THIS NOTE AND
THE SECURITIES UNDERLYING THIS NOTE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR
QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS. THE SECURITIES
MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION AND QUALIFICATION WITHOUT, EXCEPT AS OTHERWISE AGREED
BY BELL INDUSTRIES, INC., AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO BELL INDUSTRIES, INC. THAT SUCH REGISTRATION AND
QUALIFICATION ARE NOT REQUIRED.
THIS NOTE AND
THE INDEBTEDNESS EVIDENCED HEREBY IS SUBORDINATED IN THE MANNER AND
TO THE EXTENT SET FORTH IN SECTION 8(b) BELOW AND THE HOLDER OF
THIS NOTE, BY ACCEPTANCE HEREOF, SHALL BE BOUND BY THE PROVISIONS
OF SECTION 8(b) OF THIS CONVERTIBLE PROMISSORY NOTE.
CONVERTIBLE PROMISSORY
NOTE
FOR VALUE
RECEIVED, the undersigned, BELL INDUSTRIES, INC., a California
corporation (the “Maker”), hereby promises to pay to
the order of Newcastle Partners, L.P. a Texas limited partnership,
or its assigns (the “Payee”), at such place as the
Payee may designate in writing, the principal sum of Ten Million
($10,000,000), or such other amount as shall equal the outstanding
principal amount hereof, under the terms set forth herein.
Capitalized terms used but not defined herein shall have the
respective meanings given to such terms in the Purchase Agreement,
dated as of the date hereof (the “Purchase Agreement”),
between the Maker and the Payee.
1. Interest.
Except as otherwise provided herein, the unpaid principal balance
hereof from time to time outstanding shall bear interest from the
date hereof at the rate of eight percent (8%) per annum, subject to
adjustment as provided for in Section 6. Interest shall accrue
on the outstanding unpaid principal amount (as increased pursuant
to Section 2(a) below) until such principal amount is paid (or
converted as provided herein) from the date hereof. Interest on
this Note shall be computed on the basis of a 365-day
year.
2. Payment of
Interest and Principal. Except as otherwise provided herein
(including, without limitation, Sections 5 and 6 hereof), and
subject to any default hereunder, the principal and interest hereof
is payable as follows:
(a) Interest shall be paid in kind and
shall accrete as additional principal on this Note on the
applicable interest payment date; provided that, following
January 31, 2008, if both (i) Maker’s senior
lenders (including Agent, in the event that the Senior Credit
Agreement remains in effect) consent in writing to the payment of
cash interest and (ii)
the Current
Market Price at the date of election (which shall be on or
following January 31, 2008) is at least 200% of the Conversion
Price, interest on the then outstanding principal balance of this
Note may be paid in cash at the election of Maker; provided further
that, if such election to pay cash interest is made, the interest
rate set forth in Section 1 hereof shall be increased to the
lesser of (a) sixteen percent (16%) or (b) the highest
lawful interest rate permitted by applicable law; and provided
further that any accrued interest as of the date of such election
shall accrete as additional principal on this Note as of such
election date. Interest shall be payable in arrears on
December 31, March 31, June 30 and September 30
of each year, beginning March 31, 2007. All references herein to
the “principal” of this Note shall include all interest
accreted thereon as additional principal pursuant to the foregoing
sentence.
(b) The
entire outstanding principal amount of the Note together with all
accrued but unpaid interest shall be due in cash on
January 31, 2017 (the “Maturity Date”).
(c) On and
following January 31, 2010, so long as the Current Market
Price (determined on the date of prepayment) is greater than 150%
of the Conversion Price and the Shareholder Approval shall have
been received, the Maker will have right of early prepayment of
this Note at an amount equal to 105% of the aggregate outstanding
principal on this Note. For the purposes of this Note, the
“Current Market Price” on any date means the average of
the daily Closing Prices per share of Common Stock for all Trading
Days included in 90 consecutive calendar days preceding the date in
question. For purposes of the foregoing, (i) the
“Closing Price” shall be the last reported sales price
or, if no such reported sale takes place on any particular date,
the average of the reported closing bid and asked prices on the
principal exchange (or on NASDAQ) on which the Common Stock is
listed (or if the Common Stock is not so listed, the average of the
closing bid and asked prices furnished by any two members of the
National Association of Securities Dealers as selected by Payee for
such purpose) on the date in question and (ii) “Trading
Days” shall mean any day on which the market on which the
Common Stock is then traded is open for trading. Any such
prepayment under this Section 2(c) shall be on 30 days advance
notice to Payee.
