Document:

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Exhibit 4.1

PURCHASE AGREEMENT

     THIS PURCHASE AGREEMENT (the “Agreement”) is entered into as of the 31st day of
January, 2007, by and between Bell Industries, Inc., a California corporation (the “Company”), and
Newcastle Partners, L.P., a Texas limited partnership (the “Purchaser”).

R E C I T A L S :

     WHEREAS, in consideration of $10,000,000, the Company proposes to issue to the
Purchaser, and the Purchaser desires to purchase, a $10,000,000 convertible promissory note in the
form attached as Exhibit A (the “Note”).

     NOW, THEREFORE, in consideration of the foregoing recital and the mutual promises hereinafter
set forth, the parties hereto agree as follows:

SECTION 1. AGREEMENT TO SELL AND PURCHASE

       1.1 Authorization of Transaction. On or prior to the closing of the transactions
contemplated in this Agreement (the “Closing”), the Company shall have authorized the sale and
issuance to the Purchaser of the Note and, subject to obtaining Shareholder Approval (as defined
below), all of the shares of the Company’s common stock (the “Common Stock”), issuable upon
conversion of the Note (collectively, the “Shares”).

       1.2 Sale and Purchase. Subject to the terms and conditions hereof, at the Closing, the
Company hereby agrees to issue and sell to the Purchaser, and the Purchaser agrees to purchase
from the Company, the Note for an aggregate purchase price of $10,000,000 (the “Purchase Price”).

SECTION 2. CLOSING, DELIVERY AND PAYMENT

       2.1 Closing. The Closing shall take place at 10:00 a.m. on the date hereof at the offices of
the Maker’s legal counsel, Manatt in Los Angeles, California, or at such other time or place as
the Company and the Purchaser may mutually agree (the “Closing Date”). At the Closing, subject to
the terms and conditions hereof, the Company will issue, sell and deliver to the Purchaser the
Note, against payment of the Purchase Price by certified check or wire transfer of immediately
available funds. At that time, the Company and the Purchaser shall also execute the Security
Agreement in the form attached as Exhibit B and the Registration Rights Agreement in the form
attached as Exhibit C (the “Registration Rights Agreement”).

SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY

     The Company hereby represents and warrants to the Purchaser as of the Closing Date, and
agrees, as follows:

       3.1 Organization, Good Standing and Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of California. The
Company’s only active subsidiaries are the subsidiaries listed on Schedule 3.1 (the
“Subsidiaries”). Except as indicated on Schedule 3.1, each Subsidiary is duly organized, validly
existing and in good standing under the laws of its jurisdiction of organization. Each of

 

 

the Company and the Subsidiaries has all requisite corporate power and authority to own and
operate its respective properties and assets and to carry on its respective business as presently
conducted and as presently proposed to be conducted. The Company has all requisite corporate
power and authority to execute and deliver this Agreement, the Note, the Security Agreement and
the Registration Rights Agreement (together, the “Transaction Documents”), to issue and sell the
Shares upon conversion of the Note (subject to obtaining Shareholder Approval) and to carry out
the provisions of the Transaction Documents. Each of the Company and the Subsidiaries is duly
qualified and is authorized to do business and is in good standing in each jurisdiction in which
the nature of its respective activities and of its respective properties (both owned and leased)
makes such qualification necessary, except for those jurisdictions in which failure to be so
qualified would not have a material adverse effect on the Company or its business, taken as a
whole.

       3.2 Capitalization. The Company is authorized to issue 35,000,000 shares of Common Stock, of
which 8,593,224 shares are issued and outstanding as of the date hereof, and 1,000,000 shares of
preferred stock. Except as set forth on Schedule 3.2 or in the Company’s current, quarterly,
annual and other periodic filings (the “SEC Reports”) with the U.S. Securities and Exchange
Commission (the “Commission”), there are no outstanding options, warrants or other rights to
acquire any of the Company’s capital stock, or securities convertible, exercisable or exchangeable
for the Company’s capital stock or for securities themselves convertible, exercisable or
exchangeable for the Company’s capital stock (together, “Convertible Securities”). Except as set
forth on Schedule 3.2 or in the SEC Reports, the Company has no agreement or commitment to sell or
issue any shares of capital stock or Convertible Securities. All issued and outstanding shares of
the Company’s capital stock (i) have been duly authorized and validly issued, (ii) are fully paid
and nonassessable, (iii) are free from any preemptive and cumulative voting rights and (iv) were
issued pursuant to an effective registration statement filed with the Commission and applicable
state securities authorities or pursuant to valid exemptions under federal and state securities
laws. Except as set forth on Schedule 3.2 or in the SEC Reports, there are no outstanding rights
of first refusal or proxy or shareholder agreements of any kind relating to any of the Company’s
securities to which the Company or any of its executive officers and directors is a party or as to
which the Company otherwise has knowledge. When issued in compliance with the provisions of the
Note, the Shares will be validly issued, fully paid and nonassessable, and will be free of any
liens or encumbrances; provided, however, that the Shares may be subject to restrictions on
transfer under state and/or federal securities laws as set forth herein or as otherwise required
by such laws at the time a transfer is proposed.

       3.3 Authorization; Binding Obligations. All corporate action on the part of the Company, its
officers and directors (including a special committee of independent directors) necessary for the
authorization of the Transaction Documents and the performance of all obligations of the Company
hereunder and thereunder at the Closing, including the authorization, sale, issuance and delivery
of the Shares upon conversion of the Note, has been taken, and no further corporate action is
required to be taken except for the Shareholder Approval. The Transaction Documents, when
executed and delivered, will be valid and binding obligations of the Company enforceable against
the Company in accordance with their terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application affecting enforcement
of creditors’ rights, (ii) according to general principles of equity that restrict the
availability of equitable remedies and (iii) to the

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extent that the enforceability of the indemnification provisions of the Registration Rights
Agreement may be limited by applicable laws. The issuance and sale of the Shares upon conversion
of the Note are not and will not be subject to any preemptive rights or rights of first refusal.

       3.4 Financial Statements. The audited consolidated balance sheets at December 31, 2005 of
the Company and the audited consolidated statements of operations, cash flows and stockholders’
equity of the Company for the year ended December 31, 2005 and the unaudited consolidated balance
sheet at, and the unaudited consolidated statements of operations and cash flows for the nine
months ended, September 30, 2006 of the Company (all of the foregoing together, the “Financial
Statements,” with September 30, 2006 being the “Latest Statement Date” and the consolidated
financial statements at and for the nine months ended September 30, 2006 being the “Latest
Financial Statements”), as contained in the SEC Reports, fairly present the consolidated financial
condition, results of operations and cash flows of the Company and its Subsidiaries on a
consolidated basis as of the respective dates and for the respective periods covered thereby
(subject, in the case of unaudited financial statements, to normal year-end audit adjustments) and
have been prepared in accordance with generally accepted accounting principles in the United
States applied on a consistent basis (except as may be indicated in the notes thereto) and the
rules and regulations of the Commission.

       3.5 Liabilities. Except as reflected or expressly reserved in the Latest Financial
Statements, permitted by the Senior Credit Agreement (as defined in the Note) or disclosed on
Schedule 3.5, neither the Company nor any Subsidiaries has any material liabilities or obligations
and there is no known basis for any material contingent liabilities, except current liabilities
incurred after the Latest Statement Date in the ordinary course of business of the Company and
the Subsidiaries.

       3.6 Certain Agreements and Actions. Except to the extent permitted by the Senior Credit
Agreement (as defined in the Note) or as disclosed on Schedule 3.6 or in the SEC Reports, since
the Latest Statement Date, neither the Company nor any Subsidiary has (i) declared or paid any
dividends, or authorized or made any distribution upon or with respect to any class or series of
its capital stock, (ii) incurred any indebtedness for money borrowed or any other material
liabilities out of the ordinary course of business, (iii) made any loans or advances to any
person, other than ordinary advances for travel or entertainment expenses, or (iv) sold, exchanged
or otherwise disposed of any of its assets or rights, other than in the ordinary course of
business. “Person” shall mean an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization or any other entity.

