined  in the  Credit  Agreement)  amounts  in the  Letter of Credit
Account shall not be subject to the Carve-Out.  The security interests and liens
granted to the Agent on behalf of the Banks  hereunder  shall not be (i) subject
to any lien or security  interest which is avoided and preserved for the benefit
of the Debtors' estates under Section 551 of the Code or (ii) subordinated to or
made pari passu with any other lien or security interest under Section 364(d) of
the Code or otherwise.

     13. Debtors are hereby  authorized to use all Cash Collateral of the Primed
Parties,  provided that the Primed  Parties are granted  adequate  protection as
hereinafter set forth and as set forth in the Credit Agreement.
<PAGE>

     14.  As  adequate  protection  for  (x)  the  use by the  Debtors  of  Cash
Collateral and any other  property upon which security  interests and liens have
been previously  granted by the Debtors to the Pre-Petition  Secured Lenders and
(y) the priming of such security  interests  and liens by the Banks  pursuant to
the Financing and this Order, the Pre-Petition Secured Lenders (A) shall receive
from the Debtors  cash  payments in an amount that is equal to current  interest
payments and letter of credit fees at the applicable  non-default rates provided
for under the Existing  Credit  Agreements  (including  any  unreimbursed  drawn
amounts under letters of credit  issued  pursuant to any of the Existing  Credit
Agreements) and on the dates  specified  therein for the payment of interest (B)
are granted (limited in amount to the aggregate  diminution,  if any, subsequent
to the  commencement  of  the  Cases  in  the  value  of  the  interests  of the
Pre-Petition Secured Lenders in the pre-petition  Collateral resulting from such
utilization and priming),  a replacement  security interest in and lien upon all
the Collateral,  subject and  subordinate to (i)  pre-existing  liens,  (ii) the
security  interests and liens granted to the Banks in this Order and pursuant to
the  Documents,  and (iii) the  Carve-Out,  (C) are  granted  a  priority  claim
pursuant  to  Section  507(b) of the Code  (limited  in amount to the  aggregate
diminution,  if any, subsequent to the commencement of the Cases in the value of
the interests of  Pre-Petition  Secured Lenders in the  pre-petition  Collateral
resulting from such  utilization  and priming),  subject and  subordinate to the
Carve-Out and (D) shall receive  reimbursement  on a monthly basis of reasonable
expenses incurred by the agent for the Pre-Petition  Secured Lenders  (including
reasonable  attorneys  fees)  prior to and  after  the  date of  these  Cases in
connection with the administration of the Existing Credit Agreements, collection
efforts and enforcement of rights under the Existing Credit Agreements.

     15.  As  adequate  protection  for  (x)  the  use by the  Debtors  of  Cash
Collateral and any other  property upon which security  interests and liens have
been  previously  granted by the Debtors to each of the Vendors  pursuant to the
Vendor  Agreements  and (y) the priming of such security  interests and liens by
the Banks  pursuant to the Financing and this Order,  each of the Vendors (A) is
granted (limited in amount to the aggregate  diminution,  if any,  subsequent to
the  commencement  of the Cases in the value of the  interests of such Vendor in
the  pre-petition  Collateral  resulting  from such  utilization  and priming) a
replacement security interest in and lien upon the inventory of such Vendor held
by any Debtor who granted such Vendor such pre-petition  security  interests and
liens and all other  non-inventory  assets of the Borrower  and the  Guarantors,
subject and subordinate to (i) pre-existing  liens, (ii) the security  interests
and liens  granted to the Banks in this  Order and  pursuant  to the  Documents,
(iii) the  security  interests  and liens  granted to the  Pre-Petition  Secured
Lenders in this Order,  and (iv) the Carve-Out,  (B) is granted a priority claim
pursuant  to  Section  507(b) of the Code  (limited  in amount to the  aggregate
diminution,  if any, subsequent to the commencement of the Cases in the value of
the interests of each of the Vendors in the  pre-petition  Collateral  resulting
from such utilization and priming), subject and subordinate to the Carve-out and
to the priority claim granted to the Pre-Petition  Secured Lenders and (C) shall
receive  reimbursement  on a monthly basis of reasonable legal fees and expenses
incurred  by each of the  Vendors  after  the date of these  Cases in  aggregate
amount  not to exceed  $25,000  per  Vendor in  connection  with the  collection
efforts and  enforcement of their  respective  rights in connection with amounts
owing to such Vendors.

     16.  The  Court  finds  that the  adequate  protection  provided  herein is
reasonable  and sufficient to protect the interests of the Primed Parties and so
long as there  are any  borrowings  or  Letters  of Credit  outstanding,  or the
Commitment  is in effect,  the Primed  Parties  shall not take any action in the
Court or otherwise  (i) seeking  payment of the  obligations  under the Existing
Agreements  or other  agreements  or (ii)  related to  enforcement  of rights or
remedies with respect to liens on the assets of the Borrower and Guarantors.

     17. The Agent, the Banks, and the Primed Parties granted security interests
and  liens  hereunder  shall  not  be  required  to  file  or  record  financing
statements,   mortgages,   notices  of  lien  or  similar   instruments  in  any
jurisdiction (including,  without limitation,  with the United States Patent and
Trademark Office or the United States Copyright Office) or take any other action
in order to validate and perfect the  security  interests  and liens  granted to
them  pursuant  to this  Order.  If the  Agent,  the Banks or any of the  Primed
Parties  shall,  in  their  sole  discretion,  choose  to  file  such  financing
statements,  mortgages,  notices of lien or  similar  instruments  or  otherwise
confirm  perfection of such security  interests  and liens,  all such  documents
shall be deemed to have been  filed or  recorded  at the time and on the date of
entry  of  this  Order.  The  Primed  Parties  shall  not  file  such  financing
statements,  mortgages,  notices of lien or similar  instruments,  or  otherwise
confirm  perfection of such security  interests and liens,  unless the Agent and
the Banks shall theretofore have done so. <PAGE>

     18. Upon  request of the Agent,  the Primed  Parties are  directed to take,
execute and deliver  such  instruments  and do all things  necessary to perfect,
preserve and enforce the security  interests  and liens granted to the Agent for
the  benefit  of the Banks by the  Documents  and this Order  including  without
limitation,  delivery  to the  Agent of any  capital  stock of the  Borrower  or
Guarantors held in pledge by the Primed Parties.

     19. The Pre-Petition  Secured Lenders are directed to immediately turn over
to the Debtors all Cash Collateral held by them.

     20. Each of the Debtors is  authorized  and  directed to do and perform all
acts, to make,  execute and deliver all  instruments  and documents  (including,
without  limitation,  the  execution  of  security  agreements,   mortgages  and
financing  statements)  and, to pay fees,  which may be  reasonably  required or
necessary for the Debtors' performance under the Financing,  including,  without
limitation:  (i) the  execution of the  Documents,  (ii) the execution of one or
more amendments to the Credit Agreement for, among other things,  the purpose of
adding  additional   financial   institutions  as  Banks  and  reallocating  the
commitments for the Financing  among the Banks in such form as the Debtors,  the
Agent and the Banks may agree, and (iii) the non-refundable  payment to Chase or
the Banks,  as the case may be, of the Fees referred to in the Credit  Agreement
and such  Letter  of  Credit  Fees,  Commitment  Fees and  reasonable  costs and
expenses  as may  be due  from  time  to  time  including,  without  limitation,
reasonable  attorneys' fees and disbursements as provided in the Documents,  all
as such terms are defined in the Documents.

     21. Subject only to the provisions of Section 7.1 of the Credit  Agreement,
the  automatic  stay  provisions  of  Section  362 of the Code are  vacated  and
modified  to the  extent  necessary  so as to permit  the Agent and the Banks to
exercise,  upon the  occurrence of an Event of Default,  all rights and remedies
provided  for in the  Documents  (including,  without  limitation,  the right to
setoff monies of the Debtors in accounts maintained with the Agent or any Bank).
The Debtors' right to use Cash  Collateral  shall  terminate on the  Termination
Date (as defined in the Credit Agreement).

     22. The  Documents  and the  provisions of this Order shall be binding upon
the Banks,  the Primed Parties and the Debtors and their  respective  successors
and assigns (including any Chapter 7 or Chapter 11 trustee hereinafter appointed
or elected for the estate of any of the Debtors) and inure to the benefit of the
Banks,  the Primed  Parties  and the Debtors  and  (except  with  respect to any
trustee  hereinafter  appointed or elected for the estate of any of the Debtors)
their respective successors and assigns.

     23. No order  dismissing any of the Cases under Section 1112 of the Code or
otherwise  shall be entered  unless prior to the entry  thereof,  either (i) all
obligations  and  indebtedness  owing to the Agent and the Banks shall have been
paid in full, or with respect to outstanding  letters of credit,  the same shall
have been fully cash  collateralized  in accordance  with the  provisions of the
Credit  Agreement  or (ii) all  material  assets of the Debtors  shall have been
liquidated  and  the  proceeds  thereof   distributed  in  accordance  with  the
priorities  established  by  this  Order  and  the  Code.  If  any or all of the
provisions of this Order are hereafter  reversed,  modified,  vacated or stayed,
such reversal,  stay, modification or vacation shall not affect (x) the validity
and enforceability of any obligation,  indebtedness or liability incurred by the
Debtors to the Banks prior to written  notice to the Agent of the effective date
of such  reversal,  stay,  modification  or  vacation,  or (y) the  validity and
enforceability of any security interest,  lien or priority authorized or created
hereby or pursuant to the Credit Agreement.  Notwithstanding  any such reversal,
stay,  modification  or  vacation,  any  indebtedness,  obligation  or liability
incurred by the Debtors to the Banks prior to written notice to the Agent of the
effective  date of such  reversal,  stay,  modification  or  vacation  shall  be
governed in all respects by the original provisions of this Order, and the Banks
shall be entitled to all the rights, remedies,  privileges and benefits, granted
herein  and  pursuant  to  the  Credit   Agreement  with  respect  to  all  such
indebtedness,  obligation or liability. The obligations of the Debtors under the
Financing shall not be discharged by the entry of an order  confirming a plan of
reorganization  in any of the Cases and,  pursuant to Section  1141(d)(4) of the
Code, the Debtors have waived such discharge. <PAGE>

     24. The Final  Hearing on the Motion is scheduled  for  _________,  1997 at
______ a.m. before this Court.

     25. Under the circumstances,  the notice given by the Debtors of the Motion
and of the Interim Hearing  constitutes due and sufficient  notice of the Motion
and of the Interim  Hearing.  Debtors shall  promptly mail by  __________,  1997
copies of this Order to the parties who were given notice of the Interim Hearing
and to any other party  which has filed a request  for  notices  with either the
Court  (by 12 noon on  _________,  1997)  or the  Debtors'  counsel,  and to any
Official  Committee after the same has been appointed,  or to Committee counsel,
if the same shall have been  appointed.  Any party in interest  objecting to the
relief  sought at the Final  Hearing  shall serve and file  written  objections;
which  objections shall be served upon (i) Willkie,  Farr & Gallagher,  153 East
53rd Street, New York, New York, 10022, Attention:  Marc Abrams, Esq., Attorneys
for the Debtors;  (ii) Zalkin,  Rodin & Goodman LLP, 750 Third Avenue, New York,
New York 10017,  Attention:  Richard S. Toder,  Esq.,  Attorneys  for the Agent;
Milbank  Tweed Hadley & McCloy,  1 Chase  Manhattan  Plaza,  New York,  New York
10005-1413, Attention: David C.L. Frauman, Esq., Attorneys for the Agent for the
Pre-Petition  Secured  Lenders;  Morgan Lewis & Bockius,  2000 One Logan Square,
Philadelphia, Pennsylvania 19103-6993, Attention: Michael Bloom, Esq., Attorneys
for  certain  Vendors;  and (iii)  Office of the United  States  Trustee for the
Southern  District  of New York and shall be filed  with the Clerk of the United
States  Bankruptcy  Court for the  Southern  District  of New York,  so as to be
received no later than 5:00 p.m. three (3) days before such hearing. 

