Document:

Exhibit
10.3

 

EXECUTION
COPY

 

STOCK OPTION
AGREEMENT

 

STOCK OPTION AGREEMENT dated as of October 10,
2003 (this “Agreement”) by and among Euramax International, Inc., a
Delaware corporation (“Parent”), Amerimax Pennsylvania, Inc., a
Pennsylvania corporation and an indirect subsidiary of Parent (the “Purchaser”),
and Berger Holdings, Ltd., a Pennsylvania corporation (the “Company”).

 

W I T N E S S E T
H:

 

WHEREAS, concurrently with the execution and delivery
of this Agreement, the parties hereto are entering into an Agreement and Plan
of Merger (as such agreement may hereafter be amended from time to time, the “Merger
Agreement”) which provides, upon the terms and subject to the conditions
set forth therein, for (i) Parent and Purchaser to commence a tender offer
(such offer, including any amendments and changes thereto (including those
contemplated by the Merger Agreement), the “Offer”) to purchase all of
the outstanding shares of common stock, par value $.01 per share (the “Company
Common Stock”), of the Company at a price of $3.90 per share, net to the
seller in cash, without interest (the “Offer Price”) and (ii) the
subsequent merger of Purchaser with and into the Company (the “Merger”)
on the terms and conditions set forth in the Merger Agreement;

 

WHEREAS, as a condition
to the willingness of Parent and Purchaser to enter into the Merger Agreement,
Parent and Purchaser have required that the Company agree, and in order to
induce Parent and Purchaser to enter into the Merger Agreement, the Company has
agreed, to grant to Purchaser certain options to purchase shares of Company
Common Stock (shares of Company Common Stock being for purposes hereof, the “Shares”)
upon the terms and subject to the conditions of this Agreement; and

 

WHEREAS, capitalized
terms used but not defined in this Agreement shall have the meanings ascribed
to them in the Merger Agreement.

 

NOW, THEREFORE, the
parties hereto agree as follows:

 

ARTICLE 1

The Top-up Option

 

Section 1.01.                             Grant of Top-Up Stock
Option.  Subject to the terms and conditions
set forth herein, the Company hereby grants to Purchaser an irrevocable option
(the “Top-Up Stock Option”) to purchase that number of authorized but
unissued Shares (the “Top-Up Option Shares”) equal to the number of
Shares that, when added to the number of Shares owned by Purchaser and Parent
immediately following consummation of the Offer, shall constitute 80.01% of the
Fully Diluted Shares (assuming the issuance of the Top-Up Option Shares) at a
purchase

 

 

price per Top-Up Option Share equal to the Offer Price; provided,
however, that in no event shall Purchaser have the right hereunder
to purchase a number of Shares that exceeds 19.9% of the outstanding Shares on
the date hereof.  The Company agrees to
provide Parent and Purchaser with information regarding the number of
authorized Shares available for issuance on an ongoing basis.

 

Section 1.02.                             Exercise
of Top-Up Stock Option.

 

(a)                                  Purchaser
may, at its election and in its sole discretion, exercise the Top-Up Stock
Option pursuant to Section 1.02(d) below at any time after the occurrence
of a Top-Up Exercise Event (as defined below) and prior to the Top-Up
Termination Date (as defined below).

 

(b)                                 A
“Top-Up Exercise Event” shall occur for purposes of this Agreement upon
Purchaser’s payment for Shares that were purchased pursuant to the Offer
constituting, together with any Shares owned directly or indirectly by Parent
and Purchaser, more than 70% but less than 80.01% of the Shares then
outstanding.

 

(c)                                  The
“Top-Up Termination Date” shall occur for purposes of this Agreement
upon the earlier to occur of: (i) the Effective Time and (ii) the termination
of the Merger Agreement.

 

(d)                                 In
the event Purchaser wishes to exercise the Top-Up Stock Option, Purchaser shall
send to the Company a written notice (a “Top-Up Exercise Notice,” the
date of which notice is referred to herein as the “Top-Up Notice Date”)
specifying the denominations of the certificate or certificates evidencing the
Top-Up Option Shares which Purchaser wishes to receive, the place for the
closing of the purchase and sale pursuant to the Top-Up Stock Option (the “Top-Up
Closing”) and a date not earlier than one business day nor later than ten
business days after the Top-Up Notice Date for the Top-Up Closing.  The Company shall, promptly after receipt of
the Top-Up Exercise Notice, deliver a written notice to Purchaser confirming
the number of Top-Up Option Shares and the aggregate purchase price therefor.

