-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J+RayISGN2n20Zz2sxoEDp+XB/bnLU/2+F10NvmYZAcxxgksuG8tlU009s61a0Df 4+WzrQoa13DNgzR/Wa+Tog== 0000950148-96-002838.txt : 19961205 0000950148-96-002838.hdr.sgml : 19961205 ACCESSION NUMBER: 0000950148-96-002838 CONFORMED SUBMISSION TYPE: SC 14D1 PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 19961204 SROS: NASD SROS: NYSE SROS: PSE GROUP MEMBERS: BELL INDUSTRIES INC GROUP MEMBERS: BELL INDUSTRIES, INC. GROUP MEMBERS: ME ACQUISITION, INC. SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: MILGRAY ELECTRONICS INC CENTRAL INDEX KEY: 0000066270 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 135600636 STATE OF INCORPORATION: NY FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: SC 14D1 SEC ACT: 1934 Act SEC FILE NUMBER: 005-33857 FILM NUMBER: 96675712 BUSINESS ADDRESS: STREET 1: 77 SCHMITT BLVD CITY: FARMINGDALE STATE: NY ZIP: 11735 BUSINESS PHONE: 5164209800 MAIL ADDRESS: STREET 2: 77 SCHMITT BLVD CITY: FARMINGDALE STATE: NY ZIP: 11735 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: BELL INDUSTRIES INC CENTRAL INDEX KEY: 0000945489 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 954530889 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D1 BUSINESS ADDRESS: STREET 1: 11812 SAN VICENTE BLVD CITY: LOS ANGELES STATE: CA ZIP: 90049-5069 BUSINESS PHONE: 3108262355 MAIL ADDRESS: STREET 1: 11812 SAN VICENTE BLVD CITY: LOS ANGELES STATE: CA ZIP: 90049-5069 FORMER COMPANY: FORMER CONFORMED NAME: CALIFORNIA BELL INDUSTRIES INC DATE OF NAME CHANGE: 19950519 SC 14D1 1 SCHEDULE 14D-1 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ SCHEDULE 14D-1 TENDER OFFER STATEMENT PURSUANT TO SECTION 14(D)(1) OF THE SECURITIES EXCHANGE ACT OF 1934 AND SCHEDULE 13D ------------------------ MILGRAY ELECTRONICS, INC. (NAME OF SUBJECT COMPANY) ------------------------ BELL INDUSTRIES, INC. ME ACQUISITION, INC. (BIDDERS) COMMON STOCK, PAR VALUE $0.25 PER SHARE (TITLE OF CLASS OF SECURITIES) 599751 10 4 (CUSIP NUMBER OF CLASS OF SECURITIES) ------------------------ TRACY A. EDWARDS 11812 SAN VICENTE BOULEVARD LOS ANGELES, CALIFORNIA 90049-5022 (310) 826-2355 (NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF BIDDERS) ------------------------ WITH A COPY TO: ANDREW W. GROSS, ESQ. IRELL & MANELLA LLP 1800 AVENUE OF THE STARS, SUITE 600 LOS ANGELES, CALIFORNIA 90067-4276 TELEPHONE: (310) 277-1010 CALCULATION OF FILING FEE Transaction valuation* Amount of Filing fee** - ---------------------------------------- ---------------------------------------- $100,039,810 $20,008
* For purposes of calculating the filing fee only. This calculation assumes the purchase of 6,773,176 shares of Common Stock, $.25 par value per share, of Milgray Electronics, Inc. at $14.77 net per share in cash. ** The amount of the filing fee, calculated in accordance with Rule 0-11(d) of the Securities Exchange Act of 1934, as amended, equals 1/50th of one percent of the aggregate value of cash offered by ME Acquisition, Inc. for such number of shares. [ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. Amount Previously Paid: Not Form or Registration No.: Not applicable. applicable. Filing Party: Not applicable. Date Filed: Not applicable.
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 - ----------------------------------------------- ----------------------- CUSIP NO. 599751 10 4 14D-1 Page 2 of 539 Pages - ----------------------------------------------- ----------------------- - --------------------------------------------------------------------------------------------- 1. NAMES OF REPORTING PERSON S.S. or I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Bell Industries, Inc. - --------------------------------------------------------------------------------------------- 2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS) (a) [X] (b) [ ] - --------------------------------------------------------------------------------------------- 3. SEC USE ONLY - --------------------------------------------------------------------------------------------- 4. SOURCES OF FUNDS (SEE INSTRUCTIONS) BK - --------------------------------------------------------------------------------------------- 5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(e) or 2(f) [ ] - --------------------------------------------------------------------------------------------- 6. CITIZENSHIP OR PLACE OF ORGANIZATION California - --------------------------------------------------------------------------------------------- 7. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 3,742,064 (See Section 11 of the Offer to Purchase dated December 4, 1996 filed as Exhibit (a)(1) hereto) - --------------------------------------------------------------------------------------------- 8. [ ] CHECK BOX IF THE AGGREGATE AMOUNT IN ROW 7 EXCLUDES CERTAIN SHARES - --------------------------------------------------------------------------------------------- 9. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 7 55.2% - --------------------------------------------------------------------------------------------- 10. TYPE OF REPORTING PERSON (SEE INSTRUCTIONS) HC and CO - ---------------------------------------------------------------------------------------------
2 3 - ----------------------------------------------- ----------------------- CUSIP NO. 599751 10 4 14D-1 Page 3 of 539 Pages - ----------------------------------------------- ----------------------- - --------------------------------------------------------------------------------------------- 11. NAMES OF REPORTING PERSON S.S. or I.R.S. IDENTIFICATION NO. OF ABOVE PERSON ME Acquisition, Inc. - --------------------------------------------------------------------------------------------- 12. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS) (a) [X] (b) [ ] - --------------------------------------------------------------------------------------------- 13. SEC USE ONLY - --------------------------------------------------------------------------------------------- 14. SOURCES OF FUNDS (SEE INSTRUCTIONS) AF - --------------------------------------------------------------------------------------------- 15. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(e) or 2(f) [ ] - --------------------------------------------------------------------------------------------- 16. CITIZENSHIP OR PLACE OF ORGANIZATION New York - --------------------------------------------------------------------------------------------- 17. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 3,742,064 (See Section 11 of the Offer to Purchase dated December 4, 1996 filed as Exhibit (a)(1) hereto) - --------------------------------------------------------------------------------------------- 18. [ ] CHECK BOX IF THE AGGREGATE AMOUNT IN ROW 7 EXCLUDES CERTAIN SHARES - --------------------------------------------------------------------------------------------- 19. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 7 55.2% - --------------------------------------------------------------------------------------------- 20. TYPE OF REPORTING PERSON (SEE INSTRUCTIONS) CO - ---------------------------------------------------------------------------------------------
3 4 This Tender Offer Statement on Schedule 14D-1 (the "Schedule 14D-1") also constitutes a Statement on Schedule 13D with respect to the acquisition by ME Acquisition, Inc. and Bell Industries, Inc. of beneficial ownership of the shares of Common Stock referred to on the cover hereof. The item numbers and responses thereto below are in accordance with the requirements of Schedule 14D-1. ITEM 1. SECURITY AND SUBJECT COMPANY. (a) The name of the subject company is Milgray Electronics, Inc., a New York corporation (the "Company"). The address of the Company's principal executive offices is 77 Schmitt Boulevard, Farmingdale, New York 11725. (b) This Schedule 14D-1 relates to the offer by ME Acquisition, Inc. ("Purchaser"), a New York corporation and direct wholly owned subsidiary of Bell Industries, Inc. ("Parent"), a California corporation, to purchase all outstanding shares of common stock, $0.25 par value per share (the "Shares"), of the Company, upon the terms and subject to the conditions set forth in the Offer to Purchase dated December 4, 1996 (the "Offer to Purchase") and in the related Letter of Transmittal (which, together with any amendments or supplements thereto, constitute the "Offer") at a purchase price of $14.77 per Share, net to the seller in cash. At November 26, 1996, 6,773,176 Shares were outstanding. The information set forth under "INTRODUCTION" in the Offer to Purchase annexed hereto as Exhibit (a)(1) is incorporated herein by reference. (c) The information set forth under "THE TENDER OFFER -- Price Range of Shares; Dividends" in the Offer to Purchase is incorporated herein by reference. ITEM 2. IDENTITY AND BACKGROUND. (a)-(d); (g) This Schedule 14D-1 is being filed by Purchaser and Parent. The information set forth under "INTRODUCTION" and "THE TENDER OFFER -- Certain Information Concerning Purchaser and Parent" in the Offer to Purchase and Schedule I thereto is incorporated herein by reference. (e)-(f) During the last five years, none of Purchaser or Parent, or any persons controlling Purchaser, or, to the best knowledge of Purchaser or Parent, any of the persons listed on Schedule I to the Offer to Purchase (i) has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (ii) was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction as a result of which any such person was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting activities subject to, Federal or State securities laws or finding any violation of such laws. ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS WITH THE SUBJECT COMPANY. (a)-(b) The information set forth under "INTRODUCTION," "THE TENDER OFFER -- Certain Information Concerning the Company," "-- Certain Information Concerning Purchaser and Parent," "-- Background of the Offer; Contacts with the Company" and "-- Purpose of the Offer; Plans for the Company; Merger Agreement; Tender Agreement" in the Offer to Purchase is incorporated herein by reference. ITEM 4. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a)-(b) The information set forth under "INTRODUCTION" and "THE TENDER OFFER -- Source and Amount of Funds" in the Offer to Purchase is incorporated herein by reference. (c) Not applicable. ITEM 5. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE BIDDER. (a)-(e) The information set forth under "INTRODUCTION," "THE TENDER OFFER -- Background of the Offer; Contacts with the Company" and "-- Purpose of the Offer; Plans for the Company; Merger Agreement; Tender Agreement" in the Offer to Purchase is incorporated herein by reference. 4 5 (f)-(g) The information set forth under "INTRODUCTION" and "THE TENDER OFFER -- Effect of the Offer on the Market for the Shares; NNM Quotation and Exchange Act Registration" in the Offer to Purchase is incorporated herein by reference. ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY. (a) The information set forth under "THE TENDER OFFER -- Purpose of the Offer; Plans for the Company; Merger Agreement; Tender Agreement" in the Offer to Purchase is incorporated herein by reference. (b) Not applicable. ITEM 7. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO THE SUBJECT COMPANY'S SECURITIES. The information set forth under "INTRODUCTION," "THE TENDER OFFER -- Background of the Offer; Contacts with the Company" and "-- Purpose of the Offer; Plans for the Company; Merger Agreement; Tender Agreement" in the Offer to Purchase is incorporated herein by reference. ITEM 8. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED. The information set forth under "THE TENDER OFFER -- Fees and Expenses" in the Offer to Purchase is incorporated herein by reference. ITEM 9. FINANCIAL STATEMENTS OF CERTAIN BIDDERS. The information set forth under "THE TENDER OFFER -- Certain Information Concerning Purchaser and Parent" in the Offer to Purchase is incorporated herein by reference. ITEM 10. ADDITIONAL INFORMATION. (a) Not applicable. (b)-(c) The information set forth under "INTRODUCTION" and "THE TENDER OFFER -- Regulatory Approvals; State Takeover Laws" in the Offer to Purchase is incorporated herein by reference. (d) The information set forth under "THE TENDER OFFER -- Effect of the Offer on the Market for the Shares; NNM Quotation and Exchange Act Registration" in the Offer to Purchase is incorporated herein by reference. (e) The information set forth under "THE TENDER OFFER -- Regulatory Approvals; State Takeover Laws" in the Offer to Purchase is incorporated herein by reference. (f) The information set forth in the Offer to Purchase and the Letter of Transmittal, copies of which are attached hereto as Exhibits (a)(1) and (a)(2), respectively, is incorporated herein by reference. ITEM 11. MATERIAL TO BE FILED AS EXHIBITS. (a)(1) Offer to Purchase dated December 4, 1996. (a)(2) Letter of Transmittal. (a)(3) Notice of Guaranteed Delivery. (a)(4) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. (a)(5) Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. (a)(6) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9.
5 6 (a)(7) Text of joint Press Release issued by Parent and the Company on November 27, 1996. (a)(8) Form of Summary Advertisement, dated December 4, 1996. (a)(9) Letter to shareholders of the Company, dated December 4, 1996. (b) Commitment Letter, dated October 2, 1996, from Union Bank of California, N.A. to Parent (as supplemented by that certain letter agreement between Union Bank of California, N.A. and Parent dated November 13, 1996). (c)(1) Agreement and Plan of Merger, dated as of November 26, 1996, by and among Parent, Purchaser and the Company. (c)(2) Tender Agreement, dated as of November 26, 1996, by and among Parent, Purchaser and Herbert S. Davidson. (c)(3) Employment Agreement by and between Parent and Herbert S. Davidson, dated as of November 26, 1996. (c)(4) Employment Agreement by and between Parent and Richard Hyman, dated as of November 26, 1996. (c)(5) Employment Agreement by and among Parent, the Company and John Tortorici, dated as of November 26, 1996. (c)(6) Employment Agreement by and among Parent, the Company and Gary Adams, dated as of November 26, 1996. (c)(7) Employment Agreement by and among Parent, the Company and Andrew Epstein, dated as of November 26, 1996. (c)(8) Employment Agreement by and among Parent, the Company and James Darren O'Donnell, dated as of November 26, 1996. (c)(9) Employment Agreement by and among Parent, the Company and Steven Sokoloff, dated as of November 26, 1996. (c)(10) Employment Agreement by and among Parent, the Company and Elliot Schnabel, dated as of November 26, 1996. (c)(11) Employment Agreement by and among Parent, the Company and Thomas Woolf, dated as of November 26, 1996. (d) Not applicable. (e) Not applicable. (f) Not applicable.
6 7 SIGNATURE After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct and agree that this Statement may be filed collectively with ME Acquisition, Inc. Dated: December 4, 1996 BELL INDUSTRIES, INC. By: /s/ TRACY A. EDWARDS ------------------------------------ Name: Tracy A. Edwards Title: Vice President 7 8 SIGNATURE After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct and agree that this Statement may be filed collectively with Bell Industries, Inc. Dated: December 4, 1996 ME ACQUISITION, INC. By: /s/ TRACY A. EDWARDS ------------------------------------ Name: Tracy A. Edwards Title: Vice President 8 9 EXHIBIT INDEX
EXHIBIT NO. ------- (a)(1) Offer to Purchase dated December 4, 1996. (a)(2) Letter of Transmittal. (a)(3) Notice of Guaranteed Delivery. (a)(4) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. (a)(5) Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. (a)(6) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. (a)(7) Text of joint Press Release issued by Parent and the Company on November 27, 1996. (a)(8) Form of Summary Advertisement, dated December 4, 1996. (a)(9) Letter to shareholders of the Company, dated December 4, 1996. (b) Commitment Letter, dated October 2, 1996, from Union Bank of California, N.A. to Parent (as supplemented by that certain letter agreement between Union Bank of California, N.A. and Parent dated November 13, 1996). (c)(1) Agreement and Plan of Merger, dated as of November 26, 1996, by and among Parent, Purchaser and the Company. (c)(2) Tender Agreement, dated as of November 26, 1996, by and among Parent, Purchaser and Herbert S. Davidson. (c)(3) Employment Agreement by and between Parent and Herbert S. Davidson, dated as of November 26, 1996. (c)(4) Employment Agreement by and between Parent and Richard Hyman, dated as of November 26, 1996. (c)(5) Employment Agreement by and among Parent, the Company and John Tortorici, dated as of November 26, 1996. (c)(6) Employment Agreement by and among Parent, the Company and Gary Adams, dated as of November 26, 1996. (c)(7) Employment Agreement by and among Parent, the Company and Andrew Epstein, dated as of November 26, 1996. (c)(8) Employment Agreement by and among Parent, the Company and James Darren O'Donnell, dated as of November 26, 1996. (c)(9) Employment Agreement by and among Parent, the Company and Steven Sokoloff, dated as of November 26, 1996. (c)(10) Employment Agreement by and among Parent, the Company and Elliot Schnabel, dated as of November 26, 1996. (c)(11) Employment Agreement by and among Parent, the Company and Thomas Woolf, dated as of November 26, 1996. (d) Not applicable. (e) Not applicable. (f) Not applicable.
