PLATINUM ENTERTAINMENT INC, 10-Q, 1997-01-14

PLATINUM ENTERTAINMENT INC
10-Q, 1997-01-14
DURABLE GOODS, NEC

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<PAGE>

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 1996

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
------- -------

Commission File Number 0-27852

PLATINUM ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)

Delaware 36-3802328
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2001 Butterfield Road
Downers Grove, Illinois 60515
(Address of principal executive offices, including zip code)

(630) 769-0033
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No
----- -----

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date:

5,171,439 Shares of Common Stock, par value $.001 per share, at January 14, 1997
<PAGE>

PLATINUM ENTERTAINMENT, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1996
TABLE OF CONTENTS

Page
----
PART I - FINANCIAL INFORMATION

Item 1. Consolidated Balance Sheets as of November 30 and
May 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . 3-4

Consolidated Statements of Operations for the three and six
months ended November 30, 1996 and 1995. . . . . . . . . . . . 5

Consolidated Statements of Cash Flows for the six months ended
November 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . 6

Notes to Consolidated Financial Statements . . . . . . . . . . 7-8

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . 9-15

PART II - OTHER INFORMATION

Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . 16

Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 16

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 17

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Exhibits

2
<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

NOVEMBER 30, MAY 31,
1996 1996
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 952,661 $ 8,222,173
Accounts receivable, less allowances of
$1,220,316 and $1,033,433, respectively . . . . . 4,293,828 3,302,803
Artist advances . . . . . . . . . . . . . . . . . 1,955,212 1,581,390
Inventories . . . . . . . . . . . . . . . . . . . 2,452,935 1,538,108
Notes receivable. . . . . . . . . . . . . . . . . 173,353 1,467,007
Other . . . . . . . . . . . . . . . . . . . . . . 1,208,762 472,457
--------------- ---------------
Total current assets. . . . . . . . . . . . . . . 11,036,751 16,583,938

Artist advances, net of current amounts, less
allowances of $5,386,771 and
$4,942,021, respectively . . . . . . . . . . . . . . 3,520,306 2,093,224
Property and equipment, net. . . . . . . . . . . . . . 752,712 698,251
Music publishing rights and artist masters,
less accumulated amortization of
$123,261 and $90,443, respectively . . . . . . . . . 1,820,242 349,557
Equity investment in joint venture . . . . . . . . . . 3,063,183 -
Other. . . . . . . . . . . . . . . . . . . . . . . . . 174,211 18,568
--------------- ---------------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 20,367,405 $ 19,743,538
--------------- ---------------
--------------- ---------------
</TABLE>

See accompanying notes to financial statements

<PAGE>

PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

NOVEMBER 30, MAY 31,
1996 1996
(UNAUDITED)
<S> <C> <C>

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 855,670 $ 997,378
Accrued liabilities and other . . . . . . . . . . . . . . . . . . . . 1,501,300 2,104,015
Royalties payable . . . . . . . . . . . . . . . . . . . . . . . . . . 3,468,651 1,427,588
--------------- ---------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 5,825,621 4,528,981
Stockholders' equity:
Preferred stock:
Preferred stock ($.001 par value); 10,000,000 shares authorized,
no shares issued and outstanding at November 30, 1996
and at May 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock:
Common stock ($.001 par value); 40,000,000 shares authorized,
5,171,439 shares issued and outstanding at November 30,
1996 and 5,063,207 shares issued and outstanding at
May 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,151 5,063
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 36,159,638 35,253,724
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . (21,623,005) (20,044,230)
--------------- ---------------
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . 14,541,784 15,214,557
--------------- ---------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . $ 20,367,405 $ 19,743,538
--------------- ---------------
--------------- ---------------
</TABLE>

See accompanying notes to financial statements

<PAGE>

PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

THREE THREE SIX SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1996 1995 1996 1995
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>

Gross product sales. . . . . . . . . . . . . . . . $ 5,961,558 $ 5,223,195 $ 11,609,205 $ 10,370,211
Less: Returns and allowances . . . . . . . . . . . (1,198,844) (808,337) (2,271,373) (1,667,420)
Less: Discounts. . . . . . . . . . . . . . . . . . (318,901) (264,793) (763,374) (433,153)
--------------- --------------- --------------- ---------------
Net product sales . . . . . . . . . . . . . . . . 4,443,813 4,150,065 8,574,458 8,269,638
Cost of product sales . . . . . . . . . . . . . . 3,003,005 2,353,292 5,419,676 4,038,464
--------------- --------------- --------------- ---------------
1,440,808 1,796,773 3,154,782 4,231,174

Gross artist project revenues . . . . . . . . . . 930,680 1,620,207 2,111,109 2,539,316
Less: (Allowance for) recovery of
unrecoupable artist advances . . . . . . . . . . (171,959) 243,046 (321,959) 182,655
--------------- --------------- --------------- ---------------
Net artist project revenues . . . . . . . . . . . 758,721 1,863,253 1,789,150 2,721,971
Licensing, publishing and other revenues . . . . . 278,899 398,912 419,408 778,093
--------------- --------------- --------------- ---------------
Net artist project and other revenues . . . . . . 1,037,620 2,262,165 2,208,558 3,500,064
Cost of artist project and other revenues . . . . 894,454 1,667,262 2,123,176 2,962,118
--------------- --------------- --------------- ---------------
143,166 594,903 85,382 537,946
--------------- --------------- --------------- ---------------
Gross profit . . . . . . . . . . . . . . . . . . . 1,583,974 2,391,676 3,240,164 4,769,120
Other operating expenses:
Selling, general and administrative expenses . . . 2,441,137 1,754,035 4,746,386 3,987,259
Depreciation and amortization. . . . . . . . . . . 96,676 26,094 166,091 61,330
--------------- --------------- --------------- ---------------
2,537,813 1,780,129 4,912,477 4,048,589
--------------- --------------- --------------- ---------------
Operating income (loss) . . . . . . . . . . . . . (953,839) 611,547 (1,672,313) 720,531
Interest income . . . . . . . . . . . . . . . . . 35,791 9 126,285 402
Interest expense . . . . . . . . . . . . . . . . . (2,292) (163,555) (5,106) (302,669)
--------------- --------------- --------------- ---------------
Income (loss) from continuing
operations before income taxes . . . . . . . . . (920,340) 448,001 (1,551,134) 418,264
Provision for income taxes . . . . . . . . . . . . - - - -
--------------- --------------- --------------- ---------------
Net income (loss) . . . . . . . . . . . . . . . . $ (920,340) $ 448,001 $ (1,551,134) 418,264
--------------- --------------- ---------------
--------------- --------------- ---------------
Less - Cumulative preferred dividends . . . . . . (301,250)
---------------

Income applicable to common shares . . . . . . . . $ 117,014
---------------
---------------

Net income (loss) per common share . . . . . . . . $ (0.18) $ 0.19 $ (0.30) $ 0.05
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------

Weighted average number of common
shares outstanding . . . . . . . . . . . . . . . 5,142,106 2,334,949 5,102,221 2,484,671
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>

See accompanying notes to financial statements

<PAGE>

PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX SIX
MONTHS ENDED MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1996 1995
(UNAUDITED) (UNAUDITED)
<S> <C> <C>

OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . . . $ (1,551,134) $ 418,264
Adjustments to reconcile net income (loss) to net
cash used in continuing operating activities:
Provision for (recovery of) doubtful
accounts. . . . . . . . . . . . . . . . . . . (2,685) (7,739)
Charge for future returns. . . . . . . . . . . 175,156 -
Charge for (recovery of) unrecoupable
artist balances . . . . . . . . . . . . . . . 237,329 (182,655)
Depreciation and amortization. . . . . . . . . 166,543 61,330
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . (1,279,719) (2,327,320)
Inventories. . . . . . . . . . . . . . . . . . . (776,667) (620,027)
Notes receivable . . . . . . . . . . . . . . . . 1,024,707 41,934
Artist advances. . . . . . . . . . . . . . . . . (2,038,233) (1,822,825)
Accounts payable . . . . . . . . . . . . . . . . (141,708) 279,325
Accrued liabilities and other. . . . . . . . . . (801,384) (390,966)
Royalties payable. . . . . . . . . . . . . . . . 2,041,063 912,408
Other . . . . . . . . . . . . . . . . . . . . . (734,742) (232,312)
--------------- ---------------
Net cash used in continuing operating
activities . . . . . . . . . . . . . . . . . . . (3,681,474) (3,870,583)
Discontinued operations:
Change in net liabilities. . . . . . . . . . . . - (825,902)
--------------- ---------------
Net cash used in
discontinued operating activities. . . . . . . . - (825,902)
--------------- ---------------
Net cash used in operating activities. . . . . (3,681,474) (4,696,485)

INVESTING ACTIVITIES
Investment in joint venture. . . . . . . . . . . . (3,063,183) -
Purchases of property and equipment. . . . . . . . (165,645) (28,320)
Prepaid acquisition costs. . . . . . . . . . . . . (258,958) -
Cash paid for acquisition. . . . . . . . . . . . . (100,252) -
--------------- ---------------
Net cash used in investing activities. . . . . . . (3,588,038) (28,320)

FINANCING ACTIVITIES
Net proceeds from related parties. . . . . . . . . - 3,225,500
Net proceeds from revolving
line of credit . . . . . . . . . . . . . . . . . - 1,980,000
Payment of bank term loan. . . . . . . . . . . . . - (500,000)
--------------- ---------------
Net cash provided by financing activities. . . . . - 4,705,500
--------------- ---------------
Net decrease in cash . . . . . . . . . . . . . . . (7,269,512) (19,305)
Cash, beginning of period. . . . . . . . . . . . . 8,222,173 87,368
--------------- ---------------
Cash, end of period . . . . . . . . . . . . . . . $ 952,661 $ 68,063
--------------- ---------------
--------------- ---------------
</TABLE>

See accompanying notes to financial statements

6
<PAGE>

PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOLLOWING IS UNAUDITED)

1. BASIS OF PRESENTATION

The financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission regulations. In the
opinion of management, the financial statements reflect all adjustments (of a
normal and recurring nature) which are necessary to present fairly the financial
position, results of operations and cash flows for the interim periods
presented. These financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the fiscal year
ended May 31, 1996 of Platinum Entertainment, Inc. ("Company") included in the
Annual Report on Form 10-K. The interim results presented are not necessarily
indicative of the results that may be expected for the year ending May 31, 1997.

2. NET INCOME (LOSS) PER COMMON SHARE

Net income (loss) per common share is computed based upon the weighted
average number of common shares outstanding. Common and common equivalent shares
issued during the 12-month period prior to the March 12, 1996 public offering
have been included in the calculation for the three and six months ended
November 30, 1995 as if they were outstanding for those periods using the
treasury stock method and the public offering price of $13 per share. In
addition, all convertible preferred stock and convertible Class A common stock
and Class B common stock are treated as if converted into common shares at the
date of issuance.

3. ACQUISITIONS

On June 20, 1996, the Company acquired substantially all of the assets
of REX Music, Inc. (REX) for $480,000. The purchase price approximated the
indebtedness of REX to the Company, which primarily arose prior to May 31,
1996. REX produces, licenses and markets recorded music, primarily in the
Gospel format. The acquisition has been accounted for by the purchase method
of accounting and the purchase price of $480,000 approximates the fair value
of the assets acquired. The assets acquired include accounts receivable,
artist advances, inventory, copyrights and artist contracts. The value
allocated to music publishing rights and artist masters totaled $340,000 and
is being amortized over 15 years using the straight-line method.

On September 19, 1996, the Company acquired substantially all of the assets
of Double J Music Group (Double J) for 88,000 shares of common stock of the
Company and the assumption of approximately $100,000 of debt. Double J develops
and acquires ownership of musical compositions and exploits those compositions
by means of recordings, performances, audio-visual works, print publications and
other licenses. The acquisition has been accounted for by the purchase method
of accounting and the purchase price of $1,006,000 approximates the fair value
of the assets acquired. The purchase value was primarily allocated to music
publishing rights and is being amortized over 15 years using the straight-line
method.

On November 13, 1996, the Company signed a definitive agreement to acquire
substantially all of the assets and assume certain liabilities of Intersound,
Inc. (Intersound) for approximately $24,000,000 in cash and $5 million of
convertible debentures. The acquisition is subject to completion of Company due
diligence and the financing by the Company of the cash portion of the purchase
price. The Company intends to obtain such financing through bank loans or a
private placement. The acquisition is tenatively

<PAGE>

PLATINUM ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOLLOWING IS UNAUDITED)

scheduled to close during the Company's third fiscal quarter of 1997. Intersound
produces, licenses, markets and distributes recorded music for the Gospel, Adult
Contemporary, Country, Urban, Dance, Classical and Themed Productions formats.

4. JOINT VENTURE

The Company and House of Blues Records, Inc. ("HOB"), formed the House of
Blues Music Company, a joint venture between HOB and the Company ("Venture"),
effective November 1, 1996. The formation was executed upon the purchase by the
Company of the fifty percent (50%) interest of Private, Inc., a subsidiary of
Bertelsman Music Group, Inc. ("Seller"), in the joint venture between Seller and
HOB formed pursuant to a prior agreement. The payment for such 50% interest was
made on November 12, 1996 in the cash amount of $3,063,000, which is deemed a
cash capital contribution by the Company to the Venture. HOB contributed to the
Venture a license in HOB's trademarks, logo and other intellectual property in
consideration for their 50% interest in the Venture. HOB is a subsidiary of
House of Blues Entertainment, Inc. The Chairman and Chief Executive Officer of
House of Blues Entertainment, Inc. is also a director of the Company.

The Venture develops and produces recordings and related film and video
properties featuring Blues, Gospel and other music. The Venture, exclusively
through the Company, manufactures, distributes, performs, exhibits and sells
sound recordings and related audiovisual works under the "House of Blues" label.
The Company distributes the Venture's products through its normal distribution
channels for a fee to the Venture.

The Company has agreed to fund the operations of the Venture. Such funding
is deemed a cash contribution by the Company to the Venture. All income and
gain of the Venture is allocated fifty percent (50%) to HOB and fifty percent
(50%) to the Company. Any loss of the Venture is allocated among the parties
pro rata based upon the sum of their relative cash capital contributions and
their outstanding loans to the Venture; thereafter, income or gains of the
Venture shall be allocated to the parties pro rata based upon their relative
share of the losses previously allocated until each party has been allocated
income and gain equal to the losses previously allocated to them.

The Company records the activity of the Venture under the equity method of
accounting for investments in joint ventures.

5. RECLASSIFICATIONS

Certain amounts in the three and six months ended November 30, 1995
consolidated statements of operations have been reclassified to conform with the
three and six months ended November 30, 1996 presentation.

8
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The information in this section should be read together with the
consolidated financial statements and notes thereto that are included elsewhere
in the filing.

OVERVIEW

The Company continued to build its catalog during the three months ended
November 30, 1996 through investment in artist projects and the release of over
20 albums including Crystal Bernard's GIRL NEXT DOOR, Alan Parsons' ON AIR and
HOUSES OF GOD, a Gospel compilation. The Company also acquired substantially
all of the assets of Scott Entertainment, Inc. (Double J Music Group) during
September 1996. In addition, the Company and House of Blues Records, Inc.
formed a joint venture, House of Blues Music Company, effective November 1,
1996. See "Significant Matters" below for details of the joint venture.

The Company also signed a definitive agreement on November 13, 1996 to
acquire Intersound, Inc. (Intersound), one of the largest independent record
companies in the United States. Intersound's music divisions focus on most
major music formats, including Gospel, Adult Contemporary, Country, Urban,
Dance, Classical and Themed Productions. Intersound's more notable artists
under contract include Kansas, Jefferson Starship, the Bellamy Brothers, Crystal
Gayle, The Ohio Players, William Becton and The Mighty Clouds of Joy. See
"Significant Matters" below for details of the acquisition.

The Company records revenues for music products, other than telemarketing
C.O.D. sales, when such products are shipped to retailers. In accordance with
industry practice, the Company's music products are sold on a returnable basis.
The Company's allowance for future returns is based upon its historical results
of operations, SOUNDSCAN data and the historical returns experience of the
Company's primary distributor, PolyGram Group Distribution, Inc.

The Company recognizes revenues from the shipment of telemarketing C.O.D.
sales when cash is received from the customer. C.O.D. product shipments began
during the first quarter of fiscal 1995 and were discontinued in mid-February
1996, when the Company determined that C.O.D. orders would no longer be
accepted.

A significant recurring funding requirement of the Company is for
repertoire expenses, which include recording costs and advances to artists. The
Company makes substantial payments each period for recording costs and advances
in order to maintain and enhance its artist roster. These costs are recouped
from the artists' royalties, to the extent possible, from future album sales.
Artist advances are capitalized as an asset when the current popularity and past
performance of the artist provides a sound basis for estimating the probable
future recoupment of such advances from earnings otherwise payable to the
artist.

The Company has an international licensing agreement with MCA Records, Ltd.
(MCA). Revenues derived from the licensing are calculated as a percentage of
retail sales by the licensee net of returns and are recognized by the Company
upon notification of retail sales net of returns by the licensee. Results of
operations for the three and six months ended November 30, 1995 include
international licensing revenues; however, no international licensing revenues
have been recorded for the first six months of fiscal 1997 as the Company has
not been notified for such period by MCA regarding international sales generated
during this period. Manufacturing and related costs (other than artist
royalties, which are paid by the Company) are borne by the licensee. Artist
royalties paid by the Company in connection with international sales are
recorded as costs of artist project and other revenues and are calculated as a
percentage of net licensed proceeds.

<PAGE>

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items
derived from the Company's consolidated statements of operations as a percentage
of gross revenues:

THREE THREE SIX SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1996 1995 1996 1995

<S> <C> <C> <C> <C>
Total gross revenues . . . . . . . $ 7,171,000 100.0% $ 7,242,000 100.0% $ 14,140,000 100.0% $ 13,687,000 100.0%
Less: Returns and allowances . . . (1,199,000) 16.7% (808,000) 11.2% (2,272,000) 16.1% (1,667,000) 12.2%
Less: Discounts. . . . . . . . . . (319,000) 4.4% (265,000) 3.7% (763,000) 5.4% (433,000) 3.2%
Less: (Allowance for)
recovery of unrecoupable
artist advances. . . . . . . . . (172,000) 2.4% 243,000 -3.4% (322,000) 2.3% 183,000 -1.3%
------------- ------------- ------------- -------------
Total net revenues . . . . . . . . 5,481,000 76.5% 6,412,000 88.5% 10,783,000 76.2% 11,770,000 85.9%
Cost of product sales. . . . . . . 3,003,000 41.9% 2,354,000 32.5% 5,420,000 38.3% 4,039,000 29.5%
Cost of artist project and
other revenues . . . . . . . . . 894,000 12.5% 1,667,000 23.0% 2,123,000 15.0% 2,962,000 21.6%
------------- ------------- ------------- -------------
Total cost of sales and
services . . . . . . . . . . . . 3,897,000 54.4% 4,021,000 55.5% 7,543,000 53.3% 7,001,000 51.1%
------------- ------------- ------------- -------------
Gross profit . . . . . . . . . . . 1,584,000 22.1% 2,391,000 33.0% 3,240,000 22.9% 4,769,000 34.8%

Other operating expenses:
Selling, general and
administrative expenses. . . . . 2,441,000 34.0% 1,751,000 24.2% 4,746,000 33.6% 3,988,000 29.1%
Depreciation and amortization. . . 97,000 1.4% 29,000 0.4% 166,000 1.2% 61,000 0.4%
------------- ------------- ------------- -------------
2,538,000 35.4% 1,780,000 24.6% 4,912,000 34.8% 4,049,000 29.5%
------------- ------------- ------------- -------------
Operating income (loss). . . . . . (954,000) -13.3% 611,000 8.4% (1,672,000) -11.9% 720,000 5.3%
Interest income. . . . . . . . . . 36,000 0.5% - - 126,000 0.9% - -
Interest expense . . . . . . . . . (2,000) 0.0% (163,000) -2.3% (5,000) 0.0% (302,000) -2.2%
------------- ------------- ------------- -------------
Net income (loss). . . . . . . . . $ (920,000) -12.8% $ 448,000 6.1% $ (1,551,000) -11.0% $ 418,000 3.1%
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>

GROSS REVENUES

Gross revenues decreased $71,000 or 1.0% to $7,171,000 for the three months
ended November 30, 1996 and increased $453,000 or 3.3% to $14,140,000 for the
six months ended November 30, 1996 compared to comparable periods of the prior
fiscal year. No international licensing revenues have been recorded for the
first six months of fiscal 1997 as the Company has not been notified to date by
MCA regarding international sales generated during this period. International
licensing revenues for the three and six months ended November 30, 1995
approximated $370,000 and $640,000, respectively; such licensing revenues are
not indicative of the licensing revenues earned for the current or future
periods. Gross revenues generated in the Gospel, Country, Adult Contemporary,
and Blues and other formats as a percentage of total gross revenues for the
three months ended November 30, 1996 were 49.5%, 30.7%, 10.2% and 9.6% compared
to 53.7%, 7.8%, 34.7% and 3.8% for the three months ended November 30, 1995.
Gross revenues generated in the Gospel, Country, Adult Contemporary, and Blues
and other formats as a percentage of total gross revenues for the six months
ended November 30, 1996 were 43.9%, 39.1%, 9.8% and 7.2% compared to 54.5%,
8.2%, 32.1% and 5.2% for the six months ended November 30, 1995.

