Distribution Agreement

Portions of this Exhibit have been omitted pursuant to a request for confidential treatment. The omitted portions, marked by [****], have been separately filed with the Commission.





[Letterhead of RED Distribution, Inc.]



October 16, 1996







VIA FAX (212) 742-1778



Mr. Larry Rosen N2K Encoded Music 55 Broad Street, 10th Floor New York, New York 10004



Re: RED Distribution, Inc. ("RED") with N2K Encoded Music





Dear Larry:



Set forth below are the revised material terms on which RED proposes to enter into an exclusive distribution agency agreement with N2K Encoded Music (the "Label"):



Term. Three years.



Payments. Net Proceeds (i.e., Net Sales plus liquidating reserves (if any) less RED's Distribution Fee, cooperative advertising and other charge-backs (see attached schedule)) will be paid 90 days end of month, except the Label will have the right to select two months of the first year of the Term on which to be paid 60 days end of month and two other months of the first year of the Term on which to be paid 30 days end of month.



Distribution Fee. Calculated as a percentage of Net Sales (i.e., gross sales less discounts and returns).



NET SALES (on a year-by-year basis) FEE

$[****] - $[****] million [****]%

$[****] million - $[****] million [****]%

$[****] million - $[****] million [****]%

$[****] million - $[****] million [****]%

$[****] million - + [****]%





The Distribution Fee applicable to year #2 will be the Distribution Fee in effect at the end of year #1 and will be subject to the same reductions that are applicable to the Distribution Fee for year #1 as set forth above, provided, howev er, that the Distribution Fee for year #2 will commence at [****]% only if Net Sales in year #1 exceed $[****]. That is, if Net Sales in year #1 are greater than $[****] but less than $[****] the starting Distribution Fee for year #2 will be [****]%.



Similarly, the Distribution Fee applicable to year #3 will be that which is in effect at the end of year #2 and will be subject to the same reductions that are applicable to the Distribution Fee for year #2. However (i) the Distribution Fee fo r year #3 will commence at [****]% only if Net Sales in year #2 exceed $[****] and (ii) if the year #2 Distribution Fee commenced at lower than [****]% and Net Sales in year #2 are less than $[****] then the Distribution Fee for year #3 will be the same as that set forth above applicable to year #1.



Reserves. Provided the Label timely fulfills its Delivery Commitment, RED will hold no reserves until year #3. With respect to each month comprising the third year of the Term, RED will maintain a re serve equal to a percentage of Net Sales accruing during each such month. The percentage referred to in the preceding sentence will be computed by dividing (i) two times the aggregate amount credited to customers for returns received during months #12-#24 of the term by (ii) aggregate gross sales accruing during months #7-#18 of the Term. Promptly following the end of the Term, RED will perform an exposure analysis (i.e., compare shipments to SoundScan) to determine if the reserves it has established are e xcessive. If RED determines that the reserves are excessive, it will promptly liquidate any such excess. If, prior to its expiration, the Term is extended for 12 months or longer, RED will liquidate any reserves it has established during the third year.



Reserve Liquidation. Reserves established during the third year of the Term will be liquidated 9 months following the end of the Term in order that they may be used as an offset against post-Term returns ("Post Term Returns Period").



Delivery Commitment. The Label will deliver no less than 12 previously unreleased, newly compiled or recorded, studio albums during each year of the Term and no less than 4 such albums during each 6 months of each year of the Term.



Protection s. RED will require, and the Label will provide, a guaranty that the Label's next distributor will accept all post-Term returns. If at anytime during the Term or the Post Term Returns Period the Label's account is in a negative Net Proceeds position, the L abel will promptly remit payment to RED in the amount of such negative balance. N2K, Inc. will provide RED with a guarantee for any monies owing to RED by the Label. If the Label's account is in a negative Net Proceeds position for a period of 60 days or m ore, RED will have the right to sell all or a portion of the Label's inventory under RED's control at a price determined by RED, in its good faith discretion, and apply the Net Proceeds from such sale to recoup the negative Net Proceeds. Any Net Proceeds resulting from such sale in excess of the negative Net Proceeds balance will accrue to the Label's account.





1. retail display in store contests - provided the Label, at its expense,

supplies RED with the necessary materials, RED's ASR staff will implement

on the Label's behalf up to four retail display/in store contests per year

during the Term. The Label will be solely responsible for the prizes

associated with those contests.





2. inventory and customer order information - RED will provide the Label with

computerized reports regarding the Label's inventory and customer orders.

Th ...