9 EX-99.(A)(1) 2 EXHIBIT (A)(1) 1 OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF MILGRAY ELECTRONICS, INC. AT $14.77 NET PER SHARE IN CASH BY ME ACQUISITION, INC. A WHOLLY OWNED SUBSIDIARY OF BELL INDUSTRIES, INC. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON TUESDAY, JANUARY 7, 1997, UNLESS THE OFFER IS EXTENDED. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (1) THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER A NUMBER OF SHARES WHICH, WHEN ADDED TO THE SHARES OWNED BY BELL INDUSTRIES, INC. ("PARENT"), ME ACQUISITION, INC. ("PURCHASER") AND THEIR AFFILIATES, CONSTITUTES AT LEAST 66 2/3% OF THE SHARES OUTSTANDING (THE "MINIMUM CONDITION") AND (2) PARENT AND PURCHASER HAVING COMPLETED THE BANK FINANCING ARRANGEMENTS DESCRIBED IN SECTION 9 (THE "FINANCING CONDITION"). PARENT AND PURCHASER MAY TERMINATE THE OFFER IF EITHER THE MINIMUM CONDITION OR THE FINANCING CONDITION IS NOT SATISFIED. THE OFFER IS ALSO SUBJECT TO OTHER TERMS AND CONDITIONS. SEE SECTION 14. THE BOARD OF DIRECTORS OF MILGRAY ELECTRONICS, INC. (THE "COMPANY") UNANIMOUSLY HAS DETERMINED THAT EACH OF THE OFFER AND THE MERGER (AS HEREINAFTER DEFINED) IS FAIR TO, AND IN THE BEST INTERESTS OF, THE SHAREHOLDERS OF THE COMPANY, AS A GROUP, AND UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS, AS A GROUP, ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO THE OFFER (PROVIDED THAT SUCH SHAREHOLDERS SHOULD CONSULT WITH THEIR FINANCIAL OR TAX ADVISERS PRIOR TO TENDERING THEIR SHARES IN THE OFFER OR VOTING TO APPROVE THE MERGER). THE SHARES ARE LISTED FOR TRADING ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "MGRY." SEE SECTION 6. PARENT AND PURCHASER HAVE ENTERED INTO THE TENDER AGREEMENT (THE "TENDER AGREEMENT") WITH HERBERT S. DAVIDSON, A DIRECTOR, CHIEF EXECUTIVE OFFICER AND PRESIDENT OF THE COMPANY (THE "SELLING SHAREHOLDER"), PURSUANT TO WHICH, AMONG OTHER THINGS, THE SELLING SHAREHOLDER HAS AGREED TO TENDER AND SELL IN THE OFFER, UPON THE TERMS AND SUBJECT TO THE CONDITIONS THEREOF, 3,742,064 SHARES BENEFICIALLY OWNED BY THE SELLING SHAREHOLDER (OR APPROXIMATELY 55.2% OF THE COMPANY'S OUTSTANDING SHARES). SEE SECTION 11. ------------------------ IMPORTANT Any shareholder desiring to tender all or any portion of such shareholder's shares of common stock, par value $.25 per share, of the Company (the "Shares") should either (i) complete and sign the Letter of Transmittal (or a facsimile thereof) in accordance with the instructions in the Letter of Transmittal and mail or deliver it together with the certificate(s) evidencing tendered Shares, and any other required documents, to the Depositary or tender such Shares pursuant to the procedures for book-entry transfer set forth in Section 3 or (ii) request such shareholder's broker, dealer, commercial bank, trust company or other nominee to effect the transaction for such shareholder. A shareholder whose Shares are registered in the name of a broker, dealer, commercial bank, trust company or other nominee must contact such broker, dealer, commercial bank, trust company or other nominee if such shareholder desires to tender such Shares. A shareholder who desires to tender Shares and whose certificates evidencing such Shares are not immediately available, or who cannot comply with the procedures for book-entry transfer described in this Offer to Purchase on a timely basis, may tender such Shares by following the procedures for guaranteed delivery set forth in Section 3. Questions and requests for assistance, or for additional copies of this Offer to Purchase, the Letter of Transmittal or other tender offer materials, may be directed to the Information Agent at its address and telephone number set forth on the back cover of this Offer to Purchase. A shareholder may also contact brokers, dealers, commercial banks and trust companies for assistance concerning the Offer. ------------------------ December 4, 1996 2 TABLE OF CONTENTS
PAGE ----- INTRODUCTION............................................................................ 2 THE TENDER OFFER........................................................................ 3 1. Terms of the Offer...................................................... 3 2. Acceptance for Payment and Payment for Shares........................... 5 3. Procedures for Tendering Shares......................................... 6 4. Withdrawal Rights....................................................... 8 5. Certain Federal Income Tax Consequences................................. 8 6. Price Range of Shares; Dividends........................................ 9 7. Certain Information Concerning the Company.............................. 9 8. Certain Information Concerning Purchaser and Parent..................... 11 9. Source and Amount of Funds.............................................. 14 10. Background of the Offer; Contacts with the Company...................... 15 11. Purpose of the Offer; Plans for the Company; Merger Agreement; Tender Agreement............................................................... 17 12. Dividends and Distributions; Changes in Stock........................... 28 13. Effect of the Offer on the Market for the Shares; NNM Quotation and Exchange Act Registration............................................... 28 14. Conditions of the Offer................................................. 29 15. Regulatory Approvals; State Takeover Laws............................... 30 16. Fees and Expenses....................................................... 32 17. Miscellaneous........................................................... 33 Schedule I Information Concerning the Directors and Executive Officers of Parent and Purchaser........................................................... A-1 Schedule II Certain Information About Purchaser and Parent Required by New York Law..................................................................... B-1
3 To the Holders of Common Stock of Milgray Electronics, Inc.: INTRODUCTION ME Acquisition, Inc. ("Purchaser"), a New York corporation and wholly owned subsidiary of Bell Industries, Inc. ("Parent"), a California corporation, hereby offers to purchase all outstanding shares of common stock, par value $0.25 per share (the "Shares"), of Milgray Electronics, Inc., a New York corporation (the "Company"), at a price of $14.77 per Share, net to the seller in cash, without interest thereon (the "Offer Price"), upon the terms and subject to the conditions set forth in this Offer to Purchase and in the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"). Tendering shareholders will not be obligated to pay brokerage fees or commissions or, except as set forth in Instruction 6 of the Letter of Transmittal, stock transfer taxes on the purchase of Shares pursuant to the Offer. Purchaser will pay all charges and expenses of Harris Trust Company of New York, as Depositary (the "Depositary"), and MacKenzie Partners, Inc., as Information Agent (the "Information Agent"), incurred in connection with the Offer. See Section 16. The Offer is conditioned upon, among other things, (1) there having been validly tendered and not withdrawn prior to the expiration of the Offer at least 4,515,451 Shares, which represents at least 66 2/3% of the Shares outstanding (the "Minimum Condition") and (2) Parent and Purchaser having completed the bank financing arrangements described in Section 9 (the "Financing Condition"). Assuming the purchase by the Purchaser of the 3,742,064 Shares beneficially owned by the Selling Shareholder (as hereinafter defined), Purchaser will need to purchase an additional 773,387 Shares to satisfy the Minimum Condition. Under the terms of the Merger Agreement (as hereinafter defined), Parent and Purchaser may not waive the Minimum Condition without the consent of the Company, and Parent and Purchaser may terminate the Merger Agreement if the Minimum Condition is not satisfied. THE BOARD OF DIRECTORS OF THE COMPANY (THE "BOARD") HAS, BY UNANIMOUS VOTE, APPROVED EACH OF THE OFFER AND THE MERGER (AS HEREINAFTER DEFINED), HAS DETERMINED THAT EACH OF THE OFFER AND THE MERGER IS FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY'S SHAREHOLDERS, AS A GROUP, AND UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS, AS A GROUP, ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO THE OFFER (PROVIDED THAT SUCH SHAREHOLDERS SHOULD CONSULT WITH THEIR FINANCIAL OR TAX ADVISERS PRIOR TO TENDERING THEIR SHARES IN THE OFFER OR VOTING TO APPROVE THE MERGER). The Company has advised Parent that Mesirow Financial, Inc. ("Mesirow") has delivered to the Board its opinion to the effect that as of November 26, 1996, the $14.77 per share cash consideration to be received by shareholders of the Company pursuant to the Offer and the Merger is fair to the shareholders of the Company from a financial point of view. A copy of the opinion of Mesirow, which sets forth the factors considered and the assumptions made by Mesirow, is contained in the Company's Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9") which is being mailed to the Company's shareholders herewith. The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of November 26, 1996 (the "Merger Agreement"), by and among Parent, Purchaser and the Company. The Merger Agreement provides that, among other things, as soon as practicable after the purchase of Shares pursuant to the Offer and the satisfaction of the other conditions set forth in the Merger Agreement and in accordance with the relevant provisions of the New York Business Corporation Law ("New York Law"), Purchaser will be merged with and into the Company (the "Merger"). Following consummation of the Merger, the Company will continue as the surviving corporation (the "Surviving Corporation") and will be a wholly owned subsidiary of Parent. At the effective time of the Merger (the "Effective Time"), each Share issued and outstanding immediately prior to the Effective Time (other than Shares held in the treasury of the Company or owned by Purchaser, Parent or any direct or indirect wholly owned subsidiary of Parent or Shares held by dissenting shareholders who perfect their appraisal rights under Section 623 of the New York Law) will be converted into the right to receive the Offer Price, without interest (the "Merger Consideration"). The Merger Agreement is more fully described in Section 11. The Merger Agreement provides that, promptly upon the purchase of and payment for any Shares (including without limitation all Shares subject to the Tender Agreement) by Purchaser or any other 2 4 subsidiary of Parent pursuant to the Offer, Parent will be entitled to designate such number of directors, rounded to the nearest whole number, on the Board as is equal to the product of the total number of directors on the Board (which immediately prior to such calculation, will not consist of more than five directors) multiplied by the ratio of the aggregate number of Shares beneficially owned by Parent, Purchaser and their affiliates to the total number of Shares outstanding. In the Merger Agreement, the Company has agreed to take all actions necessary to cause Parent's designees to be elected or appointed to the Board, including without limitation securing the resignations of incumbent directors. The consummation of the Merger is subject to the satisfaction or waiver of certain conditions, including, if required by law, the approval and adoption of the Merger Agreement by the requisite vote of the shareholders of the Company. See Section 1. Under New York Law, except as otherwise described below, the Merger contemplated by the Merger Agreement must be approved by the affirmative vote of 66 2/3% of the Shares entitled to vote on a proposal to approve the Merger at a duly convened meeting of the shareholders of the Company. However, under New York Law, if Purchaser acquires, pursuant to the Offer or otherwise, at least 90% of the then outstanding Shares, the parties will be able to cause the Merger under the Merger Agreement to become effective without the approval of the Company's shareholders. In the event that Parent, Purchaser or any permitted assignee of Purchaser acquires at least 90% of the then outstanding Shares, Parent, Purchaser and the Company have agreed to take, at the request of Parent and subject to the conditions of the Merger Agreement, all necessary and appropriate action to cause the Merger to become effective as soon as practicable after such acquisition, without approval of the Company's shareholders. See Section 11. If, however, Purchaser does not acquire at least 90% of the then outstanding Shares and a vote of the Company's shareholders is required under New York Law, a significantly longer period of time will be required to effect the Merger. Concurrently with the execution of the Merger Agreement, Mr. Herbert S. Davidson, a director, Chief Executive Officer and President of the Company (the "Selling Shareholder"), entered into the Tender Agreement, dated as of November 26, 1996, with Parent and Purchaser (the "Tender Agreement"). The Selling Shareholder beneficially owns 3,742,064 Shares which are currently subject to the Tender Agreement, representing approximately 55.2% of the outstanding Shares. Pursuant to the Tender Agreement, the Selling Shareholder has agreed, among other things, to validly tender and sell in the Offer all such Shares which are owned of record or beneficially by him prior to the Expiration Date (as hereinafter defined) and vote such Shares in favor of the Merger, in each case upon the terms and subject to the conditions set forth in the Tender Agreement. The Tender Agreement is more fully described in Section 11. The Company has informed Purchaser that, as of November 26, 1996 there were 6,773,176 Shares issued and outstanding and 43,726 Shares issued and held in the treasury of the Company, and that there were no outstanding options, warrants or other rights to acquire Shares. As a result, as of such date, the Minimum Condition would be satisfied if Purchaser acquired 773,387 Shares from shareholders other than the Selling Shareholder, given that pursuant to the Tender Agreement the Selling Shareholder has agreed to tender the 3,742,064 Shares beneficially owned by him. THIS OFFER TO PURCHASE AND THE LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION WHICH SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER. THE TENDER OFFER 1. TERMS OF THE OFFER. Upon the terms and subject to the conditions of the Offer (including without limitation the Minimum Condition, the Financing Condition and, if the Offer is extended or amended, the terms and conditions of any extension or amendment), Purchaser will accept for payment and pay for all Shares validly tendered prior to the Expiration Date (as hereinafter defined) and not withdrawn in accordance with Section 4. The term "Expiration Date" means 5:00 p.m., New York City time, on Tuesday, January 7, 1997, unless and until Purchaser, in its sole discretion (but subject to the terms of the Merger Agreement), will have extended the period of time during which the Offer is open, in which event the term "Expiration Date" will mean the latest time and date at which the Offer, as so extended by Purchaser, will expire. See Section 11. 3 5 Purchaser expressly reserves the right, in its sole discretion (but subject to the terms of the Merger Agreement), at any time and from time to time, to extend for any reason the period of time during which the Offer is open, including the occurrence of any of the events specified in Section 14, by giving oral or written notice of such extension to the Depositary. During any such extension, all Shares previously tendered and not withdrawn will remain subject to the Offer, subject to the rights of a tendering shareholder to withdraw its Shares. See Section 4. Subject to the applicable regulations of the Securities and Exchange Commission (the "Commission"), Purchaser expressly reserves the right, in its sole discretion (but subject to the terms of the Merger Agreement), at any time and from time to time, (i) to delay acceptance for payment of, or, regardless of whether such Shares were theretofore accepted for payment, payment for, any Shares pending receipt of any regulatory approval specified in Section 15 or in order to comply in whole or in part with any other applicable law, (ii) to terminate the Offer and not accept for payment any Shares if any of the conditions referred to in Section 14 has not been satisfied or upon the occurrence of any of the events specified in Section 14 and (iii) to waive any condition or otherwise amend the Offer in any respect by giving oral or written notice of such delay, termination, waiver or amendment to the Depositary and by making a public announcement thereof. The Merger Agreement provides that, without the consent of the Company, Purchaser will not decrease the Offer Price, decrease the number of Shares sought, change the form of consideration to be paid in the Offer, amend or waive the Minimum Condition, or amend any other condition of the Offer in any manner adverse to the shareholders (other than with respect to insignificant changes or amendments), except that if on the initial scheduled Expiration Date of the Offer (as it may be extended) all conditions to the Offer will not have been satisfied or waived, the Offer may be extended from time to time until February 6, 1997; provided, however, that Purchaser may extend the Offer without the Company's consent until February 28, 1997 if the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), has not expired or terminated by February 6, 1997. In addition, the Merger Agreement provides that without the consent of the Company, the Offer Price may be increased and the Offer may be extended to the extent required by law in connection with such an increase in the Offer Price. Purchaser will terminate the Offer upon any termination of the Merger Agreement pursuant to the terms thereof. Purchaser acknowledges that (i) Rule 14e-1(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires Purchaser to pay the consideration offered or return the Shares tendered promptly after the termination or withdrawal of the Offer, and (ii) Purchaser may not delay acceptance for payment of, or payment for (except as provided in clause (i) of the first sentence of the second preceding paragraph), any Shares if any of the conditions referred to in Section 14 has not been satisfied or upon the occurrence of any of the events specified in Section 14 without extending the period of time during which the Offer is open. Any such extension, delay, termination, waiver or amendment will be followed as promptly as practicable by public announcement thereof, with such announcement in the case of an extension to be made no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. Subject to applicable law (including Rules 14d-4(c), 14d-6(d) and 14e-l under the Exchange Act, which require that material changes be promptly disseminated to shareholders in a manner reasonably designed to inform them of such changes) and without limiting the manner in which Purchaser may choose to make any public announcement, Purchaser will have no obligation to publish, advertise or otherwise communicate any such public announcement other than by issuing a press release to the Dow Jones News Service. If Purchaser makes a material change in the terms of the Offer or the information concerning the Offer, or if it waives a material condition of the Offer, Purchaser will extend the Offer to the extent required by Rules 14d-4(c), 14d-6(d) and 14e-1 under the Exchange Act. Subject to the terms of the Merger Agreement, if, prior to the Expiration Date, Purchaser should decide to decrease the number of Shares being sought or to increase or decrease the consideration being offered in the Offer, such decrease in the number of Shares being sought or such increase or decrease in the consideration 4 6 being offered will be applicable to all shareholders whose Shares are accepted for payment pursuant to the Offer and, if at the time notice of any such decrease in the number of Shares being sought or such increase or decrease in the consideration being offered is first published, sent or given to holders of such Shares, the Offer is scheduled to expire at any time earlier than the period ending on the tenth business day from and including the date that such notice is first so published, sent or given, the Offer will be extended at least until the expiration of such ten business day period. For purposes of the Offer, a "business day" means any day other than a Saturday, Sunday or Federal holiday and consists of the time period from 12:01 a.m. through 12:00 Midnight, New York City time. The Company has provided Purchaser with the Company's shareholder list and security position listings for the purpose of disseminating the Offer to holders of Shares. This Offer to Purchase, the related Letter of Transmittal, and other relevant materials, will be mailed to record holders of Shares whose names appear on the Company's shareholder list and will be furnished, for subsequent transmittal to beneficial owners of Shares, to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the shareholder list or, if applicable, who are listed as participants in a clearing agency's security position listing. 