The changes in format percentages are due principally to the release of The
Beach Boys' STARS AND STRIPES, VOLUME I at the end of the first fiscal quarter
of 1997. The increase in revenues for the three and six months ended November
30, 1996 includes approximately $500,000 and $3,200,000 of Country revenues,
respectively, attributable to the release of The Beach Boys' album. This
increase was largely offset by a decrease in telemarketing sales, which
typically generate Gospel revenues, that were significantly reduced due to the
increased costs of television advertising, and by the incremental revenue
recognized in the first six months of fiscal 1996 from the release of Peter
Cetera's ONE CLEAR VOICE. Other significant releases in the current fiscal
quarter include albums by Crystal Bernard (which generated approximately
$690,000 and $1,000,000 of Country revenues for the three and six months ended
November 30, 1996) and Alan Parsons (which generated approximately $600,000 of
Adult Contemporary

<PAGE>

revenues, all during the three months ended November 30, 1996), as well as the
HOUSES OF GOD release and other Gospel releases.

RETURNS AND ALLOWANCES

Returns and allowances increased $391,000 or 48.4% to $1,199,000 for the
three months ended November 30, 1996 and $605,000 or 36.3% to $2,272,000 for the
six months ended November 30, 1996 compared to comparable periods of the prior
fiscal year. Returns and allowances as a percentage of gross product sales,
less discounts, increased to 21.2% for the three months ended November 30, 1996
from 16.3% for the three months ended November 30, 1995, and to 20.9% for the
six months ended November 30, 1996 from 16.8% for the comparable period of the
prior fiscal year. The increase is attributable primarily to an increase in the
Company's and the industry's historical return experience rates as a result of
the weak music retail market that began in 1995 and has continued through this
quarter.

DISCOUNTS

Discounts increased $54,000 or 20.4% to $319,000 for the three months ended
November 30, 1996 and $330,000 or 76.2% to $763,000 for the six months ended
November 30, 1996 compared to comparable periods of the prior fiscal year.
Discounts as a percentage of gross product sales remained relatively unchanged
at 5.4% for the three months ended November 30, 1996 from 5.1% for the three
months ended November 30, 1995, and increased to 6.6% for the six months ended
November 30, 1996 from 4.2% for the comparable period of the prior fiscal year.
The increase for the six months ended November 30, 1996 relates primarily to the
increase in new releases volume, particularly in the Country and Adult
Contemporary formats, as it is industry practice to extend discounts on new
release orders, compared to reorders of previously released albums.

ALLOWANCE FOR UNRECOUPABLE ARTIST ADVANCES

The allowances for unrecoupable artist advances are $172,000 and $322,00
for the three and six months ended November 30, 1996, respectively, compared to
recoveries of artist advances of $243,000 and $183,000 for the three and six
months ended November 30, 1995, respectively. During the three months ended
November 30, 1995, the Company renegotiated certain artist contracts to allow
additional costs previously expensed by the Company in fiscal 1995 to be
included in recoupable artist advances, resulting in the recoveries. The
current period balances primarily relate to several Gospel and Country projects
released during the current periods or to be released later in fiscal 1997.

COST OF PRODUCT SALES

Cost of product sales increased $649,000 or 27.6% to $3,003,000 for the
three months ended November 30, 1996 and $1,381,000 or 34.2% to $5,420,000 for
the six months ended November 30, 1996 compared to comparable periods of the
prior fiscal year. Cost of product sales as a percentage of gross revenues
increased to 41.9% for the three months ended November 30, 1996 from 32.5% for
the three months ended November 30, 1995, and to 38.3% for the six months ended
November 30, 1996 from 29.5% for the comparable period of the prior fiscal year.
The increase is primarily attributable to increased royalty costs associated
with albums released during the current periods, featuring established artists
in non-Gospel formats. Further, the reduction in telemarketing sales negatively
impacted this percentage due to the lower cost of product sales attributable to
telemarketing sales compared with other distribution channels.

COST OF ARTIST PROJECT AND OTHER REVENUES

Cost of artist project and other revenues decreased $773,000 or 46.4% to
$894,000 for the three months ended November 30, 1996 and $839,000 or 28.3% to
$2,123,000 for the six months ended

<PAGE>

November 30, 1996 compared to comparable periods of the prior fiscal year. The
decrease relates primarily to the timing of project releases and the related
costs incurred to complete those projects. Significant cost of projects
released in fiscal 1997, such as albums by The Beach Boys, Crystal Bernard and
Alan Parsons, were incurred in fiscal 1996. The projects in production during
the current periods are less costly relative to the projects in production
during the comparable periods of the prior fiscal year.

In addition, cost of artist project and other revenues includes the
royalties paid by the Company to artists in connection with its first
international sales through MCA which occurred during fiscal 1996. The
Company's liability for such royalties is based on MCA's retail sales of the
Company's products net of returns, and equaled approximately 10% of such net
sales. When presented as a percentage of licensing revenues received by the
Company, however, royalties were equal to approximately 50% of such revenues.
No such activity have been recorded by the Company during the current periods as
MCA has not provided final sales data for the current periods. Such costs
approximated $184,000 and $320,000 for the three and six months ended November
30, 1995, respectively; such costs are not indicative of the licensing costs
owed for the current or future periods.

GROSS PROFIT

Gross profit decreased $807,000 or 33.8% to $1,584,000 for the three months
ended November 30, 1996 and $1,529,000 or 32.1% to $3,240,000 for the six months
ended November 30, 1996 compared to comparable periods of the prior fiscal year.
As a percentage of gross revenues, gross profit decreased to 22.1% for the three
months ended November 30, 1996 from 33.0% for the three months ended November
30, 1995, and to 22.9% for the six months ended November 30, 1996 from 34.8% for
the comparable period of the prior fiscal year. This decrease is attributable
to a decrease in telemarketing revenues which provide higher gross margins due
to the lack of third-party distribution fees, an increase in reserves for artist
advances and future product returns and an increase in sales discounts offered.
In addition, no international licensing revenues have been recorded for the
first six months of fiscal 1997 as the Company has not been notified to date by
MCA regarding international sales generated during this period. International
licensing revenues typically generate a 50% gross margin.

In addition, gross profit on product sales varies from project to project
due to differences in royalty rates and the greater profit margins achieved for
compact discs over cassettes. As a result, gross profit margins are affected in
any period by the mix of releases sold during that period.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses increased $690,000 or 39.4% to
$2,441,000 for the three months ended November 30, 1996 and $758,000 or 19.0% to
$4,746,000 for the six months ended November 30, 1996 compared to comparable
periods of the prior fiscal year. Selling, general and administrative expenses
as a percentage of gross revenues increased to 34.0% for the three months ended
November 30, 1996 from 24.2% for the three months ended November 30, 1995, and
to 33.6% for the six months ended November 30, 1996 from 29.1% and for the
comparable period of the prior fiscal year. The increases are primarily
attributable to increases in costs to promote, advertise and market new
releases, particularly in the Country and Adult Contemporary formats, increases
in compensation to support the Company's growth and additional costs incurred
to support the public aspect of the Company. The Company has reduced its
Country promotional staff and expects to experience substantial future savings
in Country radio promotion, personnel and marketing costs beginning
January 1, 1997.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization increased to $97,000 from $29,000 for the
three months ended November 30, 1996 and increased to $166,000 from $61,000
for the six months ended November 30, 1996 compared to comparable periods of
the prior fiscal year. The increases are primarily attributable to increased
amortization related to the approximate $1,500,000 of music publishing rights
and artist

<PAGE>

contracts acquired from Double J Music Group and REX Music, Inc. during the
first six months of fiscal 1997.

OPERATING INCOME/LOSS

As a result of the factors described above, the operating losses for the
three and six months ended November 30, 1996 totaled $954,000 and $1,672,000,
respectively, compared to operating income of $611,000 and $720,000 for the
comparable periods of the prior fiscal year.

INCOME TAX

No tax expense or benefit has been recorded to date through November 30,
1996 due to the Company's net operating loss carryforward and related
valuation allowance at May 31, 1996, as required under generally accepted
accounting principles. Pursuant to Section 382 of the Internal Revenue Code
of 1986, as amended, the Company's net operating loss carryforward of
approximately $12,523,000 at May 31, 1996, expiring in years 2007 through
2011, is subject to annual limitations due to a change in ownership as a
result of the initial public offering in March 1996. Consequently,
approximately $3,700,000 of the loss carryforward at May 31, 1996 will be
available to offset fiscal 1997 taxable income.

INTEREST INCOME

Interest income for the three and six months ended November 30, 1996
totaled $36,000 and $126,000 compared to no interest income for the comparable
periods of the prior fiscal year. The interest income for the current periods
is primarily attributable to earnings on net proceeds remaining in such periods
from the initial public offering.

INTEREST EXPENSE

Interest expense for the three and six months ended November 30, 1996
totaled $2,000 and $5,000 compared to $163,000 and $302,000 for the comparable
periods of the prior fiscal year. All outstanding debt was retired with the net
proceeds received from the initial public offering.

NET INCOME/LOSS

The net loss attributable to common shares for the three and six months
ended November 30, 1996 totaled $920,000 and $1,551,000 compared to net income
attributable to common shares of $448,000 and $418,000 for the comparable
periods of the prior fiscal year. The loss is attributable to the factors
discussed above. In addition, no international licensing revenues have been
recorded for the six months ended November 30, 1996 as the Company has not been
notified to date by MCA regarding international sales generated during this
period.

SIGNIFICANT MATTERS

<PAGE>

On November 13, 1996, the Company signed a definitive agreement to acquire
substantially all of the assets and assume certain liabilities of Intersound for
approximately $24,000,000 in cash and $5 million of convertible debentures. The
acquisition is subject to completion of Company due diligence and the financing
by the Company of the cash portion of the purchase price. The Company intends
to obtain such financing through bank loans or a private placement. The
acquisition is tentatively scheduled to close during the Company's third fiscal
quarter of 1997. Intersound produces, licenses, markets and distributes recorded
music for the Gospel, Adult Contemporary, Country, Urban, Dance, Classical and
Themed Productions formats.

RECENTLY ISSUED ACCOUNTING STANDARDS

In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation"("FAS 123"). This
Statement establishes financial accounting and reporting standards for stock-
based employee compensation plans as well as transactions in which the Company
issues its equity instruments to acquire services from nonemployees. The
Statement defines a fair value based method of measuring compensation costs for
such activity, but does not require accounting compliance under this method and
allows compensation costs for such activity to be measured using the intrinsic
value based method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees,"("Opinion 25") the method currently utilized by the
Company. Entities electing to remain with the accounting for Opinion 25 must
make pro forma disclosures of net income and earnings per share as if the fair
value based method of accounting defined in FAS 123 had been applied. This
Statement is effective for the Company's fiscal year ending May 31, 1997.
Management intends to continue accounting for stock options pursuant to Opinion
25 and has not yet determined what impact this Statement will have on the
Company's financial disclosures.

SEASONALITY

The Company's results of operations are subject to seasonal variations. In
accordance with industry practice, the Company records revenues for music
product, except those related to the telemarketing C.O.D. sales, when such
products are shipped to retailers. The Company has historically experienced a
decline in revenues and net income in its third fiscal quarter (December,
January and February) due to the fact that retailers purchase products from the
Company in the quarter ending November 30 in anticipation of holiday sales. As
a result, sales are traditionally lower during December and the post holiday
period.

LIQUIDITY

The Company's cash balances were $953,000 and $8,222,000 at November 30,
1996 and May 31, 1996, respectively. Net cash used in operating activities was
$3,681,000 for the six months ended November 30, 1996. The uses reflect net
cash used to fund trade receivables of $1,280,000, inventories of $777,000,
artist advances of $2,038,000 and accrued liabilities and other of $801,000,
attributable to releases by such artists as The Beach Boys, Crystal Bernard and
Alan Parsons, and scheduled future releases including albums by Peter Cetera,
National Baptist Convention and a tribute to Janis Joplin featuring established
Blues artists. Net cash provided by notes receivable of $1,025,000 results from
an agreement dated May 1996, whereby the Company sold certain audio-visual
rights for $401,000 and its right to free future studio usage for $850,000 to a
minority stockholder and former officer of the Company. The net cash provided
by royalties payable arose from the current period sales of albums in the non-
Gospel format, which typically command a higher royalty rate. Royalties are not
paid to the artist until all advances made to the artist have been recouped by
the Company. Also, the Company establishes and maintains reserves relative to
royalty payments for a period of approximately 12 months to allow for product
returns activity as royalties are not owed on returned product.

Investing activities for the six months ended November 30, 1996 include
$3,063,000 relating to the Company's investment in a joint venture with House of
Blues Music Records, Inc. See "Results of

<PAGE>

Operations - Significant Matters." Approximately $100,000 was paid in
connection with the Company's purchase of Double J Music Group, with the
remainder of the purchase settled with shares of the Company's common stock.
In addition, the Company acquired substantially all of the assets of REX
Music, Inc. (REX) for $480,000 during June 1996. The purchase price
approximated the indebtedness of REX to the Company and cash payments
relating to this purchase during the current period were not significant.
Approximately $259,000 was paid during the current period relating to
acquisitions, primarily a $100,000 earnest payment to Intersound on November
13, 1996. Purchases of property and equipment of $166,000 relate primarily
to office equipment, computers and software.

There was no financing activity during the current period.

CAPITAL RESOURCES

The Company had no debt or debt facilities outstanding at November 30,
1996. On December 3, 1996, the Company received a proposal to enter a Revised
Credit Agreement with American National Bank and Trust Company of Chicago with a
borrowing facility of $5,000,000. Pursuant to the Revised Credit Agreement, the
Company would be required to maintain certain financial and other covenants.
The Revised Credit Agreement would have an initial term of one year, subject to
annual renewal. This Agreement has not been executed.

The Company's near and long-term capital requirements will depend on
numerous factors, including the rate at which the Company grows and acquires new
artists and products. The Company has various ongoing needs for capital,
including working capital for operations, artist advances and project
development costs and capital expenditures to maintain and expand its
operations. In addition, as part of its strategy, the Company evaluates
potential acquisitions of music catalogs, publishing rights and labels. The
Company may in the future consummate acquisitions which may require the Company
to make additional capital expenditures, and such expenditures may be
significant. Future acquisitions, as well as other ongoing capital needs, may
be funded with institutional financing, seller financing and/or additional
equity or debt offerings.

Stockholders' equity at November 30, 1996 totaled $14,542,000 compared to
$15,215,000 at May 31, 1996. This decrease of $673,000 or 4.4% is primarily due
to net losses experienced by the Company during the six months ended November
30, 1996, offset by a $906,000 increase to common stock and additional paid-in
capital related to the purchase of Double J Music Group.

INFLATION

The impact of inflation on the Company's operating results has been
moderate in recent years, reflecting generally lower rates of inflation in the
economy. While inflation has not had a material impact on operating results,
there is no assurance that the Company's business will not be affected by
inflation in the future.

SAFE HARBOR PROVISION

This Report contains certain forward-looking statements (within the meaning
of the Private Securities Litigation Reform Act of 1995) that involve
substantial risks and uncertainties. When used in this Report, the words
"anticipate," "believe," "estimate and "expect" and similar expressions as they
relate to the Company or its management are intended to identify such forward-
looking statements. A number of important factors could cause the Company's
actual results, performance or achievements for fiscal 1997 and beyond to differ
materially form those expressed in such forward-looking statements. These
factors include, without limitation, commercial success of the Company's
repertoire, charges and costs related to acquisitions, the results of financing
efforts, relationships with artists and producers, attraction and retention of
key personnel, general economic and business conditions and enhanced competition
and new competitors in the recorded music industry.

<PAGE>

PART II - OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES.

(a) Not applicable.

(b) Not applicable.

(c) On September 19, 1996, the Company acquired substantially all of the
assets of Double J Music Group for 88,235 shares of common stock of
the Company and the assumption of approximately $100,000 of debt. The
common stock was issued to Scott Entertainment, Inc. Such issuance
was effected in reliance upon the exemption from the registration
requirements of the Securities Act of 1933 contained in Section 4 (2)
of the Securities Act and the rules and regulations promulgated
thereunder on the basis that such issuance did not involve any public
offering. No underwriters were engaged, and no underwriting discounts
or commissions were paid, in connection with the issuance and sale of
such common stock.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

(a) The Annual Meeting of Stockholders of the Company was held on
October 8, 1996.

(b) 1. The Stockholders voted to elect three directors to the Company's
Board of Directors, with the following votes:

Directors For Against
--------- --- -------

Douglas C. Laux 4,432,329 9,200

Paul L. Humenansky 4,432,729 8,800

Laura P. Pearl 4,432,729 8,800

2. The Stockholders also voted to approve an amendment and
restatement of the Platinum Entertainment, Inc. 1995 Employee
Incentive Compensation Plan with the following votes:

For Against Abstentions Non-Votes
--- ------- ----------- ---------
2,264,383 1,609,236 4,200 563,710

3. The Stockholders also voted to ratify the selection by the Board
of Directors of Ernst & Young LLP as the independent auditors of
the Company's financial statements for the fiscal year ending
May 31, 1997 with the following votes:

For Against Abstentions
--- ------- -----------
4,437,429 1,000 3,100

<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

A. Exhibits.

10.1 Agreement for Purchase of Joint Venture Interest by the
Registrant from Private Inc., dated as of November 12, 1996 is
herein incorporated by reference to the Registrant's Form 8-K
filed pursuant to Section 13 of the Securities Exchange Act of
1934, dated as of November 12, 1996.

10.2 Disclosure Letter to Agreement for Purchase of Joint Venture
Interest by Platinum Entertainment, Inc. from Private Inc. is
herein incorporated by reference to the Registrant's Form 8-K
filed pursuant to Section 13 of the Securities Exchange Act of
1934, dated as of November 12, 1996.

10.3 Assignment and Assumption of Joint Venture Interest, by and
among the Registrant, Private Inc. and Bertelsman Music Group,
Inc., dated as of November 12, 1996 is herein incorporated by
reference to the Registrant's Form 8-K filed pursuant to
Section 13 of the Securities Exchange Act of 1934, dated as of
November 12, 1996.

10.4 Asset Purchase Agreement, by and between River North Studios,
Inc. (subsidiary of the Registrant) and Intersound, Inc., dated
as of November 13, 1996.