 

(e)                                  Parent
and Purchaser each agree to use its reasonable best efforts to cause the
consummation of the Merger to occur as promptly as practicable (and in any
event no later than two (2) business days) after the Top-Up Closing.

 

ARTICLE 2

Closing

 

Section 2.01.                             Conditions
to Closing. The obligation of the Company to deliver Top-Up Option Shares
upon the exercise of the Top-Up Stock Option is subject to the following
conditions:

 

2

 

(a)                                  no
provision of any applicable law or regulation and no judgment, injunction,
order or decree shall prohibit the exercise of the Top-Up Stock Option or the
delivery of the Top-Up Option Shares in respect of any such exercise; and

 

(b)                                 delivery
of the Top-Up Option Shares would not violate, or otherwise cause a violation
of, Rule 4350(i) of the NASD Manual.

 

Section 2.02.                             Closing.

 

(a)                                  At
the Top-Up Closing (i) the Company shall deliver to Purchaser a certificate or
certificates evidencing the applicable number of Top-Up Option Shares (in the
denominations designated by Purchaser in the Top-Up Exercise Notice) and (ii)
Purchaser shall purchase each Top-Up Option Share from the Company at the Offer
Price. Payment by Purchaser of the purchase price for the Top-Up Option Shares
shall be made by delivery of immediately available funds by wire transfer to an
account designated by the Company.

 

(b)                                 The
Company shall pay all expenses, and any and all federal, state and local taxes
and other charges, that may be payable in connection with the preparation,
issuance and delivery of stock certificates under this Section 2.02.

 

(c)                                  Certificates
evidencing Top-Up Option Shares delivered hereunder shall include legends
legally required including the legend in substantially the following form:

 

THE SECURITIES
REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD ONLY IF SO
REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.

 

It is understood and
agreed that the foregoing legend shall be removed by delivery of substitute
certificate(s) without such legend upon the sale of the Top-Up Option Shares
pursuant to a registered public offering or Rule 144 under the Securities Act,
or any other sale as a result of which such legend is no longer required by
law.

 

ARTICLE 3

Additional
Agreements

 

Section 3.01.                             Further
Assurances. The Company shall perform such further acts and execute such
further documents and instruments as may reasonably be required to vest in
Purchaser and Parent the power to carry out the provisions of this Agreement.
If Purchaser shall exercise the Top-Up Stock Option granted hereunder in
accordance with the terms of this Agreement, the Company shall, without
additional consideration, execute and deliver all such further documents and
instruments and take all such further action as Purchaser or Parent may
reasonably request to carry out the transactions contemplated by this
Agreement.

 

3

 

ARTICLE 4

Representations and Warranties; Acknowledgment

 

Section 4.01.                             Representations and
Warranties of Purchaser.  Purchaser
hereby represents and warrants to the Company, understanding and agreeing that
the Company is entering into this Agreement in part in reliance on such
representations and warranties, as follows:

 

(a)                                  Purchaser
is an “Accredited Investor” as that term is defined in Rule 501(a) of
Regulation D promulgated under the Securities Act;

 

(b)                                 Purchaser
is purchasing the Top-Up Option Shares and being granted the Top-Up Option for
investment purposes, for its own account and not with a view to, or for sale in
connection with, any distribution thereof in violation of federal or state
securities laws; and

 

(c)                                  By
reason of its business or financial experience, Purchaser has the capacity to
protect its own interest in connection with the transactions contemplated
hereunder.

 

Section 4.02.                             Representations
and Warranties of Company.  The
Company hereby represents and warrants to Purchaser, understanding and agreeing
that Purchaser is entering into this Agreement in part in reliance on such
representations and warranties, that, as of the date of the Top-Up Closing, the
Company’s authorized capital stock shall consist of at least that number of
Shares required for the Company to issue the Top-Up Option Shares.