2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES. Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), Purchaser will purchase, by accepting for payment, and will pay for, all Shares validly tendered prior to the Expiration Date (and not properly withdrawn in accordance with Section 4) promptly after the later to occur of (i) the Expiration Date and (ii) the satisfaction or waiver of the conditions set forth in Section 14. Subject to applicable rules of the Commission and the terms of the Merger Agreement, Purchaser expressly reserves the right, in its discretion, to delay acceptance for payment of, or payment for, Shares pending receipt of any regulatory approvals specified in Section 15. See Section 15. In all cases, payment for Shares purchased pursuant to the Offer will be made only after timely receipt by the Depositary of (i) the certificates evidencing such Shares (the "Share Certificates") or timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Shares, if such procedure is available, into the Depositary's account at The Depository Trust Company or the Philadelphia Depository Trust Company (each, a "Book-Entry Transfer Facility" and, collectively, the "Book-Entry Transfer Facilities") pursuant to the procedures set forth in Section 3, (ii) the Letter of Transmittal (or facsimile thereof), properly completed and duly executed, or an Agent's Message (as defined below) in connection with a book-entry transfer of Shares and (iii) any other documents required by the Letter of Transmittal. For purposes of the Offer, Purchaser will be deemed to have accepted for payment, and thereby purchased, tendered Shares if, as and when Purchaser gives oral or written notice to the Depositary of Purchaser's acceptance of such Shares for payment. Payment for Shares accepted pursuant to the Offer will be made by deposit of the purchase price therefor with the Depositary, which will act as agent for tendering shareholders for the purpose of receiving payments from Purchaser and transmitting payments to such tendering shareholders. Under no circumstances will interest on the purchase price for Shares be paid by Purchaser, regardless of any delay in making such payment. If any tendered Shares are not accepted for payment for any reason pursuant to the terms and conditions of the Offer, or if Share Certificates are submitted evidencing more Shares than are tendered, Share Certificates evidencing unpurchased Shares will be returned, without expense to the tendering shareholder (or, in the case of Shares tendered by book-entry transfer into the Depositary's account at a Book-Entry Transfer Facility pursuant to the procedure set forth in Section 3, such Shares will be credited to an account maintained at such Book-Entry Transfer Facility), as promptly as practicable following the expiration, termination or withdrawal of the Offer. If, prior to the Expiration Date, Purchaser increases the consideration to be paid per Share pursuant to the Offer, Purchaser will pay such increased consideration for all such Shares purchased pursuant to the Offer, whether or not such Shares were tendered prior to such increase in consideration. 5 7 Purchaser reserves the right to transfer or assign, in whole at any time, or in part from time to time, to one or more of its affiliates, the right to purchase all or any portion of the Shares tendered pursuant to the Offer, but any such transfer or assignment will not relieve Purchaser of its obligations under the Offer and will in no way prejudice the rights of tendering shareholders to receive payment for Shares validly tendered and accepted for payment pursuant to the Offer. 3. PROCEDURES FOR TENDERING SHARES. Valid Tender of Shares. In order for Shares to be validly tendered pursuant to the Offer, the Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees, or an Agent's Message in connection with a book-entry transfer of Shares, and any other required documents, must be received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase prior to the Expiration Date and either (i) the Share Certificates evidencing tendered Shares must be received by the Depositary at one of such addresses or Shares must be tendered pursuant to the procedure for book-entry transfer described below and a Book-Entry Confirmation must be received by the Depositary, in each case prior to the Expiration Date, or (ii) the tendering shareholder must comply with the guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF SHARE CERTIFICATES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH ANY BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION AND RISK OF THE TENDERING SHAREHOLDER, AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. Book-Entry Transfer. The Depositary will establish an account with respect to the Shares at each Book-Entry Transfer Facility for purposes of the Offer within two business days after the date of this Offer to Purchase, and any financial institution that is a participant in any of the Book-Entry Transfer Facilities' systems may make book-entry delivery of Shares by causing a Book-Entry Transfer Facility to transfer such Shares into the Depositary's account at a Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's procedures for transfer. However, although delivery of Shares may be effected through book-entry transfer at a Book-Entry Transfer Facility, including pursuant to a Book-Entry Transfer Facility's Automated Tender Offer Program ("ATOP") procedures, the Letter of Transmittal (or facsimile thereof), with any required signature guarantees, or an Agent's Message in connection with a book-entry transfer, and any other required documents, must, in any case, be transmitted to and received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase prior to the Expiration Date or the tendering shareholder must comply with the guaranteed delivery procedures described below. DELIVERY OF DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH THE BOOK-ENTRY TRANSFER FACILITY'S PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. The term "Agent's Message" means a message, transmitted by a Book-Entry Transfer Facility to, and received by, the Depositary and forming a part of a Book-Entry Confirmation, which states that such Book-Entry Transfer Facility has received an express acknowledgement from the participant in such Book-Entry Transfer Facility tendering the Shares which are the subject of such Book-Entry Confirmation, that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that Purchaser may enforce such agreement against such participant. Signature Guarantee. Signatures on all Letters of Transmittal must be guaranteed by a participant in the Security Transfer Agents Medallion Program or the New York Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange Medallion Program (each, an "Eligible Institution"), unless the Shares tendered thereby are tendered (i) by a registered holder of Shares who has not completed the box entitled "Special Payment Instructions" on the Letter of Transmittal, or (ii) for the account of an Eligible Institution. See Instruction 1 of the Letter of Transmittal. If a Share Certificate is registered in the name of a person other than the signer of the Letter of Transmittal, or if payment is to be made, or a Share Certificate not accepted for payment or not tendered is to be returned, to a person other than the registered holder(s), then the Share Certificate must be endorsed or 6 8 accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear on the Share Certificate, with the signature(s) on such Share Certificate or stock powers guaranteed as described above. See Instructions 1 and 5 of the Letter of Transmittal. Guaranteed Delivery. If a shareholder desires to tender Shares pursuant to the Offer and such shareholder's Share Certificates are not immediately available or time will not permit all required documents to reach the Depositary prior to the Expiration Date or the procedure for book-entry transfer cannot be completed on a timely basis, such Shares may nevertheless be tendered if all the following conditions are satisfied: (i) the tender is made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by Purchaser herewith, is received by the Depositary as provided below prior to the Expiration Date; and (iii) in the case of a guarantee of Shares, the Share Certificates for all tendered Shares, in proper form for transfer, or a Book-Entry Confirmation, together with a properly completed and duly executed Letter of Transmittal (or manually signed facsimile thereof) with any required signature guarantee (or an Agent's Message in connection with a book-entry transfer) and any other documents required by such Letter of Transmittal, are received by the Depositary within three National Association of Securities Dealers, Inc. ("NASD") Automated Quotation System National Market ("NNM") trading days after the date of execution of the Notice of Guaranteed Delivery. Any Notice of Guaranteed Delivery may be delivered by hand or transmitted by telegram, facsimile transmission or mail to the Depositary and must include a guarantee by an Eligible Institution in the form set forth in the Notice of Guaranteed Delivery. Notwithstanding any other provision hereof, payment for Shares purchased pursuant to the Offer will, in all cases, be made only after timely receipt by the Depositary of (i) the Share Certificates evidencing such Shares, or a Book-Entry Confirmation of the delivery of such Shares, if available, (ii) a properly completed and duly executed Letter of Transmittal (or manually signed facsimile thereof), or an Agent's Message in connection with a book-entry transfer, and (iii) any other documents required by the Letter of Transmittal. Determination of Validity. All questions as to the validity, form, eligibility (including time of receipt) and acceptance for payment of any tendered Shares pursuant to any of the procedures described above will be determined by Purchaser, in its sole discretion, whose determination will be final and binding on all parties. Purchaser reserves the absolute right to reject any or all tenders of any Shares determined by it not to be in proper form or if the acceptance for payment of, or payment for, such Shares may, in the opinion of Purchaser's counsel, be unlawful. Purchaser also reserves the absolute right, in its sole discretion, to waive any of the conditions of the Offer or any defect or irregularity in any tender with respect to Shares of any particular shareholder, whether or not similar defects or irregularities are waived in the case of other shareholders. No tender of Shares will be deemed to have been validly made until all defects and irregularities have been cured or waived. Purchaser's interpretation of the terms and conditions of the Offer (including the Letter of Transmittal and the instructions thereto) will be final and binding. None of Parent, Purchaser, the Depositary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or will incur any liability for failure to give any such notification. Appointment as Proxy. By executing a Letter of Transmittal as set forth above, a tendering shareholder irrevocably appoints designees of Purchaser as such shareholder's proxies, each with full power of substitution, to the full extent of such shareholder's rights with respect to the Shares tendered by such shareholder and accepted for payment by Purchaser (and any and all non-cash dividends, distributions, rights, other Shares, or other securities issued or issuable in respect of such Shares on or after November 26, 1996). All such proxies will be considered coupled with an interest in the tendered Shares. This appointment will be effective if, when, and only to the extent that Purchaser accepts such Shares for payment pursuant to the Offer. Upon such 7 9 acceptance for payment, all prior proxies given by such shareholder with respect to such Shares and other securities will, without further action, be revoked, and no subsequent proxies may be given (or, if given, will not be effective). The designees of Purchaser will, with respect to the Shares and other securities for which the appointment is effective, be empowered to exercise all voting and other rights of such shareholder as they in their sole discretion may deem proper at any annual, special, adjourned or postponed meeting of the Company's shareholders, by written consent or otherwise, and Purchaser reserves the right to require that, in order for Shares or other securities to be deemed validly tendered, immediately upon Purchaser's acceptance for payment of such Shares Purchaser must be able to exercise full voting rights with respect to such Shares, except as otherwise limited by applicable New York Law. TO PREVENT FEDERAL INCOME TAX BACKUP WITHHOLDING WITH RESPECT TO PAYMENT TO CERTAIN SHAREHOLDERS OF THE PURCHASE PRICE OF SHARES PURCHASED PURSUANT TO THE OFFER, EACH SUCH SHAREHOLDER MUST PROVIDE THE DEPOSITARY WITH SUCH SHAREHOLDER'S CORRECT TAXPAYER IDENTIFICATION NUMBER AND CERTIFY THAT SUCH SHAREHOLDER IS NOT SUBJECT TO FEDERAL INCOME TAX BACKUP WITHHOLDING BY COMPLETING THE SUBSTITUTE FORM W-9 IN THE LETTER OF TRANSMITTAL. IF BACKUP WITHHOLDING APPLIES WITH RESPECT TO A SHAREHOLDER, THE DEPOSITARY IS REQUIRED TO WITHHOLD 31% OF ANY PAYMENTS MADE TO SUCH SHAREHOLDER. SEE INSTRUCTION 9 OF THE LETTER OF TRANSMITTAL. Purchaser's acceptance for payment of Shares tendered pursuant to the Offer will constitute a binding agreement between the tendering shareholder and Purchaser upon the terms and subject to the conditions of the Offer. 4. WITHDRAWAL RIGHTS. Tenders of Shares made pursuant to the Offer are irrevocable except that such Shares may be withdrawn at any time prior to the Expiration Date and, unless theretofore accepted for payment by Purchaser pursuant to the Offer, may also be withdrawn at any time after February 1, 1997. If Purchaser extends the Offer, is delayed in its acceptance for payment of Shares or is unable to accept Shares for payment pursuant to the Offer for any reason, then, without prejudice to Purchaser's rights under the Offer, the Depositary may, nevertheless, on behalf of Purchaser, retain tendered Shares, and such Shares may not be withdrawn except to the extent that tendering shareholders are entitled to withdrawal rights as described in this Section 4. Any such delay will be by an extension of the Offer to the extent required by law. For a withdrawal to be effective, a written, telegraphic or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase. Any such notice of withdrawal must specify the name of the person who tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder, if different from that of the person who tendered such Shares. If Share Certificates evidencing Shares to be withdrawn have been delivered or otherwise identified to the Depositary, then, prior to the physical release of such Share Certificates, the serial numbers shown on such Share Certificates must be submitted to the Depositary and the signature(s) on the notice of withdrawal must be guaranteed by an Eligible Institution, unless such Shares have been tendered for the account of an Eligible Institution. If Shares have been tendered pursuant to the procedure for book-entry transfer as set forth in Section 3, any notice of withdrawal must also specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Shares. All questions as to the form and validity (including time of receipt) of notices of withdrawal will be determined by Purchaser, in its sole discretion, whose determination will be final and binding. None of Parent, Purchaser, the Depositary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or will incur any liability for failure to give any such notification. Any Shares properly withdrawn will thereafter be deemed to not have been validly tendered for purposes of the Offer. However, withdrawn Shares may be re-tendered at any time prior to the Expiration Date by following one of the procedures described in Section 3. 5. CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The receipt of cash for Shares pursuant to the Offer or in the Merger will be a taxable transaction for Federal income tax purposes and may also be a taxable 8 10 transaction under applicable state, local or foreign tax laws. In general, a shareholder will recognize gain or loss for Federal income tax purposes equal to the difference between the amount of cash received in exchange for the Shares sold and the shareholder's adjusted tax basis in such Shares. Assuming the Shares constitute capital assets in the hands of the shareholder, such gain or loss will be capital gain or loss and will be long term capital gain or loss if the holder has held the Shares for more than one year at the time of the sale. Gain or loss will be calculated separately for each block of Shares tendered pursuant to the Offer. The foregoing discussion may not be applicable to certain types of shareholders, including shareholders who acquired Shares pursuant to the exercise of stock options or otherwise as compensation, individuals who are not citizens or residents of the United States and foreign corporations, or entities that are otherwise subject to special tax treatment under the Internal Revenue Code of 1986, as amended. THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND IS BASED UPON PRESENT LAW. SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISERS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE OFFER AND THE MERGER TO THEM, INCLUDING THE APPLICATION AND EFFECT OF THE ALTERNATIVE MINIMUM TAX, AND STATE, LOCAL AND FOREIGN TAX LAWS. 6. PRICE RANGE OF SHARES; DIVIDENDS. The Shares are quoted on the NNM under the symbol "MGRY." The following table sets forth, for the quarters indicated, the high and low bid quotations per Share on the NNM as reported in publicly available sources for each of the quarters indicated.