27. Financial Data Schedule.

B. Form 8-K.

On November 12, 1996, a Form 8-K was filed by the Company reporting
the purchase of a 50% interest in a joint venture. Financial
statements and pro forma financial information were not required to be
filed pursuant to Regulation S-X.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, Platinum
Entertainment, Inc. has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized, on this 14th day of January, 1997.

PLATINUM ENTERTAINMENT, INC.

By: /s/ STEVEN DEVICK
-----------------------------------
Steven Devick
Chairman of the Board, President
and Chief Executive Officer

By: /s/ DOUGLAS C. LAUX
-----------------------------------
Douglas C. Laux
Chief Financial Officer
(Principal Financial and
Accounting Officer)

<PAGE>

Exhibit 10.4

ASSET PURCHASE AGREEMENT

by and between

RIVER NORTH STUDIOS, INC.

and

INTERSOUND, INC.

dated as of November 13, 1996

<PAGE>

TABLE OF CONTENTS

PAGE
----
ARTICLE I PURCHASE AND SALE OF ASSETS.............................. 1
1.1 Assets........................................................ 1
1.2 Excluded Assets............................................... 3

ARTICLE II ASSUMPTION OF CERTAIN LIABILITIES........................ 4
2.1 Assumed Liabilities........................................... 4
2.2 Excluded Liabilities.......................................... 4

ARTICLE III CONSIDERATION AND MANNER OF PAYMENT...................... 5
3.1 Purchase Price................................................ 5
3.2 Allocation of Purchase Price.................................. 6

ARTICLE IV CLOSING.................................................. 6
4.1 Closing....................................................... 6
4.2 Deliveries by Seller.......................................... 6
4.3 Deliveries by Buyer........................................... 7

ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLER................. 8
5.1 Organization and Good Standing................................ 8
5.2 Authority; No Conflict........................................ 9
5.3 Financial Statements.......................................... 10
5.4 Books and Records............................................. 10
5.5 Title to Properties and Assets; Encumbrances.................. 10
5.6 Condition and Sufficiency of Assets........................... 11
5.7 Accounts Receivable........................................... 11
5.8 Inventory and Capitalized Assets.............................. 11
5.9 No Undisclosed Liabilities.................................... 11
5.10 Taxes......................................................... 12
5.11 No Material Adverse Change.................................... 12
5.12 Employee Benefits............................................. 12
5.13 Compliance with Legal Requirements;
Governmental Authorizations................................... 14
5.14 Legal Proceedings; Orders..................................... 15
5.15 Absence of Certain Changes and Events......................... 17
5.16 Contracts; No Defaults; Key Customers......................... 18
5.17 Insurance..................................................... 20
5.18 Environmental Matters......................................... 20
5.19 Employees..................................................... 22
5.20 Labor Disputes; Compliance.................................... 22
5.21 Intellectual Property......................................... 22

5.22 [Reserved].................................................... 23

<PAGE>

PAGE
----
5.23 Bank Accounts................................................. 23
5.24 Disclosure.................................................... 23
5.25 Relationships with Related Persons............................ 23
5.26 Brokers or Finders............................................ 24
5.27 Securities.................................................... 24
5.28 [Reserved.]................................................... 24
5.29 Securities Law Representations................................ 24

ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BUYER.................. 25
6.1 Organization and Good Standing................................ 26
6.2 Authority; No Conflict........................................ 26
6.3 Certain Proceedings........................................... 27
6.4 Brokers or Finders............................................ 27
6.5 Securities Law Representation................................. 27
6.6 Disclosure.................................................... 27

ARTICLE VII COVENANTS OF SELLER...................................... 27
7.1 Access and Investigation...................................... 27
7.2 Operation of the Businesses of Seller......................... 27
7.3 Negative Covenant............................................. 28
7.4 Required Approvals and Consents............................... 28
7.5 Notification.................................................. 29
7.6 Best Efforts.................................................. 29
7.7 Disclosure Letter............................................. 29

ARTICLE VIII COVENANTS OF BUYER....................................... 30
8.1 Approvals of Governmental Bodies.............................. 30
8.2 Best Efforts.................................................. 30
8.3 Meeting of Stockholders of Buyer.............................. 30
8.4 Notification.................................................. 30

ARTICLE IX ADDITIONAL AGREEMENTS......................................... 31
9.1 Public Disclosure............................................. 31
9.2 Auditors' Letters............................................. 31
9.3 Nonassignable Contracts....................................... 31
9.4 Blue Sky Laws................................................. 31
9.5 Consulting, Employment and Non-Competition Agreements......... 31
9.6 Control of Seller............................................. 32
9.7 Permitted Tax Distribution.................................... 33

<PAGE>

PAGE
----
ARTICLE X MUTUAL CONDITIONS PRECEDENT TO PARTIES'
OBLIGATION TO CLOSE...................................... 34
10.1 Mutual Conditions............................................. 34

ARTICLE XI CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS TO
CLOSE.................................................... 34
11.1 Accuracy of Representations................................... 34
11.2 The Seller's Performance...................................... 34
11.3 Consents...................................................... 35
11.4 Additional Documents.......................................... 35
11.5 No Proceedings................................................ 35
11.6 No Prohibition................................................ 35
11.7 Material Adverse Change....................................... 35
11.8 Due Diligence and Disclosure Letter........................... 36
11.9 Net Worth of Seller........................................... 36

ARTICLE XII CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO
CLOSE.................................................... 36
12.1 Accuracy of Representations................................... 36
12.2 Buyer's Performance........................................... 36
12.3 Additional Documents.......................................... 36
12.4 No Proceedings................................................ 37
12.5 No Prohibition................................................ 37
12.6 Material Adverse Change....................................... 37

ARTICLE XIII TERMINATION.............................................. 37
13.1 Termination Events............................................ 37
13.2 Effect of Termination......................................... 38

ARTICLE XIV INDEMNIFICATION.......................................... 38
14.1 Survival and Limitations...................................... 38
14.2 Indemnification of Buyer...................................... 39
14.3 Indemnification of Seller..................................... 40
14.4 Indemnification Procedure for Third Party Claims.............. 41

ARTICLE XV DEFINITIONS.............................................. 43
"AFFILIATES".................................................. 43
"APPLICABLE CONTRACT"......................................... 43
"BEST EFFORTS"................................................ 43
"BREACH"...................................................... 43
"CLOSING DATE"................................................ 43
"CODE"........................................................ 44

iii

<PAGE>

PAGE
----
"CONTEMPLATED TRANSACTIONS"................................... 44
"CONTRACT".................................................... 44
"DISCLOSURE LETTER"........................................... 44
"ENCUMBRANCE"................................................. 44
"ERISA"....................................................... 44
"EXCHANGE ACT"................................................ 44
"FACILITIES".................................................. 44
"GAAP"........................................................ 44
"GOVERNMENTAL AUTHORIZATION".................................. 44
"GOVERNMENTAL BODY"........................................... 44
"IRS"......................................................... 45
"LEGAL REQUIREMENT"........................................... 45
"ORDER"....................................................... 45
"ORDINARY COURSE OF BUSINESS"................................. 45
"ORGANIZATIONAL DOCUMENTS".................................... 45
"PERSON"...................................................... 46
"PROCEEDING".................................................. 46
"RELATED PERSON".............................................. 46
"REPRESENTATIVE".............................................. 46
"SECURITIES ACT".............................................. 46
"SEC"......................................................... 46
"THREATENED".................................................. 47

ARTICLE XVI GENERAL PROVISIONS....................................... 47
16.1 Expenses...................................................... 47
16.2 Notices....................................................... 47
16.3 Further Assurances............................................ 47
16.4 Waiver........................................................ 48
16.5 Entire Agreement and Modification............................. 48
16.6 Assignments, Successors, and No Third-Party Rights............ 48
16.7 Severability.................................................. 48
16.8 Section Headings, Construction................................ 48
16.9 Governing Law................................................. 48
16.10 Counterparts.................................................. 49
16.11 No Strict Construction........................................ 49

<PAGE>

IN MAKING AN INVESTMENT DECISION, THE SELLER MUST RELY ON ITS OWN
EXAMINATION OF THE ISSUER OF THE CONVERTIBLE DEBENTURES BEING TRANSFERRED
HEREUNDER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS
INVOLVED. THE CONVERTIBLE DEBENTURES BEING SOLD HEREUNDER HAVE NOT BEEN
RECOMMENDED, APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
("SEC"), ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY.
NONE OF THE FOREGOING AUTHORITIES HAVE PASSED UPON, OR ENDORSED THE MERITS OF,
THIS OFFERING OR THE ACCURACY OR ADEQUACY OF INFORMATION PROVIDED. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THE CONVERTIBLE DEBENTURES BEING SOLD HEREUNDER HAVE NOT BEEN REGISTERED
WITH THE SEC UNDER THE SECURITIES ACT OF 1933 ("THE 1933 ACT"), OR UNDER THE
SECURITIES LAWS OF ANY STATES, AND ARE BEING OFFERED AND SOLD IN RELIANCE ON
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE 1933 ACT AND SUCH STATE
LAWS. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE, AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE 1933
ACT AND SUCH APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREUNDER.

<PAGE>

ASSET PURCHASE AGREEMENT

This Asset Purchase Agreement (this "Agreement") is made as of November
13, 1996 by and between RIVER NORTH STUDIOS, INC., a Delaware corporation
("Buyer") and INTERSOUND, INC., a Minnesota corporation ("Seller"). Capitalized
terms that are not otherwise defined in this Agreement are defined in Article
15. The parties agree that, notwithstanding the date first set forth above, the
effective date and time of this Agreement shall be 12:01 a.m. (E.S.T) November
1, 1996 (the "Effective Date").

The parties, intending to be legally bound, agree as follows:

WHEREAS, Seller is engaged in the business of recording, releasing and
distributing recorded music products for sale to the public, and has its
principal place of business located at 11810 Wills Road, Roswell, Georgia;

WHEREAS, Buyer is a wholly-owned subsidiary of Platinum Entertainment,
Inc. a Delaware corporation (the "Parent"); and

WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase
from Seller, substantially all of Seller's property and assets, and in
connection therewith, Buyer has agreed to assume certain liabilities of Seller,
all upon the terms and subject to the conditions set forth below.

NOW THEREFORE, in consideration of the mutual covenants of the parties
set forth in this Agreement and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:

ARTICLE I

PURCHASE AND SALE OF ASSETS

1.1 ASSETS. On the terms and subject to the conditions set forth in
this Agreement, at the Closing, Seller shall sell, convey, transfer, assign and
deliver to Buyer, free and clear of all liens, mortgages, charges, security
interests, pledges or other encumbrances or adverse claims or interests of any
nature, other than the Bank Lien (as defined in Section 5.5) and Permitted
Encumbrances (as defined below) (and other than those liabilities specifically
being assumed by Buyer as provided in Section 2.1 below), and Buyer is
purchasing from Seller, all of Seller's right, title and interest in and to all
property and assets (other than Excluded Assets) of Seller as of the Closing
Date, wherever located and whether or not all or any of said property and assets
appear on or are reflected upon Seller's books, records or financial statements
(collectively, the "Assets"), including, but not limited to, the following:

(a) All of Seller's musical compositions and master recordings;

<PAGE>

(b) All fixtures, equipment (including computer hardware and
software, to the extent owned or licensed by Seller, as the case may be),
machinery, tools, vehicles (whether or not registered under motor vehicle
registration laws), furniture, office furniture and equipment, and other
similar personal property of Seller (collectively, the "Personal
Property");

(c) All inventory of Seller, including without limitation, raw
materials, components, work-in-process, finished goods, merchandise for
resale, and office, operating and other supplies, whether or not located
at Seller's principal place of business (collectively "Inventory");

(d) All notes and accounts receivable of Seller and all notes,
bonds and other evidences of indebtedness of any corporation or other
person held by Seller;

(e) All rights Seller may have under any and all Contracts in
which Buyer assumes the obligations thereunder pursuant to Section 1.2
below, including, without limitation, agreements, purchase orders,
licenses and leases, publishing agreements, artist contracts and license
agreements;

(f) All proprietary information of Seller, including, without
limitation, all patents, patent applications, patent disclosures and
inventions (whether or not patentable and whether or not reduced to
practice); all trademarks, service marks, trade dress, trade names and
corporate names; all registered and unregistered statutory and common law
copyrights; all registrations, applications and renewals for any of the
foregoing; all trade secrets, confidential information, ideas, formulae,
compositions, know-how, manufacturing and production processes and
techniques, research and development information, drawings,
specifications, designs, plans, improvements, proposals, technical and
computer data, documentation and software, financial, business and
marketing plans, and customer and supplier lists and related information
and all other proprietary rights (collectively, "Intellectual Property")
relating to the manufacture, merchandising, publication, sale or
distribution of products and the conduct of Seller's business;

(g) All records, files, and papers of Seller, including but not
limited to sales and purchase correspondence, books of account and
employment records relating to the Assets and business of Seller
purchased hereunder;

(h) All licenses, approvals and authorizations by or of
governmental authorities or third parties ("Permits") necessary for the
continued conduct of Seller's business or required in connection with
ownership or operation of the Assets.

(i) All causes of actions, claims, warranties, guarantees,
refunds, rights of recovery and set-off of every kind and character,
including, without limitation, rights and claims related to the
Intellectual Property and rights and claims against suppliers of

<PAGE>

inventory and other assets transferred hereunder, other than those
relating exclusively to the Excluded Assets or the Excluded Liabilities;

(j) All goodwill associated with Seller's business, including,
without limitation, goodwill associated with the Intellectual Property;

(k) All deposits and prepaid assets and expenses of Seller,
including prepaid royalties;

(l) All insurance, warranty and condemnation proceeds received
by Seller after the Closing Date with respect to damage, nonconformance
of or loss to the Assets, other than those relating to exclusively to the
Excluded Liabilities;

(m) Seller's rights to the Leased Premises (as defined in
Section 5.18) and all other rights, if any, under the leases related
thereto;

(n) All cash and cash equivalents of Seller, including, without
limitation, all cash receipts, lockboxes and bank accounts, other than
the cash payments being delivered by Buyer pursuant to this Agreement;

(o) All of the Seller's rights to songs, copyrights and
contracts assigned to Seller previously owned by Red Rewmar Music, Inc.,
Spec Twelve Music, Inc. and Rappel Music, Inc. (the "Affiliated
Companies") (representing all of the operating assets of such entities),
each of which are music publishing companies under common control with
the Seller, which assets are to be acquired by Seller between the date
hereof and the Closing Date; and

(p) All other properties and assets owned or held by the Seller
as of the Closing Date, whether or not of a type falling within any of
the categories of assets or properties described above.

1.2 EXCLUDED ASSETS. Notwithstanding the foregoing, the following
properties and assets of Seller shall be retained by Seller and are expressly
excluded from the purchase and sale contemplated by this Agreement
(collectively, the "Excluded Assets"):

(a) Seller's formal corporate records, including Articles of
Incorporation, corporate seal, minute books, stock books and other
records having exclusively to do with the corporate organization of
Seller, and all of Seller's tax returns and tax records;

(b) Seller's rights to refunds of tax deposits;

<PAGE>

(d) Records of Seller relating solely to the Excluded Assets;
and

(e) All Employee Benefit Plans and any and all rights therein
or in the assets thereunder; and

(f) Seller's rights with respect to life insurance policies on
the lives of its officers.

ARTICLE II

ASSUMPTION OF CERTAIN LIABILITIES

2.1 ASSUMED LIABILITIES. From and after the Closing Date, Buyer will
assume and agree to pay, defend, discharge and perform as and when due only (a)
liabilities or obligations reflected or reserved against in the Interim Balance
Sheet, including without limitation obligations of Seller not in excess of
$600,000 with respect to the currently pending audit by the Harry Fox Agency for
periods ended December 31, 1994 (the "Assumed Fox Liability"), (b) all other
liabilities of Seller incurred in the Ordinary Course of Business subsequent to
the date of the Interim Balance Sheet and prior to the Closing and accrued in
accordance with GAAP (it being understood that lawsuits or causes of action
relating, directly or indirectly, to Tax, patent, trademark, copyright, labor,
employment, environmental and product liability are not included under this
clause (b)), (c) first arising after the Closing under any Contract or Permit
that are or are required to be set forth in the Disclosure Letter (for which the
rights thereunder are acquired by Buyer hereunder) and which obligations are to
be performed in the Ordinary Course of Business (none of which obligations
result, directly or indirectly, from a breach of contract, breach of warranty,
tort, infringement or lawsuit occurring prior to the Closing) and (d) all
obligations of Seller, including principal, interest, premiums or other charges,
under Seller's loan agreement with NationsBank (the "NationsBank Loan") as
existing on the Closing Date or to be performed on or after the Closing Date
(all such liabilities and obligations to be so assumed by Buyer pursuant to this
Section 2.1 being referred to collectively as the "Assumed Liabilities").

2.2 EXCLUDED LIABILITIES. Notwithstanding anything to the contrary
contained in this Agreement or any agreement, document, certificate or
instrument being delivered pursuant to this Agreement (collectively, the
"Transaction Documents"), and regardless of whether such liability is disclosed
in this Agreement, in any of the Transaction Documents or on any Schedule or
Exhibit hereto or thereto, Buyer shall not assume or agree to pay, perform or
discharge or in any manner be responsible for any Excluded Liabilities. As used
herein, the term "Excluded Liabilities" means any and all debts, liabilities or
obligations of Seller or of any Employee Benefit Plan of any kind or nature
whatsoever, other than the Assumed Liabilities described in Section 2.1, and the
Excluded Liabilities shall include, without limitation (a) any suits or causes
of action relating, directly or indirectly, to Tax, patent, trademark,
copyright, labor, employment, environmental or product liability issues arising
out of or relating to the conduct

<PAGE>

of Seller at any time prior to, on or after the Closing Date, (b) any claims by
any third parties relating directly or indirectly to any audit or investigation
of Seller by the Harry Fox Agency for any period prior to the Closing Date,
except for the Assumed Fox Liability (c) any liabilities whatsoever relating,
directly or indirectly, to any Excluded Assets and (d) debts, liabilities or
obligations of any kind or nature whatsoever relating to the Affiliated
Companies.

ARTICLE III

CONSIDERATION AND MANNER OF PAYMENT

3.1 PURCHASE PRICE. The aggregate purchase price for the Assets (the
"Purchase Price") to be paid by Buyer to Seller at Closing for the Assets shall
be $29,000,000 payable as follows, plus the assumption by Buyer of the Assumed
Liabilities:

(a) Twenty-four Million Dollars ($24,000,000) in cash (the
"Cash Consideration") payable at Closing by wire transfer of immediately
available funds to an account of Seller at a bank or banks specified by
Seller in wire transfer instructions provided to Buyer at least two (2)
Business Days prior to the Closing Date.

(b) The parties hereto acknowledge that the Buyer has deposited
with Seller an amount equal to $100,000 (the "Deposit") which shall be
applied to the Cash Consideration due Seller at the Closing. In the
event this Agreement is terminated by either Seller or Buyer (other than
as a result of a breach by the other party), the Deposit shall be split
in half, whereby Seller shall be entitled to retain $50,000 of the
Deposit and the remaining $50,000 shall be returned immediately to the
Buyer. Notwithstanding the above, if this Agreement is terminated by
either Seller or Buyer pursuant to Section 13.1(a) below as a result of a
breach by the other party, the non-breaching party shall be entitled to
the full Deposit; provided, however, the non-breaching party has notified
the breaching party, in writing, of such breach, and the breach has
continued without cure for a period of ten (10) business days after
written notice of such breach has been delivered. In the event of such a
breach by Buyer, Seller may either (i) retain the Deposit as its sole and
exclusive remedy and in such case Seller shall not be entitled to (A) any
other damages for any Losses (as defined below) that may be incurred or
(B) seek any remedies at law or equity or (ii) seek any equitable
remedies (other than a remedy for money damages) available to it. In the
event of a breach by Seller which is not cured pursuant to the terms of
this Section 3.1(b), Seller shall immediately return the full Deposit to
the Buyer and the Buyer may seek any available remedies so that it may be
reimbursed for any Losses (as defined below) it incurs as a result of
such breach by Seller.

