CERTIFICATE OF DESIGNATIONS

                             OF


                 ALLIANCE ENTERTAINMENT CORP.




Pursuant to Section 151 of the  Delaware  General  Corporation  Law (the "GCL"),
ALLIANCE  ENTERTAINMENT  CORP.,  a  Delaware  corporation  (the  "Corporation"),
certifies as follows:

FIRST:  Under the authority  contained in Article  FOURTH of the  Certificate of
Incorporation,  as amended,  of the  Corporation,  the Board of Directors of the
Corporation  has  classified  an aggregate of three hundred  thousand  (300,000)
shares  of  the  authorized  but  unissued  shares  of  preferred  stock  of the
Corporation  into a series  which  shall  be  designated  Series  B  Convertible
Preferred Stock.

SECOND:  The  following  resolution  was  adopted by the Board of  Directors  on
December 19, 1996 and such resolution has not been modified and is in full force
and effect on the date hereof:

RESOLVED,  that the Board of Directors  hereby creates,  from the authorized but
unissued shares of preferred stock of the  Corporation,  a series of convertible
preferred stock  designated as Series B Convertible  Preferred  Stock, par value
$0.01  per  share  (the  "Preferred  Stock"),   and  hereby  fixes  the  powers,
designations, preferences and relative, participating, optional or other special
rights,  and the  qualifications,  limitations or restrictions  thereof,  of the
shares of such series, as follows:


<PAGE>



Section 1.  Preferred Stock Dividends.

1.1  General  Dividend  Obligation.  When,  as and if  declared  by the Board of
Directors of the Corporation, the Corporation shall pay to the holders of record
of the Preferred Stock,  out of the assets of the Corporation  available for the
payment of dividends under the General Corporation Law of the State of Delaware,
preferential  dividends  at the times and in the  amounts  provided  for in this
Section 1.

1.2  Payments of Dividends; Payments in Additional Shares.

(a) When declared by the Board of Directors of the Corporation, dividends on the
Preferred  Stock  shall be payable on whole  shares of  Preferred  Stock on each
Dividend Payment Date (capitalized terms not otherwise defined herein being used
in this  Certificate of  Designations  with the definitions set forth in Section
11).

(b) Dividends shall be paid only in additional  whole shares of Preferred Stock,
having a Liquidation  Value (exclusive of any accrued unpaid dividends) equal in
amount to the dividends payable, by mailing certificates for such shares to each
holder of record of Preferred  Stock at such  holder's  address as it appears on
the  Corporation's  stock  register  at least five days prior to the due date of
each dividend or otherwise  delivering  such shares so as to be received by such
holder on the due date of such  dividend.  If any  portion of a  dividend  would
result  in the  issuance  of a  fraction  of a share of  Preferred  Stock,  such
fraction shall be carried forward and accumulated with other fractions and shall
be paid on a subsequent  Dividend Payment Date when such  accumulated  fractions
equal at least one whole share of Preferred Stock.

(c) If at any time dividends on the outstanding  Preferred Stock at the rate set
forth  herein  shall  not have been  fully  paid or  declared  and set aside for
payment,  no dividends or other  distributions shall be declared or paid upon or
set apart for payment on the shares of any other class of Junior Securities.

1.3  Calculation of Dividends.  Dividends on each share of Preferred Stock shall
be calculated  cumulatively at the rate and in the manner prescribed herein from
and including the date of issuance of such share of Preferred Stock,  whether or
not such  dividends  shall have been  declared and whether or not there shall be
(at the time such  dividends are  calculated  or become  payable or at any other
time)  profits,  surplus  or other  funds or assets of the  Corporation  legally
available  for the payment of  dividends.  For purposes of this Section 1.3, the
date on which the Corporation shall initially issue any share of Preferred Stock
shall be deemed to be its "date of issuance"  regardless  of the number of times
transfer of such share of  Preferred  Stock shall be made on the stock  register
maintained  by  or  for  the   Corporation  and  regardless  of  the  number  of
certificates  which may be issued to  evidence  such  share of  Preferred  Stock
(whether by reason of transfer of such share or for any other reason).
<PAGE>

1.4 Dividend Rates.  Dividends shall be cumulative,  and shall accrue on a daily
basis on each  Outstanding  share  of  Preferred  Stock  at the  rate per  annum
(computed on the basis of a 360-day year having twelve thirty-day months) of six
percent (6%) of the Liquidation  Value of each share of Preferred  Stock. To the
extent not paid, on a Dividend Payment Date all unpaid dividends accrued on each
share of Preferred Stock Outstanding  during such quarter (or from and including
the  original  date  of  issuance  of such  share  in the  case  of the  initial
quarter-end  after the date of issuance) shall be added to the Liquidation Value
of such share and shall remain a part thereof until such dividends are paid.

Section 2  Liquidation Preferences.

Subject to the  holders'  conversion  rights  provided  below  herein,  upon any
liquidation (complete or partial), dissolution or winding up of the Corporation,
or any similar distribution of its assets to its stockholders which results in a
return  of  capital,  whether  voluntary  or  involuntary,  the  holders  of the
Preferred  Stock shall be entitled,  before any  distribution or payment is made
upon any Junior  Securities of the Corporation,  to be paid out of the assets of
the Corporation  available for  distribution to its  stockholders  (whether from
capital,  surplus  or  earnings)  an amount in cash  equal to the sum of (i) the
aggregate  Liquidation  Value of all shares of Preferred Stock then Outstanding,
plus (ii) all accrued unpaid dividends on such shares, and shall not be entitled
to any further payment. Written notice of such liquidation, dissolution, winding
up or other  distribution  of assets,  stating a payment date, the amount of the
payment and the place where the amounts distributable shall be payable, shall be
mailed by certified or registered mail, return receipt requested,  not less than
60 days prior to the payment date stated  therein,  to each record holder of any
share of Preferred Stock entitled  thereto at the address for such record holder
shown on the Corporation's records.  Neither the consolidation nor merger of the
Corporation into or with any other corporation or corporations,  nor the sale or
transfer by the Corporation of all or any part of its assets, shall be deemed to
be a  liquidation,  dissolution,  winding  up or  similar  distribution  of  the
Corporation  within the meaning of any of the  provisions of this Section 2. The
Preferred  Stock  shall  rank  pari  passu  with  the  Corporation's   Series  A
Convertible Preferred Stock.
<PAGE>


Section 3.  Redemptions of Preferred Stock.

3.1 Redemption  Price. For each share of Preferred Stock which is to be redeemed
by the  Corporation  at any time and for any reason in a redemption  pursuant to
this  Section 3, the  Corporation  shall be obligated  on the  Redemption  Date,
regardless of whether the Corporation shall be able or legally permitted to make
such  payment  on the  Redemption  Date,  to pay to  the  holder  thereof  (upon
surrender  by  such  holder  at  the  Corporation's   principal  office  of  the
certificate representing such share of Preferred Stock duly endorsed in blank or
accompanied by an appropriate  form of assignment) the Redemption Price for such
share of Preferred Stock, payable in cash.

3.2 Redeemed or  Otherwise  Acquired  Shares Not to Be  Reissued.  Any shares of
Preferred Stock redeemed pursuant to this Section 3 or otherwise acquired by the
Corporation  shall not be reissued,  sold or transferred by the  Corporation and
shall be retired.