MARKET PRICES --------------- HIGH LOW ------ ------ FISCAL YEAR ENDED SEPTEMBER 30, 1994: First quarter.............................................................. $ 7.37 $ 5.44 Second quarter............................................................. 7.94 6.31 Third quarter.............................................................. 8.50 7.37 Fourth quarter............................................................. 7.75 6.62 FISCAL YEAR ENDED SEPTEMBER 30, 1995: First quarter.............................................................. 7.12 5.87 Second quarter............................................................. 7.87 6.00 Third quarter.............................................................. 13.69 6.00 Fourth quarter............................................................. 16.50 11.12 FISCAL YEAR ENDED SEPTEMBER 30, 1996: First quarter.............................................................. 15.50 9.75 Second quarter............................................................. 11.87 8.62 Third quarter.............................................................. 13.50 9.00 Fourth quarter............................................................. 12.75 9.75
On November 26, 1996, the last full trading day prior to the public announcement of the execution of the Merger Agreement, the reported closing sales price of the Shares on the NNM was $13.63 per Share. On December 3, 1996, the last full trading day prior to the date of this Offer to Purchase, the reported closing sales price of the Shares on the NNM was $14.50 per Share. Shareholders are urged to obtain a current market quotation for the Shares. No dividends were paid by the Company during the above periods. The Merger Agreement prohibits the Company from declaring or paying any dividend or distribution on the Shares. In addition, the Company's financing arrangement with its bank presently prohibits the payment of cash dividends. 7. CERTAIN INFORMATION CONCERNING THE COMPANY. The information concerning the Company contained in this Offer to Purchase, including financial information, has been taken from or based upon publicly available documents and records on file with the Commission and other public sources. Neither Parent nor Purchaser assumes any responsibility for the accuracy or completeness of the information concerning the Company contained in such documents and records or for any failure by the Company to disclose events 9 11 which may have occurred or may affect the significance or accuracy of any such information but which are unknown to Parent or Purchaser. The Company is a New York corporation and its principal executive offices are located at 77 Schmitt Boulevard, Farmingdale, New York 11735. The telephone number of the Company at such offices is (516) 420-9800. The Company is a distributor of electronic components, computer products and wire products produced by a large number of manufacturers. The Company's sales are made to more than 10,000 customers, located principally in the United States, Canada and Western Europe. The Company's operations are presently conducted from its principal offices in Farmingdale, New York, as well as from twenty-eight other locations in the United States and Canada. Financial Information. Set forth below is certain financial information relating to the Company and its subsidiaries which has been excerpted or derived from the audited financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 (the "Company Form 10-K") and from the unaudited financial statements contained in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996, in each case filed by the Company with the Commission. More comprehensive financial information is included in such reports and other documents filed by the Company with the Commission. The financial information that follows is qualified in its entirety by reference to those reports and other documents, including the financial statements and related notes contained therein. The Company Form 10-K and other documents may be examined and copies may be obtained from the offices of the Commission in the manner set forth below. MILGRAY ELECTRONICS, INC. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED YEAR ENDED ------------------- SEPTEMBER 30, JUNE 30, JULY 2, ------------------------------ 1996 1995 1995 1994 1993 -------- -------- -------- -------- -------- (UNAUDITED) INCOME STATEMENT DATA Net sales................................... $212,990 $175,078 $239,519 $181,844 $150,295 -------- -------- -------- -------- -------- Costs and expenses: Cost of sales............................... 167,914 134,938 183,457 140,079 114,749 Selling, general and administrative......... 32,241 28,442 39,292 31,001 26,679 Interest.................................... 1,945 1,281 1,816 1,111 944 -------- -------- -------- -------- -------- Total costs and expenses.................. 202,100 164,661 224,565 172,191 142,372 -------- -------- -------- -------- -------- Income before income taxes.................. 10,890 10,417 14,954 9,653 7,923 Income taxes................................ 4,247 3,897 5,638 3,460 2,775 -------- -------- -------- -------- -------- Net income.................................. $ 6,643 $ 6,520 $ 9,316 $ 6,193 $ 5,148 ======== ======== ======== ======== ======== Earnings per share.......................... $ 0.98 $ 0.97 $ 1.38 $ 0.93 $ 0.78 ======== ======== ======== ======== ======== Weighted average common shares outstanding............................... 6,773 6,745 6,752 6,695 6,589 ======== ======== ======== ======== ========
10 12
SEPTEMBER 30, JUNE 30, ---------------------------- 1996 1995 1994 1993 ----------- -------- ------- ------- (UNAUDITED) BALANCE SHEET DATA Total current assets................................... $ 101,433 $ 97,548 $66,755 $59,982 Total assets........................................... 105,629 101,278 70,444 63,100 Total current liabilities.............................. 26,087 31,888 19,396 23,468 Total long-term liabilities............................ 35,142 31,633 22,733 17,971 Total shareholders' equity............................. 44,070 37,427 27,998 21,349
The Company has also issued a press release stating that, for its fiscal year ended September 30, 1996, it had net sales of $275.4 million and net income of $8.6 million, or $1.27 per share. The Company is subject to the information and reporting requirements of the Exchange Act and is required to file reports and other information with the Commission relating to its business, financial condition and other matters. Information, as of particular dates, concerning the Company's directors and officers, their remuneration, stock options granted to them, the principal holders of the Company's securities, any material interests of such persons in transactions with the Company and other matters is required to be disclosed in proxy statements distributed to the Company's shareholders and filed with the Commission. These reports, proxy statements and other information should be available for inspection at the public reference facilities of the Commission located in Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and also should be available for inspection and copying at prescribed rates at the following regional offices of the Commission: Seven World Trade Center, New York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of this material may also be obtained by mail, upon payment of the Commission's customary fees, from the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549. Reports, proxy statements and other information concerning the Company should also be available for inspection at the offices of the NASD, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006. Except as otherwise noted in this Offer to Purchase, all of the information with respect to the Company and its affiliates set forth in this Offer to Purchase has been derived from publicly available information. 8. CERTAIN INFORMATION CONCERNING PURCHASER AND PARENT. Purchaser. Purchaser is a newly incorporated New York corporation. All of the issued and outstanding shares of capital stock of Purchaser are beneficially owned by Parent. The principal executive offices of Purchaser are located at 11812 San Vicente Boulevard, Los Angeles, California 90049-5022. The telephone number of Purchaser at such offices is (310) 826-2355. Purchaser has not conducted any business other than in connection with the Offer, the Merger Agreement and the Tender Agreement. Parent. Parent is a California corporation. The principal executive offices of Parent are located at 11812 San Vicente Boulevard, Los Angeles, California 90049-5022. The telephone number of Parent at such offices is (310) 826-2355. Parent is primarily a national distributor of electronic components. In addition, Parent distributes graphic imaging and recreational-related products. The Electronics Group (79% of 1995 sales) includes one of the nation's largest electronic components distributors. The group sells semiconductors, passive and electromechanical components, connectors, and personal computers, software and related accessories. The group also manufactures high-precision, close-tolerance products for the computer industry. The Graphics and Electronic Imaging Group (13% of 1995 sales) distributes electronic imaging equipment, film, plates, chemicals and related supplies throughout the western United States to the advertising and printing industries. After-market products for the recreational vehicle, motorcycle, mobile home, snowmobile, and marine industries are distributed by the Recreational Products Group (8% of 1995 sales). Parent is subject to the information and reporting requirements of the Exchange Act and is required to file reports and other information with the Commission relating to its business, financial condition and other matters. Information, as of particular dates, concerning Parent's directors and officers, their remuneration, stock options granted to them, the principal holders of Parent's securities, any material interests of such persons in transactions with Parent and other matters is required to be disclosed in proxy statements distributed to Parent's shareholders and filed with the Commission. These reports, proxy statements and other 11 13 information should be available for inspection and copies may be obtained from the Commission in the same manner as set forth for the Company in Section 7. Parent's Common Stock is listed on the New York Stock Exchange, Inc. ("NYSE") under the symbol "BI", and reports, proxy statements and other information concerning Parent also should be available for inspection at the offices of the NYSE, 20 Broad Street, New York, New York 10005. Set forth below are certain financial information with respect to Parent and its subsidiaries for Parent's last three fiscal years, excerpted or derived from audited financial statements presented in Parent's 1995 Annual Report to Shareholders and from the unaudited financial statements contained in Parent's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1996, in each case filed by Parent with the Commission. More comprehensive financial information is included in such reports and other documents filed by Parent with the Commission. The financial information summary set forth below is qualified in its entirety by reference to those reports and other documents which have been filed with the Commission and all the financial information and related notes contained therein. Certain additional information regarding Parent and Purchaser required by New York Law is set forth in Schedule II hereto. 12 14 BELL INDUSTRIES, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS SIX MONTHS ENDED YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, JUNE 30, ------------------- ------------ ------------ ------------------- 1996 1995 1995 1994 1994 1993 -------- -------- ------------ ------------ -------- -------- (UNAUDITED) OPERATING RESULTS Net sales.............................. $464,065 $417,159 $564,325 $255,372 $451,153 $365,323 Income from continuing operations, net of taxes(1).......................... 12,180 11,062 14,971 5,309 9,075 5,005 Net income (loss)...................... 12,180 11,062 14,971 5,619 9,075 (5,025) Capital expenditures................... 6,294 3,796 5,019 1,375 2,562 5,744 Depreciation and amortization.......... 4,595 4,299 5,940 2,891 5,574 5,735 FINANCIAL POSITION Working capital........................ 142,050 127,976 136,227 116,118 107,455 97,710 Total assets........................... 251,362 220,269 233,882 200,367 184,713 175,272 Long-term liabilities.................. 43,377 40,758 43,490 40,936 39,972 47,569 Shareholders' equity................... 133,409 113,646 117,569 101,770 95,553 86,288 SHARE AND PER SHARE DATA(2) Income from continuing operations, net of taxes............................. $1.61 $1.49 2.01 .73 1.25 .70 Net income (loss)...................... $1.61 $1.49 2.01 .77 1.25 (.70) Cash dividends declared................ -- -- -- -- -- .20 Shareholders' equity................... 17.96 15.74 16.23 14.20 13.43 12.16 Market price -- high................... 23.25 25.63 25.63 22.88 19.75 14.00 Market price -- low.................... 15.00 18.63 18.63 15.75 13.38 9.25 Weighted average common shares outstanding(000's)................... 7,567 7,437 7,450 7,324 7,250 7,160 FINANCIAL RATIOS Current ratio.......................... 2.9 2.9 2.9 3.0 3.2 3.4 Return on average shareholders' equity............................... 12.9% 13.7% 13.7% 11.3% 10.0% (5.6)% Long-term liabilities to total capitalization....................... 24.5% 26.4% 27.0% 28.7% 29.5% 35.5%
- --------------- (1) Includes before-tax gain on sale of division ($3,050) and before-tax provision for lease commitment ($2,800) in 1995. (2) Adjusted to give effect to 5% stock dividends declared in May 1996, May 1995 and October 1994, and a 4% stock dividend declared in July 1993 (excluding cash dividend and market price data). (3) During the six month period ended December 31, 1994, the Company changed its year end from June 30 to December 31. The name, citizenship, business address, principal occupation or employment, five-year employment history and age for each of the directors and executive officers of Purchaser and Parent are set forth in Schedule I hereto. Except as described in this Offer to Purchase, (i) none of Purchaser, Parent or, to the best knowledge of Purchaser and Parent, any of the persons listed in Schedule I to this Offer to Purchase or any associate or majority-owned subsidiary of Purchaser, Parent or any of the persons so listed beneficially owns or has any right to acquire, directly or indirectly, any Shares and (ii) none of Purchaser, Parent or, to the best knowledge 13 15 of Purchaser and Parent, any of the persons or entities referred to above nor any director, executive officer or subsidiary of any of the foregoing has effected any transaction in the Shares during the past 60 days. Except as provided in the Merger Agreement, the Tender Agreement and as otherwise described in this Offer to Purchase, none of Purchaser, Parent or, to the best knowledge of Purchaser and Parent, any of the persons listed in Schedule I to this Offer to Purchase, has any contract, arrangement, understanding or relationship with any other person with respect to any securities of the Company, including, but not limited to, any contract, arrangement, understanding or relationship concerning the transfer or voting of such securities, joint ventures, loan or option arrangements, puts or calls, guaranties of loans, guaranties against loss or the giving or withholding of proxies. Except as set forth in this Offer to Purchase, since October 1, 1993, none of Purchaser, Parent or, to the best knowledge of Purchaser and Parent, any of the persons listed on Schedule I hereto, has had any business relationship or transaction with the Company or any of its executive officers, directors or affiliates that is required to be reported under the rules and regulations of the Commission applicable to the Offer. Except as set forth in this Offer to Purchase, since October 1, 1993, there have been no contacts, negotiations or transactions between any of Purchaser, Parent, or any of their respective subsidiaries, or, to the best knowledge of Purchaser and Parent, any of the persons listed in Schedule I to this Offer to Purchase, on the one hand, and the Company or its affiliates, on the other hand, concerning a merger, consolidation or acquisition, tender offer or other acquisition of securities, an election of directors or a sale or other transfer of a material amount of assets. 9. SOURCE AND AMOUNT OF FUNDS. The total amount of funds required by Purchaser and Parent to consummate the Offer and the Merger and to pay related fees and expenses (inclusive of estimated expenses of the Company) is estimated to be approximately $5.2 million. Purchaser will obtain all of such funds in the form of equity or debt from Parent. Parent will obtain all of the required funds from credit facilities. Parent has received a commitment letter dated October 2, 1996 (as supplemented by that certain letter agreement dated November 13, 1996, the "Bank Commitment Letter") from Union Bank of California, N.A. ("Union Bank") to provide senior secured term loan facilities and senior secured revolving credit facilities for up to $250 million (i) to finance the purchase of the Shares pursuant to the Offer and the Merger and to pay certain related fees and expenses related to the Offer and the Merger, (ii) to refinance certain existing debt of Parent and, after consummation of the Merger, the Company and (iii) for working capital and general corporate purposes of Parent and its subsidiaries. Consummation of that financing is subject to, among other things, the receipt of required consents, the absence of material adverse conditions and the negotiation, execution and delivery of definitive documentation consistent with the Bank Commitment Letter and the related term sheet. There can be no assurance that the terms described in the Bank Commitment Letter will be contained in the definitive agreements or that the definitive agreements will not contain additional provisions. The Bank Commitment Letter and the related term sheet attached provide for credit facilities relating to the Offer consisting of a tender loan (the "Tender Loan") of up to $175 million, which will mature on the earlier of the effective date of the Merger or seventy five days after the purchase of and payment for Shares in the Offer, a $50 million term loan facility (the "Term Loan") and a $200 million revolving credit facility (the "Revolving Credit Facility"), which will be available from time to time on and after the effective date of the Merger. Each of the Term Loan and Revolving Credit Facility matures in five years. Parent has agreed to assist Union Bank in syndicating the Tender Loan, the Term Loan and the Revolving Credit Facility (collectively, the "Facilities"). The Facilities will be guaranteed by each of Parent's domestic subsidiaries (including, from and after the consummation of the Merger, the Company and its subsidiaries). The loans under the Facilities and the guarantees will be secured by (i) all of the shares of capital stock of all of Parent's subsidiaries (except the stock of the Company and its subsidiaries during the period from the purchase of and payment for Shares pursuant to the Offer and the consummation of the Merger) and (ii) all accounts receivable and inventory of Parent and its subsidiary guarantors. 