(c) Five Million Dollars ($5,000,000) in aggregate principal
amount of Parent's convertible debentures (the "Convertible Debentures"),
having economic terms

<PAGE>

equivalent to, and all other terms substantially equivalent to, the terms
of the convertible debentures issued in the Private Placement (as defined
in Section 10.1).

(d) The parties hereto agree that $1,875,000 in aggregate
principal amount of the Convertible Debentures due to Seller at the
Closing shall be deposited into an escrow account as security for
Seller's indemnification obligations under Article 14 below, pursuant to
the terms of an Indemnity Escrow Agreement in the form of Exhibit 3.1(d)
attached hereto (the "Indemnity Escrow Agreement").

3.2 ALLOCATION OF PURCHASE PRICE. The parties hereto agree and
acknowledge that the Purchase Price shall be allocated for federal, state, and
other taxes as determined by the Buyer, in its sole discretion; provided,
however, the allocation by Buyer will not require Seller to recognize net
ordinary income as a direct result of such allocation. Buyer agrees to provide
Seller with the necessary information with respect to such allocation and Seller
agrees that it will adopt and utilize the amounts so allocated by Buyer for
purposes of all federal, state and other tax returns filed by it.

ARTICLE IV

CLOSING

4.1 CLOSING. The closing (the "Closing") of the transactions
contemplated by this Agreement (the "Contemplated Transactions") will take place
at the offices of Katten Muchin & Zavis, counsel to Buyer, at 525 West Monroe,
Suite 1600, Chicago, Illinois 60661, at 10:00 a.m. (local time) on a date to be
specified by the parties, which shall be no later than the second business day
after the satisfaction or waiver of the conditions set forth in Articles 10, 11
and 12 or at such other time, date and location as the parties may agree (the
"Closing Date"). Subject to the provisions of Section 13, failure to consummate
the Contemplated Transactions on the Closing Date will not result in the
termination of this Agreement and will not relieve any party of any obligation
under this Agreement.

4.2 DELIVERIES BY SELLER. At the Closing, Seller shall deliver to
Buyer (the "Seller's Closing Documents"):

(a) Such bills of sale with respect to the Seller's ownership
of the Assets, assignments, endorsements and other documents of title and
other good and sufficient instruments of conveyance and transfer, as
shall be effective to vest in Buyer full, complete and marketable right,
title and interest in and to the Assets, free and clear of all
Encumbrances other than the Bank Lien and Permitted Encumbrances (and
subject to the Assumed Liabilities), in form and substance reasonably
satisfactory to Buyer;

<PAGE>

(b) Copies of all Consents and transfer documents obtained in
connection with the transfer of the Applicable Contracts and the Permits,
including separate assignments of trademarks and copyrights, in form and
substance reasonably satisfactory to Buyer;

(c) A landlord's estoppel letter with respect to the Leased
Premises, in form and substance reasonably satisfactory to Buyer;

(d) A certificate executed by Seller to the effect that (i) the
Seller's representations and warranties in this Agreement were accurate
in all material respects as of the date of this Agreement and are
accurate in all material respects as of the Closing Date as if made on
the Closing Date (giving full effect to any supplements delivered by the
Seller to Buyer prior to the Closing Date in accordance with Section 7.5)
and (ii) the Seller has performed and complied with all material
covenants and conditions required to be performed or complied with by it
prior to or at the Closing;

(e) A certified copy of resolutions adopted by the Seller's
Board of Directors and the shareholders of the Seller (the
"Shareholders") authorizing the execution of this Agreement and
consummation of the Contemplated Transactions;

(f) A Good Standing Certificate for the Seller from all states
in which it is authorized to do business;

(g) A copy of the Seller's Articles of Incorporation and all
amendments thereto, certified by the Secretary of State of Minnesota, and
a copy of the Seller's By-laws, and all amendments thereto, certified by
the Secretary of the Seller;

(h) Those documents and certificates necessary to change the
Seller's name as of the Closing Date; such documents and certificates
shall be duly executed and complete for filing with the necessary
Governmental Bodies; and

(i) Each of the other documents required to be delivered
pursuant to Section 11.4.

4.3 DELIVERIES BY BUYER. At the Closing, Buyer shall deliver to
Seller ( the "Buyer's Closing Deliveries"):

(a) The Cash Portion of the Purchase Price, as provided in
Section 3.1(a);

(b) The certificates representing the Convertible Debentures,
as provided in Section 3.1(b);

(c) A certificate executed by Buyer to the effect that (A) each
of Buyer's representations and warranties in this Agreement was accurate
in all material respects as of the date of this Agreement and is accurate
in all material respects as of the Closing

<PAGE>

Date as if made on the Closing Date and (B) Buyer has performed and
complied with all material covenants and conditions required to be
performed or complied with by it prior to or at the Closing;

(d) A certified copy of resolutions adopted by Buyer's Board of
Directors authorizing execution of this Agreement and consummation of the
Contemplated Transactions;

(e) A Good Standing Certificate for Buyer from all states in
which Buyer is authorized to do business;

(f) An assumption agreement and other documents and instruments
as may be necessary for the Buyer to assume the Assumed Liabilities as
contemplated herein, in form and substance reasonably satisfactory to
Seller; and

(g) A copy of the Shareholders Indemnification Agreement,
attached hereto as Exhibit 4.2(h), duly executed by the Buyer; and

(h) Each of the documents required to be delivered pursuant to
Section 12.4.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF SELLER

Seller represents and warrants to Buyer as of the date of this Agreement
and as of the Closing Date, and subject to the limitations set forth in Section
14.1, as follows:

5.1 ORGANIZATION AND GOOD STANDING.

(a) Seller is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Minnesota, with full
corporate power and authority to conduct its business as it is now being
conducted, to own, hold under lease, or otherwise possess or use the
properties and assets that it purports to own, hold under lease, or
otherwise possess or use, and to perform all its obligations under the
contracts to which it is a party or by which it is bound. PART 5.1(a) OF
THE DISCLOSURE LETTER sets forth each other jurisdiction in which Seller
has qualified to do business in accordance with the laws of such
jurisdiction. Seller is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each state or other
jurisdiction in which such qualification is required by virtue of the
nature of the activities conducted by it, except where the failure to be
so qualified, individually or in the aggregate, would not have a material
adverse effect on Seller.

<PAGE>

(b) Seller has delivered to Buyer copies of the Organizational
Documents of Seller, as currently in effect.

(c) PART 5.1(c) OF THE DISCLOSURE LETTER contains a complete
and accurate list of the current directors and officers of Seller.

5.2 AUTHORITY; NO CONFLICT.

(a) This Agreement and the Seller's Closing Documents and all
other documents entered into by the Seller in connection with the
consummation of the Contemplated Transaction (together with the Seller's
Closing Documents, the "Seller Transaction Documents"), to the extent
applicable, constitute the legal, valid, and binding obligations of the
Seller, enforceable against Seller in accordance with their respective
terms except as such enforcement may be limited by bankruptcy,
insolvency, moratorium, reorganization, or similar laws affecting
creditor's rights generally and by general equitable principles. Seller
has the corporate power and authority to execute and deliver this
Agreement and each of the Seller Transaction Documents and to perform its
obligations under this Agreement and each of the Seller Transaction
Documents. This Agreement and the Seller Transaction Documents, to the
extent applicable, have been duly executed and delivered by Seller. The
execution and delivery of this Agreement and the Seller Transaction
Documents, to the extent applicable, and the consummation of the
Contemplated Transactions have been duly authorized by all necessary
action on the part of Seller's Board of Directors and the Shareholders.

(b) Except as set forth in PART 5.2(b) OF THE DISCLOSURE
LETTER, neither the execution and delivery of this Agreement or the
Seller Transaction Documents, nor the consummation or performance of any
of the Contemplated Transactions will, directly or indirectly:

(i) contravene, conflict with, or result in (with or
without notice or lapse of time) a violation or breach of (A) any
provision of the Organizational Documents of Seller, (B) any
resolution adopted by Seller's Board of Directors or the
Shareholders (C) any Legal Requirement or any Order to which
Seller, its business or any of the Assets may be subject, or give
any Governmental Body or other Person the right (with or without
notice or lapse of time) to challenge any of the Contemplated
Transactions or to exercise any remedy or obtain any relief under
any such Legal Requirement or Order, (D) any of the terms or
requirements of, or give any Governmental Body the right (with or
without notice or lapse of time) to revoke, withdraw, suspend,
cancel, terminate, or modify, any Governmental Authorization that
is held by Seller or that otherwise relates to Seller's business
or any of its assets, or (E) any provision of, or give any Person
the right (with or without notice or lapse of time) to declare a
default or exercise any remedy under, or to accelerate the
maturity or performance of, or to cancel,

<PAGE>

terminate, or modify, any Contract, including, without limitation,
the right to cause the release of any asset or property of the
Seller held in escrow.

(ii) cause the Seller to become subject to, or to become
liable for the payment of any Tax for which the Buyer would be
liable.

(iii) result in (with or without notice or lapse of time)
the imposition or creation of any Encumbrance upon or with respect
to any of the Assets.

(c) Except as set forth in PART 5.2(c) OF THE DISCLOSURE
LETTER, the Seller is not and will not be required to give any notice to
or obtain any Consent from any Person in connection with the execution
and delivery of this Agreement or any of the Seller Transaction Documents
or the consummation or performance of any of the Contemplated
Transactions.

5.3 FINANCIAL STATEMENTS. Seller has delivered to Buyer (a) audited
balance sheets of Seller as of April 30 in each of the years 1992 through 1996,
and the related statements of operations and cash flows for each of the fiscal
years in the five-year period ended April 30, 1996, including in each case the
notes thereto and (b) the unaudited balance sheet of Seller at September 30,
1996 (the "Interim Balance Sheet") and the related unaudited statements of
operations and cash flows for the five months then ended. Except as described
in PART 5.3 OF THE DISCLOSURE LETTER, such financial statements and notes fairly
present the financial condition and results of operations of Seller as at the
respective dates thereof and for the periods therein referred to, all in
accordance with GAAP, except that the unaudited interim financial statements do
not include footnote disclosure of the type associated with audited financial
statements and were or are subject to normal and recurring year-end adjustments
which were not or are not expected to be material in amount; the financial
statements referred to in this Section 5.3 reflect the consistent application of
such accounting principles throughout the periods involved, except as may be
specifically stated therein. No financial statements of any Person are required
by GAAP to be consolidated with the financial statements of Seller.

5.4 BOOKS AND RECORDS. The books account and other records of Seller,
all of which have been made available to Buyer, are complete and correct and in
all material respects have been maintained in accordance with sound business
practices.

5.5 TITLE TO PROPERTIES AND ASSETS; ENCUMBRANCES. Seller does not own
and has never owned any real property. PART 5.5 OF THE DISCLOSURE LETTER
contains a complete and accurate list of all leaseholds or other interests in
real property currently owned by Seller. The Seller has good, valid, and in the
case of Personal Property, marketable title to all the Assets (whether real,
personal, or mixed and whether tangible or intangible), including all of the
properties and assets reflected in the Interim Balance Sheet (except for
personal property sold since the date of the Interim Balance Sheet in the
Ordinary Course of Business and except for any mechanics or other statutory
liens for amounts not yet due or any lien of taxes not yet due and payable or
liens relating specifically to the Assumed Liabilities, the "Permitted

<PAGE>

Encumbrances"). All of the properties and assets purchased or otherwise acquired
by Seller since the date of the Interim Balance Sheet (except for supplies,
inventory, and personal property acquired since the date of the Interim Balance
Sheet in the Ordinary Course of Business) are listed in PART 5.5 OF THE
DISCLOSURE LETTER. All of the Assets (including, without limitation, the
properties and assets reflected in the Interim Balance Sheet) are free and clear
of all Encumbrances, other than the lien created under the NationsBank Loan (the
"Bank Lien") and Permitted Encumbrances.

5.6 CONDITION AND SUFFICIENCY OF ASSETS. The Personal Property used
by Seller in the conduct of its business, and to Seller's knowledge, the
heating, ventilation, and air-conditioning systems at the Facilities, are, (i)
to Seller's knowledge, in good condition and repair, (ii) free of material
defects, (iii) adequate for the uses to which they are being put, (iv) not in
need of maintenance or repairs except for ordinary, routine maintenance and
repairs that are not material in nature or cost, and (v) sufficient for the
continued conduct of Seller's business after the Closing in substantially the
same manner as conducted prior to the Closing.

5.7 ACCOUNTS RECEIVABLE. All accounts receivable of Seller which are
being acquired by Buyer hereunder as of the Closing Date, including, without
limitation, the accounts receivables set forth on the Interim Balance Sheet
(collectively, the "Accounts Receivable") represent or will represent valid
obligations arising from sales actually made or services actually performed in
the Ordinary Course of Business. Except as set forth in PART 5.7 OF THE
DISCLOSURE LETTER, there is no contest, claim, or asserted right of set-off
other than returns in the ordinary course of business in any agreement with any
maker of an Accounts Receivable.

5.8 INVENTORY AND CAPITALIZED ASSETS.

(a) Except for any reserves set forth on the Interim Balance
Sheet, all Inventory owned by Seller is and will be fit for the purpose
for which it was produced and is in good and, with respect to finished
goods, marketable condition. All merchandise Inventory consists of items
of a quality and quantity historically useable in the Ordinary Course of
Business except for items which are obsolete or below standard quality,
all of which have been determined and written down to net realizable
value in accordance with GAAP.

(b) All capitalized assets set forth on the Interim Balance
Sheet, including without limitation, prepaid royalties and intangible
assets, are properly valued in accordance with GAAP and all reserves and
allowances associated with such assets are adequate and calculated
consistent with past practice and, in the case of such allowances and
reserves as of the Closing Date, will not represent a materially greater
percentage of such assets as of the Closing Date than the reserve
reflected in the Interim Balance Sheet represented of such assets
reflected therein.

5.9 NO UNDISCLOSED LIABILITIES. Except as set forth in PART 5.9 OF
THE DISCLOSURE LETTER, Seller has no liabilities or obligations of any nature
(whether absolute, accrued,

<PAGE>

contingent, or otherwise) other than (i) liabilities or obligations reflected or
reserved against in the Interim Balance Sheet, (ii) current liabilities incurred
in the Ordinary Course of Business since the date of the Interim Balance Sheet,
(iii) obligations under executory Contracts that are set forth in the Disclosure
Letter or that are required to be so set forth and which obligations are to be
performed in the Ordinary Course of Business, which obligations are apparent
from the plain reading of such Contracts; (none of which liabilities,
obligations or matters result, directly or indirectly, from a breach of
contract, breach of warranty, tort, infringement or lawsuit) and (iv) those
liabilities which relate to the Proceedings specifically disclosed in PART 5.14
OF THE DISCLOSURE LETTER.

5.10 TAXES. Seller has filed all federal, state, local and foreign tax
returns, estimates, information statements and reports ("Tax Returns") that it
is required to have filed prior to the Closing in connection with the Assets or
the operation of Seller's business and such returns are true and correct.
Seller has paid all Taxes, interest and penalties, if any, reflect on such Tax
Returns or otherwise due and payable by it in connection with the Assets or the
operation of Seller's business as of the Closing. Except as set forth in the
Interim Balance Sheet, Seller does not have any liability whatsoever for Taxes
that, directly or indirectly, relate to any period prior to the Closing. Any
deficiencies proposed as a result of any governmental audits of such Tax Returns
have been paid or settled, and there are no present disputes as to Taxes payable
by Seller in connection with the Assets or the operation of Seller's business as
of the Closing.

5.11 NO MATERIAL ADVERSE CHANGE. Since the date of the Interim Balance
Sheet, there has not been any material adverse change in the business,
operations, properties, prospects, assets, or condition of Seller or any event,
condition, or contingency that is, to Seller's knowledge, to be likely to result
in such a material adverse change.

5.12 EMPLOYEE BENEFITS.

(a) Except as is described in PART 5.12(a) OF THE DISCLOSURE
LETTER, Seller has not at any time maintained, sponsored, adopted, made
contributions to, obligated itself or had any liability with respect to:

(i) any "employee pension benefit plan" (as such term is
defined in Section 3(2) of ERISA);

(ii) any "employee welfare benefit plan" (as such term is
defined in Section 3(1) of ERISA); or

(iii) any other material benefit plan, policy, program,
arrangement, agreement or contract, including but not limited to
any material personnel policy or fringe benefit, severance
agreement, excess benefit plan, bonus or incentive plan (including
stock options, restricted stock, stock bonus or deferred bonus
plans), top hat plan or deferred compensation plan, salary
reduction agreement, change-of-control agreement, employment
agreement or consulting agreement;

<PAGE>

whether or not written or terminated, with respect to any existing
employee, former employee, director, independent contractor, or any
beneficiary or dependent thereof (all such plans, policies, programs,
arrangements, agreements and contracts, including those that are set
forth in PART 5.12(a) OF THE DISCLOSURE LETTER, are referred to in this
Agreement as "Employee Benefit Plans").

(b) Seller has delivered to Buyer a complete and accurate copy,
as of the Closing, of each written Employee Benefit Plan, together with a
copy of audited financial statements, and Form 5500 Annual Reports
(including required schedules) to the extent required by ERISA or the
Code, if any, for the three (3) most recent plan years, the most recent
IRS determination letter or IRS recognition of exemption; each other
material letter, ruling or notice issued by a Governmental Authority with
respect to each such plan, a copy of each trust agreement, insurance
contract or other funding vehicle, if any, with respect to each such
plan, and the current summary plan description or summary of material
modifications with respect to each such plan. PART 5.12(b) OF THE
DISCLOSURE LETTER contains a description of the material terms of each
unwritten Employee Benefit Plan as comprehended to the Closing Date.

(c) Each Employee Benefit Plan (i) has been and currently
complies in form and in operation in all respects with all applicable
requirements of ERISA and the Code, and any other Legal Requirements;
(ii) has been and is operated and administered in compliance with its
terms (except as otherwise required by law); (iii) has been and is
operated in compliance with applicable Legal Requirements in such a
manner as to qualify, where appropriate, for both Federal and state
purposes, for income tax exclusions to its participants, tax-exempt
income for its funding vehicle, and the allowance of deductions and
credits with respect to contributions thereto; and (iv) where
appropriate, has received a favorable determination letter or recognition
of exemption from the Internal Revenue Service.

(d) With respect to each Employee Benefit Plan, there are no
claims or other Proceedings pending or Threatened with respect to the
assets thereof (other than routine claims for benefits), and there are no
facts which could reasonably be expected to give rise to any liability,
claim or other Proceeding against any Employee Benefit Plan, any
fiduciary or plan administrator or other person dealing with any Employee
Benefit Plan or the assets of any such plan (other than routine claims
for benefits).

(e) With respect to each Employee Benefit Plan, no person: (i)
has entered into any "prohibited transaction," as such term is defined
under ERISA or the Code; (ii) has breached an obligation under ERISA; or
(iii) engaged in any transaction or otherwise acted with respect to such
plan in such a manner which could subject Buyer, or any fiduciary or plan
administrator or any other person dealing with any such plan, to
liability under Sections 409 or 502 of ERISA or Sections 4972 or 4976
through 4980 of the Code.

<PAGE>

(f) Seller has not at any time participated in, made
contributions to or had any other liability with respect to any Scheduled
Plan which (i) is a "multi-employer plan" as defined in Section 4001 of
ERISA, a "multi-employer plan" within the meaning of Section 3(37) of
ERISA, a "multiple employer plan" within the meaning of Section 413(c) of
the Code or a "multiple employer welfare arrangement" within the meaning
of Section 3(40) of ERISA or (ii) is subject to Title IV of ERISA or the
funding standards of Section 302 of ERISA is Section 412 of the Code.