New York,  New York
Dated:  July ___,  1997        

                               --------------------------------  
                                 UNITED STATES BANKRUPTCY JUDGE
<PAGE>
                                             EXHIBIT A-2
Doc. No. 12714

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
-----------------------------------X

In re
                                   :        Chapter 11

ALLIANCE ENTERTAINMENT CORP.,      :
et. al.,
                    Debtors.
                                   :        Case No. 97-B 44673 (BRL)
                                            (Jointly Administered)
-----------------------------------X

                    FINAL ORDER AUTHORIZING DEBTORS TO OBTAIN
         POST-PETITION FINANCING PURSUANT TO 11 U.S.C. ss.ss.364(c)(1),
               364(c)(2), 364(c)(3) and 364(d)(1), AND TO UTILIZE
             CASH COLLATERAL PURSUANT TO 11 U.S.C. ss.363; GRANTING
               ADEQUATE PROTECTION TO PRE-PETITION SECURED PARTIES
                          AND SCHEDULING FINAL HEARING

     Upon  the  motion   (the   "Motion")   dated  July  13,  1997  of  Alliance
Entertainment Corp., as Debtor and Debtor-in-Possession (the "Borrower"), and of
Independent  National  Distributors,  Inc.,  AEC One Stop Group,  Inc.,  One Way
Records,  Inc., Concord Records,  Inc., FL Acquisition Corp.,  Execusoft,  Inc.,
Castle  Communications   (U.S.),  Inc.,  AEC  Americas,   Inc.,  Passport  Music
Worldwide,  Inc.,  Passport Music  Distribution,  Alliance  Ventures,  Inc., AEC
Acquisitions  Corp.,  Alliance  Entertainment  Corp., and Matrix Softwear Corp.,
each as a Debtor and Debtor-in-Possession  (hereinafter referred to collectively
as the  "Guarantors";  the Borrower and the Guarantors  hereinafter  referred to
collectively as the "Debtors"),

     (i) seeking this  Court's  authorization,  pursuant to Sections  364(c)(1),
364(c)(2),  364(c)(3)  and 364(d)(1) of the United  States  Bankruptcy  Code, 11
U.S.C.  ss.ss.101,  et seq.  (the "Code"),  and  Bankruptcy  Rule 4001,  for the
Borrower to (1) obtain  post-petition  financing (the "Financing"),  and for the
Guarantors  to guaranty  the payment of such  obligations,  up to the  principal
amount of $50,000,000  from The Chase  Manhattan Bank ("Chase" or "Agent"),  270
Park Avenue, New York, New York 10017, with Chase acting as Agent for itself and
a syndicate of financial  institutions  to be arranged by Chase  (together  with
Chase, the "Banks"), (w) with priority over any and all administrative  expenses
of the kind  specified  in  Sections  503(b) and 507(b) of the Code  pursuant to
Section  364(c)(1) of the Code, (x) to be secured pursuant to Section  364(c)(2)
of the Code by a perfected first priority security interest in and lien upon all
(A) unencumbered  pre- and  post-petition  property of the Debtors that is held,
beneficially or of record, by the Borrower or any of the Guarantors and (B) cash
maintained in the Letter of Credit  Account (as defined in the Credit  Agreement
hereinafter  referred to) and any investment of the funds contained therein (all
of such property referred to in this clause (x) (B) being  hereinafter  referred
to as the "Credit  Agreement Cash  Collateral"),  (y) to be secured  pursuant to
Section 364(c)(3) of the Code by a perfected  security interest in and lien upon
all pre- and  post-petition  property  of the Debtors  (other than the  property
described in (z) below, as to which the liens and security interests in favor of
the Agent  will be as  described  in such  clause)  that is subject to valid and
perfected  liens in existence on the date of the  petitions  herein or perfected
post-petition  pursuant  to Section  362(b)(18)  of the Code (to the extent that
under State or federal  law,  such liens are senior to the liens  granted to the
Agent and the Banks herein and prime existing  liens),  junior to such valid and
perfected liens, and (z) to be secured pursuant to Section 364(d)(1) of the Code
by a perfected first priority senior priming security  interest in and lien upon
all  pre-  and  post-petition  property  of  the  Borrower  and  the  Guarantors
(including,  without  limitation,  inventory,  equipment,  accounts  receivable,
intellectual  property  and the  capital  stock of certain  subsidiaries  of the
Borrower  and the  proceeds  of all of the  foregoing)  that is  subject  to the
existing liens presently securing the Debtors' indebtedness owing to (i) certain


<PAGE>

lenders (the  "Pre-Petition  Secured  Lenders") under or in connection with that
certain Third Amended and Restated Credit  Agreement,  dated as of July 25, 1995
and the Loan Documents referred to therein (as each has heretofore been amended,
collectively,  the  "Existing  Credit  Agreements"),  among  the  Borrower,  AEC
Holdings (UK) Limited, Castle Communications Limited and other institutions from
time to time parties thereto,  and The Chase Manhattan Bank, N.A., as agent, and
(ii) those  certain  security  agreements  and vendor  subordination  agreements
(identified  on Schedule A hereto)  among any of the Debtors or  Guarantors  and
Polygram Group Distribution, Inc., ("Polygram"), BMG Music ("BMG"), Sony Discos,
Inc. ("Sony"), Sony Music Entertainment,  Inc. ("SME"), Relativity Entertainment
Dist.,  Inc.   ("Relativity"),   c/o  Sony  Music   Entertainment,   Inc.,  Cema
Distribution,  a Division of Capitol Records,  Inc.  ("Cema"),  UNI Distribution
Corp.  ("UNI"),   Warner/Electra/Atlantic  Corp.  ("WEA")  and  TDK  Electronics
Corporation ("TDK" and together with Polygram, BMG, Sony, Relativity, SME, Cema,
UNI and WEA,  the  "Vendors")  (as each of the  foregoing  has  heretofore  been
amended,  collectively the "Existing Vendor  Agreements",  and together with the
Existing  Credit  Agreements,   the  "Existing  Agreements"),   and  other  loan
documentation  executed in connection therewith,  senior in all respects to such
existing  liens and to any liens granted after the date of the petitions  herein
to provide  adequate  protection  in respect of such liens (all of the foregoing
property  specified  in  clauses  (x),  (y) and  (z)  above,  being  hereinafter
collectively  referred  to in this Order as the  "Collateral")  and (2)  provide
adequate  protection to the  Pre-Petition  Secured Lenders and the Vendors (and,
together with the Pre-Petition  Secured Lenders,  the "Primed  Parties"),  whose
liens and security interests are being primed by the Financing,

     (ii) seeking this Court's  authorization,  pursuant to Section 363(c)(2) of
the Code,  for the use of cash  collateral (as such term is defined in the Code)
in which the Primed  Parties have an interest and for the  provision of adequate
protection to the Primed Parties,

     (iii) requesting, pursuant to Bankruptcy Rule 4001, that an interim hearing
(the "Interim  Hearing") on the Motion be held on  Wednesday,  July 16, 1997 for
this Court to consider  entry of an interim  order  authorizing  the Borrower to
forthwith  borrow or obtain  letters of credit up to an aggregate of $20,000,000
of the  Financing  from the Banks,  authorizing  the use by the  Debtors of cash
collateral and granting the adequate protection hereinafter described, and

<PAGE>

     (iv)  requesting that a final hearing (the "Final  Hearing")  thereafter be
held for this Court to consider entry of an order authorizing the balance of the
Financing, as set forth in the Motion and the loan documentation filed with this
Court; and pursuant to Bankruptcy Rule 4001(c)(1),  and as otherwise provided in
the Order to Show Cause in Respect of Motion for Orders  Pursuant to  Bankruptcy
Code Sections 105, 361,  362, 363 and 364 and  Bankruptcy  Rules 2002,  4001 and
9014:  (A)  Authorizing  Debtors In  Possession  to Obtain (i) Interim and Final
Secured Postpetition  Financing with Priority Over All Other Indebtedness,  (ii)
Emergency,  Interim and Final Use of Cash  Collateral;  (B)  Providing  Adequate
Protection;  (C)  Approving  Agreements  Related to  Foregoing;  (D)  Scheduling
Interim and Final Hearings and  Prescribing  Form and Manner of Notice;  and (E)
Granting  Related  Relief  dated July 14, 1997 (the  "Order to Show  Cause") due
notice under the circumstances of the Motion having been given by the Debtors to
the thirty largest  unsecured  creditors of the Debtors on a combined basis, the
Primed  Parties and the United States  Trustee for the Southern  District of New
York and any official committee appointed in the Cases (as hereinafter  defined)
and the Court  having  held an Interim  Hearing on July 16, 1997 and the Interim
Order  having been entered and upon all of the  pleadings  filed with this Court
and all of the  proceedings  had before this  Court,  and upon the record of the
Hearing  held on this  matter on July 30,  1997 and after due  deliberation  and
consideration and sufficient cause appearing therefor;

     IT IS, FOUND, DETERMINED, ORDERED AND ADJUDGED, that:

     1. This Court has core  jurisdiction over these proceedings and the parties
and property affected hereby pursuant to 28 U.S.C. ss.ss.157(b) and 1334.

     2. No other or further notice of the Motion's request for final approval of
the Financing and of the Final Hearing need be provided, and any requirement for
such other or further notice is hereby dispensed with and waived.


     3. Without  prejudice  to the rights of any other party to  challenge  such
findings for a period of sixty days from the date of entry of the Interim Order,
the Debtors  admit that,  in  accordance  with the terms of the Existing  Credit
Agreements, the Borrower and the Guarantors are truly and justly indebted to the
Pre-Petition  Secured  Lenders,   without  defense,   counterclaim,   offset  or
recoupment of any kind, and that as of the date of the petitions  herein (i) the
Borrower and the Guarantors were liable to the  Pre-Petition  Secured Lenders in
the aggregate  principal  amount of  approximately  $187,492,945,  in respect of
loans made and  letters of credit  issued by the  Pre-Petition  Secured  Lenders
pursuant to the Existing Credit Agreements, plus interest thereon, plus fees and
expenses (including  reasonable attorneys fees) incurred in connection therewith
as provided in the  Existing  Credit  Agreements  and (ii) the  Guarantors  were
contingently  liable to the  Pre-Petition  Secured  Lenders  in  respect  of the
guarantees by the Guarantors in respect of the Existing Agreements.