3.3  Determination of Number of Each Holder's Shares to Be Redeemed.  The number
of shares of  Preferred  Stock to be redeemed  from each holder  thereof in each
redemption  under this Section 3 shall be  determined by  multiplying  the total
number  of  shares of  Preferred  Stock to be  redeemed  times a  fraction,  the
numerator of which shall be the total  number of shares of Preferred  Stock then
held by such holder and the  denominator  of which shall be the total  number of
shares of Preferred Stock then Outstanding,  rounded if the result is fractional
to the nearest whole number of shares.

3.4 Optional Redemption by Corporation.  (a) The Preferred Stock may be redeemed
in whole (but not in part), at the Redemption Price, at the Corporation's option
at any time after the seventh (7th) anniversary of the date of original issuance
of the Preferred Stock, on at least 30 days' notice.

3.5 Mandatory  Redemption  Based on Failure of  Stockholders'  Vote.  (a) In the
event that the Preferred  Stock has not become  convertible  in accordance  with
Section 4.1(a) on or before July 26, 2005,  then at any time after such date (i)
any holder of shares of Preferred  Stock may require the  Corporation  to redeem
all or  any  portion  of the  Preferred  Stock  owned  by  such  holder,  at the
Redemption  Price (as  determined  pursuant to this Section  3.5),  upon written
notice to the Corporation  requesting such  redemption,  or (ii) the Corporation
may, at its option,  redeem the Preferred  Stock then  Outstanding in whole (but
not in part),  at the Redemption  Price (as determined  pursuant to this Section
3.5), upon written notice to the holders thereof. Notice of any such election by
the  Corporation to redeem shall specify a redemption  date not less than 10 nor
more than 30 days after the date of such notice.
<PAGE>

(b) The Redemption  Price for each holder's  shares of Preferred  Stock redeemed
pursuant to this Section 3.5 shall be the lesser of

(i) the amount which, on receipt by the holder, will cause the holder to realize
an Internal  Rate of Return of  thirty-five  percent  (35%) with  respect to its
investment in such shares being redeemed, and

(ii) seventy-five percent (75%) of the Corporation's  cumulative EBITDA, for the
period from the date of original  issuance of the Preferred Stock to the date of
such redemption,  multiplied by a fraction, the numerator of which is the number
of shares of Preferred Stock to be redeemed from such holder and the denominator
of which is the  aggregate  number of shares of  Preferred  Stock  issued by the
Corporation,  provided that the  Redemption  Price per share of Preferred  Stock
calculated  pursuant to this  paragraph  (ii) shall in no event be less than the
Liquidation Value thereof.

3.6  Redemptions  or  Purchase  by  Corporation's  Designee(s).  In  lieu of any
redemption  of  Preferred  Stock by the  Corporation  permitted  hereunder,  the
Corporation  may  designate  one or more  purchasers  who shall be  entitled  to
purchase  the  Preferred  Stock  from  the  holders  thereof  at the  applicable
Redemption  Price. Any such designee(s) shall have the rights and obligations of
the Corporation specified herein with respect to the redemption of such shares.

3.7 Notice of Redemption.  Except as otherwise expressly provided herein, notice
of any  redemption  of  Preferred  Stock,  specifying  the  time  and  place  of
redemption, the Redemption Price (in the case of a redemption under Section 3.5,
showing  the  computation  thereof in  reasonable  detail)  and the  Section and
paragraph  pursuant to which such  redemption is being made,  shall be mailed by
certified or registered mail, return receipt requested, to each holder of record
of shares of  Preferred  Stock to be  redeemed,  at the  address for such holder
shown on the  Corporation's  records,  not more  than  sixty  (60) nor less than
thirty (30) days prior to the date on which such  redemption is to be made.  The
notice  shall  also  specify  the  number of shares of  Preferred  Stock and the
certificate  numbers  thereof  which  are  to  be  redeemed.   With  respect  to
redemptions  made  pursuant  to Section  3.4,  upon  mailing  any such notice of
redemption  the  Corporation  shall  become  obligated  to redeem at the time of
redemption specified therein all shares of Preferred Stock therein specified. In
case less than all the shares of Preferred Stock  represented by any certificate
are redeemed, a new certificate  representing the unredeemed shares of Preferred
Stock  shall be  issued  to the  holder  thereof  without  cost to such  holder.
Notwithstanding any other provision of this Section 3, the Corporation shall not
be  entitled  to redeem  any shares of  Preferred  Stock in respect of which the
holder of such Preferred stock has delivered to Corporation a Conversion  Notice
after the delivery of notice by the  Corporation  as provided in this  paragraph
but prior to the Redemption Date.
<PAGE>

3.8 Rights After Redemption Date.  Provided that the Redemption Price is paid in
full on the  applicable  Redemption  Date, no share of Preferred  Stock shall be
entitled  to any  dividends  accrued  after  its  Redemption  Date,  and on such
Redemption  Date,  except as otherwise  provided herein or by law, all rights of
the holder of such share of Preferred Stock as a stockholder of the Corporation,
by reason of the  ownership  of such  share,  shall  cease,  except the right to
receive the Redemption  Price of such share upon  presentation  and surrender of
the  certificate  representing  such share,  and such share shall not after such
Redemption Date be deemed to be Outstanding.

3.9 Other  Redemptions.  The  Corporation  shall  neither  redeem nor  otherwise
acquire  any shares of any class of  Preferred  Stock  except  (i) as  expressly
authorized in this Certificate of Designations, or (ii) pursuant to any offer of
redemption  made to the  holders  of  Preferred  Stock  of such  class  pro rata
according to the shares held by them.

3.10  Deposit  of  Redemption  Price.  If on or  before  the date of  redemption
specified  in any notice of  redemption  of any share of  Preferred  Stock,  the
Corporation shall irrevocably deposit the amount of the Redemption Price thereof
with a bank  or  trust  company  having  an  office  in the  City  of New  York,
designated in such notice of redemption,  in trust for the benefit of the holder
of such share of Preferred Stock,  such share of Preferred Stock shall be deemed
to have been redeemed on the date so specified,  whether or not the  certificate
for such share shall be surrendered for redemption and canceled.

Section 4.  Conversion of Preferred Stock.

4.1 Conversion  Procedures.  (a) The Preferred  Stock shall be convertible  into
shares of Common Stock, in accordance with the terms of this Section 4 after the
receipt by the  Corporation of a Conversion  Notice as defined in Section 4.1(c)
hereof  received at any time after the date that the  issuance  of Common  Stock
upon such conversion is approved by the holders of outstanding  Common Stock, in
compliance with Rule 312.03 of the New York Stock Exchange Listed Company Manual
(or such approval  otherwise is not  required)  subject to the  requirements  of
Section 4.1(b) hereof.
<PAGE>

(b) A  holder  of  shares  of  Preferred  Stock  may,  at  any  time  after  the
requirements of Section 4.1(a) are satisfied, convert pursuant to this Section 4
all or any part (in whole  numbers of shares  only) of the  shares of  Preferred
Stock held by such  holder  into such  number of fully  paid and  non-assessable
whole shares of Common Stock as is obtained by multiplying  the number of shares
of  Preferred  Stock so to be  converted by the  Liquidation  Value  thereof and
dividing the result by the Conversion Price then in effect. Such right as to any
particular share shall terminate at the close of business on the day immediately
prior to the date fixed for payment on the Preferred Stock upon any liquidation,
dissolution, winding up or similar distribution of the Corporation.