(g) No Employee Benefit Plan provides medical, health, life
insurance or other welfare-type benefits for current retirees or future
retirees or current former employees or future former employees, their
spouses or dependents or any other persons (except for limited continued
medical benefit coverage for former employees, their spouses and other
dependents as required to be provided under Section 4980B of the Code and
Part 6 of Subtitle B of Title I of ERISA and the accompanying proposed
regulations or state continuation coverage laws ("COBRA")).

(h) The requirements of COBRA have been satisfied with respect
to each Employee Benefit Plan, other than requirements for which no
liability could arise.

(i) All contributions, payments, premiums, expenses,
reimbursements or accruals for all periods ending prior to or as of the
Closing (including periods from the first day of the then current plan
year to the Closing) for each Employee Benefit Plan shall have been made
or accrued on Seller's financial statements and each such plan otherwise
does not have nor could have any unfunded liability which is not
reflected on Seller's financial statements. Any contribution made or
accrued with respect to any Employee Benefit Plan is fully deductible by
Seller.

5.13 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS.

(a) Except as set forth in PART 5.13(a) OF THE DISCLOSURE
LETTER:

(i) Seller is in full compliance with each Legal
Requirement that is or was applicable to it or to the conduct or
operation of its business or the ownership or use of any of the
Assets;

(ii) no event has occurred or circumstance exists that
may constitute or result in (with or without notice or lapse of
time) a violation by Seller of, or a failure on the part of Seller
to comply with, any Legal Requirement; and

(iii) Seller has not received any notice or other
communication (whether oral or written) from any Governmental Body
or any other Person regarding, and Seller is not aware of, any
actual, alleged, possible, or potential violation of, or failure
to comply with, any Legal Requirement, or any obligation on the
part of

<PAGE>

Seller to undertake, or to bear all or any portion of the cost of,
any remedial action of any nature.

(b) PART 5.13(b) OF THE DISCLOSURE LETTER contains a complete
and accurate list of each Governmental Authorization that is held by
Seller. Each Governmental Authorization that is held by Seller or that
otherwise relates to the business of Seller, or to any of the Assets (the
"Seller Governmental Authorizations") is valid and in full force and
effect. Except as set forth in PART 5.13(b) OF THE DISCLOSURE LETTER:

(i) Seller is in full compliance with all of the terms
and requirements of each Seller Governmental Authorization;

(ii) no event has occurred or circumstance exists, to the
knowledge of Seller that may (with or without notice or lapse of
time) (A) constitute or result in a violation of or a failure to
comply with any term or requirement of any Seller Governmental
Authorization, or (B) result in the revocation, withdrawal,
suspension, cancellation, or termination of, or any modification
to, any Seller Governmental Authorization;

(iii) Seller has not received any notice or other written
communication from any Governmental Body or any other Person
regarding (A) any actual, alleged, possible, or potential
violation of or failure to comply with any term or requirement of
any Seller Governmental Authorization, or (B) any actual,
proposed, possible, or potential revocation, withdrawal,
suspension, cancellation, termination of, or modification to any
Seller Governmental Authorization; and

(iv) all applications required to have been filed for the
renewal of Seller Governmental Authorizations have been duly filed
on a timely basis with the appropriate Governmental Bodies, and
all other filings required to have been made with respect to such
Seller Governmental Authorizations have been duly made on a timely
basis with the appropriate Governmental Bodies.

The Seller Governmental Authorizations listed in PART 5.13(b) OF THE
DISCLOSURE LETTER collectively constitute all of the Governmental
Authorizations necessary to permit Seller to lawfully conduct and operate
its business in the manner it currently conducts and operates such
businesses and to permit Seller to own and use the Assets in the manner
in which it currently owns and uses the Assets.

5.14 LEGAL PROCEEDINGS; ORDERS.

(a) Except as set forth in PART 5.14(a) OF THE DISCLOSURE
LETTER, there is no pending Proceeding:

<PAGE>

(i) that has been commenced by or against Seller, or to
Seller's knowledge that otherwise relates to or may affect the
business of Seller, or any of the Assets; or

(ii) that challenges, or that may have the effect of
preventing, delaying, making illegal, or otherwise interfering
with, any of the Contemplated Transactions.

To the knowledge of Seller, (1) no such Proceeding has been Threatened,
and (2) no event has occurred or circumstance exists that could
reasonably be expected to give rise to or serve as a basis for the
commencement of any such Proceeding. Seller has delivered to Buyer
copies of all pleadings, correspondence, and other documents relating to
each Proceeding listed in PART 5.14(a) OF THE DISCLOSURE LETTER. Also
listed in PART 5.14(a) OF THE DISCLOSURE LETTER are all Proceedings
commenced or Threatened by or against Seller within the last two (2)
years, and a description of the outcome thereof.

(b) Except as set forth in PART 5.14(b) OF THE DISCLOSURE
LETTER:

(i) there is no Order to which Seller, or any of the
Assets, is subject; and

(ii) no officer, director, shareholder, or to Seller's
knowledge, agent, or employee of Seller is subject to any Order
that prohibits such officer, director, shareholder, agent, or
employee from engaging in or continuing any conduct, activity, or
practice relating to the business of Seller.

(i) Seller is in full compliance with all of the terms
and requirements of each Order to which it, or any of the Assets,
is or has been subject;

(ii) no event has occurred or circumstance exists that
will constitute or result in (with or without notice or lapse of
time) a violation of or failure to comply with any term or
requirement of any Order to which Seller, or any of the Assets, is
subject; and

(iii) Seller has not received any notice or other written
communication from any Governmental Body or any other Person
regarding any actual, alleged, possible, or potential violation
of, or failure to comply with, any term or requirement of any
Order to which Seller, or any of the Assets, is or has been
subject.

<PAGE>

5.15 ABSENCE OF CERTAIN CHANGES AND EVENTS. Except as set forth in
PART 5.15 OF THE DISCLOSURE LETTER, since September 30, 1996, Seller has
conducted its business only in the Ordinary Course of Business and there has not
been any:

(i) purchase, redemption, retirement, or other
acquisition by Seller of any shares of its capital stock; or
declaration or payment of any dividend or other distribution or
payment in respect of shares of capital stock, other than the
Permitted Tax Distribution (as defined in Section 9.7 below);

(ii) payment by Seller of any bonuses or compensation
other than regular salary payments, or nonstandard increase in the
salaries, or payment on any debt of Seller, to any stockholder,
director, officer, or employee, or entry into any employment,
severance, or similar Contract with any director, officer, or
employee;

(iii) adoption of, or increase in the payments to or
benefits under, any profit sharing, bonus, deferred compensation,
savings, insurance, pension, retirement, or other Employee Benefit
Plan;

(iv) damage to or destruction or loss of any asset or
property of Seller, whether or not covered by insurance, adversely
affecting the properties, assets, business or financial condition
of Seller;

(v) entry into, termination of, or receipt of notice of
termination of (A) any license, maintenance, distributorship,
dealer, sales representative, consulting, joint venture, credit,
or similar agreement, or (B) any Contract or transaction involving
a total remaining commitment by Seller of at least $50,000;

(vi) loan or advance by Seller to any Person other than
sales to customers on credit in the Ordinary Course of Business,
or discharge or satisfaction of any liability except in the
Ordinary Course of Business;

(vii) other than sales of assets made by Seller in the
Ordinary Course of Business, sale, lease, or other disposition of
any material asset or property of Seller or mortgage, pledge, or
imposition of any lien or other encumbrance on any material asset
or property of Seller, including the sale, lease, or other
disposition of any of Seller's intellectual property, assets or
software (other than liens for taxes not yet due and payable);

(viii) cancellation or waiver of any claims or rights with
a value to Seller in excess of $50,000;

(ix) change in the accounting methods used by Seller; or

<PAGE>

(x) agreement, whether oral or written, by Seller to do
any of the foregoing.

5.16 CONTRACTS; NO DEFAULTS; KEY CUSTOMERS.

(a) PART 5.16(a) OF THE DISCLOSURE LETTER contains a complete
and accurate list, and Seller has delivered to Buyer true and complete
copies (or forms thereof, where form agreements are used; provided that
any and all deviations or changes to the forms in any individual case are
described in PART 5.16(a) OF THE DISCLOSURE LETTER), of all Applicable
Contracts described in (i) through (xix) below:

(i) each Contract that involves executory performance of
services or delivery of goods or materials BY Seller of an amount
or value in excess of $50,000 and not terminable by Seller on
thirty (30) days prior notice without liability (without giving
effect to renewal provisions thereof);

(ii) each Contract that involves executory performance of
services or delivery of goods or materials TO Seller of an amount
or value in excess of $50,000 and not terminable by Seller on
thirty (30) days prior notice without liability;

(iii) each Contract relating to the borrowing of money,
the guaranty of another Person's borrowing of money, or the
creation of an Encumbrance on the Assets;

(iv) each Contract not in the Ordinary Course of Business
involving expenditures or receipts of Seller in excess of $50,000
or providing for an express undertaking by Seller to be
responsible for consequential damages;

(v) each lease, rental or occupancy agreement,
installment and conditional sale agreement, and other Contract
affecting the ownership of, leasing of, title to, use of, or any
leasehold or other interest in, any real property or any personal
property (A) with a fair market value in excess of $50,000 or (B)
otherwise material to Seller's business;

(vi) each license, sublicense and other Contract as to
which Seller is a party (as licensor, licensee or otherwise) and
pursuant to which Seller or any other Person is authorized to use,
sell or license any patents, trademarks, copyrights, tradenames,
service marks or other Intellectual Property of Seller;

(vii) each Contract with employees, officers, and
directors, and Contracts with any labor union or other employee
representative of a group of employees relating to wages, hours,
and other conditions of employment and each agreement providing
for Seller to indemnify any Person;

<PAGE>

(viii) each Contract to which any employee, consultant, or
contractor of Seller is bound that in any manner purports to (A)
restrict such employee's, consultant's, or contractor's freedom to
engage in any line of business or activity or to compete with any
other Person, or (B) assign to any other Person such employee's,
consultant's, or contractor's rights to any copyright, software,
invention, improvement, or discovery, including, without
limitation, all Contracts with publishers and artists;

(ix) each agreement pursuant to which Seller licenses any
intellectual property from, or to, another Person, including
without limitation, any trademarks, tradenames or copyrights;

(x) each joint venture, partnership, and other Contract
(however named) involving a sharing of profits, losses, costs, or
liabilities by Seller with any other Person;

(xi) each Contract containing covenants that in any way
purport to restrict Seller's business activity or limit the
freedom of Seller to engage in any line of business or to compete
with any Person;

(xii) each Contract providing for payments to or by any
Person based on sales, purchases, or profits, including
distribution, reseller and sales representative agreements;

(xiii) each power of attorney from Seller that is currently
effective and outstanding;

(xiv) each Contract for capital expenditures in excess of
$50,000;

(xv) each written warranty, guaranty, and or other
similar undertaking with respect to contractual performance
extended by Seller;

(xvi) each amendment, supplement, and modification
(whether oral or written) in respect of any of the foregoing;

(xvii) each agreement or plan, including, without
limitation, any stock option plan, stock appreciation rights plan,
or stock purchase plan, any of the benefits of which will be
increased, or the vesting of benefits of which will be
accelerated, by the occurrence of any of the Contemplated
Transactions; and

(xviii) all Contracts with performers, songwriters,
composers, designers and writers as well as all recording
Contracts; and

(xix) any other material Contract of Seller.

<PAGE>

(b) Except as set forth in PART 5.16(b)(i) OF THE DISCLOSURE
LETTER, all of the Contracts listed or required to be listed in PART
5.16(a) OF THE DISCLOSURE LETTER are in full force and effect and are
valid and enforceable in accordance with their respective terms (not
including the effects of bankruptcy, insolvency, receivership and other
similar laws affecting the rights and remedies of creditors generally and
the effect of general principles of equity), and, to the knowledge of
Seller, no event has occurred or circumstance exists, including, without
limitation, the failure of Seller or any distributor to meet any quota or
minimum sales or revenue level, that would give any Person (including
Seller) the right (with or without notice or lapse of time) to declare a
default or exercise any remedy under, or to accelerate the maturity or
performance of, or to cancel, terminate, or modify, any such Contract
including, without limitation, the right to cause the release of any
Assets currently held in escrow. Except as set forth on PART 5.16(b)(ii)
OF THE DISCLOSURE LETTER, none of the Applicable Contracts require any
approval or consent as a result of the consummation of the Contemplated
Transactions.

(c) There are no renegotiations of, attempts to renegotiate, or
outstanding rights to renegotiate any amounts paid or payable to Seller
under current or completed Contracts with any Person, and to the
knowledge of Seller, no such Person has made demands on Seller for such
renegotiation.

(d) PART 5.16(d) OF THE DISCLOSURE LETTER contains a list of
the top twenty-five (25) customers and licensees of Seller (determined by
revenues generated by Seller in each of the fiscal years 1995 and 1996)
(the "Customers"). Except as set forth in PART 5.16(d) OF THE DISCLOSURE
LETTER, to the knowledge of Seller, none of the Customers intend to
reduce the level of business with Seller or in any other manner
materially alter their relationship with Seller as a result of the
Contemplated Transaction or otherwise.

5.17 INSURANCE. PART 5.17 OF THE DISCLOSURE LETTER contains a complete
and accurate list of all insurance policies (including "self-insurance"
programs) now maintained by Seller (the "Insurance Policies") and all general
liability policies maintained by Seller during the past five years with respect
to Seller's business or the Assets and all claims made under any such current or
prior insurance policies. The Insurance Policies are in full force and effect,
Seller is not in default under any Insurance Policy, and no claim for coverage
under any Insurance Policy has been denied. All of the Insurance Policies will
be maintained in full force and effect until the Closing Date.

5.18 ENVIRONMENTAL MATTERS.

(a) To the knowledge of Seller, Seller has never generated,
transported, treated, stored, disposed of or otherwise handled any
Hazardous Materials (as defined below) at any site, location or facility
in connection with its business, the Assets or its leased premises
("Leased Premises") and to Seller's knowledge, no such Hazardous
Materials are present on, in or under the Leased Premises used in
connection with the operation of Seller's business, and to Seller's
knowledge, such property does not contain

<PAGE>

(including without limitation, containment by means of any underground
storage tank) any Hazardous Materials in violation of any applicable
Environmental and Safety Requirement (as defined below). To the
knowledge of Seller, there are no underground storage tanks on the Leased
Premises.

(b) Seller is (i) in compliance with all applicable
Environmental and Safety Requirements, the violation of which would
reasonably be expected to result in a liability to Seller or its
properties or assets and (ii) possesses all required permits, licenses,
certifications and approvals and has filed all notices or applications
required thereby or pertaining thereto.

(c) Seller has never been subject to, or received any notice
(written or oral) of, any private, administrative or judicial inquiry,
investigation, order or action, or any notice (written or oral) of any
intended or Threatened private, administrative, or judicial inquiry,
investigation, order or action relating to the presence or alleged
presence of Hazardous Materials in, under or upon the Leased Premises,
and to Seller's knowledge, there is no reasonable basis for any such
inquiry, investigation, order, action or notice; and to Seller's
knowledge, there are no pending or Threatened investigations, actions,
orders or proceedings (or notices of potential investigations, actions,
orders or proceedings) from any governmental agency or any other entity
regarding any matter relating to Environmental and Safety Requirements.

(d) To the Seller's knowledge, no facts, events or conditions
with respect to the past or present operations or facilities of Seller
exist which could reasonably be expected to interfere with or prevent
continued compliance with, or could give rise to any common law or
statutory liability or otherwise form the basis of any claim, action,
suit, proceeding, hearing or investigation against or involving Seller,
its assets or properties or the Leased Premises under any Environmental
and Safety Requirement or related common law theories based on any such
fact, event or circumstance, including, without limitation, liability for
investigation costs, cleanup costs, personal injury or property damage.

(e) For purposes of this Agreement, "Environmental and Safety
Requirements" means all federal, state and local statutes, laws, rules,
regulations, codes, ordinances, orders, standards, permits, licenses,
actions, policies and requirements (including consent decrees, judicial
decisions and administrative orders) relating to protection, preservation
or conservation of the environment and public or worker health and
safety, all as amended, hereafter amended or reauthorized. For purposes
of this Agreement, "Hazardous Materials" means (i) hazardous substances,
as defined by the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. Section 9601 ET SEQ.; (ii) hazardous wastes as
defined by the Resource Conservation and Recovery Act, 42 U.S.C. Section
6901 ET SEQ.; (iii) petroleum, including without limitation, crude oil or
any fraction thereof which is liquid at standard conditions of
temperature and pressure (60 degrees Fahrenheit and 14.7 pounds per
square inch absolute); (iv) any radioactive material,

<PAGE>

including, without limitation, any source, special nuclear, or by-product
material as defined in 42 U.S.C. Section 2011 ET SEQ.; (v) asbestos in
any form or condition; (vi) polychlorinated biphenyls; and (vii) any
other material, substance or waste to which liability or standards of
conduct may be imposed under any Environmental and Safety Requirements.

5.19 EMPLOYEES. PART 5.19 OF THE DISCLOSURE LETTER contains a complete
and accurate list of the following information for each employee of Seller,
including each employee on leave of absence or layoff status: name; job title;
current compensation paid or payable and any change in compensation since
September 30, 1996; vacation accrued; and service credited for purposes of
vesting and eligibility to participate under each Employee Benefit Plan. To
Seller's knowledge, no current or former employee or current or former officer
or director of Seller is a party to, or is otherwise bound by, any agreement or
arrangement, including any confidentiality, non-competition, or proprietary
rights agreement, between such employee or officer or director and any other
Person ("Proprietary Rights Agreement") that in any way adversely affected,
affects, or will affect (i) the performance of his duties as an employee or
officer or director of Seller, or (ii) the ability of Seller to conduct its
business, or otherwise produce, manufacture and distribute its products,
including any Proprietary Rights Agreement with Seller by any such employee or
director.

5.20 LABOR DISPUTES; COMPLIANCE. Except as set forth in PART 5.20 OF
THE DISCLOSURE LETTER, Seller has never been a party to any collective
bargaining or other labor Contract. There has never been, there is not
presently pending or existing, and to Seller's knowledge there is not
Threatened, any strike, slowdown, picketing, work stoppage, labor arbitration,
or proceeding in respect of the grievance of any employee, application or
complaint filed by an employee or union with the National Labor Relations Board
or any comparable Governmental Body, organizational activity, or other labor
dispute against or affecting Seller or the Facility, and no application for
certification of a collective bargaining agent is pending or, to Seller's
knowledge, is Threatened. There is no lockout of any employees by Seller, and
no such action is contemplated by Seller. Seller has complied in all respects
with all Legal Requirements, and there is no allegation, charge or complaint or
Proceeding pending or Threatened against Seller or, to Seller's knowledge, any
of its officers, directors or employees, relating to employment, equal
employment opportunity, discrimination, harassment, immigration, wages, hours,
benefits, collective bargaining, the payment of social security and similar
taxes, occupational safety and health, and plant closing, and Seller has no
knowledge of any reasonable basis for any such allegation, charge, complaint, or
Proceeding.