       3.7 Obligations of or to Related Parties. Except as disclosed on Schedule 3.7 or in the SEC
Reports, there are no obligations of the Company or any Subsidiary to executive officers,
directors, 1% or greater shareholders or key employees (listed in the Company’s most recent proxy
materials) of the Company or any Subsidiary or to any members of their immediate families or other
affiliates, other than (i) for accrued salaries, (ii) reimbursement for expenses reasonably
incurred on behalf of the Company or any Subsidiary and (iii) for other standard employee benefits
made generally available to all employees (including stock option agreements outstanding under any
stock option plan approved by the Board of Directors of the Company). Except as disclosed on
Schedule 3.7 or in the SEC Reports, none of the executive

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officers, directors, 1% or greater shareholders or key employees (listed in the Company’s
most recent proxy materials) of the Company or any Subsidiary, or any members of their immediate
families or other affiliates, are indebted to the Company or any Subsidiary or have any direct or
indirect ownership interest in any firm, corporation or other entity with which the Company or any
Subsidiary is affiliated or with which the Company or any Subsidiary has a business relationship,
or any firm, corporation or other entity that competes with the Company or any Subsidiary. Except
as disclosed in the SEC Reports, no executive officer, director, 1% or greater shareholder or key
employee (listed in the Company’s most recent proxy materials) of the Company or any Subsidiary,
or, to the Company’s knowledge, any member of their immediate families or other affiliates, is,
directly or indirectly, interested in or a party to any material contract with the Company or any
Subsidiary. Except to the extent permitted by the Senior Credit Agreement (as defined in the
Note) or as disclosed on Schedule 3.7 or in the SEC Reports, neither the Company nor any
Subsidiary is a guarantor or indemnitor of any indebtedness or obligation of any other person,
other than the Company or its Subsidiaries. The representations contained in this Section 3.7
shall not be deemed to apply to the Purchaser or any of its affiliates.

       3.8 No Material Adverse Change. Since the Latest Statement Date, and except as disclosed in
the SEC Reports, there has not been any material adverse change in the business, assets,
liabilities, condition (financial or otherwise), operations or prospects of the Company, and no
event has occurred or circumstance exists that may result in such a material adverse change.

       3.9 Title to Properties and Assets; Liens. Except to the extent permitted by the Senior
Credit Agreement (as defined in the Note) or as set forth on Schedule 3.6 or Schedule 3.9 or in
the SEC Reports, each of the Company and its Subsidiaries has good and marketable title to its
properties and assets, including the properties and assets reflected in the Latest Financial
Statements, and good title to its leasehold estates, in each case subject to no mortgage, pledge,
lien, lease, encumbrance or charge, other than (i) those resulting from taxes that have not yet
become delinquent, (ii) minor liens and encumbrances that do not materially detract from the value
of the property subject thereto or materially impair the operations of the Company or any
Subsidiary and (iii) those that have otherwise arisen in the ordinary course of business. All
facilities, machinery, equipment, fixtures and other properties owned, leased or used by the
Company or any Subsidiary are in good operating condition and repair and are reasonably fit and
usable for the purposes for which they are being used, reasonable wear and tear excepted.

       3.10 Intellectual Property. Except as set forth on Schedule 3.10 or in the SEC Reports, each
of the Company and its Subsidiaries owns or licenses all trademarks, service marks, trade names,
copyrights, trade secrets, information and other proprietary rights and processes necessary for
its business as now conducted and as proposed to be conducted, without any known infringement of
the rights of others.

       3.11 Compliance with Other Instruments. Except as disclosed in Schedule 3.11 or the SEC
Reports, neither the Company nor any Subsidiary is in violation or default of any term of its
Articles of Incorporation or Bylaws, or of any provision of any mortgage, indenture, contract,
agreement or instrument to which it is party or by which it is bound or of any judgment, decree,
order, writ, statute, rule or regulation applicable to the Company or any

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Subsidiary that would materially and adversely affect the business, assets, liabilities,
condition (financial or otherwise), operations or prospects of the Company. The execution and
delivery of, and the performance of and compliance with the transactions contemplated by, the
Transaction Documents, and the issuance and sale of the Shares upon conversion of the Note, will
not, with or without the passage of time or giving of notice or both, result in any such material
violation, or be in conflict with or constitute a default under any such term, or result in the
creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets
of the Company or any Subsidiary or the suspension, revocation, impairment, forfeiture or
nonrenewal of any permit, license, authorization or approval applicable to the Company or any
Subsidiary, the business or operations of the Company or any Subsidiary or any of the assets or
properties of the Company or any Subsidiary.

       3.12 Litigation. Except as disclosed in the SEC Reports, Schedule 3.5 or Schedule 3.12,
there is no action, suit, proceeding or investigation pending or, to the Company’s knowledge,
currently threatened against the Company that questions the validity of this Agreement or the
other agreements contemplated hereby or the right of the Company to enter into any of such
agreements, or to consummate the transactions contemplated hereby or thereby. Except as disclosed
in the SEC Reports, Schedule 3.5 or Schedule 3.12, there is no action, suit, proceeding or
investigation pending or, to the Company’s knowledge, currently threatened against the Company or
any Subsidiary that could result, either individually or in the aggregate, in any material adverse
change in the business, assets, liabilities, condition (financial or otherwise), operations or
prospects of the Company, or in any change in the current equity ownership of the Company, nor is
the Company aware that there is any basis for the foregoing. Except as disclosed in the SEC
Reports, Schedule 3.5 or Schedule 3.12, neither the Company nor any Subsidiary is a party or
subject to the provisions of any order, writ, injunction, judgment or decree of any court or
government agency or instrumentality.

       3.13 Tax Returns and Payments. Except as disclosed on Schedule 3.13, each of the Company and
its Subsidiaries has filed all tax returns (federal, state and local) required to be filed by it.
All taxes shown to be due and payable on such returns, any assessments imposed, and, to the
Company’s knowledge, all other taxes due and payable by the Company or any Subsidiary on or before
the Closing have been paid or will be paid prior to the time they become delinquent. The Company
has not been advised (i) that any of the tax returns of the Company or any Subsidiary have been or
are being audited as of the date hereof or (ii) of any deficiency in assessment or proposed
judgment to federal, state or other taxes of the Company or any Subsidiary. The Company has no
knowledge of any liability of any tax to be imposed upon the properties or assets of the Company
or any Subsidiary as of the date of this Agreement that is not adequately provided for.

       3.14 Employees. Neither the Company nor any Subsidiary has any collective bargaining
agreements with any of its employees. There is no labor union organizing activity pending or, to
the Company’s knowledge, threatened with respect to the Company or any Subsidiary. Except as set
forth on Schedule 3.14 or in the SEC Reports, no executive officer or key employee (listed in the
Company’s most recent proxy materials) has any agreement or contract, written or verbal, regarding
his employment. Except as disclosed on Schedule 3.14 or in the SEC Reports, neither the Company
nor any Subsidiary is a party to or bound by any currently effective deferred compensation
arrangement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other
employee compensation plan or agreement. To the

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Company’s knowledge, no employee of the Company or any Subsidiary, nor any consultant with
whom the Company or any Subsidiary has contracted, is in violation of any material term of any
employment or consulting agreement with the Company or any Subsidiary. Except as disclosed on
Schedule 3.14 or in the SEC Reports, no executive officer or key employee (listed in the Company’s
most recent proxy materials) of the Company or any Subsidiary has been granted the right to
continued employment by the Company or any Subsidiary or to any material compensation following
termination of employment with the Company or any Subsidiary. The Company is not aware that any
executive officer or key employee (listed in the Company’s most recent proxy materials), or that
any group of executive officers or key employees (listed in the Company’s most recent proxy
materials), intends to terminate his or their employment with the Company or any Subsidiary, nor
does the Company or any Subsidiary have a present intention to terminate the employment of any
executive officer, key employee (listed in the Company’s most recent proxy materials) or group of
executive officers or key employees (listed in the Company’s most recent proxy materials).

       3.15 Registration Rights. Except as disclosed on Schedule 3.15 or required pursuant to the
Registration Rights Agreement, the Company is presently not under any obligation, and has not
granted any rights, to register (as defined in the Registration Rights Agreement) any of the
Company’s presently outstanding securities or any of its securities that may hereafter be issued.

       3.16 Compliance with Laws; Permits. Except as disclosed in Schedule 3.16 or the SEC Reports,
neither the Company nor any Subsidiary is in violation of any applicable statute, rule,
regulation, order or restriction of any domestic or foreign government or any instrumentality or
agency thereof in respect of the conduct of its business or the ownership of its properties that
would materially and adversely affect the business, assets, liabilities, condition (financial or
otherwise), operations or prospects of the Company. No governmental orders, permissions,
consents, approvals or authorizations are required to be obtained and no registrations, filings,
notices or declarations are required to be filed in connection with the execution and delivery of,
and the performance of the transactions contemplated by, the Transaction Documents or the issuance
of the Shares upon conversion of the Note, except such as have been duly and validly obtained or
filed, or with respect to any filings that must be made after the Closing, as will be filed in a
timely manner. Each of the Company and the Subsidiaries has all franchises, permits, licenses and
any similar authority necessary for the conduct of its business as now being conducted by it, the
lack of which could materially and adversely affect the business, assets, liabilities, condition
(financial or otherwise), operations or prospects of the Company, and the Company believes it can
(and covenants to Purchaser that it will) obtain any similar authority for the conduct of its
business as planned to be conducted.