(c) Each conversion of Preferred Stock shall be effected by the surrender of the
certificate  or  certificates  representing  the shares to be  converted  at the
principal  office  of the  Corporation  (or such  other  office or agency of the
Corporation as the  Corporation may designate by notice in writing to the holder
or holders of the Preferred  Stock) at any time during its usual business hours,
which shall be  accompanied  by a written notice by the holder of such Preferred
Stock (a  "Conversion  Notice")  stating  that such  holder  desires  to convert
shares,  or  a  stated  number  of  shares,  represented  by  a  certificate  or
certificates  specifically  described therein. Such Conversion Notice shall also
specify  the name or names  (with  addresses)  and  denominations  in which  the
certificate or  certificates  for Common Stock shall be issued and shall include
instructions for delivery  thereof.  The Conversion Price shall be determined as
of the close of business on the date the certificate  representing the Preferred
Stock and the Conversion Notice is received by the Corporation.  Such conversion
shall be deemed to have been effected as of the close of business on the date on
which the certificate representing the Preferred Stock and the Conversion Notice
for such shares shall have been received by the Corporation, and as of such date
(the  "Conversion  Date") the rights of the holder of such  Preferred  Stock (or
specified  portion thereof) as such holder shall cease and the person or persons
in whose  name or names any  certificate  or  certificates  for shares of Common
Stock are to be issued upon such  conversion  shall be deemed to have become the
holder or holders of record of the shares of Common Stock represented thereby.

(d) As soon as possible after the Conversion  Date (and in no event more than 30
days after the Conversion Date),  subject to Section 4.2(c), with respect to the
certificate(s) specified in (i) and (ii) below, the Corporation shall deliver to
the converting  holder or, with respect to the  certificate(s)  specified in (i)
below, as specified by such converting holder:
<PAGE>

(i) a certificate or  certificates  representing  the number of shares of Common
Stock issuable by reason of such conversion registered in such name or names and
such   denomination  or  denominations  as  the  converting  holder  shall  have
specified;

(ii) a certificate  representing  any shares of Preferred Stock which shall have
been  represented  by the  certificate  or  certificates  which  shall have been
delivered to the  Corporation in connection with such conversion but which shall
not have been converted; and

(iii) a payment of cash in an amount equal to the value of any fractional  share
of  Common  Stock  that  otherwise  would be  issuable  in  connection  with the
Preferred Stock converted.

4.2 Authorization and Issuance of Common Stock.  The Corporation covenants and
agrees that:

(a) The  Corporation  will at all times  reserve and keep  available  out of its
authorized  but  unissued  shares of Common  Stock,  solely  for the  purpose of
issuing upon the  conversion of the Preferred  Stock as provided in this Section
4, such  number of shares of Common  Stock as shall  then be  issuable  upon the
conversion  of all  Outstanding  shares  of  Preferred  Stock.  The  Corporation
covenants that all shares of Common Stock which shall be so issuable shall, when
issued, be duly and validly issued,  fully paid and non-assessable and free from
all taxes, liens, and charges.  The Corporation will take all such action as may
be necessary to assure that all shares of Common Stock may be so issued  without
violation  of any  applicable  law or  regulation  or  any  requirements  of any
domestic stock exchange upon which any shares of Common Stock may be listed.

(b) The Corporation  will not take any action which results in any adjustment of
the number of shares of Common Stock  acquirable  upon  conversion of a share of
Preferred  Stock if after such action the total number of shares of Common Stock
issuable upon conversion of the Preferred Stock then Outstanding,  together with
the total number of shares of Common Stock then Outstanding and the total number
of shares of Common Stock  reserved  for any purpose  other than  issuance  upon
conversion  of Common  Stock,  would exceed the total number of shares of Common
Stock then  authorized by the  Corporation's  Certificate of  Incorporation,  as
amended. 
<PAGE>

(c) If any shares of Common  Stock  required  to be  reserved  for  purposes  of
conversions of shares of Preferred Stock under this  Certificate of Designations
require registration with, or approval of, any governmental  authority under any
federal or state law (other than any  registration  under the  Securities Act of
1933, as then in effect,  or any similar  federal  statute then in force, or any
state  securities  law,  required  by reason of any  transfer  involved  in such
conversion),  or listing on any domestic securities exchange, before such shares
may be issued  upon  conversion,  the  Corporation  will,  at its expense and as
expeditiously as possible,  use its best efforts to cause such shares to be duly
registered  or  approved  for  listing  or  listed on such  domestic  securities
exchange, as the case may be.

(d) The issuance of  certificates  for shares of Common Stock upon conversion of
shares of the  Preferred  Stock shall be made  without  charge to the holders of
such shares for any issuance tax in respect  thereof,  or other cost incurred by
the Corporation in connection  with such conversion and the related  issuance of
shares of Common Stock,  provided that the Corporation  shall not be required to
pay any tax which may be  payable in respect  of any  transfer  involved  in the
issuance and delivery of any certificate in a name other than that of the holder
of the Preferred Stock converted.

(e) The  Corporation  will not close its books against the transfer of any share
of Preferred  Stock or of any share of Common Stock issued or issuable  upon the
conversion  of such  shares  in any  manner  which  interferes  with the  timely
conversion of such shares.

4.3 Conversion  Price. (a) The initial  Conversion Price shall be one dollar and
twenty-five cents ($1.25). In order to prevent dilution of the conversion rights
granted hereunder, the Conversion Price shall be subject to adjustment from time
to time pursuant to this Section 4.

(b) If and whenever the Corporation  shall issue or sell, or shall in accordance
with  Section 4.4 be deemed to have issued or sold,  any shares of Common  Stock
for a  consideration  per share that is less than 95% of the Market Price on the
date of such  issue  or sale,  then,  forthwith  upon  such  issue or sale,  the
Conversion  Price  shall,  subject  to  Section  4.4,  be  reduced  to the price
(calculated  to the nearest  $0.001)  determined by  multiplying  the Conversion
Price  in  effect  immediately  prior  to the  time of such  issue  or sale by a
fraction, the numerator of which shall be the sum of (i) the number of shares of
Common  Stock  Deemed  Outstanding  immediately  prior  to  such  issue  or sale
multiplied by the Market Price immediately prior to such issue or sale plus (ii)
the  consideration  received by the Corporation upon such issue or sale, and the
denominator of which shall be the product of (iii) the total number of shares of
Common Stock Deemed Outstanding immediately after such issue or sale, multiplied
by (iv) the Market Price immediately prior to such issue or sale.
<PAGE>

Notwithstanding  the foregoing,  no adjustment of the Conversion  Price shall be
made in an amount  less than $0.001 per share,  but any such  lesser  adjustment
shall be carried  forward and shall be made at the time of and together with the
next  subsequent  adjustment  which  together  with any  adjustments  so carried
forward shall amount to $0.001 per share or more.