5.21 INTELLECTUAL PROPERTY. PART 5.21 OF THE DISCLOSURE LETTER sets
forth all Intellectual Property used by Seller in the conduct of its business
(including, without limitation, the Seller's music catalog). All of Seller's
Intellectual Property is owned by it or used pursuant to a license listed on
PART 5.21 OF THE DISCLOSURE LETTER. Except as set forth on PART 5.21 OF THE
DISCLOSURE LETTER, (i) Seller owns and possesses all right, title and interest
in and to, or has a valid license to use all of the Intellectual Property
necessary for the present and continued operation of its business; (ii) to the
knowledge of Seller, there is no claim currently outstanding or Threatened

<PAGE>

contesting the validity, enforceability, use or ownership of any of such
Intellectual Property, and to the knowledge of Seller, there is no reasonable
basis for any such claim; (iii) Seller has not infringed, misappropriated or
otherwise violated, or is now infringing, misappropriating or otherwise
violating, any Intellectual Property rights or interests of any third party;
(iv) to the knowledge of Seller, the operation of any aspect of Seller's
business does not give rise to any reasonable basis for an allegation of
infringement of, misappropriation of, or other conflict with the Intellectual
Property rights or interests of any third party; (v) no claim is currently
outstanding or Threatened against Seller relating to alleged infringement of,
misappropriation of, or other conflict with the Intellectual Property rights or
interests of any third party; (vi) to the knowledge of Seller, no third party
has infringed, misappropriated or otherwise violated the Intellectual Property
rights or interests of Seller, (vii) Seller has not taken any action that has
impaired or would reasonably be expected to impair Seller's right, title or
interest in any Intellectual Property, and (viii) Seller is not a party to any
license agreement or arrangement, whether as licensee, licensor or otherwise,
with respect to any Intellectual Property not set forth on PART 5.21 OF THE
DISCLOSURE LETTER.

5.22 [RESERVED].

5.23 BANK ACCOUNTS. PART 5.23 OF THE DISCLOSURE LETTER contains a
complete and accurate list of each bank at which Seller has an account or safe
deposit box, the number of each such account or box, and the names of all
persons authorized to draw on such accounts or to have access to such boxes.

5.24 DISCLOSURE.

(a) No representation or warranty (including the disclosures
set forth in the Disclosure Letter) of Seller in this Agreement or in any
of the Seller Transaction Documents omits to state a material fact
necessary to make the statements herein or therein not misleading.

(b) No notice given pursuant to Section 7.5 when taken together
with the disclosure described in paragraph 5.24(a) will contain any
untrue statement or omit to state a material fact necessary to make the
statements therein, in this Agreement or in any of the Seller Transaction
Documents not misleading.

5.25 RELATIONSHIPS WITH RELATED PERSONS. Except as disclosed in PART
5.25 OF THE DISCLOSURE LETTER, the (i) shareholders, directors and officers, and
their Related Persons and (ii) to the Seller's knowledge the employees of Seller
and their Related Persons, do not have any ownership interest in any of the
Assets and to Seller's knowledge, do not own, of record or as a beneficial
owner, an equity interest or any other financial or profit interest in any
Person that has (a) had business dealings or a material financial interest in
any transaction with Seller, except for less than 2% of the outstanding capital
stock of such person that is publicly traded on any recognized exchange in the
over-the-counter market or (b) engaged in competition with Seller, with respect
to any line of products or services of Seller (a "Competing Business") in any

<PAGE>

market presently served by Seller, except for less than 2% of the outstanding
capital stock of such person that is publicly traded on any recognized exchange
in the over-the-counter market. No shareholder or director of Seller, and to
Seller's knowledge, none of their Related Persons, is a party to any Contract
with, or has any claim or right against, Seller. All money owed by Seller to
its shareholders or directors or their Related Persons (other than for salary)
are for bona fide debts and are set forth in PART 5.25 OF THE DISCLOSURE LETTER.

5.26 BROKERS OR FINDERS. Except as set forth in PART 5.26 OF THE
DISCLOSURE LETTER, Seller and its agents have incurred no obligation or
liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other similar payment in connection with this Agreement.

5.27 SECURITIES. Seller represents that it has received the
prospectus, dated March 12, 1996, filed in connection with the initial public
offering of the Parent's Common Stock (the "Prospectus"), Parent's Annual Report
on Form 10-K for the fiscal year ended May 31, 1996, and all of Parent's
quarterly reports on Form 10-Q and current reports on Form 8-K filed since March
12, 1996.

5.28 [RESERVED.]

5.29 SECURITIES LAW REPRESENTATIONS.

(a) Seller represents that it (i) was provided the opportunity
to ask questions of and receive answers from Parent, or its
representative, concerning the operations, business and financial
condition of Parent, and all such questions have been answered to its
full satisfaction and any information necessary to verify such responses
has been made available to it; (ii) has received such documents,
materials and information as it deems necessary or appropriate for
evaluation of the Convertible Debentures and the Common Stock of Parent
into which they may be converted (the "Common Stock"), and further
confirms that it has carefully read and understand these materials and
have made such further investigation as was deemed appropriate to obtain
additional information to verify the accuracy of such materials; (iii)
confirm that the Convertible Debentures were not offered to Seller by any
means of general solicitation or general advertising; (iv) believes that
Seller has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of an
investment in the Convertible Debentures (v) is acquiring the Convertible
Debentures for its own account, for investment purposes only, and not
with a view towards the sale or other distribution thereof, other than
pursuant to an effective resale registration statement in whole or in
part or exemption therefrom; (vi) understands that the Convertible
Debentures and the Common Stock have not been registered under the
securities laws of any state or under the Securities Act and are offered
in reliance on exemptions therefrom and that the Convertible Debentures
and the Common Stock have not been approved or disapproved by the SEC or
by any other federal or state agency; and (vii) understands that (a)
owners of the Convertible Debentures and the Common Stock will have only
such rights, if any,

<PAGE>

to require the Convertible Debentures and the Common Stock to be
registered under the Securities Act as are provided to purchasers of
Convertible Debentures pursuant to the Private Placement; and (b) it may
not be possible for it to sell the Convertible Debentures and the Common
Stock and accordingly, it may have to hold the Convertible Debentures and
the Common Stock, and bear the economic risk of this investment for an
extended period of time: The foregoing, however, does not limit or
modify the representations and warranties of Buyer in Section 6 of this
Agreement or the right of the Seller to rely thereon.

(b) The Seller agrees with Buyer and Parent that the
Convertible Debentures and Common Stock will not be sold or otherwise
disposed of except pursuant to (a) an exemption or exclusion from the
registration requirements under the Securities Act, which does not
require the filing by Parent with the SEC of any registration statement,
offering circular or other document, in which case the Seller shall first
supply to Parent an opinion of counsel (which opinion of counsel shall be
reasonably satisfactory to Parent) that such exemption or exclusion is
available, or (b) a registration statement filed by Parent with the SEC
under the Securities Act.

(c) Seller agrees that the certificates for the Convertible
Debentures and the Common Stock received shall bear substantially the
following legend:

The securities represented by this Certificate have not
been registered under the Securities Act of 1933 or with
any state securities commission, and may not be transferred
or disposed of by the holder in the absence of a
registration statement which is effective under the
Securities Act of 1933 and applicable state laws and rules,
or unless, immediately prior to the time set for transfer,
such transfer can be effected without violation of the
Securities Act of 1933 and other applicable state laws and
rules.

In addition, Seller agrees that Parent may place stop transfer orders
with its transfer agents, trustees or custodians, as the case may be,
with respect to such certificates. The appropriate portions of the
legend will be removed from the certificate for the Convertible
Debentures or Common Stock, as the case may be, promptly upon delivery to
Parent of such satisfactory evidence as may be reasonably required by
Parent that such legend is not required to ensure compliance with the
Securities Act.

ARTICLE VI

REPRESENTATIONS AND WARRANTIES OF BUYER

Buyer hereby represents and warrants to Seller as follows:

<PAGE>

6.1 ORGANIZATION AND GOOD STANDING. Buyer is a corporation duly
incorporated, validly existing, and in good standing under the laws of Delaware,
with full corporate power and authority to conduct its business as it is now
being conducted, to own, hold under lease, or otherwise possess or use the
properties and assets that it purports to own, hold under lease, or otherwise
possess or use, and to perform all its obligations under the contracts to which
it is a party or by which it is bound. Buyer is duly qualified to do business
as a foreign corporation and is in good standing under the laws of each state or
other jurisdiction in which such qualification is required by virtue of the
nature of the activities conducted by it. Buyer has delivered to Seller copies
of the Organizational Documents of Buyer, as currently in effect.

6.2 AUTHORITY; NO CONFLICT.

(a) This Agreement and Buyer's Closing Documents and all other
documents entered into by Buyer in connection with the consummation of
the Contemplated Transactions (together with the Buyer's Closing
Documents, the "Buyer Transaction Documents") constitute the legal,
valid, and binding obligation of Buyer enforceable against it in
accordance with their respective terms, except as to the effect, if any,
of (a) applicable bankruptcy and other similar laws affecting the rights
of creditors generally, (b) rules of law governing specific performance,
injunctive relief and other equitable remedies, and (c) the
enforceability of provisions requiring indemnification in connection with
the offering, issuance or sale of securities. The Agreement and Buyer's
Transaction Documents have been duly executed and delivered by Buyer.
Buyer has the absolute and unrestricted right, power, and authority to
execute and deliver this Agreement and Buyer's Transaction Documents and
to perform its respective obligations under this Agreement and Buyer's
Transaction Documents. The execution and delivery of this Agreement and
Buyer's Transaction Documents have been, and the consummation of the
Contemplated Transactions as of the Closing Date will have been, duly
authorized by all necessary corporate action on the part of Buyer,
including any required shareholder approval.

(b) Neither the execution and delivery of this Agreement and
Buyer's Closing Documents by Buyer nor the consummation or performance of
any of the Contemplated Transactions by Buyer will give any Person the
right to prevent, delay, or otherwise interfere with any of the
Contemplated Transactions pursuant to: (i) any provision of Buyer's
Organizational Documents; (ii) any resolution adopted by the board of
directors or the stockholders of Buyer; (iii) any Legal Requirement or
Order to which Buyer or any of its respective assets may be subject; or
(iv) any Contract to which Buyer is a party or by which Buyer may be
bound. Buyer is not required to give any notice to or obtain any Consent
from any Person in connection with the execution and delivery of this
Agreement by Buyer or the consummation or performance of any of the
Contemplated Transactions by Buyer except for (i) the approval by Buyer's
and Parent's stockholders of the Contemplated Transactions and the
Private Placement; (ii) the possible filing of a Form 8-K by the Parent
with the SEC, and (iii) such consents, approvals, orders,

<PAGE>

authorizations, registrations, declarations and filings as may be
required under applicable federal and state securities laws and the laws
of any foreign country.

6.3 CERTAIN PROCEEDINGS. There is no pending proceeding that has been
commenced against Buyer or Parent and that challenges or may have the affect of
preventing, delaying making illegal or otherwise interfering with any of the
Contemplated Transactions. To Buyer's knowledge, no such proceeding has been
Threatened.

6.4 BROKERS OR FINDERS. Buyer and its respective officers and agents
have incurred no obligation or liability, contingent or otherwise, for brokerage
or finders' fees or agents' commissions or other similar payment in connection
with this Agreement.

6.5 SECURITIES LAW REPRESENTATION. As of their respective filing
dates, all of the documents listed in Section 5.27 complied in all material
respects with the requirements of the Exchange Act or the 1933 Act as the case
may be, and none of the above documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements made therein, in light of the circumstances
in which they were made, not misleading, except to the extent corrected by a
document subsequently filed by Parent with the SEC.

6.6 DISCLOSURE. No representation or warranty of the Buyer in this
Agreement omits to state a material fact necessary to make the statements herein
not misleading.

ARTICLE VII

COVENANTS OF SELLER

7.1 ACCESS AND INVESTIGATION. During the period from the date of this
Agreement to the Closing Date, Seller and its Representatives will, (i) afford
Buyer and its Representatives full and free access to Seller's personnel,
properties, contracts, books, and records, and other documents and data, (ii)
furnish Buyer and its Representatives with access to or copies of all such
contracts, books and records, and other existing documents and data as Buyer may
reasonably request, and (iii) furnish Buyer and its Representatives with such
additional financial, operating, and other data and information as Buyer may
reasonably request. No information or knowledge obtained in any investigation
pursuant to this Section 7.1 shall affect or be deemed to modify any
representation or warranty contained herein or the conditions to the obligations
of the parties to consummate the Consummated Transactions.

7.2 OPERATION OF THE BUSINESSES OF SELLER. During the period from the
Effective Date to the Closing Date, Seller will:

(a) conduct the business of Seller only in the Ordinary Course
of Business, including maintaining the Assets in good repair, order, and
condition;

<PAGE>

(b) use its Best Efforts to preserve intact the current
business organization of Seller, keep available the services of the
current officers, employees, and agents of such Seller, and maintain the
relations and goodwill with its suppliers, customers, artists, landlords,
creditors, employees, agents, and others having business relationships
with Seller;

(d) otherwise report periodically to Buyer concerning the
status of the business, operations, and finances of Seller.

7.3 NEGATIVE COVENANT. Without the prior consent of Buyer, Seller
will not take any affirmative action, or fail to take any reasonable action
within their or its control, as a result of which any of the changes or events
listed in Section 5.15 is likely to occur. In addition, from and after the
Effective Date until the Closing Date or the earlier termination of this
Agreement in accordance with its terms, the Seller will not, and will not permit
its directors, officers, employees, representatives, investment bankers,
shareholders, agents and affiliates to, directly or indirectly, (i) solicit or
encourage submission or any inquiries, proposals or offers by, (ii) participate
in any negotiations with, (iii) afford any access to the properties, books or
records of Seller to, or (iv) otherwise assist, facilitate or encourage, or
enter into any agreement or understanding with, any person, entity or group
(other than Buyer and its affiliates, representatives and agents), in connection
with any Acquisition Proposal. For purposes of this Agreement, an "Acquisition
Proposal" shall mean any proposal relating to the possible acquisition of
Seller, whether by way of merger, purchase of any Shares of common stock of
Seller, purchase of a substantial portion of the assets of Seller, or otherwise.
In addition, from and after the Effective Date until the Effective Time or the
earlier termination of this Agreement in accordance with its terms, the Seller
will not, and will not permit its directors, officers, employees,
representatives, investment bankers, shareholders, agents and affiliates to,
directly or indirectly, make or authorize any statement, recommendation or
solicitation in support of any Acquisition Proposal made by any person, entity
or group (other than Buyer). Seller will immediately cease any and all existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing.

7.4 REQUIRED APPROVALS AND CONSENTS. As promptly as practicable after
the date of this Agreement, Seller will (i) make all filings required by Legal
Requirements to be made by it and (ii) obtain all necessary consents or
approvals required under the Applicable Contracts (the "Consents"), in order to
consummate the Contemplated Transactions. Between the date of this Agreement
and the Closing Date, Seller will cooperate with Buyer in connection with any
filings required by Legal Requirements to be made by Buyer to consummate the
Contemplated Transactions.

<PAGE>

7.5 NOTIFICATION.

(a) Between the Effective Date and the Closing Date, Seller
will promptly notify Buyer in writing if Seller becomes aware of any fact
or condition that causes or constitutes a Breach of any of Seller's
representations and warranties as of the date of this Agreement, or if or
Seller becomes aware of the occurrence after the date of this Agreement
of any fact or condition that would cause or constitute a Breach of any
such representation or warranty had such representation or warranty been
made as of the time of occurrence or discovery of such fact or condition.

(b) Should any fact or condition require any change in the
disclosure set forth in the Disclosure Letter, Seller will promptly
deliver to Buyer a supplement to the Disclosure Letter specifying such
change; provided, however, that such supplements may only be made with
respect to claims made, events occurring or arising solely after the date
hereof and not arising out of any breach by Seller of its covenants or
agreements set forth in this Agreement. Any such supplements to the
Disclosure Letter delivered by Seller to Buyer pursuant to the terms of
this Section 7.5(b) shall not be deemed a breach by Seller of the
applicable representation or warranty to which such supplemental
disclosure relates.

(c) During the same period, Seller will promptly notify Buyer
of the occurrence of any Breach of any covenant of Seller in this
Section 7 or of the occurrence of any event that may make the
satisfaction of the conditions in Section 9, 10, or 11 impossible or
unlikely.

7.6 BEST EFFORTS. Between the date of this Agreement and the Closing
Date, Seller will use its Best Efforts to cause the conditions in Section 11 to
be satisfied.

7.7 DISCLOSURE LETTER. Seller shall use its Best Efforts to deliver
to Buyer a complete Disclosure Letter, as soon as possible, but in no event
later than 5 business days after the execution hereof, setting forth the
disclosure required pursuant to the terms hereof. Notwithstanding any other
provision of this Agreement to the contrary, the parties hereto acknowledge that
this Agreement is being executed prior to the delivery of the Disclosure Letter
referred to herein. It is a condition to the Buyer's obligations to consummate
the Contemplated Transactions and take the other actions required to be taken by
Buyer (but not including the delivery of the Deposit to the Seller) at, or prior
to, the Closing, that Buyer is satisfied, in its sole discretion, with the
disclosures made by Seller in the Disclosure Letter.

<PAGE>

ARTICLE VIII

COVENANTS OF BUYER

8.1 APPROVALS OF GOVERNMENTAL BODIES. As promptly as practicable
after the date of this Agreement, Buyer will make any filings required by Legal
Requirements to be made by it in order to consummate the Contemplated
Transactions. Between the date of this Agreement and the Closing Date, Buyer
will (i) cooperate with Seller in connection with (a) any filings required by
Legal Requirements to be made by Seller and (b) obtaining the Consents, in order
to consummate the Contemplated Transactions and (ii) use its reasonable best
efforts to obtain the release of all guarantees securing or supporting the
NationsBank Loan.

8.2 BEST EFFORTS. Between the date of this Agreement and the Closing
Date, Buyer will use its Best Efforts to cause the conditions in Section 12 to
be satisfied.

8.3 MEETING OF STOCKHOLDERS OF BUYER. Buyer shall take all action
necessary in accordance with Delaware law and its Restated Certificate of
Incorporation and By-laws to convene a meeting of its stockholders to consider
and vote upon the Contemplated Transactions and the Private Placement. Such
action shall be taken promptly following the execution and delivery of this
Agreement. The Board of Directors of Buyer shall, subject to fiduciary
obligations under applicable law as advised by counsel, use its best efforts to
solicit and secure from stockholders of Buyer proxies in favor of such approval.

8.4 NOTIFICATION.

(a) Between the date of this Agreement and the Closing Date,
Buyer will promptly notify Seller in writing if Buyer becomes aware of
any fact or condition that causes or constitutes a Breach of any of
Buyer's representations and warranties as of the date of this Agreement,
or if or Buyer becomes aware of the occurrence after the date of this
Agreement of any fact or condition that would cause or constitute a
Breach of any such representation or warranty had such representation or
warranty been made as of the time of occurrence or discovery of such fact
or condition.

(b) Should any fact or condition require any disclosure (or
change to any disclosure) set forth in this Agreement, Buyer will
promptly deliver to Seller a written notice specifying such disclosure.

(c) During the same period, Buyer will promptly notify Seller
of the occurrence of any Breach of any covenant of Buyer in this
Section 8 or of the occurrence of any event that may make the
satisfaction of the conditions in Section 9, 10, or 11 impossible or
unlikely.

<PAGE>

ARTICLE IX

ADDITIONAL AGREEMENTS

9.1 PUBLIC DISCLOSURE. Buyer and Seller shall consult with each other
before issuing any press release or otherwise making any public statement with
respect to the transactions contemplated hereby or this Agreement and shall not
issue any such press release or make any such public statement prior to such
consultation, except as may be required by law or any listing agreement with a
national securities exchange or the Nasdaq National Market.

9.2 AUDITORS' LETTERS. The Seller shall use its Best Efforts to cause
Grant Thornton, L.L.P., independent auditors to Seller, at Buyer's expense, to
(i) deliver letters to Buyer, from time to time, from and after the Closing
Date, in form and substance reasonably satisfactory to Buyer and customary in
scope and substance for letters delivered by independent auditors in connection
with filings with the SEC and (ii) generally cooperate with Buyer, including,
without limitation, providing Buyer and its representatives with access to its
workpapers relating to Seller.