       3.17 Environmental and Safety Laws. Except as disclosed in Schedule 3.17 or the SEC Reports,
to the Company’s knowledge, neither the Company nor any Subsidiary is in violation of any
applicable statute, law or regulation relating to the environment or occupational health and
safety, and, to the Company’s knowledge, no material expenditures are or will be required in order
to comply with any such existing statute, law or regulation.

       3.18 Private Offering. Assuming the truth and accuracy of the representations and warranties
of the Purchaser contained in Section 4, the offer, sale and issuance of the Note (and the Shares
issuable upon conversion of the Note) will be exempt from the registration

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requirements of the Securities Act of 1933, as amended (the “Securities Act”), and will have
been registered or qualified (or are exempt from registration and qualification) under the
registration, permit or qualification requirements of the State of Texas.

       3.19 Full Disclosure. None of the Transaction Documents nor the SEC Reports contains any
untrue statement of a material fact nor omits to state a material fact necessary in order to make
the statements contained herein or therein not misleading in light of the circumstances in which
they were made. There are no facts that (individually or in the aggregate) materially adversely
affect the business, assets, liabilities, condition (financial or otherwise), operations or
prospects of the Company that have not been set forth in the Transaction Documents, the SEC
Reports or in other documents delivered to the Purchaser or its attorneys or agents in connection
herewith.

       3.20 Investment Company Act. The Company is not, and will not use the proceeds from the Note
in a manner so as to become, an “investment company,” within the meaning of the Investment Company
Act of 1940, as amended.

       3.21 American Stock Exchange Compliance. The Company’s Common Stock is registered pursuant
to Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is
listed on the American Stock Exchange (the “Amex”). The Company has taken no action designed to,
or likely to have the effect of, and the transactions contemplated by this Agreement will not have
the effect of, terminating the registration of the Common Stock under Section 12(b) of the
Exchange Act or de-listing of the Common Stock from the Amex. Except as disclosed in Schedule
3.21 or the SEC Reports, the Company has not received any notification that the Commission, the
Amex or any other self-regulatory organizational body is contemplating terminating such
registration or listing.

       3.22 Reporting Status. The Company has filed all documents that the Company was required to
file under the Exchange Act during the 12 months preceding the date of this Agreement. The SEC
Reports complied in all material respects with the applicable requirements of the Securities Act
or the Exchange Act, as the case may be, and the applicable rules and regulations promulgated
thereunder as of their respective filing dates, and the information contained therein as of the
date thereof did not contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Company has disclosed in Item 4 of
the Company’s Report on Form 10-Q for the quarter ended September 30, 2006 the effectiveness of
its disclosure controls and procedures. The Company is not aware of any material weaknesses (as
defined in Section 404 of the Sarbanes-Oxley Act) in its internal controls.

       3.23 No Manipulation of Price. Neither the Company nor, to the knowledge of the Company, any
agent or other person acting on behalf of the Company has taken or will, in violation of
applicable law, take any action designed to or that might reasonably be expected to cause or
result in, or which has constituted, stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the securities issued or issuable in connection with the
transactions contemplated hereunder.

       3.24 Foreign Corrupt Practices; Sarbanes-Oxley.

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       (a) Neither the Company nor, to the knowledge of the Company, any agent or other person
acting on behalf of the Company has (i) directly or indirectly, used any corporate funds for
unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or
domestic political activity, (ii) made any direct or indirect unlawful payment to foreign or
domestic government officials or employees or to any foreign or domestic political parties or
campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the
Company (or made by any person acting on its behalf of which the Company is aware) which is in
violation of law, or (iv) violated in any material respect any provision of the Foreign Corrupt
Practices Act of 1977, as amended.

       (b) The Company, to its knowledge, is in compliance in all material respects with the
provisions of the Sarbanes-Oxley Act of 2002 (and related rules of the Commission) that are
applicable to it as of the Closing Date.

       3.25 No Material Transactions or Events. As of the Closing Date, the Company is not aware of
any pending or proposed merger, acquisition or disposition of assets that support 20% or more of
current revenues, or revenue shortfall against publicly issued Company guidance, other than as
previously disclosed in the SEC Reports or in a publicly disseminated press release.

       3.26 Acknowledgment Regarding the Purchaser’s Purchase of the Note. The Company acknowledges
that the Purchaser is not acting as a financial advisor or fiduciary of the Company (or in any
similar capacity) with respect to the Transaction Documents and the transactions contemplated
hereby and thereby, and any advice given by the Purchaser or any of its representatives or agents
in connection with the Transaction Documents and the transactions contemplated hereby and thereby
is merely incidental to the Purchaser’s purchase of the Note. The Company further represents to
the Purchaser that the Company’s decision to enter into the Transaction Documents has been based
solely on the independent evaluation by the Company and its representatives.

       3.27 No General Solicitation. Neither the Company, nor any of its affiliates, nor any person
acting on its or their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D) in connection with the offer or sale of the Note
and the Shares.

       3.28 No Integrated Offering. None of the Company, its Subsidiaries, any of their affiliates,
or any person acting on their behalf has, directly or indirectly, made any offers or sales of any
security or solicited any offers to buy any security, under circumstances that would require
registration of any of the Note or the Shares under the Securities Act or cause this offering to
be integrated with prior offerings by the Company for purposes of the Securities Act or any
applicable shareholder approval provisions, including, without limitation, under the rules and
regulations of any exchange or automated quotation system on which any of the securities of the
Company are listed or designated.

       3.29 Off-Balance Sheet Arrangements. There is no material transaction, arrangement or other
relationship between the Company and an unconsolidated or other off-balance sheet entity that is
required to be disclosed by the Company in its Exchange Act filings and is not so disclosed

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SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

     The Purchaser hereby represents and warrants to the Company as of the Closing Date, and
agrees, as follows:

       4.1 Investment Representations. The Purchaser understands that neither the offer nor the
sale of the Note or the Shares has been registered under the Securities Act. The Purchaser also
understands that the Note is being offered and sold pursuant to an exemption from registration
contained in the Securities Act based in part upon the Purchaser’s representations contained in
the Agreement. The Purchaser hereby represents and warrants as follows:

     (a) Purchaser Bears Economic Risk. The Purchaser has substantial experience in evaluating and
investing in private placement transactions of securities in companies similar to the Company so
that it is capable of evaluating the merits and risks of its investment in the Company and has the
capacity to protect its own interests. The Purchaser must bear the economic risk of this
investment indefinitely unless the Note (or the Shares) is subsequently registered pursuant to the
Securities Act, or an exemption from registration is available. Except as contemplated by the
Registration Rights Agreement, the Purchaser has no present intention of selling or otherwise
transferring the Note or the Shares, or any interest therein. The Purchaser also understands that
there is no assurance that any exemption from registration under the Securities Act will be
available and that, even if available, such exemption may not allow the Purchaser to transfer all
or any portion of the Note or the Shares under the circumstances, in the amounts or at the times
the Purchaser might propose.

     (b) Acquisition for Own Account. Except as contemplated by the Registration Rights Agreement,
the Purchaser is acquiring the Note and the Shares for the Purchaser’s own account for investment
only, and not with a view towards their public distribution.

     (c) Purchaser Can Protect Its Interest. By reason of its, or of its management’s business or
financial experience, the Purchaser has the capacity to protect its own interests in connection
with the transactions contemplated in this Agreement, the Note and the Registration Rights
Agreement. Further, the Purchaser is aware of no publication of any advertisement or general
solicitation in connection with the transactions contemplated in the Agreement.

     (d) Accredited Investor. The Purchaser is an accredited investor within the meaning of
Regulation D of the Securities Act.

     (e) Residence. The Purchaser is organized under the laws of the State of Texas and its
principal office is located in the State of Texas.

     (f) Rule 144. The Purchaser acknowledges and agrees that the Note and, if issued, the Shares
must be held indefinitely unless they are subsequently registered under the Securities Act or an
exemption from such registration is available. The Purchaser has been advised or is aware of the
provisions of Rule 144 promulgated under the Securities Act, which permits limited resale of shares
purchased in a private placement subject to the satisfaction of specified conditions.