(c)  Notwithstanding  the  provisions  of this  Section 4.3 and Section  4.4, no
adjustment of the Conversion  Price shall be required as a result of the sale or
issuance of Common  Stock,  at prices less than 95% of the Market  Price then in
effect,  (i) upon conversion of any of the Preferred Stock or the  Corporation's
Series C Convertible  Preferred  Stock, par value $0.01 per share (the "Series C
Preferred Stock") or the exchange of the Corporation's 6% Exchangeable Notes due
December 31, 2001,  (ii) in connection  with Excluded  Securities,  or (iii) the
issuance of the Series C Preferred Stock.

4.4  Effect of Certain Events on Conversion Price.  For purposes of determining
the adjusted Conversion Price under Section 4.3, the following shall be
applicable:

(a) Issuance of Rights or Options.  In case at any time the Corporation shall in
any manner grant  (whether  directly or by  assumption in a merger or otherwise)
any rights to subscribe for or to purchase,  or any options for the purchase of,
Common Stock or any stock or other  securities  convertible into or exchangeable
for Common Stock (such rights or options being herein called  "Options" and such
convertible or exchangeable stock or securities being herein called "Convertible
Securities"),  whether or not such  Options or the rights to convert or exchange
such Convertible Securities are immediately exercisable, and the price per share
for which  Common  Stock is issuable  upon the  exercise of such Options or upon
conversion or exchange of such  Convertible  Securities  (determined by dividing
(i) the total  amount,  if any,  received or receivable  by the  Corporation  as
consideration  for the  granting of such  Options,  plus the  minimum  aggregate
amount of additional  consideration payable to the Corporation upon the exercise
of all  such  Options,  plus,  in the  case  of such  Options  which  relate  to
Convertible   Securities,   the   minimum   aggregate   amount   of   additional
consideration,  if any,  payable  upon  the  issue  or sale of such  Convertible
Securities  and upon the  conversion  or  exchange  thereof,  by (ii) the  total
maximum  number of shares of Common  Stock  issuable  upon the  exercise of such
Options or upon the  conversion or exchange of all such  Convertible  Securities
issuable upon the exercise of such Options) shall be less than 95% of the Market
Price,  determined as of the date of granting of such  Options),  then the total
maximum  number of shares of Common  Stock  issuable  upon the  exercise of such
<PAGE>

Options or upon  conversion  or  exchange  of the total  maximum  amount of such
Convertible  Securities  issuable upon the exercise of such Options shall (as of
the date of grant of such Options) be deemed to be outstanding  and to have been
issued for such price per share. No adjustment of the Conversion  Price shall be
made  upon  the  actual  issue  of such  Common  Stock  or of  such  Convertible
Securities upon exercise of such Options or upon the actual issue of such Common
Stock upon  conversion  or exchange of such  Convertible  Securities,  except as
otherwise provided in Section 4.4(c).

(b) Issuance of Convertible  Securities.  In case the  Corporation  shall in any
manner issue  (whether  directly or by  assumption  in a merger or otherwise) or
sell any  Convertible  Securities,  whether  or not the  rights to  exchange  or
convert  thereunder  are  immediately  exercisable,  and the price per share for
which Common Stock is issuable upon such  conversion or exchange  (determined by
dividing (i) the total  amount  received or  receivable  by the  Corporation  as
consideration  for the issue or sale of such  Convertible  Securities,  plus the
minimum  aggregate  amount of additional  consideration,  if any, payable to the
Corporation upon the conversion or exchange  thereof,  by (ii) the total maximum
number of shares of Common Stock issuable upon the conversion or exchange of all
such  Convertible  Securities)  shall  be less  than  95% of the  Market  Price,
determined as of the date of such issue or sale of such Convertible  Securities,
then the total maximum number of shares of Common Stock issuable upon conversion
or  exchange  of all such  Convertible  Securities  shall (as of the date of the
issue or sale of such Convertible Securities) be deemed to be outstanding and to
have been  issued for such  price per share.  Except as  otherwise  provided  in
Section  4.4(c),  no adjustment of the  Conversion  Price shall be made upon the
actual  issue  of  such  Common  stock  upon  conversion  or  exchange  of  such
Convertible  Securities,  and if any  such  issue  or sale  of such  Convertible
Securities  is made upon  exercise of any Options for which  adjustments  of the
Conversion  Price have been made or are to be made pursuant to other  provisions
of this Section 4.4, no further adjustment of the Conversion Price shall be made
by reason of such issue or sale.

(c) Change in Option or Conversion  Price. If the purchase price provided for in
any Option referred to in Section 4.4(a), the additional consideration,  if any,
payable upon conversion or exchange of any Convertible Securities referred to in
Section 4.4(a) or (b), or the rate at which any Convertible  Securities referred
to in Section  4.4(a) or (b) are  convertible  into or  exchangeable  for Common
Stock,  shall  change at any time (other  than under or by reason of  provisions
designed to protect  against  dilution of the type set forth in this Section 4.4
<PAGE>

or in Sections 4.3 and 4.5), then the Conversion  Price in effect at the time of
such change shall forthwith be adjusted to the Conversion Price which would have
been in effect at such time had such  Option  or  Convertible  Securities  still
outstanding provided for such changed purchase price,  additional  consideration
or conversion rate, as the case may be, at the time initially granted, issued or
sold. If the purchase  price  provided for in any Option  referred to in Section
4.4(a),  the  additional  consideration,  if any,  payable  upon  conversion  or
exchange of any Convertible  Securities referred to in Section 4.4(a) or (b), or
the rate at which any  Convertible  Securities  referred to in Section 4.4(a) or
(b), are convertible into or exchangeable for Common Stock,  shall be reduced at
any time under or by reason of  provisions  with  respect  thereto  designed  to
protect  against  dilution of the type set forth in this Section 4.4 or Sections
4.3 and 4.5,  then in case of the  delivery of Common Stock upon the exercise of
any such Option or upon conversion or exchange of any such Convertible Security,
the Conversion  Price then in effect  hereunder  shall  forthwith be adjusted to
such  respective  amount  as  would  have  been  obtained  had  such  Option  or
Convertible  Security  never  been  issued  as to  such  Common  Stock  and  had
adjustments  been made upon the issuance of the shares of Common Stock delivered
as aforesaid,  but only if as a result of such  adjustment the Conversion  Price
then in effect hereunder would be reduced.

(d) Treatment of Expired Options and Unexercised  Convertible  Securities.  Upon
the  expiration  of any  Option or the  termination  of any right to  convert or
exchange  any  Convertible  Securities  (without  any exercise of such Option or
right),  the  Conversion  Price  then in effect  hereunder  shall  forthwith  be
adjusted to the Conversion  Price which would have been in effect at the time of
such expiration or termination had such Option or Convertible Securities, to the
extent  outstanding  immediately prior to such expiration or termination,  never
been issued, and the Common Stock issuable  thereunder shall no longer be deemed
to be outstanding.

(e)  Calculation of Consideration Received.

(i) In case any shares of Common Stock, Options or Convertible  Securities shall
be  issued  or sold or  deemed  to have  been  issued  or  sold  for  cash,  the
consideration  received  therefor  shall be deemed to be the aggregate  proceeds
payable to the Corporation therefor, prior to deduction of any expenses incurred
and  any  underwriting   commission  or  concessions  paid  or  allowed  by  the
Corporation in connection therewith. 
<PAGE>

(ii) In case any shares of Common Stock, Options or Convertible Securities shall
be  issued  or  sold  for  a  consideration  other  than  cash,  the  amount  of
consideration  other than cash received by the Corporation shall be deemed to be
the fair value, determined in good faith by the Board of Directors.