 

Section 4.03.                             Acknowledgment.  Purchaser has been advised by the Company
that the Top-Up Option Shares and the Top-Up Option have not been registered
under the Securities Act, that the Top-Up Option Shares and the Top-Up Option
will be issued on the basis of the statutory exemption provided by
Section 4(2) of the Securities Act or Regulation D promulgated thereunder,
or both, relating to transactions by an issuer not involving any public
offering and under similar exemptions under certain state securities laws, that
this transaction has not been reviewed by, passed on or submitted to any
federal or state agency or self-regulatory organization where an exemption is
being relied upon, and that the Company’s reliance thereon is based in part
upon the representations made by Purchaser in this Agreement.  Purchaser acknowledges that it has been
informed by the Company of, or is otherwise familiar with, the nature of the
limitations imposed by the Securities Act and the rules and regulations
thereunder on the transfer of securities.

 

ARTICLE 5

Miscellaneous

 

Section 5.01.                             Notices.
All notices, requests and other communications to any party hereunder shall be
in writing (including facsimile transmission) and shall be given as specified
in Section 9.5 of the Merger Agreement.

 

4

 

Section 5.02.                             Amendments;
No Waivers.

 

(a)                                  Any
provision of this Agreement may be amended or waived if, but only if, such
amendment or waiver is in writing and is signed, in the case of an amendment,
by each party to this Agreement or, in the case of a waiver, by each party
against whom the waiver is to be effective. 
Notwithstanding anything in this Agreement to the contrary, during the
period from and after the date hereof but prior to the Effective Time, the
Independent Directors (as defined in the Merger Agreement) are required to
approve (i) any amendment or modification of this Agreement on behalf of the
Company and (ii) any waiver of any of the Company’s rights or remedies
hereunder.

 

(b)                                 No
failure or delay by any party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. The rights and remedies herein provided
shall be cumulative and not exclusive of any rights or remedies provided by
law.

 

Section 5.03.                             Expenses.
Except as otherwise provided herein or in Section 8.3 of the Merger
Agreement, all costs and expenses incurred in connection with this Agreement
shall be paid by the party incurring such cost or expense.

 

Section 5.04.                             Successors
and Assigns. The provisions of this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, provided that no party may assign, delegate or otherwise transfer any
of its rights or obligations under this Agreement without the consent of each
other party hereto, except that Purchaser may transfer or assign, in whole or
from time to time in part, to one or more of its affiliates permitted to be
substituted for Purchaser under the Merger Agreement, the right to purchase all
or a portion of the Top-Up Option Shares pursuant to this Agreement, but no
such transfer or assignment will relieve Purchaser of its obligations under
this Agreement.

 

Section 5.05.                             Governing
Law. This Agreement shall be governed and construed in accordance with the
laws of the Commonwealth of Pennsylvania without giving effect to the
principles of conflicts of law thereof or of any other jurisdiction.  All parties hereto hereby irrevocably waive
a trial by jury in any proceedings arising out of this Agreement or matters
related hereto.

 

Section 5.06.                             Counterparts;
Effectiveness; Benefit. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument. This Agreement
shall become effective when each party hereto shall have received counterparts
hereof signed by all of the other parties hereto. No provision of this
Agreement is intended to confer any rights, benefits, remedies, obligations, or
liabilities hereunder upon any person other than the parties hereto and their
respective successors and assigns.

 

5

 

Section 5.07.                             Entire
Agreement. This Agreement and the Merger Agreement (including the documents
and instruments referred therein) constitute the entire agreement between the
parties with respect to the subject matter of this Agreement and supersede all
prior agreements and understandings, both oral and written, between the parties
with respect to the subject matter of this Agreement.

 

Section 5.08.                             Captions.
The captions herein are included for convenience of reference only and shall be
ignored in the construction or interpretation hereof.

 

Section 5.09.                             Severability.
If any term, provision, covenant or restriction of this Agreement is held by a
court of competent jurisdiction or other authority to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such a determination, the parties shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner in order
that the transactions contemplated hereby be consummated as originally
contemplated to the fullest extent possible.