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     (g) Access To Information. The Purchaser has had an opportunity to discuss the Company’s
business, management and financial affairs with the Company’s management and to review the
Company’s facilities. The Purchaser acknowledges that the Company has given the Purchaser access
to the corporate records and accounts of the Company, has made its officers and representatives
available for interview by the Purchaser and has furnished the Purchaser with all documents and
other information requested by the Purchaser to make an informed decision with respect to the
purchase of the Note.

       4.2 Transfer Restrictions. The Purchaser acknowledges and agrees that the Note and, if
issued, the Shares are subject to restrictions on transfer and will bear restrictive legends.

       4.3 Organization; Authorization; Binding Obligations. The Purchaser is a limited
partnership duly organized, validly existing and in good standing under the laws of the State of
Delaware. The Purchaser has all requisite limited partnership power and authority to execute and
deliver this Agreement and the Registration Rights Agreement and to carry out its obligations
under the provisions of such documents. This Agreement and the Registration Rights Agreement,
when executed and delivered, will be valid and binding obligations of the Purchaser enforceable
against the Purchaser in accordance with their terms, except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting
enforcement of creditors’ rights, (ii) according to general principles of equity that restrict the
availability of equitable remedies and (iii) to the extent that the enforceability of the
indemnification provisions of the Registration Rights Agreement may be limited by applicable laws.

SECTION 5. CONDITIONS FOR CLOSING

       5.1 Conditions for the Company to Satisfy. The obligation of the Purchaser to purchase the
Note as contemplated by this Agreement is subject to satisfaction of the following contingencies
at or prior to Closing:

     (a) The Company shall have obtained all consents and approvals from third parties,
governmental authorities and self-regulatory organizations required in connection herewith.

     (b) The Company shall have executed and delivered to the Purchaser at Closing the Transaction
Documents.

     (c) The Company’s board of directors shall have approved the Charter Exemption Resolution.

SECTION 6. COVENANTS

       6.1 Use of Proceeds. The Company will use the proceeds from the sale of the Note in
connection with the acquisition of Skytel business and other general corporate purposes.

       6.2 Listing. The Company shall promptly secure the listing of all of the Registrable
Securities (as defined in the Registration Rights Agreement) upon each national securities
exchange and automated quotation system, if any, upon which the Common Stock is then listed
(subject to official notice of issuance) and shall maintain, so long as any other shares of Common
Stock shall be so listed, such listing of all Registrable Securities from time to time

-10-

 

issuable under the terms of the Transaction Documents. The Company shall maintain the Common
Stock’s authorization for listing on the Amex; provided, however, that the Company makes no
covenant regarding applicable listing standards based on the trading price of the Common Stock.
Neither the Company nor any of its Subsidiaries shall take any action that would be reasonably
expected to result in the delisting or suspension of the Common Stock on the Amex.

       6.3 No Integrated Offering. None of the Company, its Subsidiaries, their affiliates or any
person acting on their behalf will take any action or steps referred to in Section 3.28 that would
require registration of any of the Note or the Shares under the Securities Act or cause the
offering of the Note or the Shares to be integrated with other offerings.

       6.4 Reservation of Shares. The Company shall take all action, including, without limitation,
using reasonable best efforts to obtain Shareholder Approval, necessary to have authorized, and
reserved for the purpose of issuance, the number of Shares issuable pursuant to the terms of the
Note.

       6.5 Shareholder Approval. The Company shall provide each shareholder entitled to vote at the
annual meeting of shareholders of the Company (the “Shareholder Meeting”), which shall be promptly
called and held not later than May 31, 2007 (the “Shareholder Meeting Deadline”), a proxy
statement, substantially in the form which will have been reviewed by the Purchaser and its
counsel, soliciting each such shareholder’s affirmative vote at the Shareholder Meeting for
approval of a resolution providing for the Company’s issuance of all of the Shares as described in
the Transaction Documents (including all Shares issuable under the Note) in accordance with
applicable law and the rules and regulations of the Amex (such affirmative approval of such matter
or matters being referred to herein as the “Shareholder Approval”), and the Company shall use its
reasonable best efforts to solicit its shareholders’ approval of such resolution and use its
reasonable best efforts to cause the Board of Directors of the Company (including a special
committee of independent directors) to recommend to the shareholders that they approve such
resolution. The Company shall be obligated to seek to obtain the Shareholder Approval by the
Shareholder Meeting Deadline. In the event that the shareholders fail to approve the matter or
matters referred to in the first sentence of this Section 6.5 at the 2007 annual meeting (or any
subsequent meeting), the Company shall seek approval for the matters set forth at each subsequent
shareholder meeting until such matters are approved.

       6.6 Board Resolution. Prior to the closing of the transactions contemplated hereunder, the
Company’s Board of Directors shall pass a resolution (the “Charter Exemption Resolution”), in a
manner that complies with Article Seven, Section 2(a) of the Company’s Restated Articles of
Incorporation and otherwise satisfactory to Purchaser, exempting all transactions (whether or not
related to the transactions contemplated hereunder), including but not limited to equity sales and
acquisition transactions, involving Purchaser or any affiliate thereof occurring subsequent to the
date hereof from the special shareholder voting requirements of Article Seven of the Company’s
Restated Articles of Incorporation.

       6.7 Certain Governance Provisions. So long as Purchaser beneficially owns 5% (which shall be
deemed to include, for the avoidance of doubt, all shares of Common Stock

-11-

 

issuable upon the conversion of the Note) of the shares of Common Stock outstanding,
Purchaser shall have the following governance and other rights:

     (a) Purchaser shall have the right, in its sole discretion, to designate two (2) individuals
to the Company’s Board of Directors (each, a “Purchaser Designee”); it being further agreed that
(1) Purchaser Designees shall be removable by, and only by, Purchaser at any time in Purchaser’s
discretion (and neither the Board of Directors nor any other shareholder or shareholders shall have
the right to remove any Purchaser Designee) and (2) Purchaser shall have the right in its sole
discretion to designate any replacement for any Purchaser Designee, including to designate any
director to fill any vacancy created by the removal, death, retirement or disqualification (or
other cause) of any Purchaser Designee. The Company shall take any and all action necessary so
that promptly following the closing hereunder, the Company’s Board of Directors shall consist of
six directors, of which two (2) shall be designees of Purchaser.

     (b) All standing committees of the Board of Directors of the Company shall include at least
one designee of Purchaser, as determined by Purchaser; provided that the foregoing right shall not
apply in respect of any committee of the Board of Directors on which all Purchaser Designees shall
be prohibited under the applicable SEC or exchange rules.

     (c) Any increase in the size of the Company’s Board of Directors in excess of six shall
require the consent of Purchaser.

     (d) Purchaser shall have pre-emptive rights to acquire Common Stock (or other securities) on
the same terms offered to any other purchaser or potential purchaser to maintain the percentage
level of Purchaser’s beneficial ownership of Common Stock (giving effect to the transactions
contemplated hereunder, including any conversion of the Note) in the event of any issuance or
proposed issuance of equity or equity linked securities by the Company.

     (e) The Company’s bylaws shall provide that (i) Purchaser is exempted from the advance notice
requirements set forth in 2.01(h)(1) and 2.10 of the Company’s bylaws and (ii) Purchaser’s written
consent shall be required to amend the foregoing exemption. Prior to or promptly following the
closing of the transactions contemplated hereunder, the Company’s Board of Directors shall approve
amendments to the Company’s bylaws to give effect to the foregoing.

     (f) Purchaser and its affiliates (including any further acquisitions of Common Stock thereby)
shall be exempted from the provisions of any shareholder rights agreement or plan or similar
defensive mechanism adopted by the Company.

The Company, including its Board of Directors, agrees to take all such actions as shall be required
to give full effect to the foregoing rights, including (1) taking all actions to ensure that the
Company’s governing documents are not at any time inconsistent with the foregoing provisions and
(2) if necessary, soliciting proxies from the shareholders of the Company eligible to vote for the
election of Purchaser Designees.

       6.8 Further Assurances. Except to the extent permitted by the Senior Credit Agreement (as
defined in the Note), each party shall do and perform, or cause to be done and performed, all
such further acts and things, and shall execute and deliver all such other agreements,
certificates, instruments and documents, as the other party may reasonably request

-12-

 

in order to carry out the intent and accomplish the purposes of this Agreement and the
consummation of the transactions contemplated hereby, including, without limitation, to enable the
full conversion of the Note.