9.3 NONASSIGNABLE CONTRACTS. To the extent that the assignment
hereunder by Seller to Buyer of any Applicable Contract is not permitted or is
not permitted without the consent of any other party to the Applicable Contract,
this Agreement shall not be deemed to constitute an assignment of any such
Applicable Contract if such consent is not given or if such assignment otherwise
would constitute a breach of, or cause a loss of contractual benefits under, any
such Applicable Contract, and Buyer shall not assume any obligations or
liabilities thereunder. Without in any way limiting Seller's obligations to
obtain all consents and waivers necessary for the sale, transfer, assignment and
delivery of the Applicable Contracts and the Assets to Buyer hereunder, if any
such consent is not obtained or if such assignment is not permitted irrespective
of consent and the Closing hereunder is consummated, Seller's sole
responsibilities shall be to (i) continue to use its reasonable efforts to
obtain such consents, (ii) cooperate with Buyer in any reasonable arrangement
designed to provide Buyer with the rights and benefits (subject to the
assumption by Buyer hereunder of Seller's responsibility for performance of the
obligations) under any such Applicable Contracts and (ii) fulfill all of Buyer's
reasonable requests in connection with the transfer of such Applicable
Contracts.

9.4 BLUE SKY LAWS. Buyer shall take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the Convertible Debentures and Common Stock
pursuant hereto. Seller shall use its Best Efforts to assist Buyer as may be
necessary to comply with the securities and blue sky laws of all jurisdictions
which are applicable in connection with the issuance of the Convertible
Debentures and Common Stock pursuant hereto.

9.5 CONSULTING, EMPLOYMENT AND NON-COMPETITION AGREEMENTS. Seller
shall use its best efforts to deliver or cause to be delivered to Buyer, at the
Closing, (i) from each of Brian Hadley and Michael Olson, an executed Employment
Agreement, in the form of

<PAGE>

EXHIBIT 9.5(a) and (ii) from Don Johnson, an executed Consulting, Employment and
Noncompetition Agreement, in the form of EXHIBIT 9.5(b) (collectively, the
"Employment and Non-Competition Agreements").

9.6 CONTROL OF SELLER. Without limiting the conditions set forth in
Sections 10, 11 and 12 (except to the extent failure of any such condition has
occurred by reason of Buyer's actions under this Section 9.6) or the parties
rights' under Sections 13 and 14 or any other provision of this Agreement, from
and after the close of business on the Effective Date, to and including the
close of business on the Closing Date (the "Buyer's Business Period"), the
business of Seller shall be operated subject to Buyer's direction and control,
and for Buyer's benefit, and Buyer shall, provided the transaction which is the
subject of this Agreement is consummated in accordance with its terms, be
entitled to all profits and shall bear all losses arising from the operations of
Seller's business during such period. Notwithstanding any provision herein to
the contrary, the provisions of Section 7.2 shall apply during the Buyer's
Business Period as if references to Buyer and Seller contained therein were
reversed with respect to Buyer's actions hereunder. During the Buyer's Business
Period:

(a) Buyer shall be entitled to have its representatives on the
premises of Seller and the officers and directors of Seller shall consult
with Buyer and shall take into account the business policies and
suggestions offered by Buyer's representatives with respect to the
operation of Seller's business.

(b) Separate books and records shall be kept to record the
operation of Seller's business during Buyer's Business Period and such
accounting and other business procedures shall be carried out as may be
appropriate to give effect to the intention of the parties set forth in
this Section 9.6. The books of account shall be kept in such form as
Seller and Buyer shall deem mutually acceptable. In the event Buyer's
actions under this Section 9.6 in connection with the operation of
Seller's business during the Buyer's Business Period causes a breach of a
representation or warranty of the Seller or the failure of a condition
hereunder, such breach or failure shall not constitute a breach or
failure by Seller hereunder.

At the Closing, Seller shall without further consideration deliver to Buyer the
books and records relating to the Buyer's Business Period along with such
assignments and other instruments of conveyance as shall be necessary to vest
Buyer with full legal title to all accounts receivable, contracts or other
rights and assets including, without limitation, the cash and revenues which
arise from the operation of the business during Buyer's Business Period and
Seller agrees to execute all documents that Buyer may reasonably require to
effectuate such purpose to the end that Buyer shall upon consummation of the
transaction which is the subject hereof have the full benefit of all business
transactions during Buyer's Business Period.

<PAGE>

9.7 PERMITTED TAX DISTRIBUTION.

(a) Each of Buyer and Seller agree that the Seller shall be
permitted to distribute to its shareholders an amount equal to the
federal and state taxes (using a combined state and federal tax rate
equal to 43.8%) incurred by each such shareholder with respect to taxable
income of the Seller for the period from October 1, 1996 through the date
that Buyer (as advised by a Big Six accounting firm) first begins
attributing Seller's taxable income to itself (the "Tax Period") (the
"Permitted Tax Distribution"). In determining the Permitted Tax
Distribution, the taxable income of Seller shall be calculated on a basis
consistent with Seller's past practices and in compliance with all laws
and regulations. Prior to the Closing, the Seller shall make a
reasonable good faith estimate of its taxable income for the Tax Period
and use such estimate to prepare the estimated Permitted Tax Distribution
and Seller shall (subject to Buyer's agreement that such estimate was
determined by Seller in accordance with the terms and intent of this
Section 9.7(a) make a distribution to its shareholders based on such
estimate (the "Estimated Tax Distribution"). Within thirty (30) days
after the Closing, Seller shall determine Seller's actual taxable income
for the Tax Period (and the resulting actual Permitted Tax Distribution
that should have been made), which determination shall be subject to
Buyer's agreement that such determination was made in accordance with the
terms and intent of this Section 9.7(a)) (the "Actual Tax Distribution").
In the event the Estimated Tax Distribution is less than the Actual Tax
Distribution, Buyer shall pay to Seller an amount equal to such
deficiency within 5 business days of the determination of the Actual Tax
Distribution. In the event the Estimated Tax Distribution is greater
than the Actual Tax Distribution, the Seller shall (or cause the Seller's
shareholders to) pay to Buyer an amount equal to such overage within 5
business days of the determination of the Actual Tax Distribution. If
Buyer and Seller are unable to agree on either the Estimated Tax
Distribution or the Actual Tax Distribution, such determination shall be
made by Arthur Andersen & Co., and shall be final and binding in all
respects against each of the Buyer and Seller. The fees and expenses of
Arthur Andersen & Co. in making such determinations shall be borne
equally between each of the Buyer and Seller.

(b) Notwithstanding any provision of this Agreement to the
contrary, the payment by Seller of the Permitted Tax Distribution shall
not constitute a breach of any representation, warranty or covenant of
the Seller contained in this Agreement or a material adverse change as
described in Section 11.7 hereof. Further, Seller shall be permitted to
make the Permitted Tax Distribution pursuant to the terms of subparagraph
(a) above notwithstanding the provisions of Section 9.6 hereof.

<PAGE>

ARTICLE X

MUTUAL CONDITIONS PRECEDENT TO
PARTIES' OBLIGATION TO CLOSE

10.1 MUTUAL CONDITIONS. Each of the parties' obligations to consummate
the Contemplated Transactions and to take other actions required to be taken by
the parties at the Closing is subject to the satisfaction at or prior to the
Closing, of each of the following conditions:

(a) no temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction
or other legal or regulatory restraint or prohibition preventing the
consummation of the transactions contemplated hereby shall be in effect.

(b) The stockholders of Buyer and Parent shall have approved
the Contemplated Transactions and the Private Placement.

(c) Parent shall have consummated and obtained net proceeds of
at least $30 million from a private placement (the "Private Placement")
of convertible debentures to one or more investors, on terms satisfactory
in its sole discretion.

ARTICLE XI

CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS TO CLOSE

Buyer's obligations to consummate the Contemplated Transactions and to
take the other actions required to be taken by Buyer at the Closing is subject
to the satisfaction, at or prior to the Closing, of each of the following
conditions (any of which may be waived by Buyer in whole or in part):

11.1 ACCURACY OF REPRESENTATIONS. Each of Seller's representations and
warranties in this Agreement must have been accurate in all respects as of the
date of this Agreement, and must be accurate in all respects as of the Closing
Date as if made on the Closing Date, without giving effect to any supplements
pursuant to Section 7.5.

11.2 THE SELLER'S PERFORMANCE.

(a) Each of the covenants and obligations that Seller is
required to perform or to comply with pursuant to this Agreement at or
prior to the Closing must have been duly performed and complied with in
all respects.

<PAGE>

(b) Seller must have delivered or caused to be delivered, each
of the documents required to be delivered or caused to be delivered, by
it pursuant to Section 4.2.

11.3 CONSENTS. Each of the Consents must have been obtained and must
be in full force and effect.

11.4 ADDITIONAL DOCUMENTS. Seller must have caused the following
documents to be delivered to Buyer:

(a) An opinion of Kaplan, Strangis and Kaplan, P.A., legal
counsel to Seller, dated the Closing Date, in the form of
EXHIBIT 11.4(a);

(b) A copy of the Shareholders Indemnification Agreement,
attached hereto as Exhibit 11.4(b), duly executed by the Seller and all
of the Shareholders;

(d) A copy of the Indemnity Escrow Agreement, duly executed by
Seller; and

(e) Such other documents as Buyer may reasonably request for
the purpose of consummating the Contemplated Transactions.

11.5 NO PROCEEDINGS. Since the Effective Date, there must not have
been commenced or Threatened against Buyer, or against any Person affiliated
with Buyer, any Proceeding (a) involving any challenge to, or seeking damages or
other relief in connection with, any of the Contemplated Transactions, or
(b) that would reasonably be expected to have the effect of preventing,
delaying, making illegal, or otherwise interfering with any of the Contemplated
Transactions.

11.6 NO PROHIBITION. Neither the consummation nor the performance of
any of the Contemplated Transactions by Seller will, directly or indirectly
(with or without notice or lapse of time), contravene, or conflict with, or
result in a material violation of, or cause Buyer or any Person affiliated with
Buyer to suffer any adverse consequence under, (i) any applicable Legal
Requirement or Order, or (ii) any Legal Requirement or Order that has been
published, introduced, or otherwise formally proposed by or before any
Governmental Body.

11.7 MATERIAL ADVERSE CHANGE. There shall have been no material
adverse change in the assets, liabilities of any kind, operations, condition
(financial or otherwise), operating results, employee, customer or supplier
relations, business activities or prospects of Seller since September 30, 1996.

<PAGE>

11.8 DUE DILIGENCE AND DISCLOSURE LETTER. The Buyer shall be
satisfied, in its sole discretion, with (i) its due diligence review (and the
due diligence review completed by its representatives) of Seller and (ii) the
disclosures made by Seller in the Disclosure Letter.

11.9 NET WORTH OF SELLER. The Net Worth of Seller as of the Closing
Date shall be equal to, or greater than, $10,212,712. For purposes of this
Section 11.9, the term "Net Worth" shall mean Seller's total assets less
Seller's total liabilities, determined using the same GAAP methodologies and
accounting practices used in calculating the Interim Balance Sheet delivered to
Buyer by Seller.

ARTICLE XII

CONDITIONS PRECEDENT TO SELLER'S
OBLIGATION TO CLOSE

Seller's obligation to consummate the Contemplated Transactions and to
take the other actions required to be taken by Seller at the Closing is subject
to the satisfaction, at or prior to the Closing, of each of the following
conditions (any of which may be waived by Seller, in whole or in part):

12.1 ACCURACY OF REPRESENTATIONS. Each of Buyer's representations and
warranties in this Agreement must have been accurate in all respects as of the
date of this Agreement and must be accurate in all respects as of the Closing
Date as if made on the Closing Date.

12.2 BUYER'S PERFORMANCE.

(a) Each of the covenants and obligations that Buyer is
required to perform or to comply with pursuant to this Agreement at or
prior to the Closing must have been performed and complied with in all
respects; and

(b) Buyer must have delivered each of the documents and
payments required to be delivered by them pursuant to Section 4.3.

12.3 ADDITIONAL DOCUMENTS. Buyer must have caused the following
documents to be delivered to Seller:

(a) An opinion of Katten Muchin & Zavis, legal counsel to
Buyer, dated the Closing Date, in the form of EXHIBIT 12.3(a);

(b) A copy of the Employment and Non-Competition Agreement,
duly executed by the Buyer;

<PAGE>

(d) Such other documents as Seller may reasonably request for
the purpose of consummating the Contemplated Transactions.

12.4 NO PROCEEDINGS. Since the Effective Date, there must not have
been commenced or Threatened against Seller, or against any Person affiliated
with Seller, any Proceeding (a) involving any challenge to, or seeking damages
or other relief in connection with, any of the Contemplated Transactions, or
(b) that would reasonably be expected to have the effect of preventing,
delaying, making illegal, or otherwise interfering with any of the Contemplated
Transactions.

12.5 NO PROHIBITION. Neither the consummation nor the performance of
any of the Contemplated Transactions by Buyer will, directly or indirectly (with
or without notice or lapse of time), contravene, or conflict with, or result in
a material violation of, or cause Seller, or any Person affiliated with Seller
to suffer any adverse consequence under, (i) any applicable Legal Requirement or
Order, or (ii) any Legal Requirement or Order that has been published,
introduced, or otherwise formally proposed by or before any Governmental Body.

12.6 MATERIAL ADVERSE CHANGE. There shall have been no material
adverse change in the assets, operations, condition (financial or otherwise),
operating results, employee, customer or supplier relations, business activities
or prospects of Buyer since August 31, 1996.

ARTICLE XIII

TERMINATION

13.1 TERMINATION EVENTS. This Agreement may, by notice given prior to
or at the Closing, be terminated:

(a) By either Buyer or Seller if a material Breach of any
provision of this Agreement has been committed by the other party and
such Breach has not been waived;

(b) (i) by Buyer, if any of the conditions in Sections 10 or
11 has not been satisfied as of January 31, 1997 or if satisfaction of
such a condition is or becomes impossible (other than through the failure
of Buyer to comply with its obligations under this Agreement) and Buyer
has not waived such condition on or before January 31, 1997; or

(ii) by Seller, if any of the conditions in Sections 10
or 12 has not been satisfied as of January 31, 1997 or if satisfaction of
such a condition is or becomes impossible (other than through the failure
of Seller to comply with its obligations under

<PAGE>

this Agreement) and Seller has not waived such condition on or before
January 31, 1997;

(d) By any party hereto if the Closing shall not have occurred
by January 31, 1997; provided that the right to terminate this Agreement
under this Section 13.1(d) shall not be available to any party whose
willful failure to fulfill any material obligation under this Agreement
has been the cause of, or resulted in, the failure of the Closing to
occur on or before such date.

13.2 EFFECT OF TERMINATION. Subject to the terms of Section 3.1(b),
each party's right of termination under Section 13.1 is in addition to any other
rights it may have under this Agreement or otherwise, and the exercise of a
right of termination will not be an election of remedies. Subject to the terms
of Section 3.1(b), if this Agreement is terminated pursuant to Section 13.1, all
further obligations of the parties under this Agreement will terminate;
provided, however, that if this Agreement is terminated by a party because of
the Breach of this Agreement by the other party or because one or more of the
conditions to the terminating party's obligations under this Agreement is not
satisfied as a result of the other party's failure to comply with its
obligations under this Agreement, the terminating party's right to pursue all
legal remedies will survive such termination unimpaired and such party shall be
entitled to be reimbursed for its expenses incurred prior to the date of such
termination in connection with the Contemplated Transactions.

ARTICLE XIV

INDEMNIFICATION

14.1 SURVIVAL AND LIMITATIONS.

(a) All representations and warranties in this Agreement and
any other certificate or document delivered pursuant to this Agreement
will survive the Closing until the first anniversary of the Closing Date
(the "Sunset Period"), at which time such representations and warranties
shall terminate. Notwithstanding the foregoing, a representation and
warranty shall continue in effect in the event a claim for breach thereof
has been made prior to the expiration of the Sunset Period and shall
survive until such claim is fully resolved. The right to
indemnification, reimbursement, or other remedy based on such
representations and warranties will not be affected by any investigation
conducted by Buyer.

(b) Notwithstanding anything to the contrary set forth in this
Agreement but subject to the terms set forth in Section 14.1(d), Seller
shall not be liable hereunder to a Buyer Indemnified Party as a result of
any misrepresentation or breach of any representation, warranty or
covenant contained in this Agreement unless a claim with

<PAGE>

respect thereto has been made prior to the expiration of the Sunset
Period and not until the aggregate amount of the Losses incurred by the
Buyer Indemnified Parties (in the aggregate) as a result of any
misrepresentations or breaches under this Agreement exceeds $250,000 (the
"Basket Threshold"); provided, however, that the Basket Threshold shall
not apply to (i) any Losses for which an indemnification obligation under
Section 14.2(d) or (e) would apply, (ii) any Losses which relate to third
party claims which are Excluded Liabilities, (iii) any Losses which
relate to third party suits or causes of action which are known by Seller
to be pending or Threatened as of the Closing Date, (iv) any Losses which
relate to claims by the Harry Fox Agency (except to the extent of the
Assumed Fox Liability), and (v) any Losses relating to the Seller's
obligations set forth in Section 16.1 below to pay for their own expenses
in connection with the Contemplated Transactions. Subject to (i) through
(v) above, as soon as the Buyer Indemnified Parties incur (in the
aggregate) a total of $250,000 of Losses, subject to the terms of Section
14.1(a) above, any and all further Losses (regardless of the amount of
any such further Losses) shall be subject to indemnification pursuant to
the terms of Section 14.2.

(c) Notwithstanding anything to the contrary set forth in this
Agreement, but subject to the provisions of subparagraph (d) below of
this Section 14.1, following the Closing, the aggregate liability of
Seller to the Buyer Indemnified Parties shall not exceed $1,875,000
("Cap"). Further, the Seller shall have no indemnification obligation to
satisfy any claim for Losses of the Buyer Indemnified Parties other than
through recourse against the Convertible Debentures (or underlying
securities to the extent converted) held in escrow pursuant to the
Indemnity Escrow Agreement.

(d) Each of the limitations set forth in subparagraphs (a), (b)
and (c) above (including, without limitation, the Sunset Period, the Cap
and the Basket) shall in no event apply to any Losses incurred by a Buyer
Indemnified Party, directly or indirectly, as a result of (i) a breach of
the representations and warranties contained in the third and fifth
sentences of Section 5.5 above, (ii) any claims by any third parties
relating, directly or indirectly, to any audit or investigation of Seller
(or the business or operations conducted by Seller prior to the Closing
Date) by the Harry Fox Agency for any period prior to the Closing Date,
except for the Assumed Fox Liability or (iii) any fraudulent acts
committed by Seller or any officer, director, employee, agent or
shareholder of Seller.

14.2 INDEMNIFICATION OF BUYER. Subject to the provisions of Section
14.1, Seller, on behalf of itself and its successors and assigns, hereby agrees
to indemnify Buyer and its Affiliates, shareholders, directors, partners,
officers, employees, agents, representatives and successors, permitted assigns
of Buyer and their respective Affiliates (the "Buyer Indemnified Parties") and
save and hold them harmless from and against and pay on behalf of or reimburse
the Buyer Indemnified Parties as and when incurred for any and all liabilities,
demands, claims, actions, causes of action, assessments, losses, costs, damages,
deficiencies, taxes, fines or expenses (whether or not arising out of third
party claims), including, without limitation,

<PAGE>

interest, penalties, reasonable attorneys' fees and all amounts paid in
investigation, defense or settlement of any of the foregoing (collectively,
"Losses"), which any Buyer Indemnified Party may suffer, sustain or become
subject to, in connection with, incident to, resulting from or arising out of or
in any way relating to or by virtue of:

(a) Any misrepresentation or breach of warranty on the part of
Seller under Section 5 of this Agreement or any misrepresentation in or
omission from any of the representations, warranties, statements,
schedules and exhibits, certificates, Disclosure Letter or other
instruments or documents furnished, in writing, to Buyer by Seller made
in or pursuant to this Agreement;

(b) Any nonfulfillment or breach of any covenant or agreement
on the part of Seller under this Agreement;

(c) Any action, demand, proceeding, investigation or claim by
any third party (including any Governmental Body) against or affecting
any Buyer Indemnified Party which, if successful, would give rise to or
evidence the existence of or relate to a misrepresentation or breach of
any of the representations, warranties, agreements or covenants of
Seller;

(d) Any Losses incurred by Buyer arising out of or relating,
directly or indirectly, to any Excluded Liabilities; or

(e) Any claim for payment of fees and/or expenses as a broker
or finder in connection with the origin, negotiation, execution or
consummation of this Agreement based upon any alleged agreement between
the claimant and either Seller or any Shareholder;

The rights of the Buyer Indemnified Parties to indemnification under parts (b),
(d) and (e) of this Section 14.2 shall apply notwithstanding that the matter in
question may be disclosed in the Disclosure Letter, in this Agreement or in any
document entered into in connection with the Contemplated Transaction, or may be
the subject of, excluded from or beyond the scope of any representation or
warranty of Seller in this Agreement.