     4. Without  prejudice  to the rights of any other party to  challenge  such
findings for a period of sixty days from the date of entry of the Interim Order,
the Debtors  further  admit that, by reason of the Existing  Credit  Agreements,
their obligations  thereunder are secured by enforceable and perfected liens and
security   interests   granted  by  the  Borrower  and  the  Guarantors  to  the
Pre-Petition  Secured  Lenders  upon  and  in  all of  the  Borrower's  and  the
Guarantors'  right,  title and  interest  in, to and under the  property of each
described in the Existing Credit  Agreements to which they are party  (including
the  set-off  rights  described  in  paragraph  5  below),  including,   without
limitation, inventory, equipment, accounts receivable, intellectual property and
the capital  stock of certain  subsidiaries  of the Borrower and the proceeds of
all of the foregoing. <PAGE>

     5. As of the date of the  petitions  herein,  funds on deposit at Chase and
various of the other  Pre-Petition  Secured  Lenders  were  subject to rights of
set-off under applicable law and the Existing  Agreements and, by virtue of such
set-off  rights,  are  subject to a lien in favor of such  Pre-Petition  Secured
Lenders  pursuant  to  Sections  506(a)  and 553 of the  Code.  Pursuant  to the
Existing Credit Agreements,  such Pre-Petition  Secured Lenders are obligated to
share the benefit of such lien with the other Pre-Petition Secured Lenders party
to such Existing Credit  Agreements  based upon their respective pro rata shares
of the  obligations  under such  agreements.  Accordingly,  any  proceeds of the
pre-petition  collateral  (including cash on deposit at the Pre-Petition Secured
Lenders  as of the date of the  petitions  herein)  are cash  collateral  of the
Pre-Petition  Secured  Lenders  within  the  meaning  of  Section  363(a) of the
Code("Cash Collateral"). The Pre-Petition Secured Lenders are entitled, pursuant
to Sections 361,  363(e) and  364(d)(1) of the Code,  to adequate  protection of
their interest in the  pre-petition  collateral,  including the Cash Collateral,
for any diminution in value of the pre-petition collateral,  including,  without
limitation, resulting from the use of the Cash Collateral, the incurrence by the
Debtors of post-petition  financing secured by priming liens on the pre-petition
collateral,  the use, sale or lease of the pre-petition  collateral  (other than
the Cash Collateral) and the imposition of the automatic stay.

     6. The  Borrower  has an  immediate  need to obtain  financing  in order to
permit,  among other things,  the orderly  continuation  of the operation of its
business  and  the   businesses  of  the   Guarantors,   to  maintain   business
relationships  with vendors and  suppliers,  to make certain  strategic  capital
expenditures  and investments  and to satisfy other working  capital needs.  The
Borrower is unable to obtain adequate  unsecured  credit allowable under Section
503(b)(1)  of the Code as an  administrative  expense.  A facility in the amount
provided by the Financing is  unavailable  to the Borrower  without the Borrower
and the  Guarantors  granting to the Banks (i) pursuant to Section  364(c)(1) of
the Code,  allowed claims,  with respect to all  indebtedness and obligations of
the Borrower and the Guarantors under the Credit Agreement, having priority over
any and all administrative expenses of the kind specified in Sections 503(b) and
507(b) of the Code, (ii) pursuant to Section 364(c)(2) of the Code, security for
such  obligations by the granting of a perfected  first priority senior security
interest in and lien upon (x) all of the  Collateral  that is not  encumbered by
liens in favor of the Primed  Parties  or any other  party or entity and (y) the
Credit  Agreement Cash  Collateral,  (iii) pursuant to Section  364(c)(3) of the
Code,  security  for such  obligations  by the  granting of a  perfected  junior
priority  security  interest in and lien upon all of the Collateral  (other than
the Collateral  that is described in clause (iv) below, as to which the security
interest  and lien in favor of the Agent shall be as  described  in such clause)
that is subject to valid and  perfected  liens in  existence  on the date of the
petitions herein or perfected  post-petition  pursuant to Section  362(b)(18) of
the Code (to the extent  that under  State and federal law such liens are senior
to the liens granted to the Agent and the Banks herein and prime existing liens)
and  (iv)  pursuant  to  Section  364(d)(1)  of  the  Code,  security  for  such
obligations by the granting of a first priority senior priming security interest
in and lien upon all of the  Collateral  that is  subject to  existing  liens in
favor of the Primed  Parties,  senior in all respects to such existing liens and
to any liens granted after the date of the petitions  herein to provide adequate
protection  in  respect of such  liens,  subject,  in the cases of  clauses  (i)
through (iv) above,  to the  Carve-Out,  as defined  herein.  The ability of the
Borrower and the Guarantors to obtain  sufficient  working capital and liquidity
through  the  incurrence  of new  indebtedness  for  borrowed  money  and  other
financial  accommodations  is  vital to the  Borrower  and the  Guarantors.  The
preservation and maintenance of the going concern values of the Borrower and the
Guarantors is integral to a successful reorganization of the Debtors pursuant to
the provisions of Chapter 11 of the Code.

     7. The terms of the Financing are fair and reasonable, reflect the Debtors'
exercise of prudent business  judgment  consistent with their fiduciary duty and
are  supported  by  reasonably  equivalent  value  and fair  consideration.  The
Financing  has been  negotiated  in good faith and at  arm's-length  between the
Debtors  and the Agent and any credit  extended,  letters  of credit  issued and
loans made to the  Debtors by the Banks  pursuant  to the  Revolving  Credit and
Guaranty  Agreement  dated as of July  ___,  1997  shall be  deemed to have been
extended by the Banks in good faith,  as that term is used in Section  364(e) of
the Code. <PAGE>

     8. The Documents (as defined below) are hereby approved in their entireties
and the Borrower is immediately authorized to borrow or obtain letters of credit
pursuant  to  the  Credit  Agreement,  and  the  Guarantors  may  guaranty  such
borrowings,  up to an aggregate of $50,000,000  (inclusive of amounts authorized
pursuant to the Interim Order). Notwithstanding anything herein to the contrary,
no Loans or Letters of Credit under the Credit Agreement, Cash Collateral or any
portion of the Carve-Out (as defined  below) may be used to object to or contest
in any manner,  or raise any defenses to, the  validity,  perfection,  priority,
enforceability  or amount of the  obligations  of the Debtors under the Existing
Credit Agreements or any security  interests or liens securing such obligations,
or to investigate  (other than by professionals of an official  committee during
the period  permitted by this order,  as set forth in paragraphs 3 and 4 herein)
or assert  any  claims or causes of  action  against  the  Pre-Petition  Secured
Lenders or any agent under the Existing Credit Agreements.

     9. The  Debtors  are  expressly  authorized  and  empowered  to execute and
deliver, among other documents, the Credit Agreement and the Security and Pledge
Agreement  to which such  Debtors are party (as each such term is defined in the
Credit  Agreement) in  substantially  the forms heretofore filed with this Court
(the "Documents").  The Debtors are hereby authorized to perform and do all acts
that may be  required in  connection  with the  Documents.  Upon  execution  and
delivery of the  Documents,  the Documents  shall  constitute  valid and binding
obligations of the Debtors party thereto,  enforceable against each Debtor party
thereto in accordance with their terms.

     10. For all of the Debtors'  obligations and indebtedness arising under the
Financing  and the  Documents,  the Agent and the Banks are granted  pursuant to
Section  364(c)(1) of the Code an allowed claim having priority over any and all
administrative  expenses of the kind specified in Sections  503(b) and 507(b) of
the Code,  subject only in the event of the  occurrence and  continuation  of an
unwaived Event of Default (as defined in the Credit  Agreement) or an event that
would  constitute an Event of Default with the giving of notice or lapse of time
or  both  to the  payment  of  (x)  accrued  and  unpaid  and  future  fees  and
disbursements incurred by the Debtors' professionals and any statutory committee
professionals  appointed  in the Debtors'  Chapter 11 cases (the  "Cases") in an
aggregate amount not in excess of $2,500,000, (y) certain indemnification claims
of  directors  of foreign  subsidiaries  of  Borrower in an amount not to exceed
$500,000,  all as more fully  described  in the Credit  Agreement,  and (z) fees
pursuant to 28 U.S.C. ss.1930 (collectively, the "Carve-Out"), provided that (i)
following the Termination Date (as defined in the Credit  Agreement)  amounts in
the Letter of Credit  Account shall not be subject to the Carve-Out and (ii) the
Carve-Out shall not include any professional  fees or disbursements  incurred in
connection  with  investigating  or  asserting  any  claims  or causes of action
against the Banks,  the  Pre-Petition  Secured  Lenders,  the Agent or the agent
under  the  Existing  Credit  Agreements  (including  discovery  proceedings  in
anticipation   thereof)  and/or   investigating  or  challenging  the  validity,
perfection,  priority,  enforceability,  avoidance,  extent  or  amount  of  any
security  interest,  lien or claim of the  Pre-Petition  Secured  Lenders or the
agent under the Existing Credit  Agreements  (provided that an  investigation by
professionals  of a single  statutory  committee  with respect to the  validity,
perfection,  priority,  enforceability,  avoidance,  extent  or  amount  of  any
security  interest,  lien or claim of the  Pre-Petition  Secured  Lenders or the
Agent under the Existing Credit  Agreements  during the period permitted by this
Order,  as set forth in paragraphs 3 and 4 herein is covered by the  Carve-Out).
No other claim  having a priority  superior  or pari passu with that  granted by
this Order to the Agent and the Banks shall be granted  while any portion of the
Financing or the commitment thereunder remains outstanding.
<PAGE>

     11. Debtors shall be permitted to pay  administrative  expenses allowed and
payable  under  Sections  330 and 331 of the  Code,  as the  same may be due and
payable, and so long as an unwaived Event of Default or an event with the giving
of notice or lapse of time or both would  constitute  an Event of Default  shall
not have  occurred,  such payments  shall not be applied  against the Carve-Out.
Except to the extent of the  Carve-Out,  no  expenses of  administration  of the
Cases or any future  proceeding  or case which may result  therefrom,  including
liquidation in bankruptcy or other  proceedings under the Code, shall be charged
against the  Collateral,  pursuant to Section  506(c) of the Code or  otherwise,
without the prior written  consent of the Agent and the Required  Banks referred
to in the Credit Agreement  granted pursuant to the Credit Agreement and no such
consent shall be implied from any other action, inaction, or acquiescence by the
Agent or the Banks.

     12.  As  security  for all of the  Debtors'  obligations  and  indebtedness
arising under the Financing and the Documents,  the Agent on behalf of the Banks
is hereby  granted  (effective  immediately  and  without the  necessity  of the
execution by the Debtors of mortgages,  security  agreements or otherwise),  (x)
pursuant to Section  364(c)(2) of the Code, a perfected  first  priority  senior
security interest in and lien upon all unencumbered Collateral and on the Credit
Agreement  Cash  Collateral,  (y)  pursuant to Section  364(c)(3) of the Code, a
perfected  junior  priority  security  interest  in  and  lien  upon  encumbered
Collateral (other than the Collateral described in clause (z) below, as to which
the  security  interest  and lien in favor of the Agent will be as  described in
such  clause) that is subject to valid and  perfected  liens in existence on the
date of the petitions  herein or which are perfected  post-petition  pursuant to
Section  362(b)(18)  of the Code and (z)  pursuant to Section  364(d)(1)  of the
Code, a perfected  first priority senior priming  security  interest in and lien
upon all of the  Collateral  that is subject to  existing  liens in favor of the
Primed Parties,  such security  interests and liens being senior in all respects
to any and all present and future liens,  if any,  which encumber the Collateral
referred  to in this  clause (z) and any liens  granted  after the filing of the
petitions to provide  adequate  protection in respect of such existing liens, in
each case subject only to the Carve-Out, provided that following the Termination
Date (as  defined  in the  Credit  Agreement)  amounts  in the  Letter of Credit
Account shall not be subject to the Carve-Out.  The security interests and liens
granted to the Agent on behalf of the Banks  hereunder  shall not be (i) subject
to any lien or security  interest which is avoided and preserved for the benefit
of the Debtors' estates under Section 551 of the Code or (ii) subordinated to or
made pari passu with any other lien or security interest under Section 364(d) of
the Code or otherwise.