 

Section 5.10.                             Enforcement.
The parties agree that irreparable damage would occur in the event that any of
the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. 
It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement in the United States
District Court for the Eastern District of Pennsylvania and, in the absence of
Federal jurisdiction, in the state courts located in Philadelphia County in the
event any dispute arises out of this Agreement or any of the transactions
contemplated by this Agreement, and each party will not attempt to deny or
defeat personal jurisdiction or venue in any such court by motion or other
request for leave from any such court.

 

Section 5.11.                             Submission
to Jurisdiction; Waivers. 
Each of the Company, Parent and Purchaser irrevocably agrees that any
legal action or proceeding with respect to this Agreement or for recognition
and enforcement of any judgment in respect hereof brought by any other party
hereto or its successors or assigns shall be brought and determined in the in
the United States District Court for the Eastern District of Pennsylvania and,
in the absence of Federal jurisdiction, in the state courts located in
Philadelphia County, and each of the Company, Parent and Purchaser hereby
irrevocably submits with regard to any such action or proceeding for itself and
in respect to its property, generally and unconditionally, to the exclusive
jurisdiction of the aforesaid courts. 
Each of the Company, Parent and Purchaser hereby irrevocably waives, and
agrees not to assert, by way of motion, as a defense, counterclaim or
otherwise, in any action or proceeding with respect to this Agreement, (a) any
claim that it is not personally subject to the jurisdiction of the above-named
courts for any reason other than the failure to lawfully serve process, (b)
that it or its property is exempt or immune from jurisdiction of any such court
or from any legal process commenced in such courts (whether through service of
notice, attachment

 

6

 

prior to judgment, attachment in aid of execution of judgment,
execution of judgment or otherwise), and (c) to the fullest extent permitted by
applicable law, that (i) the suit, action, or proceeding in any such court is
brought in an inconvenient forum, (ii) the venue of such suit, action or
proceeding is improper and (iii) this Agreement, or the subject matter hereof,
may not be enforced in or by such courts.

 

7

 

IN WITNESS WHEREOF, the
parties hereto have caused this Agreement to be duly executed by their
respective authorized officers as of the day and year first above written.

 

	
   

  	
  BERGER HOLDINGS, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Joseph F. Weiderman

  	
   

  
	
   

  	
   

  	
  Name: Joseph F.
  Weiderman

  
	
   

  	
   

  	
  Title: President and
  Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  AMERIMAX PENNSYLVANIA,
  INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ J. David Smith

  	
   

  
	
   

  	
   

  	
  Name: J. David Smith

  
	
   

  	
   

  	
  Title: President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  EURAMAX INTERNATIONAL,
  INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ J. David Smith

  	
   

  
	
   

  	
   

  	
  Name: J. David Smith

  
	
   

  	
   

  	
  Title: President

  
					

 

8Exhibit 10.13

 

CREDIT AGREEMENT

 

THIS CREDIT
AGREEMENT is dated as of the 27th day of September, 1999 and is by and between
K-TEL INTERNATIONAL, INC., a Minnesota corporation with offices located at 2605
Fernbrook Lane North, Plymouth, Minnesota 55447 (the “Borrower”), and K-5
LEISURE PRODUCTS, INC., a Nevada corporation with offices located at 220
Saulteaux Crescent, Winnipeg, Manitoba, Canada (the “Lender”).

 

RECITALS:

 

WHEREAS, the
Borrower has entered into a Loan and Security Agreement with Foothill Capital
Corporation (“Foothill”) dated November 19, 1997 for a revolving loan of SIX
MILLION AND NO/100 U.S. DOLLARS (U.S. $6,000,000) and a term loan of FOUR
MILLION AND NO/100 U.S. DOLLARS (U.S. $4,000,000)(the “Foothill Agreement”);

 

WHEREAS, the
Lender desires to extend to Borrower a conditional revolving credit line in the
principal amount of EIGHT MILLION AND NO/100 U.S. DOLLARS (U.S. $8,000,000.00)
(the “Credit”) for working capital purposes; and

 

WHEREAS, the
Lender is willing to make the Credit available to the Borrower subject to the
provisions of this Credit Agreement;

 

NOW,
THEREFORE, in consideration of the premises and of the mutual agreements
herein, the parties agree as follows:

 

SECTION 1                                   Definitions

 

In addition to
those terms as defined in the above recitals, as used herein:

 

1.1                                 “Agreement”
shall mean this Credit Agreement and all amendments and supplements hereto
which may from time to time become effective hereafter in accordance with the
terms hereof.