14.3 INDEMNIFICATION OF SELLER. Buyer, on behalf of itself and its
successors and assigns, hereby agrees to indemnify the Seller and its
Affiliates, shareholders, directors, partners, officers, employees, agents,
representatives, successors and permitted assigns of Buyer and their respective
Affiliates (the "Seller Indemnified Parties") and save and hold each of them
harmless from and against and pay on behalf of or reimburse the Seller
Indemnified Party as and when incurred for any and all Losses which a Seller
Indemnified Party may suffer, sustain or became subject to, in connection with,
incident to resulting from or arising out of or in any way relating to or by
virtue of:

<PAGE>

(a) Any misrepresentation or breach of warranty on the part of
Buyer under Section 6 of this Agreement or any misrepresentation in or
omission from any of the representations, warranties, statements,
schedules and exhibits, certificates or other instruments or documents
furnished to Seller by the Buyer made in or pursuant to this Agreement or
any other Contemplated Agreement;

(b) Any nonfulfillment or breach of any covenant or agreement
on the part of Buyer under this Agreement or any other Contemplated
Agreement;

(c) Any action, demand, proceeding, investigation or claim by
any third party (including governmental agencies) against or affecting a
Seller Indemnified Party which, if successful, would give rise to or
evidence the existence of or relate to a misrepresentation or breach of
any of the representations, warranties, agreements or covenants of Buyer;

(d) Any claim arising out of Buyer's failure to pay, satisfy or
discharge the Assumed Liabilities;

(f) Any requirement of any federal, state or local taxing
authority that Seller recognize taxable income for the period beginning
at the end of the Tax Period and ending on the Closing Date.

14.4 INDEMNIFICATION PROCEDURE FOR THIRD PARTY CLAIMS. In the event
that subsequent to the Closing any person or entity entitled to indemnification
under this Agreement (an "Indemnified Party") asserts a claim for
indemnification or receives notice of the assertion of any claim or of the
commencement of any action or proceeding by any entity who is not a party to
this Agreement or an Affiliate of a party to this Agreement (including, but not
limited to any domestic or foreign court or Governmental Body, federal, state or
local) (a "Third Party Claim") against such Indemnified Party, against which a
party to this Agreement is required to provide indemnification under this
Agreement (an "Indemnifying Party"), the Indemnified Party shall give written
notice together with a statement of any available information (other than
privileged information) regarding such claim to the Indemnifying Party within
thirty (30) business days after learning of such claim (or within such shorter
time as may be necessary to give the Indemnifying Party a reasonable opportunity
to respond to such claim). The Indemnifying Party shall have the right, upon
written notice to the Indemnified Party (the "Defense Notice") within fifteen
days (15) after receipt from the Indemnified Party of notice of such claim,
which notice by the Indemnifying Party shall specify the counsel it will appoint
to defend such claim ("Defense Counsel"), to conduct at its expense the defense
against such claim in its own name, or if necessary in the name of the
Indemnified Party; provided, however, that the Indemnified Party shall have the
right to approve the Defense Counsel, which approval shall

<PAGE>

not be unreasonably withheld, and in the event the Indemnifying Party and the
Indemnified Party cannot agree upon such counsel within ten (10) days after the
Defense Notice is provided, then the Indemnifying Party shall propose an
alternate Defense Counsel, which shall be subject again to the Indemnified
Party's approval which approval shall not be unreasonably withheld. If the
parties still fail to agree on the Defense Counsel, then, at such time, they
shall mutually agree in good faith on a procedure to determine the Defense
Counsel.

(a) In the event that the Indemnifying Party shall fail to give
the Defense Notice within said 15 day period, it shall be deemed to have
elected not to conduct the defense of the subject claim, and in such
event the Indemnified Party shall have the right to conduct the defense
in good faith and to compromise and settle the claim in good faith
without prior consent of the Indemnifying Party and the Indemnifying
Party will be liable for all reasonable costs, expenses, settlement
amounts or other Losses paid or incurred in connection therewith.

(b) In the event that the Indemnifying Party does deliver a
Defense Notice and thereby elects to conduct the defense of the subject
claim, the Indemnifying Party shall be entitled to have the exclusive
control over said defense settlement of the subject claim and the
Indemnified Party will cooperate with and make available to the
Indemnifying Party such assistance and materials as it may reasonably
request, all at the expense of the Indemnifying Party, and the
Indemnified Party shall have the right at its expense to participate in
the defense assisted by counsel of its own choosing. In such an event,
the Indemnifying Party will not settle the subject claim without the
prior written consent of the Indemnified Party, which consent will not be
unreasonably withheld.

(c) Without the prior written consent of the Indemnified Party,
the Indemnifying Party will not enter into any settlement of any Third
Party Claim or cease to defend against such claim, if pursuant to or as a
result of such settlement or cessation, (i) injunctive relief or specific
performance would be imposed against the Indemnified Party, or (ii) such
settlement or cessation would lead to liability or create any financial
or other obligation on the part of the Indemnified Party for which the
Indemnified Party is not entitled to indemnification hereunder.

(d) Notwithstanding paragraph (b) above, the Indemnifying Party
shall not be entitled to control, but may participate in, and the
Indemnified Party shall be entitled to have sole control over, the
defense or settlement of any claim (i) that seeks a temporary restraining
order, a preliminary or permanent injunction or specific performance
against the Indemnified Party, (ii) to the extent such claim involves
criminal allegations against the Indemnified Party, (iii) that if
unsuccessful, would set a precedent that would materially interfere with,
or have a material adverse effect on, the business or financial condition
of the Indemnified Party, or (iv) to the extent such claim imposes
liability on the part of the Indemnified Party for which the Indemnified
Party is not entitled to indemnification hereunder. In such an event,
the Indemnifying Party will still have all of its obligations hereunder
provided that the Indemnified Party will not settle the subject

<PAGE>

claim without the prior written consent of the Indemnifying Party, which
consent will not be unreasonably withheld.

(e) Any final judgment entered or settlement agreed upon in the
manner provided herein shall be binding upon the Indemnifying Party, and
shall conclusively be deemed to be an obligation with respect to which
the Indemnified Party is entitled to prompt indemnification hereunder.

(f) A failure by an Indemnified Party to give timely, complete
or accurate notice as provided in this Section 14.4 will not affect the
rights or obligations of any party hereunder except and only to the
extent that, as a result of such failure, any party entitled to receive
such notice was deprived of its right to recover any payment under its
applicable insurance coverage or was otherwise directly and materially
damaged as a result of such failure to give timely notice.

ARTICLE XV

DEFINITIONS

For purposes of this Agreement, the following terms have the meanings
specified:

"AFFILIATES" -- means an affiliate as defined in Rule 405 under the
Securities Act, and includes any past and present Affiliate of a Person.

"APPLICABLE CONTRACT" -- any Contract (a) under which Seller has or may
acquire any rights, (b) under which Seller has or may become subject to any
obligation or liability, or (c) by which Seller or any of the assets owned or
used by Seller is or may become bound.

"BEST EFFORTS" -- the efforts that a prudent Person desirous of
achieving a result would use in similar circumstances to ensure that such result
is achieved as expeditiously as reasonably possible.

"BREACH" -- a "Breach" of a representation, warranty, covenant,
obligation, or other provision of this Agreement will be deemed to have occurred
if there is or has been (a) any inaccuracy in or breach of, or any failure to
perform or comply with, such representation, warranty, covenant, obligation, or
other provision, or (b) any claim (by any Person) or other occurrence or
circumstance that is or was inconsistent with such representation, warranty,
covenant, obligation, or other provision, and the term "Breach" means any such
inaccuracy, breach, failure, claim, occurrence, or circumstance.

"CLOSING DATE" -- the date and time as of which the Closing actually
takes place.

<PAGE>

"CODE" -- the Internal Revenue Code of 1986, as amended, or any successor
law, and regulations issued by the IRS pursuant to the Internal Revenue Code or
any successor law.

"CONTEMPLATED TRANSACTIONS" -- all of the transactions contemplated by
this Agreement,

(i) the execution, delivery, and performance of Seller's
Closing Documents and Buyer's Closing Documents; and

(ii) the performance by Buyer and Seller of their
respective covenants and obligations under this Agreement and each
of the Seller Transaction Documents and Buyer Transaction
Documents.

"CONTRACT" -- any agreement, contract, obligation, promise, or
undertaking (whether written or oral and whether express or implied) that is
legally binding.

"DISCLOSURE LETTER" -- the disclosure letter delivered by Seller to Buyer
concurrently with the execution and delivery of this Agreement.

"ENCUMBRANCE" -- any claim, lien, pledge, charge, security interest,
equitable interest, option, right of first refusal or preemptive right,
condition, or other restriction of any kind, including any restriction on use,
voting (in the case of any security), transfer, receipt of income, or exercise
of any other attribute of ownership.

"ERISA" -- the Employee Retirement Income Security Act of 1974, as
amended, or any successor law.

"EXCHANGE ACT" -- the Securities Exchange Act of 1934, as amended.

"FACILITIES" -- any real property, leaseholds, or other interests
currently or formerly owned or operated by Seller (or any predecessor Person)
and any buildings, plants, or structures currently or formerly owned, leased, or
operated by Seller (or any predecessor Person).

"GAAP" -- generally accepted United States accounting principles, applied
on a basis consistent with the basis on which the audited financial statements
referred to in Section 5.4 were prepared.

"GOVERNMENTAL AUTHORIZATION" -- any approval, consent, license, permit,
waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement.

"GOVERNMENTAL BODY" -- any:

(i) nation, state, county, city, town, village,
district, or other jurisdiction of any nature;

<PAGE>

(ii) federal, state, local, municipal, foreign, or other
government;

(iii) governmental or quasi-governmental authority of any
nature (including any governmental agency, branch, department,
official, or other entity and any court or other tribunal);

(iv) multi-national organization or body; or

(v) body exercising, or entitled or purporting to
exercise, any administrative, executive, judicial, legislative,
police, regulatory, or taxing authority or power of any nature.

"IRS" -- the United States Internal Revenue Service.

"LEGAL REQUIREMENT" -- any federal, state, local, municipal, foreign, or
other constitution, ordinance, regulation, statute, treaty, or other law
adopted, enacted, implemented, or promulgated by or under the authority of any
Governmental Body or by the eligible voters of any jurisdiction, and any
agreement, approval, consent, injunction, judgment, license, order, or permit by
or with any Governmental Body or to which Seller is a party or by which Seller
is bound.

"ORDER" -- any award, injunction, judgment, order, ruling, subpoena, or
verdict or other decision entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.

"ORDINARY COURSE OF BUSINESS" -- an action taken by a Person will be
deemed to have been taken in the "Ordinary Course of Business" only if:

(i) such action is consistent with the past practices of
such Person and is taken in the ordinary course of the normal
day-to-day operations of such Person;

(ii) such action is not required to be authorized by the
board of directors of such Person (or by any Person or group of
Persons exercising similar authority) and does not require any
other separate or special authorization of any nature; and

(iii) such action is similar in nature and magnitude to
actions customarily taken, without any separate or special
authorization, in the ordinary course of the normal day to day
operations of other Persons that are in the same line of business
as such Person.

"ORGANIZATIONAL DOCUMENTS" -- (i) the articles or certificate of
incorporation and the bylaws of a corporation; (ii) any charter or similar
document adopted or filed in connection with

<PAGE>

the creation, formation, or organization of a Person; and (iii) any amendment to
any of the foregoing.

"PERSON" -- any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, or other entity or
Governmental Body.

"PROCEEDING" -- any suit, litigation, arbitration, hearing, audit,
investigation, or other action (whether civil, criminal, administrative,
investigative, or informal) commenced, brought, conducted, or heard by or
before, or otherwise involving, any Governmental Body or arbitrator.

"RELATED PERSON" -- with respect to a particular individual:

(i) each other member of such individual's Family; and

(ii) any Person that is directly or indirectly controlled
by any one or more members of such individual's Family.

With respect to a specified Person other than an individual:

(i) any Person that, directly or indirectly, controls,
is controlled by, or is under common control with such specified
Person; and

(ii) each Person that serves as a director, executive
officer, general partner, executor, or trustee of such specified
Person (or in a similar capacity);

For purposes of this definition, the "Family" of an individual includes (i) such
individual, (ii) the individual's spouse and former spouses, (iii) any lineal
ancestor or lineal descendant of the individual, or (iv) a trust for the benefit
of the foregoing. A Person will be deemed to control another Person, for
purposes of this definition, if the first Person possesses, directly or
indirectly, the power to direct, or cause the direction of, the management
policies of the second Person, (x) through the ownership of voting securities,
(y) through common directors, trustees or officers, or (z) by contract or
otherwise).

"REPRESENTATIVE" -- with respect to a particular Person, any director,
officer, employee, agent, consultant, advisor, or other representative of such
Person, including legal counsel, accountants, and financial advisors.

"SECURITIES ACT" -- the Securities Act of 1933, 15 U.S.C. Section 77a et
seq., as amended, or any successor law.

"SEC" -- the Securities and Exchange Commission.

<PAGE>

"THREATENED" -- a claim, Proceeding, dispute, action, or other matter
will be deemed to have been "Threatened" if any demand or statement has been
made (orally or in writing) or any notice has been given (orally or in writing).

ARTICLE XVI

GENERAL PROVISIONS

16.1 EXPENSES. Except as paid prior to the date hereof or otherwise
specifically provided for herein, each of Buyer, on one hand, and Seller on the
other hand, shall pay all costs and expenses incurred or to be incurred by it or
them as the case may be, in negotiating and preparing this Agreement and
carrying out the transactions contemplated by this Agreement.

16.2 NOTICES. All notices, consents, waivers, and other communications
under this Agreement must be in writing and will be deemed to have been duly
given (a) when delivered by hand; (b) when sent by telecopier, provided that a
copy is mailed by U.S. certified mail, return receipt requested; (c) three days
after sent by Certified U.S. Mail, return receipt requested; or (d) one day
after deposit with a nationally recognized overnight delivery service, in each
case to the appropriate addresses and telecopier numbers set forth below (or to
such other addresses and telecopier numbers as a party may designate by notice
to the other parties):

Seller: with a copy to:

Intersound, Inc. Kaplan, Strangis and Kaplan, P.A.
Hembre Crest Center 5500 Norwest Center
11810 Wills Road 90 South Seventh Street
P.O. Box 1724 Minneapolis, Minnesota 55402
Roswell, Georgia 30077-1724 Attention: Robert T. York
Attention: Don Johnson Telecopy No.: (612) 375-1143
Telecopy No.: (770) 664-7316

Buyer: with a copy to:

Platinum Entertainment, Inc. Katten Muchin & Zavis
2001 Butterfield Road 525 West Monroe Street
Downers Grove, Illinois 60515 Suite 1600
Attention: Steven Devick Chicago, Illinois 60661-3693
Telecopy No.: (630) 769-0049 Attention: Matthew S. Brown, Esq.
Adam H. Schecter, Esq.
Telecopy No.: (312) 902-1061

16.3 FURTHER ASSURANCES. To the extent consistent with the terms of
this Agreement, the parties agree (a) to furnish upon request to each other such
further information, (b) to

<PAGE>

execute and deliver to each other such other documents, and (c) to do such other
acts and things, all as the other party may reasonably request for the purpose
of carrying out the intent of the Contemplated Transactions.

16.4 WAIVER. The rights and remedies of the parties to this Agreement
are cumulative and not alternative. Neither the failure nor any delay by any
party in exercising any right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such right,
power, or privilege, and no single or partial exercise of any such right, power,
or privilege will preclude any other or further exercise of such right, power,
or privilege or the exercise of any other right, power, or privilege.

16.5 ENTIRE AGREEMENT AND MODIFICATION. This Agreement supersedes all
prior oral or written agreements between the parties with respect to its subject
matter and constitutes (along with the documents referred to in this Agreement)
as a complete and exclusive statement of the terms of the agreement between the
parties with respect to its subject matter. This Agreement may not be amended
except by a written agreement executed by the party to be charged with the
amendment.

16.6 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS. None of the
parties may assign any of its rights under this Agreement without the prior
consent of the other parties except that Buyer may assign any of its rights
under this Agreement to any subsidiary of Buyer. Subject to the preceding
sentence, this Agreement will apply to, be binding in all respects upon, and
inure to the benefit of the successors and permitted assigns of the parties.
Nothing expressed or referred to in this Agreement will be construed to give any
Person other than the parties to this Agreement any legal or equitable right,
remedy, or claim under or with respect to this Agreement or any provision of
this Agreement.

16.7 SEVERABILITY. If any provision of this Agreement is held invalid
or unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.

16.8 SECTION HEADINGS, CONSTRUCTION. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Sections" refer to the corresponding
Sections of this Agreement. All words used in this Agreement will be construed
to be of such gender or number as the circumstances require. Unless otherwise
expressly provided, the word "including" does not limit the preceding words or
terms.

16.9 GOVERNING LAW. This Agreement will be governed by and construed
under the laws of the State of Delaware without regard to conflict of laws
principles.

<PAGE>

16.10 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.

16.11 NO STRICT CONSTRUCTION. The language used in this Agreement will
be deemed to be the language chosen by the parties to express their mutual
intent, and no rule of strict construction will be applied against any party.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.

BUYER: SELLER:

River North Studios, Inc. Intersound, Inc.

By: /s/ Steven Devick By: /s/ D. Johnson
----------------------------------- ------------------------
Its: Chief Executive Officer and President Its: President
------------------------------------- ------------------------

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AT NOVEMBER 30, 1996, THE UNAUDITED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30,
1996 AND THE UNAUDITED NOTES THERETO FOR PLATINUM ENTERTAINMENT, INC.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 952,661
<SECURITIES> 0
<RECEIVABLES> 5,514,144
<ALLOWANCES> 1,220,316
<INVENTORY> 2,452,935
<CURRENT-ASSETS> 11,036,751<F1>
<PP&E> 1,125,445
<DEPRECIATION> 372,733
<TOTAL-ASSETS> 20,367,405<F2>
<CURRENT-LIABILITIES> 5,825,621
<BONDS> 0
0
0
<COMMON> 5,151
<OTHER-SE> 14,536,633
<TOTAL-LIABILITY-AND-EQUITY> 20,367,405
<SALES> 5,961,558
<TOTAL-REVENUES> 7,171,437
<CGS> 3,003,005
<TOTAL-COSTS> 3,897,459
<OTHER-EXPENSES> 2,537,813
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,292
<INCOME-PRETAX> (920,340)
<INCOME-TAX> 0
<INCOME-CONTINUING> (920,340)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (920,340)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> 0
<FN>
<F1>Includes gross artist advances of $1,955,212.
<F2>Includes gross artist advances of $10,862,289, less an allowance for
unrecoupable artist advances of $5,386,771.
</FN>

</TABLE>