     13. Debtors are hereby  authorized to use all Cash Collateral of the Primed
Parties,  provided that the Primed  Parties are granted  adequate  protection as
hereinafter set forth and as set forth in the Credit Agreement.
<PAGE>

     14.  As  adequate  protection  for  (x)  the  use by the  Debtors  of  Cash
Collateral and any other  property upon which security  interests and liens have
been previously  granted by the Debtors to the Pre-Petition  Secured Lenders and
(y) the priming of such security  interests  and liens by the Banks  pursuant to
the Financing and this Order, the Pre-Petition Secured Lenders (A) shall receive
from the Debtors  cash  payments in an amount that is equal to current  interest
payments and letter of credit fees at the applicable  non-default rates provided
for under the Existing  Credit  Agreements  (including  any  unreimbursed  drawn
amounts under letters of credit  issued  pursuant to any of the Existing  Credit
Agreements) and on the dates  specified  therein for the payment of interest (B)
are granted (limited in amount to the aggregate  diminution,  if any, subsequent
to the  commencement  of  the  Cases  in  the  value  of  the  interests  of the
Pre-Petition Secured Lenders in the pre-petition  Collateral resulting from such
utilization and priming),  a replacement  security interest in and lien upon all
the Collateral,  subject and subordinate to (i)  pre-existing  liens (other than
liens being primed by this Order), (ii) the security interests and liens granted
to the  Banks in this  Order  and  pursuant  to the  Documents,  and  (iii)  the
Carve-Out,  (C) are granted a priority  claim  pursuant to Section 507(b) of the
Code (limited in amount to the aggregate  diminution,  if any, subsequent to the
commencement of the Cases in the value of the interests of Pre-Petition  Secured
Lenders in the  pre-petition  Collateral  resulting  from such  utilization  and
priming),  subject  and  subordinate  to the  Carve-Out  and (D)  shall  receive
reimbursement  on a monthly basis of reasonable  expenses  incurred by the agent
for the Pre-Petition Secured Lenders (including reasonable attorneys fees) prior
to and after the date of these Cases in connection  with the  administration  of
the Existing  Credit  Agreements,  collection  efforts and enforcement of rights
under the Existing Credit Agreements.

     15.  As  adequate  protection  for  (x)  the  use by the  Debtors  of  Cash
Collateral and any other  property upon which security  interests and liens have
been  previously  granted by the Debtors to each of the Vendors  pursuant to the
Vendor  Agreements  and (y) the priming of such security  interests and liens by
the Banks  pursuant to the Financing and this Order,  each of the Vendors (A) is
granted (limited in amount to the aggregate  diminution,  if any,  subsequent to
the  commencement  of the Cases in the value of the  interests of such Vendor in
the  pre-petition  Collateral  resulting  from such  utilization  and priming) a
replacement security interest in and lien upon the inventory of such Vendor held
by any Debtor who granted such Vendor such pre-petition  security  interests and
liens and all other  non-inventory  assets of the Borrower  and the  Guarantors,
subject and subordinate to (i) pre-existing liens (other than liens being primed
by this Order),  (ii) the security  interests  and liens granted to the Banks in
this Order and pursuant to the Documents, (iii) the security interests and liens
granted  to the  Pre-Petition  Secured  Lenders  in this  Order,  and  (iv)  the
Carve-Out,  (B) is granted a priority  claim  pursuant to Section  507(b) of the
Code (limited in amount to the aggregate  diminution,  if any, subsequent to the
commencement  of the Cases in the value of the  interests of each of the Vendors
in the  pre-petition  Collateral  resulting from such  utilization and priming),
subject and  subordinate  to the Carve-out and to the priority  claim granted to
the  Pre-Petition  Secured Lenders and (C)  reimbursement  on a monthly basis of
reasonable legal fees and expenses  incurred jointly by the Vendors for a single
counsel for such Vendors  after the date of these Cases in  connection  with the
collection efforts and enforcement of their respective rights in connection with
amounts owing to such Vendors.

     16.  The  Court  finds  that the  adequate  protection  provided  herein is
reasonable  and sufficient to protect the interests of the Primed Parties and so
long as there  are any  borrowings  or  Letters  of Credit  outstanding,  or the
Commitment  is in effect,  the Primed  Parties  shall not take any action in the
Court or otherwise  (i) seeking  payment of the  obligations  under the Existing
Agreements  or other  agreements  or (ii)  related to  enforcement  of rights or
remedies with respect to liens on the assets of the Borrower and Guarantors.
<PAGE>

     17. The Agent, the Banks, and the Primed Parties granted security interests
and  liens  hereunder  shall  not  be  required  to  file  or  record  financing
statements,   mortgages,   notices  of  lien  or  similar   instruments  in  any
jurisdiction (including,  without limitation,  with the United States Patent and
Trademark Office or the United States Copyright Office) or take any other action
in order to validate and perfect the  security  interests  and liens  granted to
them  pursuant  to this  Order.  If the  Agent,  the Banks or any of the  Primed
Parties  shall,  in  their  sole  discretion,  choose  to  file  such  financing
statements,  mortgages,  notices of lien or  similar  instruments  or  otherwise
confirm  perfection of such security  interests  and liens,  all such  documents
shall be deemed to have been  filed or  recorded  at the time and on the date of
entry  of  this  Order.  The  Primed  Parties  shall  not  file  such  financing
statements,  mortgages,  notices of lien or similar  instruments,  or  otherwise
confirm  perfection of such security  interests and liens,  unless the Agent and
the Banks shall theretofore have done so.

     18. Upon  request of the Agent,  the Primed  Parties are  directed to take,
execute and deliver  such  instruments  and do all things  necessary to perfect,
preserve and enforce the security  interests  and liens granted to the Agent for
the  benefit  of the Banks by the  Documents  and this Order  including  without
limitation,  delivery  to the  Agent of any  capital  stock of the  Borrower  or
Guarantors held in pledge by the Primed Parties.

     19. The Pre-Petition  Secured Lenders are directed to immediately turn over
to the Debtors all Cash Collateral held by them.

     20. Each of the Debtors is  authorized  and  directed to do and perform all
acts, to make,  execute and deliver all  instruments  and documents  (including,
without  limitation,  the  execution  of  security  agreements,   mortgages  and
financing  statements)  and, to pay fees,  which may be  reasonably  required or
necessary for the Debtors' performance under the Financing,  including,  without
limitation:  (i) the  execution of the  Documents,  (ii) the execution of one or
more amendments to the Credit Agreement for, among other things,  the purpose of
adding  additional   financial   institutions  as  Banks  and  reallocating  the
commitments for the Financing  among the Banks in such form as the Debtors,  the
Agent and the Banks may agree, and (iii) the non-refundable  payment to Chase or
the Banks,  as the case may be, of the Fees referred to in the Credit  Agreement
and such  Letter  of  Credit  Fees,  Commitment  Fees and  reasonable  costs and
expenses  as may  be due  from  time  to  time  including,  without  limitation,
reasonable  attorneys' fees and disbursements as provided in the Documents,  all
as such terms are defined in the Documents.

     21. Subject only to the provisions of Section 7.1 of the Credit  Agreement,
the  automatic  stay  provisions  of  Section  362 of the Code are  vacated  and
modified  to the  extent  necessary  so as to permit  the Agent and the Banks to
exercise,  upon the  occurrence of an Event of Default,  all rights and remedies
provided  for in the  Documents  (including,  without  limitation,  the right to
setoff monies of the Debtors in accounts maintained with the Agent or any Bank).
The Debtors' right to use Cash  Collateral  shall  terminate on the  Termination
Date (as defined in the Credit Agreement). <PAGE>

     22. The  Documents  and the  provisions of this Order shall be binding upon
the Banks,  the Primed Parties and the Debtors and their  respective  successors
and assigns (including any Chapter 7 or Chapter 11 trustee hereinafter appointed
or elected for the estate of any of the Debtors) and inure to the benefit of the
Banks,  the Primed  Parties  and the Debtors  and  (except  with  respect to any
trustee  hereinafter  appointed or elected for the estate of any of the Debtors)
their respective successors and assigns.

     23. No order  dismissing any of the Cases under Section 1112 of the Code or
otherwise  shall be entered  unless prior to the entry  thereof,  either (i) all
obligations  and  indebtedness  owing to the Agent and the Banks shall have been
paid in full, or with respect to outstanding  letters of credit,  the same shall
have been fully cash  collateralized  in accordance  with the  provisions of the
Credit  Agreement  or (ii) all  material  assets of the Debtors  shall have been
liquidated  and  the  proceeds  thereof   distributed  in  accordance  with  the
priorities  established  by  this  Order  and  the  Code.  If  any or all of the
provisions of this Order are hereafter  reversed,  modified,  vacated or stayed,
such reversal,  stay, modification or vacation shall not affect (x) the validity
and enforceability of any obligation,  indebtedness or liability incurred by the
Debtors to the Banks prior to written  notice to the Agent of the effective date
of such  reversal,  stay,  modification  or  vacation,  or (y) the  validity and
enforceability of any security interest,  lien or priority authorized or created
hereby or pursuant to the Credit Agreement.  Notwithstanding  any such reversal,
stay,  modification  or  vacation,  any  indebtedness,  obligation  or liability
incurred by the Debtors to the Banks prior to written notice to the Agent of the
effective  date of such  reversal,  stay,  modification  or  vacation  shall  be
governed in all respects by the original provisions of this Order, and the Banks
shall be entitled to all the rights, remedies,  privileges and benefits, granted
herein  and  pursuant  to  the  Credit   Agreement  with  respect  to  all  such
indebtedness,  obligation or liability. The obligations of the Debtors under the
Financing shall not be discharged by the entry of an order  confirming a plan of
reorganization  in any of the Cases and,  pursuant to Section  1141(d)(4) of the
Code, the Debtors have waived such discharge.