(iii) In case any Options shall be issued in  connection  with the issue or sale
of  other  securities  of the  Corporation,  together  comprising  one  integral
transaction in which no specific  consideration  is allocated to such Options by
the parties  thereto,  such Options shall be deemed to have been issued  without
consideration.

(iv) In case any shares of Common Stock, Options or Convertible Securities shall
be  issued  in  connection  with any  merger  in which  the  Corporation  is the
surviving  corporation,  the amount of consideration therefor shall be deemed to
be the fair value,  determined in good faith by the Board of Directors,  of such
portion of the net assets and business of the non-surviving corporation as shall
be attributable to such Common Stock, Options or Convertible Securities,  as the
case may be.

(v) In the event of any  consolidation  or merger  of the  Corporation  in which
stock or other  securities of any  corporation are issued in exchange for Common
Stock of the Corporation or in the event of any sale of all or substantially all
of  the  assets  of  the  Corporation  for  stock  or  other  securities  of any
corporation,  the Corporation  shall be deemed to have issued a number of shares
of its Common Stock for stock or securities of the other corporation computed on
the basis of the actual  exchange ratio on which the  transaction was predicated
and for a  consideration  equal  to the  fair  market  value on the date of such
transaction  of such stock or  securities of the other  corporation,  and if any
such calculation results in adjustment of the Conversion Price the determination
of the  number of  shares of Common  Stock  receivable  upon  conversion  of the
Preferred Stock  immediately  prior to such merger,  consolidation  or sale, for
purposes of Section 4.7, shall be made after giving effect to such adjustment of
the Conversion Price.
<PAGE>

(vi) In case  the  Corporation  shall  declare  a  dividend  or make  any  other
distribution upon any stock of the Corporation payable in Common Stock,  Options
or Convertible Securities,  any Common Stock, Options or Convertible Securities,
as the case may be, issuable in payment of such dividend or  distribution  shall
be deemed to have been issued or sold without consideration.

(f) Record Date.  For purposes of Sections 4.3 and 4.4, in case the  Corporation
shall  take a record of the  holders  of its  Common  Stock for the  purpose  of
entitling them (i) to receive a dividend or other distribution payable in Common
Stock, Options or Convertible  Securities,  or (ii) to subscribe for or purchase
Common Stock, Options or Convertible Securities,  then such record date shall be
deemed to be the date of the issue or sale of the shares of Common  Stock deemed
to have been issued or sold upon the  declaration of such dividend or the making
of such other distribution or the date of granting of such right or subscription
or purchase, as the case may be.

4.5 Subdivisions and Combinations. Except to the extent Section 4.4(e)(vi) above
applies,  in the event that the Corporation  shall at any time subdivide (by any
stock split, stock dividend or otherwise) one or more classes of its outstanding
Common Stock into a greater  number of shares of Common  Stock,  the  Conversion
Price  in  effect  immediately  prior  to such  subdivision  forthwith  shall be
proportionately reduced.  Conversely, in the event the outstanding shares of one
or more classes of the Common Stock shall be combined  into a smaller  number of
shares (by reverse stock split or  otherwise),  the  Conversion  Price in effect
immediately prior to such combination shall be proportionately increased.

4.6 Dividends. In the event that the Corporation declares a dividend (other than
a dividend payable in Common Stock, Options or Convertible Securities, or a cash
dividend  payable out of earnings or earned surplus) upon Common Stock,  then at
the option of the holders of a majority of the  outstanding  shares of Preferred
Stock,

(1) the Corporation shall pay over to each holder, on the dividend payment date,
the cash,  stock or other  securities and other property which holder would have
received  if such  holder had  converted  all of his or its shares of  Preferred
Stock into Common  Stock and had been the record  holder of such Common Stock on
the date on which a record is taken for the purpose of such  dividend,  or, if a
record is not taken,  the date as of which the holders of Common Stock of record
entitled to such dividend are to be determined, or 
<PAGE>

(2) the Conversion Price in effect  immediately prior to the declaration of such
dividend  shall be  reduced by an amount  equal to the  amount of such  dividend
payable per share of Common  Stock,  in the case of a cash  dividend,  or by the
fair value of such dividend per share (as reasonably  determined by the Board of
Directors of the Corporation), in the case of any other dividend, such reduction
to be  effective  on the date as of which a record is taken for purposes of such
dividend, or if a record is not taken, the date as of which holders of record of
Common Stock entitled to such dividend are determined, or

(3) in the case of a dividend  consisting  of stock or  securities  (other  than
Common Stock, Options or Convertible Securities) or other property distributable
to holders of Common  Stock,  the holder of Preferred  Stock may elect that,  in
lieu  of (1) or  (2)  above,  lawful  and  adequate  provisions  shall  be  made
(including without  limitation any necessary  reduction in the Conversion Price)
whereby  such  holder of  Preferred  Stock  shall  thereafter  have the right to
purchase  and/or  receive,  on  the  terms  and  conditions  specified  in  this
Certificate  of  Designations  and in  addition  to the  shares of Common  Stock
receivable immediately prior to the declaration of such dividend upon conversion
of his or its shares of Preferred  Stock,  such shares of stock,  securities  or
property as are distributable with respect to outstanding shares of Common Stock
equal to the number of shares of Common Stock  receivable  immediately  prior to
such declaration upon conversion of his or its shares of Preferred Stock, to the
end that the provisions  hereof  (including  without  limitation  provisions for
adjustments of the Conversion Price and of the number of shares  receivable upon
such  conversion)  shall  thereafter  be  applicable,  as  nearly  as may be, in
relation to such shares of stock, securities or property.

For the purposes of this Section 4.6,  "dividend" shall mean any distribution to
the holders of Common Stock as such, and a dividend shall be considered  payable
out of earnings or earned  surplus (other than  revaluation or paid-in  surplus)
only to the extent that such  earnings  or earned  surplus are charged an amount
equal to the fair value of such dividend as  reasonably  determined by the Board
of Directors of the Corporation. 
<PAGE>