SECTION 7. MISCELLANEOUS

       7.1 Governing Law. This Agreement shall be governed by the laws of the State of Texas,
without regard to conflicts of law principles. EACH OF THE PARTIES TO THIS AGREEMENT CONSENTS TO
SUBMIT TO THE PERSONAL JURISDICTION OF ANY STATE OR FEDERAL COURT SITTING IN THE STATE OF TEXAS,
IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, AGREES THAT ALL CLAIMS
IN RESPECT OF THE ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT, AND AGREES
NOT TO BRING ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT IN ANY OTHER
COURT. EACH OF THE PARTIES TO THIS AGREEMENT AGREES NOT TO ASSERT IN ANY ACTION OR PROCEEDING
ARISING OUT OF RELATING TO THIS AGREEMENT THAT THE VENUE IS IMPROPER, AND WAIVES ANY DEFENSE OF
INCONVENIENT FORUM TO THE MAINTENANCE OF ANY ACTION OR PROCEEDING SO BROUGHT AND WAIVES ANY BOND,
SURETY OR OTHER SECURITY THAT MIGHT BE REQUIRED OF ANY OTHER PARTY WITH RESPECT THERETO.

       7.2 Survival. The representations, warranties, covenants and agreements made herein shall
survive any investigation made by the parties and the closing of the transactions contemplated
hereby until the earlier to occur of (a) the Maturity Date (as defined in the Note) of the Note
and (b) the payment (or conversion) in full of the principal amount of the Note and any accrued
but unpaid interest thereon; provided that, notwithstanding anything to the contrary, the
provisions set forth in Section 6.7 hereof shall survive in accordance with the express terms of
Section 6.7. All statements as to factual matters contained in any certificate or other
instrument delivered by or on behalf of the Company pursuant hereto in connection with the
transactions contemplated hereby shall be deemed to be representations and warranties by the
Company hereunder solely as of the date of such certificate or instrument.

       7.3 Successors and Assigns. Except as otherwise expressly provided herein, the provisions
hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs,
executors and administrators of the parties hereto and shall inure to the benefit of and be
enforceable by each person who shall be a holder of the Note or the Shares from time to time. The
Company shall not assign this Agreement or any rights or obligations hereunder without the prior
written consent of the Purchaser. The Purchaser may assign some or all of its rights hereunder
(other than the rights set forth in Section 6.7 hereof, except Section 6.7(f) which exemption
shall continue to apply to any transferee of the Note in respect of Shares issuable thereunder)
without the consent of the Company in connection with a transfer by the Purchaser of any of the
Notes or the Shares.

       7.4 Entire Agreement. The Transaction Documents and the other documents delivered pursuant
hereto constitute the full and entire understanding and agreement between the parties with regard
to the subjects hereof and thereof and no party shall be liable or bound
to the other in any manner by any representations, warranties, covenants and agreements,
except as specifically set forth herein and therein.

-13-

 

       7.5 Severability. The invalidity, illegality or unenforceability of one or more of the
provisions of this Agreement in any jurisdiction shall not affect the validity, legality or
enforceability of the remainder of this Agreement in such jurisdiction or the validity, legality
or enforceability of this Agreement, including any such provision, in any other jurisdiction, it
being intended that all rights and obligations of the parties hereunder shall be enforceable to
the fullest extent permitted by law.

       7.6 Amendment and Waiver. This Agreement may be amended or modified, and any provision
hereunder may be waived, only upon the written consent of the Company and the Purchaser.

       7.7 Notices. All notices, requests, consents and other communications hereunder shall be
made in writing and shall be deemed given (i) when made if made by hand delivery, (ii) one
business day after being deposited with an overnight courier if made by courier guaranteeing
overnight delivery, (iii) on the date indicated on the notice of receipt if made by first-class
mail, return receipt requested or (iv) on the date of confirmation of receipt of transmission by
facsimile, addressed as follows:

	 	 	 	 	 
	 

	 	(a)
	 	if to the Company, at
	 
	 	 	 	 
	 

	 	 	 	Bell Industries, Inc.
	 

	 	 	 	8888 Keystone Crossing
	 

	 	 	 	Suite 1700
	 

	 	 	 	Indianapolis, Indiana 46240
	 

	 	 	 	Facsimile: (317) 715-6816
	 

	 	 	 	Attention: Chief Financial Officer
	 
	 	 	 	 
	 

	 	 	 	with a copy to:
	 
	 	 	 	 
	 

	 	 	 	Manatt, Phelps & Phillips, LLP
	 

	 	 	 	11355 West Olympic Boulevard
	 

	 	 	 	Los Angeles, CA 90064
	 

	 	 	 	Facsimile: (310) 914-5712
	 

	 	 	 	Attention: Mark Kelson, Esq.
	 
	 	 	 	 
	 

	 	(b)
	 	if to the Purchaser, in care of:
	 
	 	 	 	 
	 

	 	 	 	Newcastle Partners, L.P.
	 

	 	 	 	200 Crescent Court, Suite 1400
	 

	 	 	 	Dallas, TX 75201
	 

	 	 	 	Facsimile: (214) 661-7475
	 

	 	 	 	Attention: Evan D. Stone, Esq.

-14-

 

       7.8 Indemnification by the Company. The Company agrees to indemnify and hold the Purchaser
harmless against any loss, liability, damage or expense (including reasonable legal fees and
costs) that the Purchaser may suffer, sustain or become subject to as a result of or in connection
with the breach by the Company of any representation, warranty, covenant or agreement of the
Company contained in any of the Transaction Documents; provided, however, that no indemnification
shall be required hereunder for the negligence or willful misconduct of the Purchaser or breach by
the Purchaser of any of the representations and warranties set forth in Section 4 hereof. In case
any such action is brought against the Purchaser, the Company will be entitled to participate in
and assume the defense thereof with counsel reasonably satisfactory to the Purchaser, and after
notice from the Company to the Purchaser of its election to assume the defense thereof, the
Company shall not be responsible for any legal or other expenses subsequently incurred by the
Purchaser in connection with the defense thereof; provided, that if the Purchaser shall have
reasonably concluded that there may be one or more legal defenses available to the Purchaser which
conflict in any material respect with those available to the Company, the Company shall not have
the right to assume the defense of such action on behalf of the Purchaser and the Company shall
reimburse the Purchaser for that portion of the fees and expenses of one counsel retained by the
Purchaser.

       7.9 Expenses. The Company agrees to pay or reimburse the Purchaser for its reasonable legal
fees and expenses incurred by Purchaser in connection with the negotiation and execution of the
Transaction Documents and any and all expenses that Purchaser may incur after the date hereof in
connection with the granting of any waiver with respect to, the modification of any of the terms
or provisions of, or the enforcement of any of the Transaction Documents.

       7.10 Titles and Subtitles. The titles of the sections and subsections of the Agreement are
for convenience of reference only and are not to be considered in construing this Agreement.

       7.11 Counterparts. This Agreement may be delivered via facsimile or other means of
electronic communication, and may be executed in counterparts, each of which shall be an original,
but all of which together shall constitute one instrument.

-15-

 

     IN WITNESS WHEREOF, the parties hereto have hereunto affixed their signatures.

	 	 	 	 	 	 	 	 	 	 	 
	Bell Industries, Inc.	 	 	 	Newcastle Partners, L.P.	 	 
	 
	 	 	 	 	 	 	By: Newcastle Capital Management, L.P.	 	 
	 	 	 	 	 	 	its General Partner	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	By

	 	/s/ John A. Fellows	 	 	 	By	 	/s/ Mark Schwarz	 	 
	 

	 	 

	 	 	 	 	 	 

	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	Its

	 	Chief Executive Officer	 	 	 	Its	 	Chief Executive Officer	 	 
	 

	 	 

	 	 	 	 	 	 

	 	 

-16-exv4w2

 

Exhibit 4.2

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

	 	 	 	 	 
	$10,000,000

	 	January 31, 2007
	 	 

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, individually and collectively, the lenders from time to time party to
the Senior Credit Agreement.

     “Lien” means any interest in an asset securing an obligation owed to, or a claim by,
any Person other than the owner of the asset, irrespective of whether (a) such interest is based on
the common law, statute, or contract, (b) such interest is recorded or perfected, and (c) such
interest is contingent upon the occurrence of some future event or events or the existence of some
future circumstance or circumstances. Without limiting the generality of the foregoing, the term
“Lien” includes the Lien or security interest arising from a mortgage, deed of trust, encumbrance,
notice of Lien, levy or assessment, pledge, hypothecation, assignment, deposit arrangement,
security agreement, conditional sale or trust receipt, or from a lease, consignment, or bailment
for security purposes and also includes reservations, exceptions, encroachments, easements,
rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and
encumbrances affecting real property.