 

1.2                                 “Banking
Day” shall mean a day on which banks are generally open for business in
Minneapolis, Minnesota.

 

1.3                                 “Borrowed
Money” shall mean funds obtained by incurring contractual indebtedness and
shall not include trade accounts payable or money borrowed from the Lender.

 

1.4                                 “Closing
Date” shall mean the date on which funds are advanced under the Credit.

 

1.5                                 “Current
Note” shall mean the promissory note of the Borrower substantially in the form
of attached Exhibit A, evidencing borrowings under Section 2.1 hereof.

 

 

1.6                                 “Events
of Default” shall mean any and all events of default described in Section 8
hereof.

 

1.7                                 “Guaranty”
shall mean the Guaranty of K-Tel Online, Inc.; Dominion Entertainment, Inc.;
K-Tel Consumer Products, Inc.; K-Tel TV, Inc.; K-Tel Video, Inc.; K-Tel
International (USA), Inc.; K-Tel International GmbH; K-Tel Entertainment (UK)
Ltd.; K-Tel Entertainment (Can) Inc.; K-Tel Direct, Inc.; K-Tel Marketing (UK)
Limited; and K-Tel Ireland Limited in form and content acceptable to the
Lender.

 

1.8                                 “Liens”
shall have the same definition as in the Foothill Agreement.

 

1.9                                 “Loan
Documents” shall mean this Agreement, the Current Note, the Guaranty, the
Security Agreement, the Stock Security Agreement and all other documents
contemplated by this Agreement.

 

1.10                           “Maturity
Date” shall mean November 20, 2001.

 

1.11                           “Permitted
Liens” shall have the same definition as in the Foothill Agreement, with the
addition of the liens created by the Foothill Agreement.

 

1.12                           “Permitted
Protests” shall have the same meaning as in the Foothill Agreement.

 

1.13                           “Reference
Rate” means the variable rate of interest, per annum, most recently announced
by Norwest Bank Minnesota, National Association, or any successor thereto, as
its “base rate,” irrespective of whether such announced rate is the best rate
available from such financial institution.

 

1.14                           “Security
Agreement” shall mean the security agreement of the Borrower substantially in
the form of Exhibit B.

 

1.15                           “Stock
Security Agreement” shall mean the stock pledge agreement substantially in the
form of Exhibit C.

 

1.16                           “Subsidiary”
shall mean any corporation of which more than fifty percent (50%) of the
outstanding voting securities shall, at the time of determination, be owned
directly, or indirectly through one or more intermediaries, by the Borrower.

 

SECTION 2                                   The
Loan

 

2.1                                 Subject
to the other provisions of this Agreement, the Lender agrees to continue to
lend to the Borrower from time to time sums not to exceed EIGHT MILLION AND
NO/100 U.S. DOLLARS (U.S. $8,000,000.00) in aggregate principal amount at any
one time outstanding.  Each borrowing
under this Section 2.1 will be requested in writing or in person by an
authorized officer of the Borrower, or telephonically by any person reasonably
believed by the Lender to be an authorized officer or designee of the
Borrower.  Each borrowing under this
Section 2.1 will be 

 

2

evidenced by a notation on the Lender’s records, which shall be
presumptive evidence of such borrowing (absent manifest error), and by
the Current Note.  Within the limits of
the Credit and subject to the terms and conditions hereof, the Borrower may
borrow, prepay pursuant to Section 2.5 hereof and reborrow pursuant to this
Section 2.1.

 

2.2                                 Interest
on the unpaid principal of the Current Note shall be calculated at an annual
rate equal to the Reference Rate in effect from time to time on the basis of
the actual number of days elapsed in a year of 365 days, and shall change as
and when the Reference Rate changes.