4.7  Reorganization,  Reclassification,  Consolidation,  Merger or Sale.  If any
capital   reorganization  or  reclassification  of  the  capital  stock  of  the
Corporation,  or any  consolidation  or merger of the  Corporation  with or into
another   corporation,   or  any  sale  of  all  or  substantially  all  of  the
Corporation's assets to another corporation shall be effected in such a way that
holders of Common  Stock shall be entitled to receive  (either  directly or upon
subsequent  liquidation)  stock,  securities  or assets  with  respect  to or in
exchange  for  Common  Stock,  then,  as a  condition  of  such  reorganization,
reclassification,  consolidation,  merger or sale, lawful and adequate provision
(as  determined  reasonably  and in good faith by the Board of  Directors of the
Corporation)  shall be made whereby each of the holders of the  Preferred  Stock
shall  thereafter  have the right to acquire and receive upon the basis and upon
the terms and  conditions  specified  herein and in lieu of the shares of Common
Stock of the Corporation  immediately theretofore acquirable and receivable upon
the  conversion of such  holder's  shares,  such shares of stock,  securities or
assets as may be issued or payable  with  respect to or in exchange for a number
of  outstanding  shares of Common  Stock equal to the number of shares of Common
Stock immediately  theretofore acquirable and receivable upon conversion of such
shares had such reorganization, reclassification,  consolidation, merger or sale
not taken place, and in any such case  appropriate  provision shall be made with
respect to such holder's  rights and interests to the end that the provisions of
this Section 4 (including without  limitation  provisions for adjustments of the
Conversion  Price and of the  number of shares of Common  Stock  acquirable  and
receivable upon the exercise of the conversion rights granted in this Section 4)
shall thereafter be applicable in relation to any shares of stock, securities or
assets  thereafter  deliverable  upon the  conversion  of such  holder's  shares
(including,  in the case of any such consolidation,  merger or sale in which the
successor  corporation or purchasing  corporation is other than the Corporation,
an  immediate  adjustment  of the  Conversion  Price to the value for the Common
Stock reflected by the terms of such consolidation,  merger or sale if the value
so reflected is less than the Conversion  Price in effect  immediately  prior to
such  consolidation,  merger or sale).  The  Corporation  shall not  effect  any
consolidation,  merger or sale, unless the successor  corporation (if other than
the Corporation)  resulting from such consolidation or merger or the corporation
purchasing  such  assets  shall  assume the  obligation  to deliver to each such
holder such shares of stock,  securities  or assets as, in  accordance  with the
foregoing provisions, such holder may be entitled to acquire or receive.

4.8 Notice of  Adjustment.  Immediately  upon any  adjustment of the  Conversion
Price,  the  Corporation  shall send  written  notice  thereof to all holders of
Preferred  Stock,  which notice shall state the Conversion  Price resulting from
such adjustment and the increase or decrease, if any, in the number of shares of
Common  Stock  acquirable  and  receivable  upon  conversions  of all  shares of
Preferred Stock held by each such holder, setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is based.
<PAGE>

4.9  Other Adjustment-Related Notices.  In the event that at any time:

(a) the Corporation  shall declare a dividend (or any other  distribution)  upon
its  Common  Stock  payable  otherwise  than in cash out of  earnings  or earned
surplus;

(b) the Corporation  shall offer for subscription pro rata to the holders of any
class of its Common Stock any  additional  shares of stock of any class or other
rights;

(c)  there  shall be any  capital  reorganization,  or  reclassification  of the
capital stock of the Corporation,  or consolidation or merger of the Corporation
with, or sale of all or substantially all of its assets to, another corporation;
or

(d)  there shall be any voluntary or involuntary dissolution, liquidation,
winding up or similar distribution of the Corporation;

then, in connection  with any such event,  the  Corporation  shall give by first
class mail, postage prepaid,  addressed to the holders of Preferred Stock at the
address for each such holder as shown on the books of the Corporation:

(i) at least 30 days' prior written notice of the date on which the books of the
Corporation  shall  close  or  a  record  shall  be  taken  for  such  dividend,
distribution  or  subscription  rights  (and  specifying  the date on which  the
holders of Common Stock shall be entitled thereto) or for determining  rights to
vote in respect of such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation, winding up or similar distribution; and

(ii) in the case of any such  reorganization,  reclassification,  consolidation,
merger, sale, dissolution,  liquidation,  winding up or similar distribution, at
least 30 days' prior  written  notice of the date when the same shall take place
(and  specifying the date on which the holders of Common Stock shall be entitled
to exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding up or similar distribution). 
<PAGE>

4.10 Certain  Events.  If any event occurs as to which the other  provisions  of
this Section 4 are not strictly  applicable or if strictly  applicable would not
fairly protect the conversion  rights of the Preferred  Stock in accordance with
the  essential  intent  and  principles  of such  provisions,  then the Board of
Directors  shall make an adjustment in the  application of such  provisions,  in
accordance  with such  essential  intent and  principles,  so as to protect such
conversion rights as aforesaid.

4.11 Disputes.  In the event that there is any dispute as to (a) the computation
of the price or the number of shares of Common Stock  required to be issued upon
conversion of Preferred  Stock, or (b) the  computation of the Redemption  Price
under  Section 3.6, in either case in which holders of 50 percent or more of the
Preferred  Stock shall join,  the  holders  and the  Corporation  will retain an
independent and nationally  recognized accounting firm to conduct at the expense
of the  Corporation  an audit of the  computations  pursuant to the terms hereof
involved  in  such  dispute,   including  the  financial   statements  or  other
information upon which such  computations  were based. The determination of such
nationally  recognized  accounting firm shall, in the absence of manifest error,
be binding upon the holders of the Preferred Stock and the Corporation. If there
shall be a dispute as to the selection of such nationally  recognized accounting
firm, such firm shall be appointed by the American Institute of Certified Public
Accountants ("AICPA") if willing, otherwise the American Arbitration Association
("AAA"),  upon  application  by the  Corporation  or any holder or holders of at
least 50 percent of the  outstanding  Preferred Stock with notice to the others.
If the price, number of shares of Common Stock or Redemption Price as determined
by such  accounting  firm is five  percent (5%) or more higher or lower than the
price,  number of shares of Common  Stock or  Redemption  Price  computed by the
Corporation,  the expenses of such  accounting  firm and, if any, AICPA and AAA,
shall be borne completely by the Corporation.  In all other cases, they shall be
borne by the disputing holders of Preferred Stock.

Section 5.  Purchase Rights.

If at any time or from time to time the Corporation  shall grant,  issue or sell
any  Options,  Convertible  Securities  or  rights  to  purchase  property  (any
"Purchase  Rights")  pro rata to the  record  holders  of Common  Stock and such
grant, issuance or sale does not result in an adjustment of the Conversion Price
under  Section  4.4,  then each holder of  Preferred  Stock shall be entitled to
acquire,  upon the terms  applicable  to such  Purchase  Rights,  the  aggregate
Purchase  Rights which such holder could have acquired if it had held the number
of shares of Common Stock acquirable and receivable (directly or upon subsequent
conversion,  assuming unrestricted  convertibility) upon conversion  immediately
prior to the time or times at which the Corporation, granted issued or sold such
Purchase Rights. 
<PAGE>

Section 6. Voting Rights of Preferred Stock. (a) Except as otherwise provided by
law, by  agreement  among the  stockholders,  or as  otherwise  provided in this
Certificate of  Designations,  Preferred Stock shall entitle the holders thereof
to no voting rights.

(b) The  Preferred  Stock  shall be  entitled to vote with the holders of Common
Stock on any and all  matters  presented  to the  holders of Common  Stock for a
stockholders'  vote at any time after the  satisfaction  of the  conditions  set
forth in Section 4.1(a) hereof. After the Preferred Stock is entitled to vote on
matters  presented to holders of Common Stock, a share of Preferred  Stock shall
possess  that number of votes equal to the number of shares of Common Stock that
such share of Preferred Stock is convertible into on the applicable record date.

Section 7.  Registration of Transfer.

The Corporation  shall keep at its principal  office (or such other place as the
Corporation  reasonably designates) a register for the registration of shares of
Preferred Stock.  Upon the surrender of any certificate  representing  Preferred
Stock at such place,  the  Corporation  shall,  at the request of the registered
holder of such certificate, execute and deliver (at the Corporation's expense) a
new certificate or certificates in exchange therefor  representing the aggregate
number of shares  represented  by the  surrendered  certificate,  subject to the
requirements of applicable  securities laws. Each such new certificate  shall be
registered  in such name and shall  represent  such number of shares as shall be
requested by the holder of the surrendered  certificate,  shall be substantially
identical in form to the surrendered certificate,  and the holders of the shares
represented by such new certificate shall be entitled to receive all theretofore
payable  but unpaid  dividends  on the  shares  represented  by the  surrendered
certificate.