Dated:  July ___, 1997

                                           -------------------------------
                                            UNITED STATES BANKRUPTCY JUDGE



<PAGE>
                                                         EXHIBIT B

                          SECURITY AND PLEDGE AGREEMENT

         SECURITY AND PLEDGE AGREEMENT (the  "Agreement"),  dated as of July 17,
1997, by and between ALLIANCE  ENTERTAINMENT  CORP., a Delaware corporation (the
"Borrower"),  and  each  of  the  subsidiaries  of  the  Borrower  party  hereto
(collectively   with  the  Borrower,   the   "Grantors"),   each  a  debtor  and
debtor-in-possession  under  Chapter 11 of the  Bankruptcy  Code,  and THE CHASE
MANHATTAN  BANK,  as agent (in such  capacity,  the  "Agent") for the banks (the
"Banks") party to the Credit Agreement (as hereinafter defined):

         WHEREAS,  contemporaneously  with the  execution  and  delivery of this
Agreement,  the Agent,  the Banks and the Grantors are entering into a Revolving
Credit and Guaranty Agreement dated as of the date hereof (as amended,  modified
or supplemented from time to time, the "Credit Agreement"); and

         WHEREAS,  unless otherwise defined herein,  terms defined in the Credit
Agreement are used herein as therein defined; and

         WHEREAS,  it is a  condition  precedent  to the making of Loans and the
issuance of Letters of Credit that the  Grantors  shall have  granted a security
interest,  pledge  and lien on  substantially  all of the  Grantors'  assets and
properties and the proceeds  thereof pursuant to Sections  364(c)(2),  364(c)(3)
and 364(d)(1) of the Bankruptcy Code; and

         WHEREAS, the grant of such security interest,  pledge and lien has been
authorized  pursuant  to  Section  364(c)(2),  364(c)(3)  and  364(d)(1)  of the
Bankruptcy  Code by the Interim Order and,  after the entry  thereof,  will have
been so authorized by the Final Order (collectively, the "Order"); and

         WHEREAS,  to  supplement  the Order without in any way  diminishing  or
limiting  the effect of the Order or the security  interests,  pledges and liens
granted  thereunder,  the  parties  hereto  desire to more fully set forth their
respective rights in connection with such security interests, pledges and liens;
and

         WHEREAS, this Agreement has been approved by the Order;

         NOW, THEREFORE, in consideration of the premises and in order to induce
the Banks to make Loans and issue Letters of Credit,  the Grantors  hereby agree
with the Banks as follows:



<PAGE>


     SECTION  1. Grant of  Security  and  Pledge.  Each of the  Grantors  hereby
transfers, grants, bargains, sells, conveys, hypothecates,  assigns, pledges and
sets over to the Agent for its benefit and the ratable  benefit of the Banks and
hereby grants to the Agent for its benefit and the ratable benefit of the Banks,
a perfected pledge and security  interest in all of the Grantors'  right,  title
and  interest  in and to the  following  (the  "Collateral"),  which  pledge and
security  interest shall be (x) junior to the Permitted Senior Liens hereinafter
referred to and (y) subject to the Carve-Out:

     (a) all present and future accounts,  accounts  receivable and other rights
of each of the  Grantors  to payment  for goods  sold or leased or for  services
rendered  (except those evidenced by instruments or chattel paper),  whether now
existing or hereafter arising and wherever arising, and whether or not they have
been earned by performance (collectively, the "Accounts");

     (b) all goods and  merchandise  now owned or hereafter  acquired by each of
the Grantors  wherever  located,  whether in the possession of a Grantor or of a
bailee or other person for sale, storage, transit,  processing, use or otherwise
consisting  of whole  goods,  components,  supplies,  materials,  or  consigned,
returned  or  repossessed  goods)  which  are  held  for  sale or lease or to be
furnished  (or have been  furnished)  under any contract of service or which are
raw materials, work-in-process,  finished goods or materials used or consumed in
such   Grantor's   business  or  processed  by  or  on  behalf  of  any  Grantor
(collectively, the "Inventory");

     (c)  all  machinery,   all  manufacturing,   distribution,   selling,  data
processing  and  office  equipment,  all  furniture,  furnishings,   appliances,
fixtures and trade fixtures,  tools,  tooling,  molds, dies, vehicles,  vessels,
aircraft  and all  other  goods  of  every  type  and  description  (other  than
Inventory),  in each instance whether now owned or hereafter acquired by each of
the Grantors and wherever located (collectively, the "Equipment");

     (d) all  works  of art  now  owned  or  hereafter  acquired  by each of the
Grantors, including, without limitation,  paintings, sketches, drawings, prints,
sculptures, crafts, tapestries,  porcelain, carvings, artifacts,  renderings and
designs;

     (e) all rights,  interests,  choses in action, causes of action, claims and
all other  intangible  property of each of the Grantors of every kind and nature
(other than  Accounts,  Trademarks,  Patents and  Copyrights),  in each instance
whether now owned or  hereafter  acquired by such  Grantor,  including,  without
limitation,  all general intangibles;  all corporate and other business records;
all loans, royalties, and other obligations receivable; all inventions, designs,
trade  secrets,  computer  programs,  software,  printouts  and  other  computer
materials, goodwill,  registrations,  copyrights, licenses, franchises, customer
lists, credit files, correspondence, and advertising materials; all customer and
supplier  contracts,  firm sale  orders,  rights  under  license  and  franchise
agreements (including all license agreements with any other Person in connection
with any of the Trademarks or such other  Person's names or marks,  whether such
Grantor is a licensor or licensee under any such license  agreement),  and other
contracts and contract rights; all interests in partnerships and joint ventures;
all tax refunds  and tax refund  claims;  all right,  title and  interest  under
leases,  subleases,  licenses and concessions and other  agreements  relating to
real or personal  property;  all payments due or made to each of the Grantors in
connection  with  any  requisition,   confiscation,   condemnation,  seizure  or
forfeiture of any property by any person or governmental authority;  all deposit
accounts (general or special) with any bank or other financial institution;  all
credits  with and other claims  against  carriers  and  shippers;  all rights to
indemnification;  all reversionary interests in pension and profit sharing plans
and reversionary,  beneficial and residual  interest in trusts;  all proceeds of
insurance  of which each of the  Grantors  is  beneficiary;  and all  letters of
credit,  guaranties,  liens,  security  interest and other  security  held by or
granted to each of the Grantors;  and all other intangible property,  whether or
not similar to the foregoing (collectively, the "General Intangibles"); <PAGE>

     (f) all chattel paper, all instruments,  all notes and debt instruments and
all payments  thereunder  and  instruments  and other property from time to time
delivered in respect thereof or in exchange  therefor,  and all bills of lading,
warehouse receipts and other documents of title and documents,  in each instance
whether now owned or hereafter acquired by each of the Grantors;

     (g) all property or interests in property now or hereafter acquired by each
of the Grantors  which may be owned or hereafter  may come into the  possession,
custody or control  of the Agent or any agent or  affiliate  of the Agent in any
way or for any purpose  (whether  for  safekeeping,  deposit,  custody,  pledge,
transmission,  collection or otherwise), and all rights and interests of each of
the  Grantors,  now  existing or  hereafter  arising  and  however and  wherever
arising,  in  respect  of any and all (i) notes,  drafts,  letters  of  credits,
stocks, bonds, and debt and equity securities,  whether or not certificated, and
warrants,  options,  puts and calls and other  rights to  acquire  or  otherwise
relating to the same; (ii) money  (including all cash and cash  equivalents held
in the  Letter of Credit  Account  (as  defined  and  referred  to in the Credit
Agreement));  (iii) proceeds of loans, including, without limitation, Loans made
under the Credit  Agreement;  and (iv) insurance  proceeds and books and records
relating to any of the property  covered by this  Agreement;  together,  in each
instance, with all accessions and additions thereto, substitutions therefor, and
replacements, proceeds and products thereof;

     (h) all trademarks,  trade names, trade styles,  service marks,  prints and
labels on which said  trademarks,  trade names,  trade styles and service  marks
have appeared or appear,  designs and general  intangibles  of like nature,  now
existing or hereafter adopted or acquired,  and all registrations and recordings
thereof,  including,   without  limitation,   applications,   registrations  and
recordings in the United  States  Patent and Trademark  Office or in any similar
office or agency of the United States,  any State thereof,  or any other country
or political subdivision thereof, all whether now owned or hereafter acquired by
each of the Grantors, including, but not limited to, those described in Schedule
3  annexed  hereto  and made a part  hereof,  and all  reissues,  extensions  or
renewals  thereof and all  licenses  thereof  together,  in each case,  with the
goodwill of the business  connected with the use of, and symbolized by each such
trademark,  service mark, trade name and trade style (all of the foregoing being
herein referred to as the "Trademarks"); <PAGE>

     (i) all letters patent of the United States or any other  country,  and all
registrations   and   recordings   thereof,   including,   without   limitation,
applications,  registrations  and  recordings  in the United  States  Patent and
Trademark  Office or in any similar office or agency of the United  States,  any
State  thereof or any other country or any political  subdivision  thereof,  all
whether now owned or hereafter acquired by each of the Grantors,  including, but
not  limited to,  those  described  in Schedule 4 annexed  hereto and made apart
hereof,  and  (ii)  all  reissues,   continuations,   continuations-in-part   or
extensions  thereof and all licenses  thereof (all of the foregoing being herein
referred to as the "Patents");

     (j) all  copyrights of the United  States,  or any other  country,  and all
registrations   and   recordings   thereof,   including,   without   limitation,
applications, registrations and recordings in the United States Copyright Office
or in any similar office or agency of the United States,  any State thereof,  or
any other  country or political  subdivision  thereof,  all whether now owned or
hereafter acquired by each of the Grantors, including, but not limited to, those
described in Schedule 5 hereto and all renewals and  extensions  thereof and all
licenses  thereof  (all  of  the  foregoing  being  herein  referred  to as  the
"Copyrights");

     (k) all  books,  records,  ledger  cards  and  other  property  at any time
evidencing  or  relating  to  the  Accounts,   Equipment,  General  Intangibles,
Trademarks, Patents or Copyrights;

     (l) (i) all  the  shares  of  capital  stock  owned  by  each  Grantor,  as
applicable,  listed on Part I of Schedule 6 hereto of the issuers listed thereon
(individually,  an "Issuer", and collectively,  the "Issuers") and all shares of
capital  stock of any  Issuer  obtained  in the future by such  Grantor  and the
certificates  representing or evidencing all such shares (the "Pledged Shares");
(ii) all  other  property  which  may be  delivered  to and held by the Agent in
respect of the Pledged  Shares  pursuant to the terms  hereof;  (iii) subject to
Section 9 below, all dividends,  cash,  instruments and other property from time
to time  received,  receivable  or  otherwise  distributed,  in  respect  of, in
exchange for or upon the conversion of the securities referred to in clauses (i)
and (ii) above;  and (iv) subject to Section 9 below,  all rights and privileges
of each  Grantor,  as  applicable,  with  respect  to the  securities  and other
property  referred to in clauses (i),  (ii) and (iii)(the  items  referred to in
clauses  (i)  through  (iv)  being  collectively  referred  to as  the  "Pledged
Collateral");

     (m) all other personal  property of each of the Grantors,  whether tangible
or intangible, and whether now owned or hereafter acquired; and

     (n)  all  proceeds  and  products  of any of the  foregoing,  in any  form,
including,  without  limitation,  any claims  against  third parties for loss or
damage to or destruction of any or all of the foregoing.

     As used herein,  the term "Permitted Senior Liens" shall mean (i) valid and
perfected  Liens  existing  on  the  Filing  Date,   including  Liens  perfected
thereafter  pursuant to Section  362(b)(18) of the Bankruptcy Code but excluding
Liens granted  pursuant to the Existing  Agreements or Liens in favor of certain
of the  Grantors'  pre-petition  vendors set forth on Schedule 3.6 to the Credit
Agreement,  (ii) the Carve-Out and (iii) payments under Section  6.7(iii) of the
Credit  Agreement.  The  Collateral  shall not include  goods  consigned  to any
Grantor. <PAGE>

     SECTION 2. Security for  Obligations.  This  Agreement  and the  Collateral
secure the payment of all obligations of each of the Grantors,  now or hereafter
existing,  under the Credit  Agreement,  in each case,  which are being "primed"
pursuant  to the terms of the Credit  Agreement  and the Order the Notes and the
other Loan  Documents,  whether  for  principal,  interest,  fees,  expenses  or
otherwise, and all obligations of each of the Grantors now or hereafter existing
under or in respect of this Agreement (all such obligations of the Grantor being
herein called the "Obligations").