14 16 Until the date of the delivery of financial statements for the period ending December 31, 1996, the Facilities will bear interest, depending on the interest rate pricing option selected by Parent, at a rate equal to the reserve-adjusted LIBOR Rate plus a sliding scale margin of up to 1.5% per annum, based on leverage coverage (determined as of the date of the purchase of and payment for Shares pursuant to the Offer), or the Base Rate (the reserve adjusted LIBOR Rate and the Base Rate being collectively referred to as the "Alternate Base Rate"). Thereafter, outstanding amounts under the Facilities will bear interest, depending on the interest rate pricing option selected by Parent, at the Alternate Base Rate plus a sliding scale margin of up to 1.5% per annum, based on leverage coverage (determined for the most recent trailing four fiscal quarters) for loans effected pursuant to the Facilities and as to which the reserve-adjusted LIBOR Rate option has been selected by Parent. After the occurrence and during the continuation of an event of default, interest will accrue at a rate equal to the rate on loans bearing interest at the Base Rate plus an additional two percentage points per annum and will be payable on demand. A commitment fee on the undrawn amount of the Facilities will be payable at a sliding rate of 0.25% to 0.375%, depending on leverage. It is anticipated that the indebtedness incurred by Parent under such loans will be repaid from funds generated internally by Parent and its subsidiaries (including, after the Merger, if consummated, funds generated by the Company and its subsidiaries), through an offering of Parent's capital stock, through additional borrowings, through application of proceeds of dispositions or through a combination of two or more such sources. No final decisions have been made concerning the method Parent will use to repay such indebtedness. Such decisions when made will be based upon Parent's review from time to time of the advisability of particular actions, as well as on prevailing interest rates and financial and other economic and market conditions. The margin regulations promulgated by the Federal Reserve Board place restrictions on the amount of credit that may be extended for the purposes of purchasing margin stock (including the Shares) if the credit is secured directly or indirectly by margin stock. The Purchaser believes the financing of the acquisition of the Shares will be in full compliance with margin regulations, as applicable. 10. BACKGROUND OF THE OFFER; CONTACTS WITH THE COMPANY. Information set forth below regarding the Company, or discussions to which representatives of Parent and Purchaser were not participants, was provided by the Company. As part of its on-going strategic efforts to expand its business during the past few years, Parent had considered several strategies, including the possible combination with a comparable distributor of electronic components and related products. Several distributors were identified although contacts between Parent and these distributors were limited and informal. In May 1994, a meeting was arranged between certain officers of Parent and the Company to discuss the possibility of a combination. On May 18, 1994, Theodore Williams, Chairman and Chief Executive Officer, Bruce M. Jaffe, then President and Chief Operating Officer, Tracy A. Edwards, Vice President and Chief Financial Officer, of Parent met with Herbert Davidson, a director, Chief Executive Officer and President, and Richard Hyman, a director, Executive Vice President and Chief Operating Officer, of the Company. During this meeting, Mr. Davidson stated that although the Company was not for sale, he was interested in discussing the merits of a strategic combination with Parent. Mr. Davidson indicated that he was not opposed to further discussions to explore the potential benefits of a strategic combination with Parent, although he believed that the benefits thereof might be limited at that time. Accordingly, during the summer of 1994, Mr. Hyman visited with Mr. Williams and Mr. Jaffe to discuss further the background and history of Parent and the Company and the prospects of a combination under mutually agreeable terms. However, following these conversations, the Company indicated that it was not interested in pursuing a strategic combination with Parent at that time. To assist its strategic efforts to expand its business, Parent retained Peers & Co. (together with its agents, "Peers"), beginning in January 1995, to assist Parent in initiating, negotiating and completing mergers with or acquisitions of distributors of electronic components and related products. Since its engagement Peers and Parent have evaluated a number of such distributors, including the Company. Peers contacted a number of these distributors on Parent's behalf. 15 17 On July 25, 1995, Peers wrote a letter to Mr. Davidson expressing Parent's belief that the Company and Parent were a strong strategic fit and that Parent desired to explore the combination of the Company and Parent. In early August, Peers spoke to Mr. Davidson who stated that the Company was not for sale but that he was not opposed to a meeting sometime in the future. On August 31, 1995, Parent announced that it had made a proposal to merge with Sterling Electronics Corporation ("Sterling"). On September 19, 1995, Sterling announced it had rejected Parent's proposal. During October through January, Parent had discussions with other electrical distributors regarding a combination with Parent through a merger or acquisition. In February 1996, Parent requested that Peers contact the Company to attempt to re-open discussions regarding a combination with Parent. On February 22 and 28 and March 3, 1996, a Peers representative spoke with Mr. Hyman to discuss a combination of Parent and the Company involving an exchange of stock. Mr. Hyman indicated he would discuss the concept with Mr. Davidson. During the conversations, the concept of the Company's shareholders receiving a premium over the current market price of the Shares was discussed, but a specific price or exchange ratio was not proposed. On March 11, 1996, Mr. Hyman called Peers to state that Parent's proposal to exchange stock was not of sufficient interest to warrant a meeting. Mr. Hyman said that the Company was concerned that a transaction involving an exchange of stock might have uncertainty as to value. Furthermore, Mr. Hyman stated that, although Parent had previously made oral indications of an interest to combine, the Company had never received a written proposal from Parent. On March 14, 1996, Peers had a discussion with Mr. Hyman to further explore the Company's reasons for declining to meet. Peers discussed the Company's reasons for declining a meeting with Parent's senior management. Over the next ten days, Parent discussed ways to address the Company's concerns and the feasibility of making a cash offer to acquire the Company's common stock, including preliminary discussions with banks about providing necessary financing. On March 25, 1996, Parent sent a written proposal to the Company proposing to acquire the Company for cash by paying to all of the Company's shareholders a price of $13.50 per Share in cash, which offer represented an approximately 44% premium over the closing stock price of the Company's common stock on March 25, 1996 of $9.375 per Share. Over the next three weeks, conversations took place between representatives of the Company and Parent which resulted in the Company's representatives indicating they were willing to meet to further discuss Parent's proposal. On April 16, 1996, Messrs. Williams and Jaffe and a Peers representative met with Messrs. Davidson and Hyman to discuss Parent's proposal. At that meeting, the Company's representatives said they believed the Company was worth more than Parent's proposal. Additionally, such representations stated that there were several issues relating to a combination which needed to be discussed, explained and resolved, among which were how the business operations of the two entities would be combined, future operational efficiencies which might be realized and continuity of employment for key executives of the Company. On April 17, 1996, Parent sent a revised proposal to the Company which increased the offer to approximately $100 million for all of the Company's outstanding Shares, or $14.77 per Share, which represented an approximately 34% premium over the closing stock price of the Company's common stock on April 16, 1996 of $11.00 per share. In early May 1996, Mr. Davidson called Mr. Williams to state that the Company was prepared to enter into further discussions regarding combining with Parent. During the next several months, a series of discussions were held between representatives of the Company and Parent to develop the specific terms of an acquisition of the Company. These discussions included meetings in New York and Los Angeles between Parent's and the Company's senior management. On August 21 and 22, 1996, Messrs. Williams and Jaffe met with Messrs. Davidson and Hyman to discuss the proposed terms of Parent's acquisition offer. During these meetings, the purchase price of $14.77 per Share was confirmed and terms of proposed employment agreements for key management of the Company were 16 18 reviewed and agreed upon in principle. Additionally, counsel for Parent and for the Company had a meeting and numerous telephone conversations regarding specific terms of an acquisition agreement and the employment agreements and the preparation of necessary documentation. On October 31 and November 1, 1996, representatives of Parent and the Company held a series of due diligence meetings in New York. Discussion between representatives of Parent and the Company regarding details of the Merger Agreement, the Tender Agreement and related matters continued during the next several weeks. On November 20, 1996, Mr. Hyman met with representatives of Parent and Purchaser in Los Angeles, California to discuss the Company's financial results during the fiscal quarter which will end December 31, 1996. On November 26, 1996, the terms of the proposed transaction and related merger agreement were presented to and reviewed by the Board. Mesirow made presentations to the Board and delivered its opinion that, as of November 26, 1996, the $14.77 per Share cash consideration to be received by shareholders of the Company pursuant to the Offer and the Merger is fair to the shareholders of the Company from a financial point of view. The full Board then discussed the proposed Merger Agreement and reviewed proposed resolutions related to the transaction. After discussion and further analysis, the Company's Board unanimously decided to proceed with the sale of the Company and to accept Parent's proposal, and it then approved the Merger Agreement and the transactions contemplated thereby and unanimously recommended that the shareholders of the Company, as a group, accept the Offer and tender their Shares pursuant thereto (provided that such shareholders should consult with their financial or tax advisers prior to tendering their Shares in the Offer or voting to approve the Merger). With respect to the Merger, the Board unanimously recommended that, if a shareholder vote is required by applicable law, the shareholders of the Company, as a group, vote in favor of approval and adoption of the Merger Agreement and the Merger (provided that shareholders should consult with their financial or tax advisers prior to voting to approve the Merger). On November 26, 1996, Parent, Purchaser and the Selling Shareholder executed and delivered the Tender Agreement, and Parent, Purchaser and the Company executed and delivered the Merger Agreement. On November 27, 1996, Parent and the Company issued a joint press release announcing the execution of the Merger Agreement and the Tender Agreement. Purchaser commenced the Offer on December 4, 1996. 11. PURPOSE OF THE OFFER; PLANS FOR THE COMPANY; MERGER AGREEMENT; TENDER AGREEMENT. PURPOSE OF THE OFFER. The purpose of the Offer, the Merger, the Merger Agreement and the Tender Agreement is to enable Parent to acquire control of the Board and the entire equity interest in the Company. Upon consummation of the Merger, the Company will become a wholly owned subsidiary of Parent. The Offer is being made pursuant to the Merger Agreement. PLANS FOR THE COMPANY. As promptly as practicable following the purchase of and payment for Shares under the Offer, (x) Parent intends (i) to exercise its right under the Merger Agreement to designate such number of directors for the Board as it is then entitled to designate and (ii) in the event Purchaser acquires at least 90% of the then outstanding Shares, to cause a "short form" merger of Purchaser and the Company under New York Law and (y) in the event Purchaser acquires less than 90% of the then outstanding Shares, the Company intends to cause a special meeting of the Company's stockholders to be held to vote upon the Merger. It is Purchaser's expectation that those individuals so elected or appointed to the Board will not receive any compensation for services rendered in such capacity. It is expected that, initially following the Merger, except as set forth below, the business and operations of the Company will be conducted in a manner substantially similar to how they are conducted currently. However, Parent will continue to evaluate the business and operations of the Company during the pendency of the Offer and after the consummation of the Offer and the Merger and will take such further actions as it deems appropriate under the circumstances then existing. Following the Merger, Parent plans to investigate combining its existing distribution business, or segments thereof, with the Company, and where feasible or practicable, to combine such business, or segments thereof. 17 19 MERGER AGREEMENT. THE FOLLOWING IS A SUMMARY OF CERTAIN PROVISIONS OF THE MERGER AGREEMENT. THE SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE MERGER AGREEMENT WHICH IS INCORPORATED HEREIN BY REFERENCE AND A COPY OF WHICH HAS BEEN FILED WITH THE COMMISSION AS AN EXHIBIT TO THE SCHEDULE 14D-1. THE MERGER AGREEMENT MAY BE EXAMINED AND COPIES MAY BE OBTAINED AT THE PLACE AND IN THE MANNER SET FORTH IN SECTION 8 OF THIS OFFER TO PURCHASE. The Offer. The Merger Agreement provides that Purchaser will commence the Offer and that, upon the terms and subject to the prior satisfaction or waiver of the conditions of the Offer, Purchaser will accept for payment and pay for Shares tendered as soon as practicable after it is legally permitted to do so under applicable law; provided, however, that Purchaser will not, without the written consent of the Company, accept for payment and pay for any Shares prior to January 7, 1997. The Merger Agreement provides that, without the written consent of the Company, Purchaser will not decrease the Offer Price, decrease the number of Shares sought, change the form of the consideration to be paid in the Offer, amend or waive the Minimum Condition, or amend any other condition of the Offer in any manner adverse to the holders of Shares (other than with respect to insignificant changes or amendments) except that if on the initial scheduled expiration date of the Offer (as it may be extended) all conditions of the Offer have not been satisfied or waived, the Offer may be extended from time to time until February 6, 1996 without the consent of the Company; provided, however, that, notwithstanding the foregoing, Purchaser may extend the Offer without the Company's consent until February 28, 1997 if the waiting period under the HSR Act has not expired or terminated by February 6, 1997. In addition, the Merger Agreement provides that, without the consent of the Company, the Offer Price may be increased and the Offer may be extended to the extent required by law in connection with such an increase. The Merger. The Merger Agreement provides that subject to the terms and conditions thereof, and pursuant to New York Law, at the Effective Time Purchaser will be merged with and into the Company. As a result of the Merger, the separate corporate existence of Purchaser will cease and the Company will continue as the Surviving Corporation. The respective obligations of Parent and Purchaser, on the one hand, and the Company, on the other hand, to effect the Merger are subject to the conditions that: (i) all authorizations, consents, orders or approvals of, or declarations or filings with, or expiration of waiting periods imposed by, any Federal, state, local or foreign governmental or regulatory authority necessary for the consummation of the Merger and the transactions contemplated by the Merger Agreement will have been filed, occurred or been obtained and will be in effect at the Effective Time; (ii) no temporary restraining order, preliminary injunction or permanent injunction or other order precluding, restraining, enjoining, preventing or prohibiting the consummation of the Merger will have been issued by any Federal, state or foreign court or other governmental or regulatory authority and remain in effect; (iii) no Federal, state, local or foreign statute, rule or regulation will have been enacted which prohibits the consummation of the Merger or would make the consummation of the Merger illegal; and (iv) the Merger Agreement will have been approved and adopted by the affirmative vote required of the shareholders of the Company, if required pursuant to the Company's articles of incorporation and applicable New York Law in order to consummate the Merger. In addition, the obligations of the Company to effect the Merger are also subject to the satisfaction or waiver, on or prior to the date of the closing of the Merger (the "Closing Date"), of the additional condition that Parent, Purchaser or their affiliates will have purchased Shares (including without limitation the Shares subject to the Tender Agreement) pursuant to the Offer. The Merger Agreement provides that at the Effective Time, each issued and outstanding Share (other than Shares that are owned by the Company as treasury stock and any Shares owned by Parent, Purchaser or any other wholly owned subsidiary of Parent) will be converted into the right to receive the Offer Price, without interest. Pursuant to the Merger Agreement, each issued and outstanding share of common stock, no par value, of Purchaser will be converted into one fully paid and non-assessable share of common stock of the Surviving Corporation. 