Section 8.  Replacement.

Upon  receipt  of  evidence  reasonably  satisfactory  to  the  Corporation  (an
affidavit of the registered  holder shall be  satisfactory) of the ownership and
the loss, theft,  destruction or mutilation of any certificate evidencing one or
more shares of the Preferred  Stock and, in the case of any such loss,  theft or
destruction,   upon  receipt  of  indemnity   reasonably   satisfactory  to  the
Corporation (provided that if the registered holder is an institutional investor
its own agreement of indemnity, without bond, shall be satisfactory), or, in the
case of any such mutilation, upon surrender of such certificate, the Corporation
shall (at its  expense)  execute and deliver in lieu of such  certificate  a new
certificate of like kind  representing the number of shares  represented by such
lost, stolen, destroyed or mutilated certificate,  and the shares represented by
such new  certificate  shall be  entitled,  among other  things,  to receive all
theretofore  payable but unpaid dividends on the shares represented by the lost,
stolen, destroyed or mutilated certificate. 
<PAGE>

Section 9.  Restrictions on Corporate Action.

So long as any shares of the Preferred Stock remain  outstanding and in addition
to  any  other  approvals  or  consents  required  by  law,  without  the  prior
affirmative vote or written consent of the holders of at least a majority of all
shares of the Preferred Stock Outstanding at the time:

(a) The  Corporation  shall not increase  the number of shares of the  Preferred
Stock which the Corporation is authorized to issue, or issue  additional  shares
of Preferred Stock except pursuant to Section 1.2(b).

(b) Unless the dividend  payment and redemption  obligations of the  Corporation
with respect to the Preferred  Stock have, at such time,  been fully  satisfied,
the  Corporation  shall  not  declare  or pay any  dividend  or make  any  other
distribution  on any Junior  Securities  other than  dividends or  distributions
payable solely in Junior Securities,  or purchase,  redeem, or otherwise acquire
for any  consideration,  or set  aside as a sinking  fund or other  fund for the
redemption  or repurchase  of any Junior  Securities or any warrants,  rights or
options to purchase the same.

Section 10.  Closing Books.

The  Corporation  will not close its books  against the transfer of any share of
Preferred Stock.

Section 11.  Definitions.

As used in this  Certificate of Designations  the following terms shall have the
following  meanings,  which meanings shall be equally applicable to the singular
and  plural  forms of such  terms:  "Business  Day" means any day which is not a
Saturday or a Sunday or a day on which banks are permitted to close in New York,
New York.

"Common  Stock"  means the Common  Stock,  par value  $0.0001 per share,  of the
Corporation,  and any capital  stock of any class of the  Corporation  hereafter
authorized  which  shall not be limited to a fixed sum or  percentage  of par or
stated value in respect to the rights of the holders  thereof to  participate in
dividends or in the  distribution of assets upon any  liquidation,  dissolution,
winding up or similar distribution of the Corporation. 
<PAGE>

"Common Stock Deemed  Outstanding"  means, at any given time, the sum of (a) the
number of shares of Common Stock actually outstanding at such time (exclusive of
any  shares  of  Common  Stock  owned  or  held  by or for  the  account  of the
Corporation),  plus  (b) the  number  of  shares  of  Common  Stock  into  which
Outstanding shares of Preferred Stock are convertible at such time, plus (c) the
number of other shares of Common Stock deemed to be outstanding  under Section 4
at such time.

"Consolidated Interest Expense" means (without duplication), for any period, the
sum of:

(i)  the interest expense of the Corporation and its Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP;

(ii) all fees,  commissions,  discounts and other charges of the Corporation and
its  Subsidiaries  for  such  period,  determined  on a  consolidated  basis  in
accordance with GAAP, with respect to letters of credit and bankers' acceptances
and the costs (net of benefits) associated with interest hedging obligations;

(iii)  amortization  or write-off of debt discount and deferred  financing costs
(other than deferred  financing  costs incurred on or prior to the Closing Date)
in connection with any Long Term Debt of the  Corporation  and its  Subsidiaries
for such period, determined on a consolidated basis in accordance with GAAP; and

(iv) interest  capitalized by the Corporation and its  Subsidiaries  during such
period determined on a consolidated basis in accordance with GAAP.

"Consolidated Net Income" means,  with respect to any period,  the aggregate net
income for such period, on a consolidated  basis,  determined in accordance with
GAAP ("Net Income"), of the Corporation and its Subsidiaries; provided, however,
that (i) the Net Income (if positive) of any person that is accounted for by the
equity method of  accounting  shall be included only to the extent of the amount
of dividends or distributions paid in cash to the Corporation or a Subsidiary by
such person during such period,  (ii) the Net Income (if positive) of any person
acquired in a pooling of interests  transaction for any period prior to the date
of such acquisition shall be excluded,  (iii)  extraordinary  gains,  losses and
non-cash  restructuring  charges  shall be  excluded,  (iv) the Net  Income  (if
positive) of any Subsidiary shall be excluded to the extent that the declaration
or payment of dividends or similar  distributions by such Subsidiary of such Net
Income is not at the time of  determination  permitted by operation of the terms
of its charter or any agreement,  instrument,  judgment, decree, order, statute,
rule or governmental regulation applicable to that Subsidiary, (v) net after tax
gains (but not net after tax  losses)  from sales of assets  other than  current
<PAGE>

assets or from the  disposition  of any  property  or assets  other  than in the
ordinary course of business shall be excluded, (vi) any after tax gains (but not
losses)  from  currency  exchange  transactions  not in the  ordinary  course of
business  consistent  with  past  practice  shall be  excluded,  and  (vii)  the
cumulative effect of any change in accounting principles shall be excluded.

"Conversion Price" means one dollar and twenty-five cents ($1.25), as such price
may be adjusted from time to time pursuant to the provisions of Section 4.

"Dividend  Payment Date" means, with respect to Preferred Stock, the last day of
March,  June,  September  and December in each year (or if any such day is not a
Business Day the immediately preceding Business Day).

"EBITDA" shall mean, with respect to any period,  Consolidated Net Income of the
Corporation  for such  period  plus,  in each  case to the  extent  deducted  in
computing such  Consolidated  Net Income,  the sum of (without  duplication) (i)
Consolidated  Interest  Expense for such period,  (ii) the  provision  for taxes
based on net income of the  Corporation  and its  Subsidiaries  for such  period
determined  on a  consolidated  basis in  accordance  with  GAAP,  and (iii) the
depreciation  and   amortization   expense  of  such  the  Corporation  and  its
Subsidiaries  for such period  determined on a consolidated  basis in accordance
with GAAP.