     SECTION 3. Delivery of Pledged Collateral; Other Action. The Grantors shall
deliver all  certificates or instruments  representing or evidencing the Pledged
Collateral  to the  Agent  pursuant  hereto  and  shall be  accompanied  by duly
executed  instruments  of  transfer  or  assignment  in  blank,  all in form and
substance  satisfactory  to the  Agent.  Upon  the  occurrence  and  during  the
continuance  of any Event of  Default,  the Agent  shall have the right (for the
ratable benefit of the Banks),  at any time in its discretion and without notice
to the  Grantors,  to transfer to or to register in the name of the Agent or any
of its  nominees  any or all of the Pledged  Collateral.  To the extent that the
certificates or instruments  representing  or evidencing the Pledged  Collateral
have heretofore  been delivered in pledge  pursuant to the Existing  Agreements,
each of the Pledgors hereby agree and acknowledge that the Pledged Collateral is
now being held in pledge by the Agent pursuant to this Agreement as security for
the Obligations, subject to the terms of the Order.

     SECTION 4.  Representations  and  Warranties.  Each  Grantor,  jointly  and
severally, represents and warrants as follows:

     (a)  All of  the  Inventory  and/or  Equipment  is  located  at the  places
specified in Schedule 1 hereto. The chief places of business and chief executive
offices of each of the  Grantors and the offices  where each  Grantor  keeps its
records  concerning  any Accounts and all  originals of all chattel  paper which
evidence  any Account are located at the places  specified in Schedule 2 hereto.
All  trade  names  under  which  each of the  Grantors  have  sold and will sell
Inventory are listed on Schedule 3 hereto.

     (b) Each of the Grantors  owns the  Collateral  free and clear of any lien,
security  interest,  charge or  encumbrance  except  for the  security  interest
created by this  Agreement  and except as  permitted  under  Section  6.1 of the
Credit  Agreement and except as described on Schedule 6. No effective  financing
statement or other instrument  similar in effect covering all or any part of the
Collateral is on file in any recording office,  except (x) such as may have been
filed in favor of the Agent  relating to this  Agreement and (y) in favor of any
holder of a Lien permitted under Section 6.1 of the Credit Agreement.

     (c) As of the Filing Date, no Grantor owns any material Trademarks, Patents
or Copyrights or has any material Trademarks,  Patents or Copyrights  registered
in, or the  subject of pending  applications  in, the United  States  Patent and
Trademark  Office or any  similar  office or agency in any other  country or any
political subdivision thereof,  other than those described in Schedules 3, 4 and
5 hereto. The registrations for the Collateral  disclosed on such Schedules 3, 4
and 5 hereto are valid and subsisting and in full force and effect.  None of the
material Patents or Copyrights have been abandoned or dedicated.
<PAGE>

     (d) The Pledged Shares have been duly authorized and validly issued and are
fully paid and non-assessable.

     (e) Each Grantor,  as the case may be, is the legal and beneficial owner of
the  Pledged  Collateral  described  on  Schedule  6 free and clear of any lien,
security  interest,  option  or other  charge  or  encumbrance,  except  for the
security  interest  created  by this  Agreement  and the  Orders  and  except as
disclosed on Schedule 6.

     (f) Except as  disclosed  on Schedule 6, the Pledged  Shares  described  in
Section 1(l) hereof constitute all of the issued and outstanding shares of stock
of each of the  Issuers  and no Issuer is under any  contractual  obligation  to
issue  any  additional  shares  of  stock or any  other  securities,  rights  or
indebtedness.

     (g) Except for the Order,  no  authorization,  approval or other action by,
and no notice to or filing with, any  governmental  authority or regulatory body
is required  either (i) for the grant and pledge by each of the  Grantors of the
security interests granted hereby or for the execution,  delivery or performance
of this  Agreement  by each of the  Grantors or (ii) for the  perfection  of the
security  interests  or the  exercise  by the Agent of its rights  and  remedies
hereunder.

     SECTION 5. Further Assurances.

     (a) Each of the Grantors  agrees that from time to time,  at the expense of
the Grantors,  it will promptly execute and deliver all further  instruments and
documents, and take all further action, that may be necessary, or that the Agent
may reasonably  request,  in order to perfect and protect any security  interest
granted or purported to be granted hereby or to enable the Agent to exercise and
enforce any of its rights and remedies hereunder with respect to any Collateral.
Without  limiting the generality of the foregoing,  and without further order of
the Bankruptcy  Court, each of the Grantors will execute and file such financing
or continuation statements, or amendments thereto, and such other instruments or
notices,  as may be necessary,  or as the Agent may reasonably request, in order
to perfect and  preserve  the  security  interests  granted or  purported  to be
granted hereby.

     (b) Each grantor hereby  authorizes the Agent to file one or more financing
or continuation statements,  and amendments thereto, relative to all or any part
of the Collateral without the signature of such Grantor where permitted by law.

     (c) Each Grantor will furnish to the Agent from time to time statements and
schedules  further  identifying  and  describing  the  Collateral and such other
reports in connection  with the Collateral as the Agent may reasonably  request,
all in reasonable detail. <PAGE>

     SECTION 6. As to Equipment and Inventory. Each Grantor shall:

     (a) Keep the  Equipment  and Inventory  (other than  Inventory  sold in the
ordinary  course of  business)  at the places  specified  therefor in Schedule 1
hereto or, upon 30 days' prior written  notice to the Agent,  at other places in
jurisdictions  where all action  required  by Section 5 shall have been taken to
assure the continuation of the perfection of the security  interest of the Agent
(for its  benefit  and the  ratable  benefit of the Banks)  with  respect to the
Equipment and Inventory.

     (b) Maintain or cause to be  maintained  in good repair,  working order and
condition,  excepting ordinary wear and tear and damage due to casualty,  all of
the Equipment,  and make or cause to be made all appropriate  repairs,  renewals
and  replacements  thereof,  to the extent not obsolete and consistent with past
practice of such Grantor,  as quickly as practicable after the occurrence of any
loss or damage thereto which are necessary or reasonably  desirable to such end,
except  where the  failure  to do any of the  foregoing  would  not  result in a
material  adverse  effect on the assets,  properties or condition  (financial or
otherwise) of the Grantors, taken as a whole.

     (c)  Until  satisfaction  in full of the  Obligations,  at any time when an
Event of Default has occurred and is  continuing:  (i) each Grantor will perform
any and all  reasonable  actions  requested  by the Agent to enforce the Agent's
security interest in the Inventory and all of the Agent's rights hereunder, such
as leasing  warehouses  to the Agent or its  designee,  placing and  maintaining
signs,  appointing  custodians,   transferring  Inventory  to  warehouses,   and
delivering to the Agent warehouse receipts and documents of title in the Agent's
name;  (ii) if any  Inventory  is in the  possession  or  control  of any of the
Grantors' agents,  contractors or processors or any other third party, each such
Grantor will notify the Agent  thereof and will notify such agents,  contractors
or processors or third party of the Agent's security  interest therein and, upon
request,  instruct  them to hold  all  such  Inventory  for the  Agent  and such
Grantor's  account,  as their  interests may appear,  and subject to the Agent's
instructions; (iii) the Agent shall have the right to hold all Inventory subject
to the security  interest granted  hereunder;  and (iv) the Agent shall have the
right to take  possession  of the  Inventory or any part thereof and to maintain
such  possession  on such  Grantor's  premises  or to  remove  any or all of the
Inventory  to such  other  place or  places  as the  Agent  desires  in its sole
discretion.  If  the  Agent  exercises  its  right  to  take  possession  of the
Inventory,  such Grantor,  upon the Agent's demand,  will assemble the Inventory
and make it  available  to the Agent at such  Grantor's  premises at which it is
located.

     SECTION 7. As to Accounts.

     (a) Each Grantor shall keep its chief place of business and chief executive
office and the office where it keeps its records  concerning  the Accounts,  and
the offices  where it keeps all  originals of all chattel  paper which  evidence
Accounts,  at the location therefor  specified in Section 4(a) or, upon 30 days'
prior written  notice to the Agent,  at such other  locations in a  jurisdiction
where all actions  required  by Section 5 shall have been taken with  respect to
the Accounts. Each Grantor will hold and preserve such records and chattel paper
and will permit representatives of the Agent, at any time during normal business
hours,  to inspect and make  abstracts  from such  records and chattel  paper in
accordance with Section 5.7 of the Credit Agreement. <PAGE>

     (b) Except as otherwise provided in this subsection (b), each Grantor shall
continue  to collect  in  accordance  with its  customary  practice,  at its own
expense,  all amounts due or to become due to such  Grantor  under the  Accounts
and, prior to the occurrence of an Event of Default, such Grantor shall have the
right to adjust,  settle or compromise the amount or payment of any Account,  or
release  wholly or partly any account  debtor or obligor  thereof,  or allow any
credit or discount thereon, all in accordance with its customary  practices.  In
connection  with such  collections,  the Grantors may, upon the  occurrence  and
during the  continuation  of an Event of Default,  take (and at the direction of
the Agent shall take) such  action as the  Grantors or the Agent may  reasonably
deem  necessary or advisable to enforce  collection of the  Accounts;  provided,
that upon written  notice by the Agent to any Grantor,  following the occurrence
and during the  continuation of an Event of Default,  of its intention so to do,
the Agent shall have the right to notify the account  debtors or obligors  under
any Accounts of the  assignment of such Accounts to the Agent and to direct such
account  debtors or obligors to make payment of all amounts due or to become due
to such Grantor thereunder directly to the Agent and, upon such notification and
at the expense of such Grantor, to enforce collection of any such Accounts,  and
to adjust,  settle or  compromise  the amount or  payment  thereof,  in the same
manner and to the same extent as such Grantor might have done.  After receipt by
such Grantor of the notice referred to in the proviso to the preceding sentence,
(i) all amounts and proceeds (including instruments) received by such Grantor in
respect of the Accounts  shall be received in trust for the benefit of the Agent
(for the ratable benefit of the Banks) hereunder, shall be segregated from other
funds of the Grantors and shall be forthwith  paid over to the Agent in the same
form  as so  received  (with  any  necessary  endorsement)  to be  held  as cash
collateral  and either (A)  released  to the  Grantors  if such Event of Default
shall  have  been  cured or  waived  or (B) if such  Event of  Default  shall be
continuing,  applied as provided by Section 15, and (ii) the Grantors  shall not
adjust,  settle or compromise  the amount or payment of any Account,  or release
wholly or partly any account debtor or obligor  thereof,  or allow any credit or
discount thereon.

     SECTION 8. As to Trademarks, Patents and Copyrights.

     (a) Each Grantor shall, either itself or through licensees, continue to use
the Trademarks as each is currently  used in the Grantor's  business in order to
maintain the  Trademarks  in full force free from any claim of  abandonment  for
nonuse and each such Grantor will not (and will not permit any licensee  thereof
to) do any act or knowingly  omit to do any act whereby any Trademark may become
invalidated,  unless such failure to use a Trademark is not reasonably likely to
have a  material  adverse  effect on the  condition  (financial  or  otherwise),
operation or properties of the Grantors taken as a whole.