3. Conversion
at the Option of Payee.
(a) At any
time while any portion of the principal or interest of this Note is
outstanding, the Payee may give the Maker written notice of its
intention to convert all or any portion of the outstanding
principal and/or accrued but unpaid interest on this Note into such
number of shares of the Maker’s common stock (the
“Common Stock”), equal to the amount to be converted
divided by the Conversion Price in effect at such time. Upon
receipt of the Payee’s written notice, the Maker shall cause
certificates representing those shares to be delivered to Payee
within three business days of Maker’s receipt of such notice.
The person or persons entitled to receive the shares of Common
Stock issuable upon a conversion of this Note shall be treated for
all purposes as the record holder or holders of such shares of
Common Stock on the date the applicable conversion notice is
given.
(b) The
“Conversion Price” shall be $3.81, subject to any
adjustment. The Conversion Price shall be adjusted proportionally
for any subsequent stock dividend or split, stock combination or
other similar recapitalization, reclassification or reorganization
of or affecting Maker’s Common Stock. In addition, the
Conversion Price shall also be appropriately adjusted in the event
that Maker issues shares of Common Stock (or issues securities,
including warrants or similar rights, entitling holders to
exercise, convert or exchange into, or otherwise subscribe for,
shares of Common Stock) at a price per share less than the Current
Market Price as of the date of such issuance, as follows: the new
Conversion Price shall be reduced to equal (x) the prevailing
Conversion Price (i.e., prior to any adjustment hereunder)
multiplied by (y) the quotient obtained by dividing
(a) the Market Value Share Number by (b) the total number
of shares of Common Stock that would be outstanding after giving
effect to the exercise, conversion or exchange of any rights or
other derivative Company securities outstanding (determined pro
forma for the applicable issuance giving rise to the adjustment in
the Conversion Price hereunder). For purposes of the foregoing, the
“Market Value Share Number” shall equal the sum of
(i) the total number of shares of Common Stock that would be
outstanding after giving effect to the exercise, conversion or
exchange of any rights or other derivative Company securities
outstanding (determined prior to the applicable issuance giving
rise to the adjustment in the Conversion Price) plus (ii) the
quotient obtained by dividing (A) the aggregate consideration
received by the Company in the applicable issuance (or, in the case
of the issuance of any rights or other derivative Company
securities giving rise to the adjustment in the Conversion Price
hereunder, such aggregate consideration to be received upon the
exercise, conversion or exchange of any such rights or derivative
Company securities) by (B) the Current Market
Price.
(c) In
case of a Change of Control, instead of receiving shares of
Maker’s Common Stock upon conversion of this Note, Payee
shall have the right thereafter to receive the kind and amount of
shares of stock and other securities, cash and property which the
Payee would have owned or have been entitled to receive immediately
after such Change of Control had the same portion of this Note been
converted immediately prior to the effective date of such Change of
Control and, in any such case, if necessary, appropriate adjustment
shall be made in the application of the provisions set forth in
this Section with respect to the rights and interests thereafter of
the Payee, to the end that the provisions set forth in this Section
shall thereafter correspondingly be made applicable, as nearly as
may reasonably be, in relation to any shares of stock and other
securities, cash and property thereafter deliverable in connection
with this Note. The provisions of this subsection shall similarly
apply to successive Changes of Control.
(d)
“Change of Control” means that the Maker shall,
directly or indirectly, in one or more related transactions,
(i) consolidate or merge with or into (whether or not the
Maker is the surviving corporation) another person, (ii) sell,
assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Maker to
another person, (iii) allow another person to make a purchase,
tender or exchange offer that is accepted by the holders of more
than 50% of the outstanding shares of Common Stock (not including
any shares of Common Stock held by the person or persons making or
party to, or associated or affiliated with the persons making or
party to, such purchase,
tender or
exchange offer), or (iv) consummate a stock purchase agreement
or other business combination (including, without limitation, a
reorganization, recapitalization or spin-off) with another person
whereby such other person acquires more than 50% of the outstanding
shares of Common Stock (not including any shares of Common Stock
held by the other person or other persons making or party to, or
associated or affiliated with the other persons making or party to,
such stock purchase agreement or other business combination);
provided, however, that a transaction in which Newcastle Partners,
L.P. or any of its affiliates is the acquiring party shall not be
deemed to constitute a Change of Control.