     “Paid in Full” means the payment in full in cash of all Senior Debt and the
termination of all commitments of the holders of the Senior Debt to extend further credit to
Borrowers, or, in the case of Senior Debt consisting of contingent obligations in respect of
letters of credit, hedging obligations, bank product obligations, or other reimbursement
obligations, the setting apart of cash sufficient to discharge such portion of the Senior Debt in
an account for the exclusive benefit of the holders thereof, in which account such holders shall be
granted a first priority perfected security interest in a manner reasonably acceptable to such
holders.

     “Person” means natural persons, corporations, limited liability companies, limited
partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land
trusts, business trusts, or other organizations, irrespective of whether they are legal entities,
and governments and agencies and political subdivisions thereof.

     “Senior Credit Agreement” means that certain Credit Agreement, dated as of January 31,
2007, by and among Borrowers, the Lenders, and Agent, as amended, restated, supplemented, or
otherwise modified from time to time

     “Senior Debt” means all obligations (whether now outstanding or hereafter incurred,
contingent or non-contingent, liquidated or unliquidated, or primary or secondary) of Borrowers in
respect of (a) principal under the Senior Credit Agreement or any other Senior Loan Document (or
any refinancing agreement entered into with respect

 

 

thereto), (b) all interest and premium, if any, in respect of the Indebtedness referred to in
clause (a) above, (c) all fees (including attorneys fees) and expenses payable pursuant to
any Senior Loan Document (or a refinancing agreement entered into with respect thereto), (d) all
other Obligations (as defined in the Senior Credit Agreement) or other payment obligations
(including costs, expenses, letter of credit reimbursement obligations, hedging obligations, bank
product obligations, or otherwise) of Borrowers to Agent or Lenders under or arising pursuant to
any Senior Loan Document (or to third persons under provisions of a refinancing agreement entered
into with respect thereto), including contingent reimbursement obligations with respect to
outstanding letters of credit, all costs and expenses incurred by Agent or any Lender in connection
with its or their enforcement of any rights or remedies under the Senior Loan Documents, including,
by way of example, attorneys fees, court costs, appraisal and consulting fees, auctioneer fees,
rent, storage, insurance premiums, and like items, and irrespective of whether allowable as a claim
against Borrowers in any Insolvency Proceeding, (e) post-petition interest on the Indebtedness
referred to in clauses (a) through (d) above, at the rate provided for in the
instrument or agreements evidencing such Indebtedness, accruing subsequent to the commencement of
an Insolvency Proceeding (whether or not such interest is allowed as a claim in such Insolvency
Proceeding), and (f) any refinancings, renewals, or extensions of the Indebtedness referred to in
clauses (a) through (e) above.

     “Senior Loan Documents” means the Senior Credit Agreement and the other Loan Documents
(as defined in the Senior Credit Agreement), each as amended, restated supplemented, or otherwise
modified from time to time, including any agreement extending the maturity of, consolidating, or
otherwise restructuring (including adding subsidiaries of Borrowers thereunder) all or any portion
of the Indebtedness under such agreement or any successor or replacement agreement and whether by
the same or any other agent, lender, or group and whether or not increasing the amount of
Indebtedness that may be incurred thereunder.

(2) Subordination and Standby.

     (a) Agreement to Subordinate.

          (i) Maker covenants and agrees, and the holder of this Note by its acceptance hereof likewise
covenants and agrees, that this Note is subject to the provisions of this Section (8)(b)(2)(a)(i),
and each Person holding this Note, whether upon original issue or upon transfer, assignment or
exchange thereof, accepts and agrees to be bound by such provisions. The holder of this Note by
its acceptance hereof also acknowledges and agrees that the subordination provisions set forth in
this Section 8(b)(2)(a)(i) are, and are intended to be, an inducement and a consideration to each
holder of the Senior Debt to acquire and continue to hold, or to continue to hold, the Senior Debt
and such holder of the Senior Debt shall be deemed conclusively to have relied on such
subordination provisions in acquiring and continuing to hold, or continuing to hold, such Senior
Debt.

          (ii) The holder of this Note by its acceptance hereof agrees, for itself and each future
holder of this Note or the Junior Debt, that the Junior Debt is expressly

 

 

“subordinate and junior in right of payment” (as that phrase is hereinafter defined) to all
Senior Debt. “Subordinate and junior in right of payment” means that (A) no part of the Junior
Debt shall have any claim to the assets of any Borrower on a parity with or prior to the claim of
the Senior Debt, and (B) unless and until the Senior Debt has been Paid in Full, without the
express prior written consent of the holders of the Senior Debt, the holder of this Note will not
take, demand (including by means of any legal action) or receive from a Borrower, and no Borrower
will make, give or permit, directly or indirectly, by set-off, redemption, purchase or in any other
manner, any payment of the whole or any part of the Junior Debt.

          (iii) Unless and until the Senior Debt is Paid in Full and irrespective of whether a default
or event of default has occurred and is continuing with respect to the Senior Debt: (A) the holder
of this Note shall not accelerate the Junior Debt and shall not, directly or indirectly, commence,
prosecute, or participate in any lawsuit, action, or proceeding, whether private, judicial,
equitable, administrative, or otherwise (including the filing of any Insolvency Proceeding against
any Borrower or any assets of any Borrower) to enforce its rights or interests in respect of the
Junior Debt, and (B) the holder of this Note shall have no right either to (x) obtain a Lien on any
assets of any Borrower (other than, so long as the holder of this Note executes and delivers to the
Agent an intercreditor and subordination agreement in form and substance reasonably satisfactory to
Agent, those Liens granted by Borrower to the holder of this Note under the Security Agreement) or
(y) enforce any Liens in, foreclose, levy, or execute upon, or collect or attach any assets of any
Borrower, whether by judicial action or otherwise. In the event that the holder of this Note
obtains any Liens in violation of the provisions of this Note, any and all of such Liens shall in
each case be subordinate to the Liens on the collateral securing the Senior Debt.

     (b) Insolvency.

          (i) Continuing Subordination. The provisions of this Section 8(b)(2)(b)(i) are intended to be
enforceable notwithstanding any dissolution, winding-up, liquidation, or reorganization of any
Borrower, whether voluntary or involuntary, or the commencement of any Insolvency Proceeding by or
against a Borrower. Upon any such dissolution, winding-up, liquidation, reorganization, or
Insolvency Proceeding, (A) all amounts due or to become due upon the Senior Debt shall first be
Paid in Full before any payment is made on account of the Junior Debt, and (B) any payment or
distribution of any kind or character (whether in cash, property, securities, by set-off, or
otherwise) to which the holder of this Note would be entitled but for the provisions of this
Section 8(b)(2)(b)(i), shall be immediately delivered by the Person making such payment or
distribution (whether a Borrower, a trustee in bankruptcy, a receiver, or otherwise) or the holder
of this Note (if received by it) directly to Agent for application to the payment of the Senior
Debt.

          (ii) Reinstatement. If Agent or any Lender or any other holder of any Senior Debt is required
in any Insolvency Proceeding or otherwise to turn over or otherwise pay any amount (a “Recovery”)
to the estate or to any creditor or representative of a Borrower or any other Person, then the
Senior Debt shall be reinstated to the extent

 

 

of such Recovery. If the provisions of this Section 8(b)(2)(b)(ii) shall have been terminated
prior to such Recovery, such provisions shall be reinstated in full force and effect, and such
prior termination shall not diminish, release, discharge, impair, or otherwise affect the
obligations of the parties hereto from such date of reinstatement.

          (iii) Proof of Claim. The holder of this Note may file a proof of claim in an Insolvency
Proceeding; provided however that if the holder of this Note does not file a proper claim or proof
of debt or other document or amendment thereof in the form required in any Insolvency Proceeding
prior to 30 days before the expiration of time to file such claim or other document or amendment
thereof, then Agent shall have the right (but not the obligation) in such proceeding, and the
holder of this Note hereby irrevocably appoints Agent as such holder’s lawful attorney in fact to
demand, sue for, collect, receive and give receipt for the payments and distributions in respect of
the Subordinated Debt that are made in such proceeding and that are required to be paid or
delivered to Agent as provided in Section 8(b)(2)(b)(i), to file and prove all claims therefore, to
vote the claim of the holder of this Note (whether in respect of any plan of reorganization or
liquidation or otherwise), and to execute and deliver all documents in such proceeding, all in the
name of Agent or the holder of this Note, as Agent reasonably may determine to be necessary or
appropriate.