"Excluded  Securities"  means (a) Options or Convertible  Securities  issued and
outstanding on the date of original  issuance of the Preferred Stock, and Common
Stock issued upon exercise or conversion thereof,  (b) Common Stock,  Options or
Common Stock issued upon  exercise of such  Options,  issued to employees of the
Corporation  or any of its  Subsidiaries  pursuant to the stock  option plans or
other  incentive  plans  adopted by the Board of  Directors  and  submitted  for
approval  by the  Corporation's  stockholders  at its  1996  annual  meeting  of
stockholders,  and (c) any Common  Stock,  Options,  or Common Stock issued upon
exercise of such Options,  issued to employees of the  Corporation or any of its
Subsidiaries pursuant to the provisions of any other stock bonus or stock option
or other incentive plan or plans subsequently adopted by the Board of Directors.

"GAAP" means generally accepted accounting  principles set forth in the opinions
and pronouncements of the Accounting  Principles Board of the American Institute
of  Certified  Public  Accountants  and  statements  and  pronouncements  of the
Financial Accounting Standards Board. 
<PAGE>

"Internal Rate of Return" means the annual rate (assuming quarterly compounding)
which  if used  to  discount  to  present  value  the  payments  in cash or cash
equivalents made or received by the holder of Preferred Stock, during the period
from the date of calculation back to the initial issuance of such shares,  would
cause the net present value (on such date) of such investment to equal zero (0).
In calculating an Internal Rate of Return:

(A) each  payment  received  in cash or cash  equivalents  by a  holder  (or its
predecessors  in  interest)  of shares  attributable  to such shares or any sale
thereof for cash shall be treated as a cash inflow  with a positive  value,  and
each cash  disbursement  made by the holder (or its  predecessors  in  interest)
directly  attributable  to such shares shall be treated as a cash outflow with a
negative value;

(B) each such payment or disbursement shall be discounted from the date actually
made to the date of the holder's initial investment in shares; and

(C)  indemnity  payments,  financing  fees  (including  without  limitation  the
financing fee paid in connection with the original  issuance of Preferred Stock)
and payments in reimbursement of out-of-pocket  expenses received by the holders
of  shares  shall  not be  treated  as  cash  inflows  and  therefore  shall  be
disregarded.

"Junior   Security"  means  the  Series  C  Convertible   Preferred  Stock,  the
Corporation's  Common Stock and any other equity  security of any kind which the
Corporation or any Subsidiary  shall at any time issue or be authorized to issue
other than preferred stock.

"Liquidation  Value" of any share of Preferred  Stock as of any particular  date
means  an  amount  equal  to the sum of  $100.00  plus any  accrued  and  unpaid
dividends on such share of Preferred Stock.

"Long-Term  Debt" shall mean  (without  duplication)  (A) all  indebtedness  for
borrowed money or evidenced by notes, bonds,  debentures or similar evidences of
indebtedness,  all obligations for the deferred and unpaid purchase price of any
property,  service or business  (other than trade  accounts  payable and accrued
liabilities incurred in the ordinary course of business and constituting current
liabilities),  (B) all capitalized lease obligations,  (C) letters of credit and
all obligations of relating thereto,  (D) all obligations in respect of interest
rate swap  agreements,  currency swap  agreements  and other similar  agreements
designed to hedge against  fluctuations  in interest  rates or foreign  exchange
rates, and (E) all Preferred Stock (and convertible preferred stock of any other
class)  if and so long as the  Market  Price of  Common  Stock is less  than the
Conversion  Price (or  conversion  price of any such other class of  convertible
preferred  stock)  from time to time in  effect;  in each case  determined  on a
consolidated basis in accordance with GAAP.
<PAGE>

 "Market  Price" means as to any  security the average of the closing  prices of
such  security's  sales  on such day on all  domestic  exchanges  on which  such
security may at the time be listed, or, if there shall have been no sales on any
such  exchange on such day,  the  average of the  highest  bid and lowest  asked
prices on all such  exchanges  at the end of such  day,  or, if on such day such
security shall not be so listed or trading  thereon or on such exchange shall be
suspended,  the  closing  price on such day of any such  security  traded on the
NASDAQ System or, if no such closing price is available,  (i) the average of the
representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M.,
New York time,  on such day, or (ii) if on such day such  security  shall not be
quoted  in the  NASDAQ  System,  the  average  of the high and low bid and asked
prices on such day in the  domestic  over-the-counter  market as reported by the
National Quotation Bureau, Incorporated,  or any similar successor organization,
in the case of (i) or (ii) averaged over a period of 21 business days consisting
of the day as of which "Market Price" is being determined and the 20 consecutive
business days prior to such day (unless otherwise  provided  herein).  If at any
time such  security  is not  listed on any  domestic  exchange  or quoted in the
NASDAQ System or the domestic  over-the-counter market, the "Market Price" shall
be the fair market value per share of Common  Stock,  which shall be  reasonably
determined  by the Board of Directors of the  Corporation  as of a date which is
within 15 days of the date as of which the determination is to be made.

"Outstanding"  when used with  reference to shares of Preferred  Stock as of any
particular  time shall mean shares thereof  issued and  outstanding at such time
and  shall  not  include  any  shares  of  Preferred  Stock  represented  by any
certificate in lieu of which a new  certificate  has been executed and delivered
by the  Corporation in accordance with Section 7 or Section 8, but shall include
only those shares represented by such new certificate.

"Person" means and includes an  individual,  a  partnership,  a  corporation,  a
trust, a joint venture,  an unincorporated  organization and a government or any
department or agency thereof.

"Redemption Date" as to any share of Preferred Stock means the date specified in
the notice of redemption  delivered  pursuant to Section 3.7;  provided that for
purposes  of Section  3.8,  the  Redemption  Date shall be the date on which the
applicable  Redemption  Price is  actually  paid to the  holder of such share of
Preferred Stock or deposited in trust for the benefit of such holder pursuant to
Section 3.10.
<PAGE>

"Redemption  Price" as to any share of Preferred Stock means (a) for purposes of
Section 3.5, the Redemption Price specified therein, and (b) in all other cases,
the Liquidation Value of such share.

"Subsidiary"  means any  corporation  at least 50% of the Voting  Stock of every
class of which  is,  at the time as of which any  determination  is being  made,
owned by the Corporation either directly or through one or more Subsidiaries.

"Voting Stock" means any shares of stock having general voting power in electing
the board of directors  (irrespective of whether or not at the time stock of any
other class or classes has or might have voting power by reason of the happening
of any contingency).

Section 12. Miscellaneous.

(a) The  unenforceability  or  invalidity of any provision or provisions of this
Certificate of Designations  shall not render invalid or unenforceable any other
provision or provisions  herein  contained.  (b) Section and paragraph  headings
herein are for  convenience  only and shall not be  construed  as a part of this
Certificate of Designations.

(c) All notices to holders of Preferred  Stock  required or permitted  hereunder
shall be sent by  overnight  courier  service,  prepaid,  addressed to each such
holder at the address for such holder shown on the books of the Corporation.
<PAGE>

     IN WITNESS  WHEREOF,  this  Certificate has been signed on this 20th day of
December,  1996,  and the  signature of the  undersigned  shall  constitute  the
affirmation and  acknowledgment of the undersigned,  under penalties of perjury,
that this  Certificate is the act and deed of the undersigned and that the facts
stated in the Certificate are true.

ALLIANCE ENTERTAINMENT CORP.


By: /s/ Joseph J. Bianco
    --------------------------
 Joseph J. Bianco, Co-Chairman


ATTEST:


/s/ Christopher J. Joyce
------------------------------
Christopher J. Joyce,
Assistant Secretary