(f) No
fractional shares of Maker’s Common Stock shall be issued
upon conversion of the Note. In lieu of any fractional shares to
which Payee would otherwise be entitled, the Maker shall pay cash
equal to the product of such fraction multiplied by the average of
the closing prices of the Common Stock on the American Stock
Exchange (or the exchange on which Maker’s Common Stock
trades for the five consecutive trading days immediately preceding
the date of the conversion.
(g) In the
event of an adjustment to the Conversion Price, the Maker shall
promptly deliver to the Payee a certificate, signed by its Chief
Financial Officer, setting forth the new Conversion Price and a
calculation in reasonable detail of the adjustment to the
Conversion Price.
(h) The
Maker shall pay any and all taxes that may be payable with respect
to the issuance and delivery of Common Stock upon conversion of
this Note; provided that the Maker shall not be required to pay any
tax that may be payable in respect of any issuance of Common Stock
to any person other than the Payee or with respect to any income
tax due by the Payee with respect to such Common Stock.
4. Redemption
Upon Change of Control. No sooner than 15 days nor later than
10 days prior to the consummation of a Change of Control, the
Maker shall deliver written notice of such Change of Control to the
Payee (a “Change of Control Notice”). At any time
during the period beginning after the Payee’s receipt of a
Change of Control Notice and ending on the date of the consummation
of such Change of Control, the Payee may require the Maker to
redeem all or any portion of this Note by delivering written notice
thereof (a “Change of Control Redemption Notice”) to
the Maker, which Change of Control Redemption Notice shall indicate
the portion of the outstanding principal amount of this Note that
the Payee is electing to redeem. The portion of this Note subject
to redemption pursuant to this Section 4 shall be redeemed by
the Maker at a price equal to 110% of the principal amount being
redeemed, plus accrued but unpaid interest on such principal amount
(the “Change of Control Redemption Price”). Redemptions
required by this Section 4 shall be made on the date of the
consummation of the Change of Control and shall have priority to
payments to shareholders of the Maker in connection with such
Change of Control. Notwithstanding anything to the contrary in this
Section 4, until the Change of Control Redemption Price is
paid in full, the principal amount submitted for redemption under
this Section 4 (together with any accrued but unpaid interest
thereon) may be converted, in whole or in part, by the Payee into
Common Stock pursuant to Section 3.
5. Conversion
On Maturity Date. On the Maturity Date, in lieu of receiving the
payment required by Section 2(b), the Payee may elect to have
Maker issue to the Payee a certificate representing such number of
shares of Common Stock as is equal to the quotient obtained by
dividing the entire principal amount of this Note then outstanding,
plus all accrued but unpaid interest thereon, by the Conversion
Price in effect at such time, in full satisfaction of this Note
(the “Maturity Date Conversion”). The applicable
provisions of Section 3 shall apply with equal force to the
Maturity Date Conversion. In the event that the Shareholder
Approval has not then been obtained, Payee may elect to receive
both (1) such number of shares as the Maker shall be permitted
to issue under exchange rules in the absence of a shareholder vote
and (2) cash in lieu of any remaining principal
balance.
6. Condition to
Issuance of Shares Upon Conversion. Notwithstanding anything to the
contrary contained in Section 3 or Section 5 of this
Note, it shall be a condition precedent to Maker’s issuance
of shares of Common Stock under this Note in an amount greater than
19.9% of the Company’s then issued and outstanding Common
Stock upon conversion of this Note, whether on the Maturity Date or
otherwise, that the Shareholder Approval shall have been obtained
prior to such issuance; provided that, in the event that the
Shareholder Approval is not obtained, Payee shall be permitted to
convert this Note into such number of shares as the Maker shall be
permitted to issue under exchange rules in the absence of a
shareholder vote (and Payee shall be permitted to retain the Note
in respect of any remaining principal balance). In addition,
notwithstanding anything to the contrary, in the event that the
Shareholder Approval is not obtained, the interest rate set forth
in Section 1 hereof in respect of the Disallowed Excess
Principal on this Note shall be increased to the lesser of
(a) sixteen percent (16%) or (b) the highest lawful
interest rate permitted by applicable law. For purposes of this
Note, the “Disallowed Excess Principal” shall mean the
principal balance of the Note (determined after giving effect to
any accretion for interest that has become payable) in excess of
the principal balance of the Note then convertible at the
Conversion Price into the maximum number of shares permitted under
applicable exchange rules in the absence of a shareholder vote. For
the avoidance of doubt, the Disallowed Excess Principal shall
increase with each subsequent payment of interest that accretes as
additional principal on this Note.