 

2.3                                 Interest
on the Current Note shall be payable monthly, commencing on the first day of
the first month following the date of this Agreement and continuing on the
first day of each succeeding month until the Current Note is paid.

 

2.4                                 The
outstanding principal of the Current Note shall be repayable in full upon the
Maturity Date.

 

2.5                                 The
Borrower may at any time prepay the Current Note in whole or from time to time
in part without premium or penalty.

 

SECTION 3                                   Conditions
Precedent

 

3.1                                 The
Borrower shall deliver the Loan Documents to the Lender on or before the
Closing Date, duly executed by the necessary parties.

 

3.2                                 The
Borrower acknowledges that the following items have been delivered to the
Lender and remain in full force and effect:

 

A.                                   A
certified copy of resolutions of the Borrower’s board of directors authorizing
the execution, delivery and performance of this Agreement, the Note, the
Security Agreement, and each other document to be delivered pursuant hereto;

 

B.                                     A
certificate of the Borrower’s corporate secretary as to the incumbency and
signatures of the officers of the Borrower signing this Agreement, the Note,
the Security Agreement, and each other documents to be delivered pursuant
hereto; and

 

C.                                     Certificates
of insurance, in form and substance acceptable to Lender, indicating that
Borrower is in compliance with the covenant contained in Section 6.6 hereof.

 

3.3                                 The
Lender shall not be obligated to lend hereunder on the occasion for any
borrowing unless:

 

A.                                   The
representations and warranties contained in Section 5 hereof are true and
accurate in all material respects on and as of such date; and

 

3

 

B.                                     No
Event of Default, and no event which might become an Event of Default after the
lapse of time or the giving of notice and the lapse of time, has occurred and
is continuing or will exist upon the disbursements of such loan.

 

SECTION 4                                   Security

 

4.1                                 To
secure the Current Note and the performance of its additional obligations as
set forth hereunder, the Borrower acknowledges that all obligations under this
Agreement shall be secured by

 

A.                                   the
Security Agreement and financing statements, in form and substance satisfactory
to the Lender, granting to the Lender a first security interest (except for
Permitted Liens) in inventory, accounts receivable, equipment, furniture,
fixtures and general intangibles, now owned or hereafter acquired; and

 

B.                                     Stock
Security Agreement from the Borrower, with the certificates representing such
shares and guaranteed by the Guaranty, which is secured by security agreements
in form and content satisfactory to the Lender; provided that Lender cannot
take the shares if held by Foothill.

 

4.2                                 As
additional security for the prompt satisfaction of all obligations of Borrower
under the Current Note and Security Agreement, the Borrower hereby assigns,
transfers and sets over to the Lender all of its right, title and interest in
and to, and grants the Lender a lien on and a security interest in, all amounts
that may be owing from time to time by the Lender to the Borrower in any
capacity, including, but without limitation, any balance or share belonging to
the Borrower, of any deposit or other account with the Lender, which lien and
security interest shall be independent of any right of set-off which the Lender
may have.

 

4.3                                 The
foregoing liens shall be first and prior liens except for Permitted Liens.

 

4.4                                 At
any time requested by the Lender, the Borrower shall execute and deliver or
cause to be executed and delivered to the Lender such additional documents as
the Lender may consider to be necessary or desirable to evidence or perfect the
security interests referred to in Section 4.1 hereof.

 

SECTION 5                                   Representations
and Warranties

 

To induce the
Lender to enter into this Agreement, the Borrower represents and warrants to
the Lender as follows:

 

5.1                                 The
Borrower is a corporation duly organized, existing and in good standing under
the laws of the State of Minnesota.

 

4

 

5.2                                 The
execution, delivery and performance of this Agreement, the Current Note and
Security Agreement by the Borrower are within its corporate powers, have been
duly authorized, and are not in contravention of law, or the terms of
Borrower’s Articles of Incorporation or By-Laws or of any undertaking to which
the Borrower is a party or by which it is bound.

 

5.3                                 The
property of the Borrower is not subject to any lien except Permitted Liens.

 

5.4                                 No
litigation or governmental proceeding is pending or, to the knowledge of the
officers of the Borrower, threatened against the Borrower which could have a
material adverse effect on the Borrower’s financial condition or business,
except as disclosed on Schedule A attached.