18 20 The Company's Board of Directors. The Merger Agreement provides that promptly upon the purchase of and payment for any Shares (including without limitation all Shares subject to the Tender Agreement) by Purchaser or any other subsidiary of Parent pursuant to the Offer, Parent will be entitled to designate such number of directors, rounded to the nearest whole number, on the Board as is equal to the product of the total number of directors then serving on the Board (which, immediately prior to such calculation, may not consist of more than five directors) multiplied by the ratio of the aggregate number of Shares beneficially owned by Parent, Purchaser and any of their affiliates to the total number of Shares then outstanding. The Company must, upon request of Purchaser, take all action necessary to cause Parent's designees to be elected or appointed to the Board, including without limitation securing the resignations of such number of its incumbent directors as is necessary to enable Parent's designees to be so elected or appointed to the Board, and must cause Parent's designees to be so elected or appointed. It is Purchaser's expectation that those individuals so elected or appointed to the Board will not receive any compensation for services rendered in such capacity. At such time, the Company will also cause persons designated by Parent to constitute the same percentage (rounded to the nearest whole number) as is on the Board of (i) each committee of the Board, (ii) each board of directors (or similar body) of each subsidiary of the Company and (iii) each committee (or similar body) of each such board. The Merger Agreement further provides that the Company will promptly take all actions required pursuant to Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder, including mailing to shareholders as part of the Company's Schedule 14D-9 the information required by such Section 14(f) and Rule 14f-1, as is necessary to enable Parent's designees to be elected to the Board. From and after the time, if any, that Parent's designees constitute a majority of the Board, any amendment of the Merger Agreement, any termination of the Merger Agreement by the Company, any extension of time for performance of any of the obligations of Parent or Purchaser thereunder, any waiver of any condition or any of the Company's rights thereunder or other action by the Company thereunder (other than as specifically provided in the Merger Agreement) may be effected only if the action is approved by a majority of the directors of the Company then in office who were directors of the Company on the date of the Merger Agreement; provided that if there will be no such directors, such actions may be effected by majority vote of the entire Board. Shareholders' Meeting. Pursuant to the Merger Agreement, the Company will, if required by applicable law in order to consummate the Merger: (i) duly call, give notice of, convene and hold a special meeting of its shareholders (the "Special Meeting") as soon as practicable following the acceptance for payment and purchase of Shares by Purchaser pursuant to the Offer for the purpose of considering and taking action upon the Merger Agreement; (ii) prepare and file with the Commission a preliminary proxy or information statement relating to the Merger and the Merger Agreement and use its reasonable efforts (x) to obtain and furnish the information required to be included by the Commission in the Company Proxy Statement (as defined below) and, after consultation with Parent, to respond promptly to any comments made by the Commission with respect to the preliminary proxy or information statement and cause a definitive proxy or information statement (the "Company Proxy Statement") to be mailed to its shareholders and (y) to obtain the necessary approvals of the Merger and the Merger Agreement by its shareholders; and (iii) include in the Company Proxy Statement the recommendation of the Board that shareholders of the Company, as a group, vote in favor of the approval of the Merger and the adoption of the Merger Agreement (provided that shareholders should consult with their financial or tax advisers prior to voting to approve the Merger) unless, in the opinion of the Board after consultation with independent counsel, the inclusion of such recommendation would be inconsistent with its fiduciary duties under applicable law. Purchaser has agreed that it will, and will cause any of its permitted assignees to, vote all of the Shares then owned by it which are entitled to vote in favor of the approval of the Merger and the adoption of the Merger Agreement. The Merger Agreement provides that in the event Purchaser acquires at least 90% of the outstanding Shares, the parties will take all necessary and appropriate action to cause the Merger to become effective as soon as practicable after such acquisition, without approval of the Company shareholders. Interim Operations. In the Merger Agreement, the Company has agreed that, except as expressly contemplated therein or as agreed in writing by Parent, after November 26, 1996, and prior to the time the directors of the Purchaser have been elected to the Board (the "Board Reorganization"), that the business of 19 21 the Company and its subsidiaries will be carried on in the usual, regular and ordinary course, in substantially the same manner as previously conducted. Pursuant to the Merger Agreement, without limiting the generality of the foregoing, and except as otherwise expressly provided in the Merger Agreement, prior to the Board Reorganization, neither the Company nor any its subsidiaries will, without the prior written consent of Parent or Purchaser: (i) (a) declare, set aside or pay any dividends on or make other distributions in respect of any shares of its capital stock, (b) split, combine or reclassify any shares of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any shares of its capital stock or (c) propose to do any of the foregoing; (ii) issue, pledge, deliver, sell or transfer or authorize or propose the issuance, pledge, delivery, sale or transfer of, or repurchase, redeem or otherwise acquire, directly or indirectly, or propose the repurchase, redemption or other acquisition of, any shares of capital stock of any class of the Company or its subsidiaries, or any options, warrants or other rights exercisable for or securities convertible into or exchangeable for, any such shares (or enter into any agreements, arrangements, plans or understandings with respect to any of the foregoing); (iii) propose or adopt any amendment to its or their articles of incorporation or bylaws (or similar charter documents); (iv) transfer, sell, lease, license, mortgage or otherwise dispose of or encumber any material assets, or enter into any commitment to do any of the foregoing, other than in the ordinary and usual course of business, consistent with past practice; (v) incur, become subject to, or agree to incur any debt for borrowed money or incur or become subject to any obligation or liability (absolute or contingent), except current liabilities incurred, monies borrowed under the Company's current bank loan agreement, and obligations under contracts entered into, in the ordinary course of business consistent with prior practice, and the Company will not pay or be liable for prepayment or other penalties in connection with the early retirement of any Company indebtedness for borrowed money; (vi) make any change in the compensation payable or to become payable to any of its officers, directors, branch managers, marketing managers, agents or consultants, enter into or amend any employment, severance, termination or other agreement or make any loans to any of its officers, directors, branch managers, marketing managers, agents or consultants or make any change in its existing borrowing or lending arrangements for or on behalf of any of such persons, whether contingent on consummation of the Offer, the Merger or otherwise; provided, however, that the foregoing shall not prohibit the Company or any of its subsidiaries from increasing the compensation payable to any branch manager or marketing manager after three days' advance written notice to Parent's Chief Executive Officer or President; (vii) (a) pay, agree to pay or make any accrual or arrangement for payment of any pension, retirement allowance or other employee benefit pursuant to any existing plan, agreement or arrangement to any officer, director or employee except in the ordinary course of business and consistent with past practice; (b) pay or agree to pay or make any accrual or arrangement for payment to any employees of the Company or any of its subsidiaries of any amount relating to unused vacation days; (c) commit itself or themselves to adopt or pay, grant, issue, accelerate or accrue salary or other payments or benefits pursuant to any pension, profit-sharing, bonus, extra compensation, incentive, deferred compensation, stock purchase, stock option, stock appreciation right, group insurance, severance pay, retirement or other employee benefit plan, agreement or arrangement, or any employment or consulting agreement with or for the benefit of any director, officer, employee, agent or consultant, whether past or present; or (d) amend in any material respect any such existing plan, agreement or arrangement; provided, however, that the foregoing shall not prohibit the Company or any of its subsidiaries from (i) accruing or paying any bonus payable for the fiscal year ended September 30, 1996 determined in a manner consistent with past practice and in any event not to exceed the bonus paid for the fiscal year ended September 30, 1995 20 22 or (ii) providing for the deferral until calendar year 1997 of compensation earned in, and accrued on the Company's consolidated financial statements for, the fiscal year ended September 30, 1996; and (viii) (a) enter into, amend or terminate any agreements, commitments or contracts which, individually or in the aggregate, are material to the financial condition, business, assets, properties, prospects or results of operations of the Company and its subsidiaries taken as a whole, or waive, release, assign or relinquish any material rights or claims thereunder, except in the ordinary course of business, consistent with past practice; (b) discharge or satisfy any lien or encumbrance or payment of any obligation or liability (absolute or contingent) other than current liabilities in the ordinary course of business; (c) cancel or agree to cancel any material debts or claims, except in each case in the ordinary course of business; (d) waive any rights of substantial value; (e) pay, discharge, satisfy or settle any litigation or other claims, liabilities or obligations (absolute, accrued, asserted, unasserted, contingent or otherwise) involving the payment by the Company or any of its subsidiaries of more than $50,000; (f) make any equity investments in third parties; (g) incur, pay, or be subject to any material obligation to make any payment of, or in respect of, any tax on or before the Effective Time, except in the ordinary course of business consistent with past practice, settle any material audit, make or change any material tax election or file any amended tax returns, or agree to extend or waive any statute of limitations on the assessment or collection of taxes; (h) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company or any of its subsidiaries (other than the Merger) or otherwise make any material change in the conduct of the business or operations of the Company and its subsidiaries taken as a whole; or (i) agree in writing or otherwise to take any of the foregoing actions or any other action which would constitute a Material Adverse Effect (as hereinafter defined) in any of the items and matters covered by the representations and warranties of the Company in the Merger Agreement, or make any representation or warranty of the Company in the Merger Agreement materially inaccurate in any respect. In addition, except as expressly provided in the Merger Agreement, prior to the Board Reorganization, the Company and each of its subsidiaries will: (i) (a) properly prepare and file all material reports or tax returns required to be filed with any governmental or regulatory authorities with respect to its business, operations or affairs, and (b) pay in full and when due all taxes indicated on such tax returns or otherwise levied or assessed upon the Company, its subsidiaries or any of their assets and properties unless such taxes are being contested in good faith by appropriate proceedings and reasonable reserves therefor have been established in accordance with generally accepted accounting principles, consistently applied; and (ii) (a) report on a regular basis, at reasonable times, to a representative designated by Parent regarding material operational matters and financial matters (including monthly unaudited financial information); (b) promptly and regularly notify Parent of any material change in the normal course or operation of its business or its properties and of any material development in the business or operations of the Company and its subsidiaries (including without limitation any Material Adverse Effect or any governmental or third party claims, complaints, investigations or hearings, or communications indicating that the same may be forthcoming or contemplated); and (c) cooperate with Parent and its affiliates and representatives in arranging for an orderly transition in connection with the transfer of control of the Company. As used in the Merger Agreement, a "Material Adverse Effect" means any event, circumstance, condition, development or occurrence causing, resulting in or having a material adverse effect on the financial condition, business, assets, properties, prospects or results of operations of the Company and its subsidiaries taken as a whole. No Solicitation. In the Merger Agreement, the Company has agreed that the Company and its subsidiaries and affiliates will not, and will use their reasonable efforts to ensure that their respective officers, directors, employees, investment bankers, attorneys, accountants and other representatives and agents do not, directly or indirectly, initiate, solicit, encourage or participate in, or provide any information to any person concerning, or take any action to facilitate the making of, any offer or proposal which constitutes or is 21 23 reasonably likely to lead to any Acquisition Proposal (as hereinafter defined) of the Company or any subsidiary or affiliate or an inquiry with respect thereto. The Company has agreed and will cause its subsidiaries and affiliates, and their respective officers, directors, employees, investment bankers, attorneys, accountants and other agents to, immediately cease and cause to be terminated all existing activities, discussions and negotiations, if any, with any parties conducted heretofore with respect to such matters. Nonetheless, the Company may, directly or indirectly, provide access and furnish information concerning its business, properties or assets to any corporation, partnership, person or other entity or group pursuant to an appropriate confidentiality agreement, and may negotiate and participate in discussions and negotiations with such entity or group concerning an Acquisition Proposal (x) if such entity or group has submitted a bona fide written proposal to the Board relating to any such transaction and (y) if, in the opinion of the Board, after consultation with independent legal counsel to the Company, the failure to provide such information or access or to engage in such discussions or negotiations would be inconsistent with their fiduciary duties under applicable law. The Company is required to promptly notify Parent and Purchaser of any such offers, proposals or Acquisition Proposals (including without limitation the terms and conditions thereof and the identity of the person making it), and is further required to keep Parent apprised of all developments with respect to any such Acquisition Proposal. The Company is further required to give Parent written notice of any Acquisition Proposal that the Company intends to accept as an Acceptable Offer in accordance with the terms of the Merger Agreement at least two business days prior to accepting such offer or otherwise entering into any agreement or understanding with respect thereto. Any modification of an Acquisition Proposal constitutes a new Acquisition Proposal for purposes of the described provisions of the Merger Agreement. Nothing in the Merger Agreement prohibits the Company or its Board from (a) taking and disclosing to the Company's shareholders a position with respect to a tender offer by a third party pursuant to Rules 14d-9 and 14e-2 under the Exchange Act, or (b) making such disclosure to the Company's shareholders which, in the opinion of the Board, after consultation with independent legal counsel to the Company, may be required under applicable law. "Acquisition Proposal" when used in connection with any person means any tender or exchange offer involving such person, any proposal for a merger, consolidation or other business combination involving such person or any subsidiary of such person, any proposal or offer to acquire in any manner a substantial equity interest in, or a substantial portion of the business or assets of, such person or any subsidiary of such person, any proposal or offer with respect to any recapitalization or restructuring with respect to such person or any subsidiary of such person or any proposal or offer with respect to any other transaction similar to any of the foregoing with respect to such person, or any subsidiary of such person; provided, however, that, as used in the Merger Agreement, the term "Acquisition Proposal" does not apply to (i) any transaction of the type described in Section 6.1(d) of the Merger Agreement involving Parent, Purchaser or their affiliates. "Acceptable Offer" means an executed written offer for an Acquisition Proposal received by the Company (i) in which the offeror demonstrates proof reasonably satisfactory to the Company's Board of Directors of its financial capability and authority to consummate the transactions contemplated by such offer (including without limitation the payments required by Section 9.1(b) of the Merger Agreement) and (ii) which provides for (x) net cash proceeds to the Company or all of its shareholders (in addition to amounts paid pursuant to clause (i) above) in an amount greater than that provided for under the Merger Agreement, at a per Share purchase price greater than that contained thereunder (or, in the event such amount has been increased by Parent in the Merger Agreement, such greater amount) or (y) the issuance of publicly traded stock as the consideration payable to the Company or all of its shareholders (in addition to amounts paid pursuant to clause (i) above) which has an established market value in excess of the per Share purchase price contained herein (or, in the event such amount has been increased by Parent in the Merger Agreement, such greater amount). Directors' and Officers' Indemnification. (a) The bylaws of the Surviving Corporation shall contain the provisions with respect to indemnification set forth in the bylaws of the Company on November 26, 1996 and shall not be amended, repealed or otherwise modified from such date until six years from the Effective Time in any manner that would adversely affect the rights thereunder of individuals who on or at any time prior to the 22 24 Effective Time were directors, officers, employees or agents of the Company, unless such modification is required by law. (b) For six years after the earlier of (i) the date on which the designees of Parent have been elected to the Board pursuant to the Merger