     (b) No Grantor will do any act, or omit to do any act,  whereby the Patents
or  Copyrights  may become  abandoned or dedicated  and each such Grantor  shall
notify  the Agent  immediately  if it knows of any  reason or has reason to know
that any application or registration may become  abandoned or dedicated,  unless
such  abandonment  or  dedication  is not  reasonably  likely to have a material
adverse  effect  on  the  condition  (financial  or  otherwise),  operations  or
properties of the Grantors taken as a whole. <PAGE>

     (c) No Grantor will, either itself or through any agent, employee, licensee
or  designee,  (i) file an  application  for the  registration  of any Patent or
Trademark  with the United  States  Patent and  Trademark  Office or any similar
office or agency in any other  country or any political  subdivision  thereof or
(ii) file any  assignment  of any patent or  trademark,  which such  Grantor may
acquire from a third party,  with the United States Patent and Trademark  Office
or  any  similar  office  or  agency  in any  other  country  or  any  political
subdivision thereof, unless such Grantor shall, within 30 days after the date of
such filing,  notify the Agent thereof,  and, upon request of the Agent, execute
and deliver any and all  assignments,  agreements,  instruments,  documents  and
papers as the Agent may request to evidence the Agent's  interest in such Patent
or Trademark and the goodwill and general  intangibles of such Grantor  relating
thereto or represented  thereby,  and such Grantor hereby  constitutes the Agent
its  attorney-in-fact  to execute and file all such  writings for the  foregoing
purposes,  all lawful acts of such attorney being hereby ratified and confirmed;
such power being coupled with an interest is irrevocable  until the  Obligations
are paid in full.

     (d) Each Grantor will take all necessary steps in any proceeding before the
United States Patent and Trademark Office, the United States Copyright Office or
any similar  office or agency in any other country or any political  subdivision
thereof,   to  maintain  each  application  and  registration  of  all  material
Trademarks,  Patents and Copyrights,  including,  without limitation,  filing of
renewals,  affidavits of use,  affidavits of  incontestability  and  opposition,
interference and cancellation proceedings.

     (e) Each Grantor  will,  without  further  order of the  Bankruptcy  Court,
perform all acts and execute and deliver all further  instruments and documents,
including,  without  limitation,  assignments  for security in form suitable for
filing with the United States Patent and Trademark Office, and the United States
Copyright Office, respectively, reasonably requested by the Agent at any time to
evidence,  perfect,  maintain,  record and enforce  the Agent's  interest in all
material  Trademarks,  Patents and Copyrights or otherwise in furtherance of the
provisions of this  Agreement,  and each Grantor hereby  authorizes the Agent to
execute  and  file  one or  more  accurate  financing  statements  (and  similar
documents)  or copies  thereof or of this  Security  Agreement  with  respect to
material Patents, Trademarks and Copyrights signed only by the Agent.

     (f) Each Grantor will, upon acquiring knowledge of any use by any person of
any term or  design  likely  to cause  confusion  with any  material  Trademark,
promptly notify the Agent of such use, and if requested by the Agent, shall join
with the Agent, at such Grantor's  expense,  in such action as the Agent, in its
reasonable  discretion,  may deem  advisable  for the  protection of the Agent's
interest in and to the Trademarks.

     SECTION 9. As to the Pledged Collateral; Voting Rights; Dividends; Etc. (a)
So long as no Event of Default shall have occurred and be  continuing:SECTION 9.
As to the Pledged Collateral;  Voting Rights;  Dividends; Etc. (a) So long as no
Event of Default shall have occurred and be continuing\:

     (i) the Grantors (as applicable)  shall be entitled to exercise any and all
voting and other consensual rights  pertaining to the Pledged  Collateral or any
part thereof for any purpose not  inconsistent  with the terms of this Agreement
provided, that such Grantors shall not exercise or shall refrain from exercising
any such right if, in the Agent's reasonable judgment,  such action would result
in a breach of the Credit Agreement;

     (ii)  notwithstanding  the  provisions  of Section 1 hereof,  such Grantors
shall be entitled to receive and retain any and all dividends paid in respect of
the Pledged Shares ; provided, that any and all <PAGE>

     (A)  dividends  paid or  payable  other  than in cash in  respect  of,  and
instruments and other property received,  receivable or otherwise distributed in
respect of, or in exchange for, any Pledged Shares, and

     (B) dividends and other distributions paid or payable in cash in respect of
any  Pledged  Shares  in  connection  with a  partial  or total  liquidation  or
dissolution  or in connection  with a reduction of capital,  capital  surplus or
paid-in-surplus, and

     (C) cash paid, payable or otherwise distributed in respect of principal of,
or in redemption of, or in exchange for, any Pledged Shares;

shall be,  and shall be  forthwith  delivered  to the Agent to hold as,  Pledged
Collateral and shall,  if received by any of the Grantors,  be received in trust
for the benefit of the Agent,  be segregated from the other property or funds of
such Grantor,  and be forthwith  delivered to the Agent as Pledged Collateral in
the same form as so received (with any necessary endorsement); and

     (iii) the Agent shall  execute  and  deliver  (or cause to be executed  and
delivered)  to  the  Grantors  (as   applicable)  all  such  proxies  and  other
instruments  as the  Grantors (as  applicable)  may  reasonably  request for the
purpose of enabling  such  Grantor to exercise the voting and other rights which
it is entitled to exercise  pursuant to  paragraph  (i) above and to receive the
dividends  which it is  authorized  to receive and retain  pursuant to paragraph
(ii) above;

     (b) Upon the occurrence and during the continuance of an Event of Default:

     (i) upon written  notice from the Agent to the Grantors (as  applicable) to
such effect,  all rights of such Grantors (as applicable) to exercise the voting
and other  consensual  rights  which it would  otherwise be entitled to exercise
pursuant  to  Section  9(a)(i)  and to  receive  the  dividends  which  it would
otherwise be authorized to receive and retain pursuant to Section 9(a)(ii) shall
cease, and all such rights shall thereupon become vested in the Agent, who shall
thereupon  have the sole right to  exercise  such  voting  and other  consensual
rights and to receive and hold as Pledged Collateral any such dividends; and

     (ii) all  dividends  which are  received by such  Grantors  contrary to the
provisions  of paragraph (i) of this Section 9(b) shall be received in trust for
the benefit of the Agent,  shall be segregated  from other funds of the Grantors
and shall be forthwith paid over to the Agent as Pledged  Collateral in the same
form as so received (with any necessary endorsement). <PAGE>

     SECTION 10.  Insurance.  Each Grantor shall,  at its own expense,  maintain
insurance  with respect to the Inventory and Equipment in such amounts,  against
such risks,  in such form and with such insurers,  as is provided for in Section
5.3 of the  Credit  Agreement.  Following  an Event of  Default  and  during its
continuance,  each Grantor shall, at the request of the Agent,  duly execute and
deliver  instruments  of  assignment  of such  insurance  policies and cause the
respective insurers to acknowledge notice of such assignment.

     Upon the occurrence and during the continuance of any Event of Default, all
insurance  payments in respect of such  Inventory and  Equipment  shall be held,
applied and paid to the Agent as specified in Section 15 hereof.

     SECTION 11. Transfers to Others;  Liens;  Additional  Shares.  Each Grantor
shall not:

     (a) Sell, assign (by operation of law or otherwise) or otherwise dispose of
any of the Collateral, except for dispositions otherwise permitted by the Credit
Agreement.

     (b) Create or suffer to exist any lien,  security  interest or other charge
or  encumbrance  upon or with  respect  to any of the  Collateral  to secure any
obligation of any person or entity,  except for the security interest created by
this  Agreement  and the Order,  or except as otherwise  permitted by the Credit
Agreement.

     (c) Each of the Grantors (as applicable) agrees that it will (i) cause each
of the  Issuers  that are  wholly-owned  Subsidiaries  not to issue any stock or
other securities in addition to or substitution for the Pledged Shares issued by
such  Issuer,  except  to the  respective  Grantor  and (ii)  pledge  hereunder,
immediately upon its acquisition  (directly or indirectly)  thereof, any and all
such  additional  shares  of stock or other  securities  of each  Issuer  of the
Pledged Shares.

     SECTION  12.  Agent   Appointed   Attorney-in-Fact.   Each  Grantor  hereby
irrevocably   appoints  the  Agent  such   Grantor's   attorney-in-fact   (which
appointment shall be irrevocable and deemed coupled with an interest), with full
authority in the place and stead of such Grantor and in the name of such Grantor
or otherwise,  from time to time in the Agent's discretion,  upon and during the
occurrence and  continuation  of an Event of Default,  to take any action and to
execute  any  instrument  which the Agent may deem  necessary  or  advisable  to
accomplish the purposes of this Agreement, including, without limitation:

     (i) to  obtain  and  adjust  insurance  required  to be paid  to the  Agent
pursuant to Section 10,

     (ii) to ask, demand, collect, sue for, recover,  compound, receive and give
acquittance and receipts for moneys due and to become due under or in respect of
any of the Collateral,

     (iii) to receive,  endorse,  and  collect any drafts or other  instruments,
documents and chattel paper, in connection with clause (i) or (ii) above,

     (iv) to receive,  endorse and collect all  instruments  made payable to the
Grantors  representing  any  dividend  or other  distribution  in respect of the
Pledged  Collateral or any part thereof and to give full discharge for the same,
and

     (v) to file any  claims or take any  action or  institute  any  proceedings
which the Agent may deem necessary or desirable for the collection of any of the
Collateral  or  otherwise to enforce the rights of the Agent with respect to any
of the Collateral.
<PAGE>

     SECTION  13.  Agent  May  Perform.  If any  Grantor  fails to  perform  any
agreement  contained herein, the Agent may itself perform,  or cause performance
of,  such  agreement,  and the  expenses  of the Agent  incurred  in  connection
therewith shall be payable by the Grantors under Section 16(b).

     SECTION 14. The Agent's Duties. The powers conferred on the Agent hereunder
are  solely  to  protect  its  interest  and the  interests  of the Banks in the
Collateral  and shall not impose any duty upon it to exercise  any such  powers.
Except  for  the  safe  custody  of any  Collateral  in its  possession  and the
accounting for moneys actually received by it hereunder, the Agent shall have no
duty as to any Collateral or as to the taking of any necessary steps to preserve
rights against prior parties or any other rights  pertaining to any  Collateral,
including,  without  limitation,  ascertaining  or taking action with respect to
calls, conversions,  exchanges, maturities, tenders or other matters relative to
any  Pledged  Collateral,  whether  or not the  Agent  has or is  deemed to have
knowledge of such matters.