 

5.5                                 All
financial statements delivered to Lender by or on behalf of Borrower, including
any schedules and notes pertaining thereto, have been prepared in accordance
with generally accepted accounting principles consistently applied, and fully
and fairly present the financial condition of the Borrower at the dates thereof
and the results of operations for the periods covered thereby.

 

SECTION 6                                   Affirmative
Covenants

 

The Borrower
covenants and agrees that so long as any indebtedness remains outstanding
hereunder, unless the Lender shall otherwise consent in writing, it will:

 

6.1                                 Pay,
when due, all taxes assessed against it or its property except to the extent
and so long as contested in good faith.

 

6.2                                 Maintain
its corporate existence and comply with all laws and regulations applicable
thereto.

 

6.3                                 Furnish
to the Lender copies of all reports and certificates required to be provided to
Foothill under Article 6 of the Foothill Agreement within the time periods set
forth therein.

 

6.4                                 Comply
with all the affirmative covenants set forth in Sections 6.1 to 6.16 of the
Foothill Agreement, so long as Foothill has not declared a default under the
Foothill Agreement or Foothill has not been paid in full.

 

6.5                                 Cause
its properties of an insurable nature to be adequately insured by reputable and
solvent insurance companies against loss or damages customarily insured against
by persons operating similar properties, and similarly situated, and carry such
other insurance (including business interruption insurance) as usually carried
by persons engaged in the same or similar businesses and similarly situated,
with the Lender named as loss payee on all such policies of insurance.

 

5

 

6.6                                 Permit
any of Lender’s duly authorized employees or agents the right, at any
reasonable time and from time to time, to visit and inspect the properties of
Borrower and to examine and take abstracts from its books and records.

 

6.7                                 Pay
all of Lender’s reasonable legal, accounting, financial and out-of-pocket
expenses incurred by the Lender in connection with preparing this agreement and
all related loan documents, the transactions contemplated therein, and the
administration and enforcement of this Agreement.

 

SECTION 7                                   Negative
Covenants

 

Without the
Lender’s written consent, so long as any indebtedness remains outstanding under
the Credit, the Borrower will not:

 

7.1                                 Do
any of the items listed in Sections 7.1 through 7.22 of the Foothill Agreement.

 

7.2                                 Permit
any lien including, without limitation, any pledge, assignment, mortgage, title
retaining contract or other type of security interest to exist on its property,
real or personal, including specifically any liens or security interests on
copyrights, trademarks and other intellectual property, except Permitted Liens.

 

7.3                                 Enter
into any transaction of merger or consolidation, or transfer, sell, assign,
lease or otherwise dispose of (other than sales in the ordinary course of
business) all or a substantial part of its or its subsidiaries’ properties or
assets, or any of its note or accounts receivable, or any stock (other than
directors qualifying shares) or any assets or properties necessary or desirable
for the proper conduct of its business, or change the nature of its business,
or wind up, liquidate or dissolve, or agree to do any of the foregoing.

 

7.4                                 Create,
incur, assume or suffer to exist, contingently or otherwise, indebtedness for
Borrowed Money, except indebtedness disclosed to the Lender in writing as
existing at the time of execution of this Agreement, including but not limited
to indebtedness to Foothill.

 

SECTION 8                                   Events
of Default

 

8.1                                 Upon
the occurrence of any of the following Events of Default:

 

A.                                   Default
in any payment of interest or of principal on the Current Note when due, and
continuance thereof for 10 calendar days;

 

B.                                     Default
in the observance or performance of any other agreement of the Borrower set
forth herein or in the Security Agreement and continuance thereof for 30 days
after notice;

 

6

 

C.                                     Any
representation or warranty made by the Borrower herein, or in any statement or
certificate furnished by the Borrower hereunder, is untrue in any material
respect;

 

D.                                    There
occurs an Event of Default under the Foothill Agreement.

 

E.                                      A
garnishment summons or a writ of attachment shall be issued against or served
upon the Lender for the attachment of any property of the Borrower or any
indebtedness owing to Borrower.