Agreement and constitute a majority of the members thereof and (ii) the Effective Time, Parent will, or will cause the Surviving Corporation to, indemnify, defend and hold harmless the present and former officers, directors, employees and agents of the Company and its subsidiaries (each, an "Indemnified Party") against all losses, claims, damages, liabilities, fees and expenses (including reasonable fees and disbursements of counsel and judgments, fines, losses, claims, liabilities and amounts paid in settlement (provided that any such settlement is effected with the prior written consent of Parent or the Surviving Corporation, which consent shall not be unreasonably withheld)) arising out of actions or omissions occurring at or prior to the Effective Time (including without limitation matters arising out of or pertaining to the transactions contemplated by the Merger Agreement) to the full extent permitted under New York Law or the Company's articles of incorporation or bylaws, in each case as in effect at November 26, 1996, including provisions therein relating to the advancement of expenses incurred in the defense of any action or suit; provided, that in the event any claim or claims are asserted or made within such six-year period, all rights to indemnification in respect of any such claim or claims shall continue until disposition of any and all such claims; and provided, further, that any determination required to be made with respect to whether an Indemnified Party's conduct complies with the standards set forth under New York Law, the Company's articles of incorporation or bylaws or the written indemnification agreements referred to below, as the case may be, will be made by independent counsel mutually acceptable to Parent and the Indemnified Party. (c) In addition, Parent and the Surviving Corporation shall honor and fulfill in all respects the obligations of the Company pursuant to certain indemnification agreements with the Company's directors and officers. (d) The Company's directors' and officers' liability insurance as presently in effect (including without limitation all coverages and terms thereunder) shall be maintained by Parent or the Surviving Corporation through the Effective Time. As of the Effective Time, Parent shall, or shall cause the Surviving Corporation to, purchase and pay for run-off coverage (i.e., coverage for an extended reporting period) for a six-year term, covering those persons who are currently covered by the Company's directors' and officers' liability insurance policy with coverages and terms substantially similar to those now applicable under the Company's present directors' and officers' liability insurance policy. Benefit Plans and Certain Contracts and Employment Arrangements. It is Parent's current intention to cause the Company to provide its employees for at least two years following the Effective Time in general with employee benefit arrangements providing welfare benefits substantially comparable in the aggregate to those provided by the Company as of the date of the Merger Agreement, except for any changes thereto that may be required by law, provided, that Parent has retained the right to amend, modify or terminate any employee benefit policy or arrangement maintained by the Company to the extent not prohibited by the terms thereof or by applicable law. Simultaneously with the execution of the Merger Agreement, Parent entered into employment agreements with the Selling Shareholder and Richard Hyman and Parent and the Company entered into employment agreements with John Tortorici, Elliott Schnabel, Thomas Woolf, Gary Adams, Steven Sokoloff, James Darren O'Donnell and Andrew Epstein (collectively, with Mr. Hyman, the "Key Officers"), such agreements to be effective as of the Effective Time. The Selling Shareholder's employment agreement provides that the Selling Shareholder will be employed for a one year term as Vice Chairman of the Board and an Assistant Secretary of Parent at a salary of $100,000 per year, with automatic one year extensions at a nominal salary (to be set by Parent) sufficient to enable the Selling Shareholder to participate in Parent's medical insurance plan. Mr. Hyman's employment agreement provides that Mr. Hyman will be employed for a five year term as President of the Company and Executive Vice President -- Electronics Distribution Group of Parent at a base salary of $400,000 per year plus a guaranteed minimum incentive bonus of $135,000 per year. Mr. Tortorici's employment agreement provides that Mr. Tortorici will be employed for a three year term as Vice President -- Finance and Treasurer of the Company at a base salary of $175,000 per year plus a 23 25 guaranteed minimum incentive bonus of $70,000 per year. Mr. Schnabel's employment agreement provides that Mr. Schnabel will be employed for a three year term as Regional Vice President -- Sales of the Company at a base salary of $200,000 per year plus a guaranteed minimum incentive bonus of $80,000 per year. Mr. Woolf's employment agreement provides that Mr. Woolf will be employed for a three year term as Regional Vice President -- Sales of the Company at a base salary of $175,000 per year plus a guaranteed minimum incentive bonus of $56,000 per year. Mr. Adams' employment agreement provides that Mr. Adams will be employed for a three year term as Regional Vice President -- Sales of the Company at a base salary of $150,000 per year plus a guaranteed minimum incentive bonus of $61,000 per year. Mr. Sokoloff's employment agreement provides that Mr. Sokoloff will be employed for a three year term as Vice President -- Marketing (semiconductors, computer products and displays) of the Company at a base salary of $250,000 per year plus a guaranteed minimum incentive bonus of $94,000 per year. Mr. O'Donnell's employment agreement provides that Mr. O'Donnell will be employed for a three year term as Vice President--Marketing (passives, electromechanical and power supplies) of the Company at a base salary of $225,000 per year plus a guaranteed minimum incentive bonus of $75,000 per year. Mr. Epstein's employment agreement provides that Mr. Epstein will be employed for a three year term as Vice President -- Operations of the Company at a base salary of $175,000 per year plus a guaranteed minimum incentive bonus of $66,000 per year. In addition, each of the Key Officers will be awarded options to acquire 10,000 shares of common stock of Parent (25,000 shares in the case of Mr. Hyman) under Parent's stock option plans pursuant to a stock option agreement to be entered into upon effectiveness of their respective employment agreements. Each Key Officer will also be entitled to participate in all of Parent's employee benefit plans listed in Parent's employee handbook, as the same may change from time to time, and, in addition, to participate on the same terms as senior Parent executives in any benefit plans available to members of Parent's management (whether or not listed in the employee handbook). Election of Directors. Parent will, immediately after the Effective Time, cause the Selling Shareholder to be elected to Parent's Board of Directors. Representations and Warranties. The Company has made customary representations and warranties to Parent and Purchaser with respect to, among other things, its organization and qualification, subsidiaries, capitalization, authority, consents and approvals, the Company's Commission reports, financial statements, undisclosed liabilities, certain changes, taxes, litigation, employee benefit plans, environmental liability, compliance with applicable laws, material contracts, patents, trademarks, trade names, copyrights and registrations, insurance, opinion of financial advisor, vote required, information supplied, the Company's proxy statement, certain matters with respect to New York Law, Company stock options, inventory, customers and suppliers and backlog. In addition, the Company represented to Parent and the Purchaser that the Board, at a meeting duly called and held, has (i) determined that the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger, are fair to, and in the best interests of, the shareholders of the Company, as a group, (ii) approved the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger, in all respects and that such approval constitutes approval of the Offer, the Merger Agreement and the Merger for purposes of Sections 902 and 912 of the New York Business Corporation Law and similar statutes of other states that might be deemed applicable. Termination; Expenses. The Merger Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, whether before or after shareholder approval thereof: (i) by mutual consent of the Board of Directors of Parent and the Board; (ii) by either the Board of Directors of Parent or the Board: (a)(i) if all conditions to the Offer shall not have been satisfied or waived within the relevant time periods specified in Section 1.1(a) of the Merger Agreement, (ii) if all such conditions to the Offer have been so satisfied or waived and the Purchaser shall not have accepted for purchase and purchased all Shares validly tendered and not withdrawn prior to the Expiration Date within ten (10) business days following such Expiration Date, or (iii) if the Merger will not have been consummated on or prior to May 31, 1997; provided, however, that the right to terminate the Merger Agreement as described in this clause (a) will not be available to any party whose failure to fulfill any material obligation under the Merger Agreement has been the cause of, 24 26 or resulted in, the failure of the Offer or the Merger, as applicable, to be consummated on or prior to the applicable date(s); or (b) if a court of competent jurisdiction or other governmental or regulatory authority will have issued an order, decree or ruling or taken any other action (which order, decree, ruling or other action the parties hereto will use their reasonable efforts to lift), in each case permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Merger Agreement and such order, decree, ruling or other action will have become final and non-appealable; (iii) by the Board: (a) if, prior to the purchase of Shares by Parent, Purchaser or their affiliates pursuant to the Offer, the Company will have (A) accepted an Acceptable Offer in compliance with the terms of Section 6.1 of the Merger Agreement and (B) paid or caused to be paid the expenses payable to Parent provided for in Section 9.1(b) of the Merger Agreement; or (b) if, prior to the purchase of the Shares pursuant to the Offer, Parent or Purchaser breaches or fails in any material respect to perform or comply with any of its material covenants and agreements contained therein or breaches its representations and warranties in any material respect; or (c) if Parent, Purchaser or any of their affiliates will have failed to commence the Offer on or prior to five business days following the date of the initial public announcement of the Offer other than due to an occurrence that if occurring after the commencement of the Offer would result in a failure to satisfy any of the conditions described in Section 14 of this Offer to Purchase; provided that the Company may not terminate the Merger Agreement as described in this clause (c) if the Company is in material breach of the Merger Agreement; or (d) if prior to the purchase of Shares pursuant to the Offer, there shall have been instituted, pending or threatened any action, suit or proceeding which challenges, seeks to make illegal, prohibits, or makes illegal the acceptance for payment, payment for or purchase of Shares or the consummation of the Offer or the Merger and which, in the opinion of independent counsel acceptable to the parties (consent not to be unreasonably withheld), has reasonable possibility of success; (iv) by the Board of Directors of Parent: (a) if, due to an occurrence that if occurring after the commencement of the Offer would result in a failure to satisfy any of the conditions described in Section 14 of this Offer to Purchase, Parent, Purchaser or any of their affiliates will have failed to commence the Offer on or prior to December 4, 1996; provided that Parent and Purchaser may not terminate the Merger Agreement as described in this clause (a) if Parent or Purchaser (x) is in material breach of the Merger Agreement or (y) has not exercised such right by the close of business, Los Angeles time, on the fifth business day following December 4, 1996; (b) if Parent or Purchaser is not in material breach of the Merger Agreement and prior to the purchase of Shares pursuant to the Offer, the Company will have received an Acceptable Offer and the Board will have withdrawn, modified or changed (including by amendment of the Schedule 14D-9) in a manner adverse to Parent or Purchaser its approval or recommendation of the Offer, the Merger Agreement or the Merger or will have recommended an Acquisition Proposal; provided, however that if the Company's Board of Directors modifies or changes its recommendation of the Offer, this Agreement or the Merger to either express no opinion and remain neutral with respect thereto, or to provide that it is unable to take a position with respect thereto, such modification or change will not be deemed to be adverse to Parent or Purchaser for purposes of this clause (b); (c) if Parent or Purchaser, as the case may be, will have terminated the Offer, or the Offer will have expired without Parent or Purchaser, as the case may be, purchasing any Shares thereunder, provided that Parent and Purchaser may not terminate the Merger Agreement as described in this clause (c) if (x) it or the Purchaser has failed to purchase the Shares in the Offer in violation of the material terms thereof or (y) Parent or Purchaser has not exercised such right by the close of business on or before the fifth business day following the termination or expiration of the Offer in accordance with its terms; or (d) if, prior to the purchase of the Shares pursuant to the Offer, the Company breaches or fails in any material respect to perform or comply with any of its material covenants and agreements contained in the Merger Agreement or breaches its representations and warranties in any material respect. If (i) the Board terminates the Merger Agreement because the Company has accepted an Acceptable Offer under certain conditions prior to the purchase of Shares under the Offer, (ii) the Board of Directors of Parent terminates the Merger Agreement if the Company has received an Acceptable Offer and withdrawn or adversely changed its recommendation of the transaction under certain circumstances, or (iii) the Board of 25 27 Directors of Parent terminates the Merger Agreement if Parent, Purchaser or any of their affiliates will have failed to commence the Offer by December 4, 1996 under certain circumstances or if Parent or Purchaser will have terminated the Offer or the Offer will have expired without Parent or Purchaser purchasing any Shares under certain conditions, in each case due to (x) a material breach of the representations and warranties of the Company set forth in the Merger Agreement or (y) a material breach of, or failure to perform or comply with, any material obligation, agreement or covenant contained in the Merger Agreement, including but not limited to the covenants by the Company, then in any such case as described in clause (i), (ii) or (iii) the Company shall be required to reimburse Parent for all of its fees and expenses incurred in connection with the Offer and the Merger Agreement and the transactions contemplated thereby. Any such amounts must be paid by the Company concurrently with the termination of the Merger Agreement in the case of a termination referred to in clause (i) and otherwise not later than two business days after termination of the Merger Agreement (or, if later, after Parent provides reasonable documentation to the Company of the amount of such fees and expenses). Any such fees and expenses not paid when due shall accrue interest at the rate of ten percent per annum from the due date until paid in full. If (i) the Board of Directors of the Company terminates the Merger Agreement prior to the purchase of any Shares pursuant to the Offer because Parent or Purchaser breaches or fails in any material respect to perform or comply with any of its material covenants and agreements contained in the Merger Agreement or breaches its representations and warranties contained therein in any material respect or (ii) Parent is unable to obtain the financing necessary to satisfy the Financing Condition (other than because of (a) the occurrence of any event that would result in a failure to satisfy any of the conditions of the Offer (see Section 14) (and for this purpose only, disregarding the provisos to the condition set forth in paragraph (d) of Section 14), or (ii) the occurrence of a Material Adverse Effect with respect to Parent and its consolidated subsidiaries, whether such event or Material Adverse Effect occurs before or after commencement of the Offer), then Parent shall be required to reimburse the Company for all of its fees and expenses incurred in connection with the Offer and the Merger Agreement and the transactions contemplated thereby, such reimbursement to occur not later than two business days after termination of the Merger Agreement (or, if later, after the Company provides reasonable documentation to Parent of the amount of such fees and expenses). Any such fees and expenses not paid when due shall accrue interest at the rate of ten percent per annum from the due date until paid in full. TENDER AGREEMENT. THE FOLLOWING IS A SUMMARY OF THE MATERIAL TERMS OF THE TENDER AGREEMENT. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE TENDER AGREEMENT WHICH IS INCORPORATED HEREIN BY REFERENCE AND COPIES OF WHICH HAVE BEEN FILED WITH THE COMMISSION AS AN EXHIBIT TO THE SCHEDULE 14D-1. THE TENDER AGREEMENT MAY BE EXAMINED AND COPIES MAY BE OBTAINED AT THE PLACE AND IN THE MANNER AS SET FORTH IN SECTION 8 OF THIS OFFER TO PURCHASE. Tender of Shares. Concurrently with the execution of the Merger Agreement, Parent, Purchaser and the Selling Shareholder entered into the Tender Agreement. Upon the terms and subject to the conditions of such agreement, the Selling Shareholder has agreed (i) to validly tender or cause the record owner of any Shares beneficially owned by the Selling Shareholder to tender all such Shares pursuant to the Offer not later than December 10, 1996 or, with respect to any Shares acquired directly or indirectly, or otherwise beneficially owned, by the Selling Shareholder in any capacity after November 26, 1996 and prior to the termination of the Tender Agreement, whether upon the exercise of options, warrants or rights, the conversion or exchange of convertible or exchangeable securities, or by means of a purchase, dividend, distribution, gift, bequest, inheritance or as a successor-in-interest in any capacity (including a fiduciary capacity) or otherwise ("After-Acquired Shares") within one business day following the acquisition thereof, and (ii) not to withdraw any Shares so tendered without the prior written consent of Parent. The Selling Shareholder has agreed that Purchaser's obligation to accept for payment and pay for the Shares in the Offer is subject to the terms and conditions of the Offer. Non-Competition; Nondisclosure. The Selling Shareholder has agreed that for a period of three years from the date of the sale of the Shares, or, if longer, while the Selling Shareholder is a director, officer or employee of Parent or Purchaser, he will not compete with the Company or solicit employees or customers of the Company, and that he will not disclose trade secrets or other confidential information of the Company. 