          (iv) Other Waivers. Until the Senior Debt has been Paid in Full, the holder of this Note
agrees that it shall not without Agent’s written consent, (A) propose any plan of reorganization or
liquidation or file any pleading or other document in support of any plan that would impair the
rights of Agent, the Lenders, or any other holders of the Senior Debt, (B) oppose any plan of
reorganization or liquidation proposed by, or approved in writing by, Agent, (C) vote its claim in
favor of any plan of reorganization or liquidation opposed by Agent, or (D) oppose any relief
requested or supported by Agent; provided, however that the holder of this Note may propose a plan
of reorganization so long as such plan requires that the Senior Debt be Paid in Full on the
effective date of such plan.

     (c) Turnover. In the event that the holder of this Note receives any payment or distribution
of assets of Borrower of any kind in contravention of any term of this Note (whether in cash,
property or securities, by setoff or otherwise) before the Senior Debt is Paid in Full, then such
payment or distribution shall be held by such holder in trust for the benefit of Agent, and such
holder shall immediately deliver such payment or distribution to Agent in precisely the form
received (except for the endorsement or assignment by such holder where necessary) for application
to the payment of the Senior Debt. In the event of the failure of the holder of this Note to make
any such endorsement or assignment to Agent, Agent and any of its officers or agents are hereby
irrevocably authorized to make such endorsement or assignment and the holder of this Note hereby
irrevocably appoints Agent as such holder’s lawful attorney in fact for the purpose of enabling
Agent to make such endorsement or assignment.

     (d) Debt Amendments and Changes.

 

 

          (i) Any holder of the Senior Debt may, at any time and from time to time, without the consent
of or notice to the holder of this Note, without incurring responsibility to the holder of this
Note, and without impairing or releasing the subordination provided in this Note or the obligations
of the holder of this Note to the holders of the Senior Debt, discontinue the extension of credit
to any Borrower and take any other action in respect of the Senior Debt or the assets of any
Borrower which such holders is entitled to take with respect to the Senior Debt or such assets.
Any holder of the Senior Debt shall have the right, without notice to or consent from the holder of
this Note, to amend, restate, supplement, or modify the Senior Debt or any Senior Loan Document, in
any manner whatsoever, including the right to do any of the following: (A) change the manner,
place, or terms of payment (including any change in the rate of interest) or extend the time of
payment of, or renew, amend, modify, alter, or grant any waiver or release with respect to, or
consent to any departure from, the Senior Debt or any instrument evidencing the same or any
agreement evidencing, governing, creating, guaranteeing or securing the Senior Debt; (B) sell,
exchange, release, or otherwise deal with any property pledged, mortgaged or otherwise securing the
Senior Debt; (C) release any Person liable under or in respect of the Senior Debt; (D) fail or
delay in the perfection of Liens securing the Senior Debt; (E) exercise or refrain from exercising
any rights against Company and any other Person; or (F) amend, or grant any waiver or release with
respect to, or consent to any departure from, any guarantee for all or any of the Senior Debt, and
the holder of this Note consents and agrees to any such action, amendment, supplement, or
modification. The holder of this Note waives notice of any such action, amendment, supplement, or
modification, and agrees that no such action, amendment, supplement, or modification shall affect,
release, or impair the provisions of this Section 8(b).

          (ii) The holder of this Note understands and agrees that none of the Junior Documents or any
other document, instrument or agreement evidencing all or any part of the Subordinated Debt (other
than immaterial modifications) may be modified or amended without the prior written consent of
Agent.

     (e) No Impairment of Subordination. No right of any present or future holder of the Senior
Debt to enforce subordination as herein provided shall at any time in any way be prejudiced or
impaired by any act or failure to act on the part of a Borrower or by any act or failure to act, in
good faith, by any such holder, or by any noncompliance by a Borrower with the terms, provisions
and covenants of this Note, regardless of any knowledge thereof which any such holder may have or
otherwise be charged with.

     (f) No impairment of Borrower’s Obligation. Nothing contained in this Section 8(b) or
elsewhere in this Note is intended to or shall impair, as among Borrowers, their creditors other
than the holders of the Senior Debt, and the holder of this Note, the obligation of Borrowers,
which is absolute and unconditional, to pay to the holder of this Note the principal of, and
premium, if any, and interest on this Note as and when the same shall become due and payable in
accordance with their terms, or is intended to or shall affect the relative rights of the holder of
this Note and creditors of Borrowers other than the holders of the Senior Debt. No provision of
this Section 8(b)(2)(f) shall prevent the occurrence of any default or event of default under this
Note; provided that if

 

 

payment of this Note is accelerated because of an event of default, Borrowers shall promptly
notify Agent of the acceleration.

(3) Costs and Attorneys Fees. In the event Agent or any Lender or any other holder of any Senior
Debt commences or becomes a party to any proceeding or action to enforce the provisions of Section
8(b), the court or body before which the same shall be tried shall award to the prevailing party
all costs and expenses thereof, including, but not limited to, reasonable attorneys’ fees, the
usual and customary and lawfully recoverable court costs, and all other expenses in connection
therewith.

(4) Third Party Beneficiary. Each of Agent, each Lender, and each other holder of any Senior Debt
is a third party beneficiary of this Section 8(b) and may enforce the provisions of Section 8(b)
against any holder of the Junior Debt.

(5) Modification of this Section. None of the provisions of this Section 8(b) may be waived,
amended, supplemented or otherwise modified without the prior written consent of Agent and the
requisite holders of Senior Debt as required by the Senior Loan Documents, which may be withheld by
Agent or such holders in their sole reasonable discretion.

(6) Notwithstanding anything to the contrary, the provisions set forth in this Section 8(b) shall
be superceded by the provisions of any intercreditor and subordination agreement or similar
agreement entered into between Payee and Agent in connection with the granting of any security
interest to Payee pursuant to Section 8(a) hereof.

9. Affirmative Covenants. Except to the extent permitted by the Senior Credit Agreement so
long as such facility remains in effect, from the date hereof and until payment in full of this
Note, the Maker will, and will cause each of its Subsidiaries to:

(a) Maintenance of Existence. Do all things necessary to preserve and keep in full force and effect
its existence as a corporation.

(b) Compliance with Applicable Laws. Comply in all material respects with the requirements of all
applicable statutes, laws, rules, regulations and orders of any governmental authority, except
where contested in good faith and by proper proceedings.

(c) Licenses. Obtain and maintain all material licenses, permits, franchises or other governmental
authorizations necessary to the ownership of its properties or to the conduct of its business.

(d) Financial Reporting. Comply with the financial reporting requirements set forth in the Senior
Credit Agreement.

10. Negative Covenants.

 

 

(a) Indebtedness. Except to the extent permitted by the Senior Credit Agreement so long as such
facility remains in effect, neither the Company nor any Subsidiary will incur indebtedness for
borrowed money except the following:

(i) Senior Debt under Senior Credit Agreement in an aggregate principal amount not to exceed $40
million;

(ii) Indebtedness for borrowed money that is not secured by a Lien on any assets, property or
capital stock owned by the Company or any of its Subsidiaries in an amount not to exceed
$1,000,000; and

(iii) any other Indebtedness permitted to be incurred under Section 6.1 of the Senior Credit
Agreement so long as such facility remains in effect.

(b) Liens. Neither the Company nor any of its Subsidiaries shall create, incur, assume or permit to
exist any Lien on or with respect to any of its assets or property of any character, whether now
owned or hereafter acquired, except for Permitted Liens (as defined in the Senior Credit Agreement
so long as such facility remains in effect; provided that “Permitted Liens” shall be defined in
accordance with Section 8(b) otherwise).

(c) Material Asset Sales. Neither the Company nor any of its Subsidiaries shall sell, lease,
transfer, license or otherwise dispose of any of its assets or property including securities
(collectively, a “Transfer”), whether now owned or hereafter acquired, except (i) transfers in the
ordinary course of its business consisting of the sale of inventory and sales of worn-out or
obsolete equipment and (ii) transfers not in excess of one million ($1,000,0000) for fair value and
other than to any affiliate of the Company.

(d) Mergers, Etc. Neither the Company nor any of its Subsidiaries shall consolidate with or merge
into any other Person or permit any other Person to merge into it.