     SECTION 15.  Remedies.  If any Event of Default  shall have occurred and be
continuing, and subject to the provisions of Section 7 of the Credit Agreement:

     (a) The Agent may  exercise  in respect of the  Collateral,  in addition to
other rights and remedies provided for herein or otherwise  available to it, and
without  application  to or order of the  Bankruptcy  Court,  all the rights and
remedies of a secured  party on default  under the Uniform  Commercial  Code and
also may (i) require  each Grantor to, and each  Grantor  hereby  agrees that it
will at its expense and upon  request of the Agent  forthwith,  assemble  all or
part of the  Collateral  as directed by the Agent and make it  available  to the
Agent at a place to be designated by the Agent which is reasonably convenient to
both  parties  and (ii)  without  notice  except as  specified  below,  sell the
Collateral or any part thereof in one or more parcels at public or private sale,
at any of the Agent's  offices or  elsewhere,  for cash, on credit or for future
delivery, and at such price or prices and upon such other terms as the Agent may
deem commercially reasonable.  Each Grantor agrees that, to the extent notice of
such sale shall be required by law, at least ten days' notice to the Grantors of
the time and place of any public sale or the time after  which any private  sale
is to be made shall constitute reasonable  notification.  The Agent shall not be
obligated  to make any sale of  Collateral  regardless  of notice of sale having
been given.  The Agent may adjourn any public or private  sale from time to time
by announcement at the time and place fixed therefor, and such sale may, without
further notice, be made at the time and place to which it was so adjourned.

     (b) The Agent may  instruct the Grantors not to make any further use of the
Patents, Copyrights or Trademarks or any mark similar thereto for any purpose.

     (c) The Agent may  license,  whether  general,  special or  otherwise,  and
whether on an exclusive or nonexclusive basis, any of the Trademarks, Patents or
Copyrights throughout the world for such term or terms, on such conditions,  and
in such manner, as the Agent shall in its sole discretion determine.
<PAGE>

     (d)  The  Agent  may  (without   assuming  any   obligations  or  liability
thereunder),  at any  time,  enforce  (and  shall  have the  exclusive  right to
enforce)  against any  licensee or  sublicensee  all rights and  remedies of the
Grantors in, to and under any one or more license agreements with respect to the
Collateral,  and take or refrain from taking any action  under any thereof,  and
each of the  Grantors  hereby  releases  the Agent from,  and agrees to hold the
Agent free and harmless  from and against any claims  arising out of, any action
taken or omitted to be taken with respect to any such license agreement.

     (e) In the event of any such license, assignment, sale or other disposition
of the  Collateral,  or any of it, each  Grantor  shall  supply its know-how and
expertise  relating to the  manufacture  and sale of the products  bearing or in
connection  with the Trademarks,  Patents or Copyrights,  and its customer lists
and other records  relating to the Trademarks,  Patents or Copyrights and to the
distribution of said products, to the Agent or its designee.

     (f) In order to implement the assignment,  sale or other disposal of any of
the Trademarks,  Patents or Copyrights,  the Agent may, at any time, pursuant to
the authority granted in Section 12 hereof, execute and deliver on behalf of the
Grantors,  one or more  instruments of assignment of the Trademarks,  Patents or
Copyrights (or any  application of registration  thereof),  in form suitable for
filing, recording or registration in any country.

     (g) All cash  proceeds  received  by the Agent in  respect  of any sale of,
collection  from, or other  realization  upon all or any part of the  Collateral
may, in the discretion of the Agent, be held by the Agent as collateral for, and
then or at any time thereafter  applied (after payment of any amounts payable to
the Agent  pursuant to Section 16) in whole or in part against,  all or any part
of the  Obligations in such order as the Agent shall elect.  Any surplus of such
cash or cash proceeds  held by the Agent and remaining  after payment in full of
all the  Obligations  shall be paid over to the Grantors or to whomsoever may be
lawfully entitled to receive such surplus.

     (h) If at any time when the Agent shall  determine to exercise its right to
sell all or any part of the Pledged Collateral pursuant to this Section 15, such
Pledged  Collateral  or the part  thereof  to be sold  shall not be  effectively
registered  under the  Securities  Act of 1933, as amended,  and as from time to
time in effect, and the rules and regulations thereunder (the "Securities Act"),
the Agent is hereby expressly authorized to sell such Pledged Collateral or such
part thereof by private sale in such manner and under such  circumstances as the
Agent may deem  necessary  or  advisable  in order that such sale may legally be
effected  without such  registration.  Without  limiting the  generality  of the
foregoing, in any such event the Agent, in compliance with applicable securities
laws,  (a) to the extent  permitted by applicable  law, may proceed to make such
private sale  notwithstanding  that a registration  statement for the purpose of
registering  such Pledged  Collateral or such part thereof shall have been filed
under such  Securities  Act, (b) may approach  and  negotiate  with a restricted
number of potential  purchasers  to effect such sale and (c) may  restrict  such
sale to  purchasers  as to their  number,  nature  of  business  and  investment
intention including without limitation to purchasers each of whom will represent
and agree to the satisfaction of the Agent that such purchaser is purchasing for
its own account, for investment, and not with a view to the distribution or sale
of such Pledged Collateral,  or part thereof, it being understood that the Agent
may cause or require  each  Grantor,  and each  Grantor  hereby  agrees upon the
written  request of the Agent,  to cause (i) a legend or legends to be placed on
the  certificates  to be  delivered  to such  purchasers  to the effect that the
Pledged  Collateral  represented  thereby  have not been  registered  under  the
Securities  Act  and  setting  forth  or  referring  to   restrictions   on  the
transferability  of such  securities;  and (ii) the  issuance  of stop  transfer
instructions  to such  Issuer's  transfer  agent,  if any,  with  respect to the
Pledged Collateral,  or, if such Issuer transfers its own securities, a notation
in the appropriate  records of such Issuer.  In the event of any such sale, each
Grantor   does  hereby   consent  and  agree  that  the  Agent  shall  incur  no
responsibility  or  liability  for  selling  all or  any  part  of  the  Pledged
Collateral  at  a  price  which  the  Agent  may  deem   reasonable   under  the
circumstances, notwithstanding the possibility that a substantially higher price
might be realized if the sale were public and deferred until after  registration
as aforesaid. <PAGE>

     SECTION 16. Indemnity and Expenses.

     (a) Each Grantor, jointly and severally, agrees to indemnify the Agent from
and  against  any and all  claims,  losses  and  liabilities  growing  out of or
resulting from this Agreement  (including,  without  limitation,  enforcement of
this Agreement),  except claims, losses or liabilities directly arising from the
Agent's own gross negligence, willful misconduct or bad faith.

     (b) The  Grantors  will upon  demand pay to the Agent the amount of any and
all reasonable expenses,  including the reasonable fees and disbursements of its
counsel and of any experts and agents,  which the Agent may incur in  connection
with (i) the administration of this Agreement,  (ii) the custody,  preservation,
use or operation of, or the sale of, collection from, or other realization upon,
any of the Collateral, (iii) the exercise or enforcement of any of the rights of
the Agent  hereunder  or (iv) the  failure by any of the  Grantors to perform or
observe any of the provisions hereof.

     (c) The Grantors assume all  responsibility  and liability arising from the
use of the Trademarks,  Patents and Copyrights, and the Grantors hereby, jointly
and severally, indemnify and hold the Agent harmless from and against any claim,
suit, loss, damage or expense (including reasonable attorneys' fees) arising out
of any alleged  defect in any product  manufactured,  promoted or sold by any of
the  Grantors  in  connection  with  any  Trademark  or out of the  manufacture,
promotion,  labeling,  sale or  advertisement  of any such product by any of the
Grantors except as the same may have resulted from the gross negligence, willful
misconduct or bad faith of the Agent.

     (d) Each of the  Grantors  agree that the Agent does not assume,  and shall
have no  responsibility  for, the payment of any sums due or to become due under
any agreement or contract  included in the Collateral or the  performance of any
obligations  to be  performed  under or with  respect to any such  agreement  or
contract by any of the  Grantors,  and except as the same may have resulted from
the gross  negligence or willful  misconduct of the Agent,  each of the Grantors
hereby jointly and severally agree to indemnify and hold the Agent harmless with
respect to any and all claims by any person relating thereto.

     SECTION  17.  Security  Interest  Absolute.  All  rights  of the  Agent and
security  interests  hereunder,  and all  obligations  of  each of the  Grantors
hereunder, shall be absolute and unconditional, irrespective of any circumstance
which might constitute a defense  available to, or a discharge of, any guarantor
or other obligor in respect of the Obligations.

     SECTION 18.  Amendments;  Etc. No amendment  or waiver of any  provision of
this  Agreement,  nor  any  consent  to any  departure  by  any of the  Grantors
herefrom,  shall in any event be  effective  unless the same shall be in writing
and signed by the party against whom enforcement is sought, and then such waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given.
<PAGE>

     SECTION 19.  Addresses  for Notices.  All notices and other  communications
provided for hereunder shall be in writing and shall be given in accordance with
the applicable provisions of the Credit Agreement.

     SECTION 20.  Continuing  Security  Interest.  This Agreement shall create a
continuing  security  interest  in the  Collateral  and shall (i) remain in full
force and effect until payment in full of the Obligations,  (ii) be binding upon
each of the Grantors,  their  successors  and assigns and (iii) inure,  together
with the rights and remedies of the Agent hereunder, to the benefit of the Agent
and each of the Banks and their respective successors,  transferees and assigns.
Upon the  payment in full of the  Obligations,  the  security  interest  granted
hereby  shall  terminate  and all rights to the  Collateral  shall revert to the
Grantors  subject to any existing liens,  security  interests or encumbrances on
such  Collateral.  Upon any such  termination,  the Agent will, at the Grantor's
expense,  execute and deliver to the  Grantors  such  documents  as the Grantors
shall reasonably request to evidence such termination.

     SECTION  21.  Governing  Law.  This  Agreement  shall  be  governed  by and
construed  in  accordance  with the laws of the  State of New  York,  except  as
required  by  mandatory  provisions  of law and  except to the  extent  that the
validity  or  perfection  of  the  security  interest  hereunder,   or  remedies
hereunder, in respect of any particular Collateral are governed by the laws of a
jurisdiction  other  than the State of New York and by Federal  law  (including,
without  limitation,  the Bankruptcy Code) to the extent the same has pre-empted
the law of the State of New York or such other jurisdiction.

     SECTION 22.  Headings.  Section  headings in this  Agreement  are  included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.


<PAGE>
     IN WITNESS  WHEREOF,  each of the  Grantors  and the Agent have caused this
Agreement  to be duly  executed  and  delivered  by  their  respective  officers
thereunto duly authorized as of the date first above written.

GRANTORS:

ALLIANCE ENTERTAINMENT CORP.
CONCORD RECORDS, INC.
INDEPENDENT NATIONAL DISTRIBUTORS, INC.
AEC ONE STOP GROUP, INC.
PASSPORT MUSIC DISTRIBUTION, INC.
FL ACQUISITION CORP.
ALLIANCE VENTURES, INC.
EXECUSOFT, INC.
AEC ACQUISITION CORP.
CASTLE COMMUNICATIONS (U.S.), INC.
PASSPORT MUSIC WORLDWIDE, INC.
AEC AMERICAS, INC.
A.E. LAND CORP.
ONE WAY RECORDS, INC.
MATRIX SOFTWARE, INC.

By:
   -------------------------------
   Title:   Vice President
            of each of the foregoing

RED ANT BOX, INC.*
RED ANT HOLDINGS, INC.*
BLACK ANT MUSIC, INC.*
ARMY ANT MUSIC, INC.*
VELVET ANT MUSIC, INC.*
RED ANT MUSIC, INC.*


By:
   -------------------------------
   Title: Chief Executive Officer
          of each of the foregoing

RED ANT LLC*
By: Red Ant Box, Inc., its managing
       member

By:
   -------------------------------
   Title: Chief Executive Officer

THE CHASE MANHATTAN BANK,
   as Agent


By:
   -----------------------------
   Title:
270 Park Avenue
New York, New York 10017