 

F.                                      Borrower
or any Guarantor shall (A) be or become insolvent (however defined); (B)
voluntarily file, or have filed against it involuntarily, a petition under the
United States Bankruptcy Code; or (C) if a corporation, partnership or
organization, be dissolved or liquidated or, if a partnership, suffer the death
of a partner or, if an individual, die; or (D) go out of business.

 

then, or at any time
thereafter, unless such Event of Default is remedied, the Lender or the holder
of the Current Note may, without notice and without demand to the Borrower,
terminate the Credit or declare the Current Note to be due and payable, or both,
whereupon the Credit shall terminate forthwith or the Current Note shall
immediately become due and payable, or both, as the case may be.

 

SECTION 9                                   Miscellaneous

 

9.1                                 The
provisions of this Agreement shall be in addition to those of any guaranty,
pledge or security agreement, note or other evidence of liability held by the
Lender, all of which shall be construed as complementary to each other.  Nothing herein contained shall prevent the
Lender from enforcing any or all other notes, guaranties, pledges or security
agreements in accordance with their respective terms.

 

9.2                                 From
time to time, the Borrower will execute and deliver to the Lender such
additional documents and will provide such additional information as the Lender
may reasonably require to carry out the terms of this Agreement and be informed
of the Borrower’s status and affairs.

 

9.3                                 Any
notices or consents required or permitted by this Agreement shall be in writing
and shall be deemed delivered if delivered in person or if sent by certified
mail, postage prepaid, return receipt requested, or telegraph, as follows,
unless such address is changed by written notice hereunder:

 

	
  A.

  	
   

  	
  If the
  Borrower:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  K-Tel
  International, Inc.

  
	
   

  	
   

  	
  2605
  Fernbrook Lane North

  

 

7

 

	
   

  	
   

  	
  Plymouth, MN
  55447

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Attention:  Mr. Steven Kahn

  
	
   

  	
   

  	
   

  
	
  B.

  	
   

  	
  If to the
  Lender:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  K-5 Leisure
  Products, Inc.

  
	
   

  	
   

  	
  220
  Saulteaux Crescent

  
	
   

  	
   

  	
  Winnipeg,
  Manitoba R3J 3W3

  
	
   

  	
   

  	
  Canada

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Attention:
  Dennis W. Ward

  

 

9.4                                 The
substantive Laws of the State of Minnesota shall govern the construction of
this Agreement and the rights and remedies of the parties hereto.

 

9.5                                 This
Agreement shall inure to the benefit of, and shall be binding upon, the
respective successors and permitted assigns of the parties hereto.  The Borrower has no right to assign any of
its rights or obligations hereunder without the prior written consent of the
Lender.  This Agreement, and the documents
executed and delivered pursuant hereto, constitute the entire agreement between
the parties , and may be amended only by a writing signed on behalf of each
party.

 

9.6                                 If
any provision of this Agreement shall be held invalid under any applicable
Laws, such invalidity shall not affect any other provisions of this Agreement
that can be given effect without the invalid provision, and, to this end, the
provisions hereof are severable.

 

9.7                                 The
Lender agrees to provide payoff statements within a reasonable time after
receipt of the Borrower’s written request therefor.  Lender, upon satisfactory assurance that it will be paid in full,
will deliver satisfactions and/or releases into an appropriate escrow to
facilitate payment.

 

9.8                                 Lender’s
rights and remedies under the Loan Documents and all other documents and
agreements contemplated by this Agreement shall be cumulative.  The Lender shall have all the rights and
remedies not inconsistent herewith as provided under the Uniform Commercial
Code, by law, or in equity.  No exercise
by the Lender of one right or remedy shall be deemed an election and no waiver
by the Lender of any Event of Default shall be deemed a continuing waiver.  No delay by the Lender shall constitute a
waiver, election or acquiescence by it.

 

8

 

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

 

	
   

  	
  K-TEL
  INTERNATIONAL, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/ Lawrence
  Kieves

  	
   

  
	
   

  	
   Its

  	
     PRESIDENT

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  K-5 LEISURE
  PRODUCTS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/ Philip
  Kives

  	
   

  
	
   

  	
   Its

  	
     CHIEF
  EXECUTIVE

  	
   

  

 

9

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