11. Default. Except to the extent that any of the following are not “Events of Default” under the
Senior Credit Agreement so long as such facility remains in effect, the occurrence of any one or
more of the following events shall constitute an event of default (each, an ‘Event of Default”),
upon which Payee may declare the entire principal amount of this Note, together with all accrued
but unpaid interest, to be immediately due and payable in cash:

(a) The Maker shall fail to make any payment of principal (including, but not limited to, upon any
conversion pursuant to Section 5 hereof or the maturity of the Note) and/or accrued but unpaid
interest (at the applicable rate) when due and payable, and such failure, in the case of any
interest payment, shall continue for a period of at least five business days.

(b) The Maker shall be in material default of any term or provision of this Note, the Purchase
Agreement, the Registration Rights Agreement or the Security Agreement, and
such failure shall continue through 15 days after Payee gives written notice of such default to
Maker.

 

 

(c) Any representation or warranty of the Maker contained in the Purchase Agreement or the
Registration Rights Agreement shall have been false in any material respect on the Closing Date.

(d) Maker or any of its Subsidiaries shall (i)(A) fail to make any payment when due under
the terms of any bond, debenture, note or other evidence of indebtedness, including the Senior
Debt, to be paid by such Person (excluding this Note but including any other evidence of
indebtedness of Maker or any of its subsidiaries to the Payee) and such failure shall continue
beyond any period of grace provided with respect thereto, or (B) default in the observance or
performance of any other agreement, term or condition contained in any such bond, debenture, note
or other evidence of indebtedness, and (ii) in each case, the effect of such failure or default is
to cause, or permit the holder or holders thereof to cause, indebtedness in an aggregate amount of
one million dollars ($1,000,000) or more to become due prior to its stated date of maturity, unless
such acceleration shall have been rescinded and such failure to pay cured within thirty (30) days
from the date of such acceleration.

(e) A final judgment or order for the payment of money in excess of one million dollars
($1,000,000) (exclusive of amounts covered by insurance issued by an insurer not an affiliate of
Maker) shall be rendered against the Maker or any of its Subsidiaries and the same shall remain
undischarged for a period of thirty (30) days during which execution shall not be effectively
stayed, or any judgment, writ, assessment, warrant of attachment, or execution or similar process
shall be issued or levied against a substantial part of the property of the Maker or any of its
subsidiaries and such judgment, writ, or similar process shall not be released, stayed, vacated or
otherwise dismissed within thirty (30) days after issue or levy.

(f) any Liens of Payee in any of the assets of Maker or its Subsidiaries shall cease to be or shall
not be valid and perfected Liens or the Maker or any Subsidiary shall assert that such Liens are
not valid and perfected Liens.

(g) The Maker or any of its Subsidiaries, pursuant to or within the meaning of Title 11, U.S. Code,
or any similar federal, foreign or state law for the relief of debtors (collectively, “Bankruptcy
Law”), (i) commences a voluntary case, (ii) consents to the entry of an order for relief against it
in an involuntary case, (iii) consents to the appointment of a receiver, trustee, assignee,
liquidator or similar official (a “Custodian”), (iv) makes a general assignment for the benefit of
its creditors or (v) admits in writing that it is generally unable to pay its debts as they become
due.

(h) A court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i)
is for relief against the Maker or any of its Subsidiaries in an involuntary case, (ii) appoints a
Custodian of the Maker or any of its Subsidiaries or (iii) orders the liquidation of the Maker or
any of its Subsidiaries.

 

 

Without limiting the above, the Maker acknowledges that payments (including but not limited to upon
conversion of this Note) on the various scheduled due dates are of essence and that any failure to
timely make any applicable payment of the principal or interest (within any permitted grace period)
permits Payee to declare this Note immediately due in cash in its entirety without any prior notice
of any kind to Maker, except for the specific notices provided above. Upon the occurrence and
during the continuance of an event of default, the interest rate under this Note shall be increased
to the lesser of (a) sixteen percent (16%) or (b) the highest lawful interest rate permitted by
applicable law. In the event that such event of default is subsequently cured, the adjustment
referred to in the preceding sentence shall cease to be effective as of the date of such cure;
provided that the interest as calculated and unpaid at such increased rate during the continuance
of such event of default shall continue to apply to the extent relating to the days after the
occurrence of such event of default through and including the date of cure of such event of
default.

12. Applicable Law; Forum. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS
PRINCIPLES THEREOF. EACH OF PAYEE AND MAKER CONSENTS TO SUBMIT TO THE PERSONAL JURISDICTION OF
ANY STATE OR FEDERAL COURT SITTING IN THE STATE OF TEXAS, IN ANY ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO THIS NOTE, AGREES THAT ALL CLAIMS IN RESPECT OF THE ACTION OR PROCEEDING MAY BE
HEARD AND DETERMINED IN ANY SUCH COURT, AND AGREES NOT TO BRING ANY ACTION OR PROCEEDING ARISING
OUT OF OR RELATING TO THIS NOTE IN ANY OTHER COURT. EACH OF THE PARTIES TO THIS AGREEMENT AGREES
NOT TO ASSERT IN ANY ACTION OR PROCEEDING ARISING OUT OF RELATING TO THIS NOTE THAT THE VENUE IS
IMPROPER, AND WAIVES ANY DEFENSE OF INCONVENIENT FORUM TO THE MAINTENANCE OF ANY ACTION OR
PROCEEDING SO BROUGHT AND WAIVES ANY BOND, SURETY OR OTHER SECURITY THAT MIGHT BE REQUIRED OF ANY
OTHER PARTY WITH RESPECT THERETO; PROVIDED HOWEVER THAT THE VALIDITY, CONSTRUCTION AND
ENFORCEABILITY OF SECTION 8(B) OF THIS NOTE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF
CALIFORNIA, AND EACH OF THE HOLDER OF THIS NOTE AND THE HOLDERS OF THE SENIOR DEBT SUBMIT TO THE
PERSONAL JURISDICTION OF ANY STATE OR FEDEAL COURT SITTING IN THE STATE OF CALIFORNIA IN RESPECT OF
CLAIMS ARISING UNDER SECTION 8(B) OF THIS NOTE.

13. Waivers. The Maker hereby waives presentment for payment, notice of dishonor, protest and
notice of payment and all other demands and notices of any kind in connection with the enforcement
of this Note. Any provision of this Note may be amended, waived or modified upon the written
consent of Maker and Payee. No failure or delay on the part of the Payee in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such

 

 

power, right or privilege preclude other or further exercise thereof or of any other power, right
or privilege.

14. No Setoffs. The Maker shall pay (and, if applicable, this Note shall automatically accrete in
respect of) principal and interest under the Note without any deduction for any setoff or
counterclaim.

15. Costs of Collection. If this Note is not paid when due, the Maker shall pay Payee’s reasonable
costs of collection, including reasonable attorneys’ fees.

16. Notices. Whenever notice is required to be given under this Note, such notice shall be given in
accordance with Section 7.7 of the Purchase Agreement.

17. Transferability. This Note shall be transferable by Payee. Neither this Note, nor any
obligations hereunder, shall be assignable by Maker without Payee’s express written consent.

18. Inspection Rights. The Holder and its representatives shall have the right, at any time during
normal business hours, upon reasonable prior notice, to visit and inspect the properties of Maker
and its corporate, financial and operating records, and make abstracts therefrom.

19. Severability. The invalidity, illegality or unenforceability of one or more of the provisions
of this Note in any jurisdiction shall not affect the validity, legality or enforceability of the
remainder of this Note in such jurisdiction or the validity, legality or enforceability of this
Note, including any such provision, in any other jurisdiction, it being intended that all rights
and obligations of the parties hereunder shall be enforceable to the fullest extent permitted by
law. Payee does not agree or intend to contract for, charge, collect, take, reserve or receive any
amount in the nature of interest or otherwise which would in any way or event (including demand,
prepayment or acceleration) cause Payee to collect more on its loan that the maximum amount Payee
would be permitted to charge or collect by federal law or the law of the State of Texas (as
applicable). Any such excess interest shall instead of anything to the contrary, be applied first
to reduce the outstanding principal balance of this Note, and when the principal balance has been
paid in full, be refunded to Maker.

{SIGNATURE PAGE FOLLOWS}

 

 

IN WITNESS WHEREOF, the undersigned has hereunto affixed its signature.

BELL INDUSTRIES, INC.

	 	 	 	 	 
	By
	 	/s/ John A. Fellows	 	 
	 

	 	 

	 	 
	 
	 	 	 	 
	Its
	 	Chief Executive Officer

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