7. Dividends.
If, at any time while any portion of the principal or interest on
the Note is outstanding, Maker declares a distribution in cash,
property (including securities) or a combination thereof, whether
by way of dividend or otherwise, with respect to its Common Stock,
the Payee shall participate pro rata in such distribution on an
as-converted basis with holders of Maker’s Common
Stock.
8. Security;
Subordination.
(a) Notwithstanding anything to the
contrary, the indebtedness evidenced by this Note is hereby
expressly subordinated in the manner set forth in Section 8(b)
below. This Note
will rank
senior to all existing and future unsecured indebtedness of Maker.
In addition, promptly following the date of this Note, Maker agrees
to enter into a security agreement with Payee acceptable to Payee,
Maker and Agent which agreement grants Payee a second lien security
interest in all of Maker’s presently existing and hereafter
acquired real and personal property to secure Maker’s
obligations under this Note; provided that the security agreement
set forth as exhibit A hereto shall be deemed to be acceptable to
both Maker and Agent. Notwithstanding anything to the contrary, if
the foregoing security agreement is not executed within eight
(8) weeks following the date of this Note, the interest rate
set forth in the first sentence of Section 1 of this Note
shall be increased to, and remain (until any further adjustment
pursuant to this Note), ten percent (10%).
(b) Subordination Provisions
(1) Certain
Terms Defined . The following terms in this Note shall have the
meanings specified below:
“
Agent ” means Wells Fargo Foothill, Inc., in its
capacity as the arranger and administrative agent for the Lenders,
together with its successors and assigns, if any, in such
capacity.
“
Borrowers ” means, individually and collectively,
jointly and severally, Bell Industries, Inc., a California
corporation, and Bell Industries, Inc., a Minnesota
corporation.
“
Indebtedness ” means (a) all obligations for
borrowed money, (b) all obligations evidenced by bonds,
debentures, notes, or other similar instruments and all
reimbursement or other obligations in respect of letters of credit,
bankers acceptances, interest rate swaps, or other financial
products, (c) all obligations as a lessee under capital
leases, (d) all obligations or liabilities of others secured
by a Lien on any asset of a Person or its subsidiaries,
irrespective of whether such obligation or liability is assumed,
(e) all obligations to pay the deferred purchase price of
assets (other than trade payables incurred in the ordinary course
of business and repayable in accordance with customary trade
practices), (f) all obligations owing under hedge agreements,
and (g) any obligation guaranteeing or intended to guarantee
(whether directly or indirectly guaranteed, endorsed, co-made,
discounted, or sold with recourse) any obligation of any other
Person that constitutes Indebtedness under any of clauses
(a) through (f) above.
“
Insolvency Proceeding ” means any proceeding commenced
by or against any Person under any provision of title 11 of the
United States Code (as in effect from time to time) or under any
other state or federal bankruptcy or insolvency law, assignments
for the benefit of creditors, formal or informal moratoria,
compositions, extensions generally with creditors, or proceedings
seeking reorganization, arrangement, or other similar
relief.
“ Junior
Debt ” means all principal, interest, fees, costs,
enforcement expenses, and all other payment obligations (including
attorneys fees and disbursements and the
repurchase
price with respect to this Note) of any kind arising under this
Note (and any amendments, restatements, supplements, or other
modifications thereof) or any other Junior Document, together with
any and all refinancings, renewals, or extensions of such
obligations.
“ Junior
Documents ” means, collectively, this Note, the Purchase
Agreement, the Security Agreement and any and all other documents
or instruments executed in connection with this Note, the Purchase
Agreement or the Security Agreement, whether now existing or
hereafter created, each as amended, restated supplemented, or
otherwise modified from time to time.
“
Lenders ” means, indivi
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