26 28 Notwithstanding the foregoing, at any time after the initial three year period, the Selling Shareholder may compete with the Company or solicit employees of the Company with the express written consent of Parent, which will not be unreasonably withheld. Voting. The Selling Shareholder has agreed that (for so long as the Merger Agreement is in effect), at any meeting of the holders of the Shares, however called, or in connection with any written consent of the holders of the Shares, he will vote (or cause to be voted) his Shares (a) in favor of the Merger, the execution and delivery by the Company of the Merger Agreement and the approval of the terms thereof and each of the other actions contemplated by the Merger Agreement and the Tender Agreement and any actions required in furtherance thereof; (b) against any action or agreement that would result in a breach in any respect of any covenant, representation or warranty or any other obligation or agreement of the Company under the Merger Agreement or the Tender Agreement; and (c) except as otherwise agreed to in writing in advance by Parent, against any of the following actions or agreements (other than the Merger Agreement or the transactions contemplated thereby): (i) any action or agreement that is intended, or could reasonably be expected, to impede, interfere with, delay, postpone or attempt to discourage or adversely affect the Merger, the Offer and the transactions contemplated by the Tender Agreement and the Merger Agreement; (ii) any extraordinary corporate transaction, such as a merger, consolidation or other business combination involving the Company and its subsidiaries; (iii) a sale, lease or transfer of a material amount of assets of the Company or its subsidiaries or a reorganization, recapitalization, dissolution or liquidation of the Company or its subsidiaries; (iv) any change in the management or the Board, except as specifically contemplated by the Merger Agreement; (v) any change in the present capitalization or dividend policy of the Company; (vi) any amendment of the Company's articles of incorporation or bylaws; or (vii) any other material change in the Company's corporate structure or business. Any such vote or consent shall be given in accordance with such procedures relating thereto as shall ensure that it is duly counted for purposes of determining that a quorum is present and for purposes of recording the results of such vote or consent. Notwithstanding anything to the contrary contained in the Tender Agreement, the Selling Shareholder will be free to act in his capacity as a member of the Board and an officer and to discharge his fiduciary duties as such. Other Covenants, Representations, Warranties. In connection with the Tender Agreement, the Selling Shareholder has made certain representations, warranties and covenants, including without limitation with respect to ownership of Shares, the Selling Shareholder's power and authority to enter into and perform his obligations under the Tender Agreement, the receipt of requisite governmental consents and approvals, absence of conflicts, absence of liens and encumbrances on and in respect of the Selling Shareholder's Shares, restrictions on the transfer of the Selling Shareholder's Shares, reliance by Parent, finder's fees, no solicitation, non-competition, nondisclosure, notice of additional shares and the solicitation of acquisition proposals. Vote Required to Approve Merger. New York Law provides that the adoption of any plan of merger or consolidation by the Company requires the approval of the Board and the affirmative vote of at least 66 2/3% of all outstanding shares entitled to vote thereon (including the votes of any Shares owned by Parent and Purchaser that have voting rights at such time), if the "short form" merger procedure described below is not available. The Board has authorized and approved the Offer and the Merger; consequently, the only additional action of the Company that may be necessary to effect the Merger is approval by such shareholders at a meeting of the Company's shareholders convened for that purpose (the "Shareholders' Meeting") if the short-form merger procedure described below is not available. New York Law also provides that the Merger will not require the approval of the Company's shareholders, and can be adopted by Purchaser's Board of Directors, if Purchaser owns at least 90% of the outstanding Shares. Accordingly, if, as a result of the Offer or otherwise, Purchaser acquires or controls the voting power of at least 90% of the outstanding Shares, Purchaser could, and intends to, effect the Merger without the Shareholders' Meeting and without approval by shareholders of the Company. If, however, Purchaser does not acquire at least 90% of the then outstanding Shares pursuant to the Offer or otherwise and a vote of the Company's shareholders is required under New York Law, a significantly longer period of time will be required to effect the Merger. Even if the Minimum Condition is satisfied, Purchaser will not necessarily be able to purchase sufficient Shares in the Tender Offer in order to be able to use the "short form" merger procedures described above. 27 29 The Commission has adopted Rule 13e-3 under the Exchange Act which is applicable to certain "going private" transactions and which may under certain circumstances be applicable to the Merger or another business combination following the purchase of Shares pursuant to the Offer in which Purchaser seeks to acquire the remaining Shares not held by it. Purchaser believes, however, that Rule 13e-3 will not be applicable to the Merger because it is anticipated that the Merger will be effected within one year following consummation of the Offer. Rule 13e-3 requires, among other things, that certain financial information concerning the Company and certain information relating to the fairness of the proposed transaction and the consideration offered to minority shareholders in such transaction, be filed with the Commission and disclosed to shareholders prior to consummation of the transaction. Appraisal Rights. Notwithstanding anything in the Merger Agreement to the contrary, any issued and outstanding Shares held by persons who object to the Merger and comply with all the provisions of New York Law concerning the right of holders of Shares to dissent from the merger and require appraisal of their Shares (each, a "Dissenting Shareholder") will not be converted into the right to receive the Offer Price, without interest, pursuant to the Merger Agreement but will become the right to receive such consideration as may be determined to be due to such Dissenting Shareholder pursuant to New York Law; provided, however that the Shares outstanding immediately prior to the Effective Time and held by a Dissenting Shareholder who will, after the Effective Time, fail to perfect his right to appraisal, withdraw his demand for appraisal, or lose his right of appraisal, in any case pursuant to Section 623 of the New York Law, will be deemed to be converted as of the Effective Time into the right to receive the Offer Price, payable to the holder thereof, without interest. The Company will give Parent (i) prompt notice of any written demands for appraisal of the Shares received by the Company and (ii) the opportunity to direct all negotiations and proceedings with respect to any such demands. The Company will not, without the prior written consent of Parent, voluntarily make any payment with respect to, or settle, offer to settle or otherwise negotiate, any such demands. 12. DIVIDENDS AND DISTRIBUTIONS; CHANGES IN STOCK. As described above, the Merger Agreement provides that the Company will not, and will not cause or permit any of its subsidiaries to, (a) declare, set aside or pay any dividends on or make other distributions in respect of any shares of its capital stock, (b) split, combine or reclassify any shares of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any shares of its capital stock or (c) propose to do any of the foregoing. 13. EFFECT OF THE OFFER ON THE MARKET FOR THE SHARES; NNM QUOTATION AND EXCHANGE ACT REGISTRATION. The purchase of Shares by Purchaser pursuant to the Offer will reduce the number of Shares that might otherwise trade publicly and will reduce the number of holders of Shares, which could adversely affect the liquidity and market value of the remaining Shares held by the public. Depending upon the number of Shares purchased pursuant to the Offer, the Shares may no longer meet the requirements of the NASD for continued inclusion on the NNM. The NASD requires that an issuer have at least 100,000 publicly held shares, held by at least 300 shareholders, with a market value of at least $200,000, have total assets of at least $2 million and have capital and surplus (total shareholders' equity) of at least $1 million. If the NNM were to cease to publish quotations for the Shares, it is possible that the Shares would continue to trade in the over-the-counter market and that price or other quotations would be reported by other sources. The extent of the public market for such Shares and the availability of such quotations would depend, however, upon such factors as the number of shareholders and/or the aggregate market value of such securities remaining at such time, the interest in maintaining a market in the Shares on the part of securities firms, the possible termination of registration under the Exchange Act as described below, and other factors. Purchaser cannot predict whether the reduction in the number of Shares that might otherwise trade publicly would have an adverse or beneficial effect on the market price for, or marketability of, the Shares or whether it would cause future market prices to be greater or lesser than the Offer Price. The Shares are currently "margin securities," as such term is defined under the margin regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), which has the effect, among other things, of allowing brokers to extend credit on the collateral of such securities. Depending upon factors similar to those described above regarding listing and market quotations, following the Offer it is 28 30 possible that the Shares might no longer constitute "margin securities" for purposes of the margin regulations of the Federal Reserve Board, in which event such Shares could no longer be used as collateral for loans made by brokers. The Shares are currently registered under the Exchange Act. Such registration may be terminated upon application of the Company to the Commission if the Shares are not listed on a national securities exchange and there are fewer than 300 record holders of the Shares. The termination of registration of the Shares under the Exchange Act would substantially reduce the information required to be furnished by the Company to holders of Shares and to the Commission and would make certain provisions of the Exchange Act, such as the short-swing profit recovery provisions of Section 16(b) and the requirement of furnishing a proxy statement in connection with shareholders' meetings pursuant to Section 14(a), no longer applicable to the Shares. In addition, "affiliates" of the Company and persons holding "restricted securities" of the Company may be deprived of the ability to dispose of such securities pursuant to Rule 144 promulgated under the Securities Act. If registration of the Shares under the Exchange Act were terminated, the Shares would no longer be "margin securities" or be eligible for NNM reporting. Parent intends to seek to cause the Company to terminate the registration of the Shares under the Exchange Act as soon after consummation of the Offer as the requirements for termination of the registration of the Shares are met. 14. CONDITIONS OF THE OFFER. Notwithstanding any other provisions of the Offer, and in addition to (and not in limitation of) Purchaser's rights to extend and amend the Offer at any time in its sole discretion (subject to the provisions of the Merger Agreement), Purchaser will not be required to accept for payment or, subject to any applicable rules and regulations of the Commission, including Rule 14e-1(c) under the Exchange Act (relating to Purchaser's obligation to pay for or return tendered Shares promptly after termination or withdrawal of the Offer), pay for, and may delay the acceptance for payment of or, subject to the restriction referred to above, the payment for, any tendered Shares, and may terminate the Offer as to any Shares not then paid for, if (i) the applicable waiting period under the HSR Act has not expired or terminated, (ii) the Minimum Condition has not been satisfied or waived, (iii) the Financing Condition has not been satisfied or waived, or (iv) at any time on or after November 26, 1996 and before the time for payment of any such Shares, any of the following events will occur or will be determined by Purchaser to have occurred: (a) there will have been instituted, pending or threatened any action, proceeding, application, claim or suit, or any statute, rule, regulation, judgment, order or injunction promulgated, entered, enforced, enacted, proposed, issued or applicable to the Offer or the Merger by any domestic or foreign Federal, state or local governmental regulatory or administrative agency or authority or court or legislative body or commission which directly or indirectly (1) challenges, seeks to make illegal, prohibits or makes illegal, or imposes any material limitations on, Parent's or Purchaser's ownership or operation (or that of any of their respective subsidiaries or affiliates) of all or a material portion of the businesses or assets of them or of the Company or its subsidiaries, or compels Parent or Purchaser or their respective subsidiaries and affiliates to dispose of or hold separate any material portion of the business or assets of the Company or Parent and their respective subsidiaries, in each case taken as a whole, (2) challenges, seeks to make illegal, prohibits or makes illegal the acceptance for payment, payment for or purchase of Shares or the consummation of the Offer or the Merger, (3) results in the delay in or restricts the ability of Purchaser, or renders Purchaser unable, to accept for payment, pay for or purchase some or all of the Shares, (4) imposes material limitations on the ability of Parent or Purchaser to exercise full rights of ownership of the Shares, including without limitation the right to vote the Shares purchased by it on all matters presented to the Company's shareholders, (5) seeks to obtain or obtains material damages or otherwise directly or indirectly relates to the transactions contemplated by the Offer or the Merger, (6) seeks to require divestiture by Parent, Purchaser or any of their respective subsidiaries or affiliates of any Shares, or (7) could otherwise have a Material Adverse Effect, provided that Parent will have used reasonable efforts to cause any such judgment, order or injunction to be vacated or lifted; 29 31 (b) there will have occurred (1) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States (whether or not mandatory), (2) a commencement of a war, armed hostilities or other international or national calamity directly or indirectly involving the United States, (3) any limitation (whether or not mandatory) by any foreign or United States governmental authority on the extension of credit by banks or other financial institutions, or (4) in the case of any of the foregoing existing at the time of the commencement of the Offer, a material acceleration or worsening thereof; (c) the representations and warranties of the Company set forth in the Merger Agreement will not be true and correct in any material respect when made or at and as of the date of consummation of the Offer as though made on or as of such date, except (i) for changes specifically permitted by the Merger Agreement, and (ii) those representations and warranties that address matters only as of a particular date are true and correct as of such date, or the Company will have breached or failed in any material respect to perform or comply with any material obligation, agreement or covenant required by the Merger Agreement to be performed or complied with by it; (d) any change in the financial condition, business, assets, properties, prospects or results of operations of the Company and its subsidiaries taken as a whole that would constitute a Material Adverse Effect will have occurred, or there will be any event, condition, occurrence or development of a state of circumstances or facts which individually or in the aggregate causes, results in or could cause or result in such a Material Adverse Effect; provided, however, that any decrease in net sales or net income before taxes (including, without limitation, losses) of the Company and its subsidiaries on a consolidated basis that may have occurred at any time subsequent to September 30, 1996 (whether before, on or after November 26, 1996) shall not alone be deemed to constitute, or to cause or result in, or be a factor in the determination of, a Material Adverse Effect; and provided further that the potential loss of certain product lines disclosed by the Company to Parent and Purchaser shall not be deemed to constitute, or to cause or result in, a Material Adverse Effect; (e) the Merger Agreement will have been terminated in accordance with its terms; (f) any person or group will have entered into a definitive agreement or agreement in principle with the Company with respect to an Acquisition Proposal or other business combination with the Company; (g) the Board will have withdrawn, modified or changed (including by amendment of the Schedule 14D-9) in a manner adverse to Parent or Purchaser its approval or recommendation of the Offer, the Merger Agreement or the Merger or will have recommended an Acquisition Proposal; provided, however, that if the Board modifies or changes its recommendation of the Offer, the Merger Agreement or the Merger to either express its opinion and remain neutral with respect thereto, or to provide that it is unable to take a position with respect thereto, such modification or change will not be deemed to be adverse to Parent or Purchaser for purposes of this paragraph (g); which in the sole judgment of Parent or Purchaser, in any such case, and regardless of the circumstances (including any action or inaction by Parent or Purchaser giving rise to such condition) makes it inadvisable to proceed with the Offer or with such acceptance of Shares for payment or payments. The foregoing conditions are for the sole benefit of Parent and Purchaser and may be waived by Parent or Purchaser, in whole or in part at any time and from time to time in the sole discretion of Parent or Purchaser. The failure by Parent or Purchaser at any time to exercise any of the foregoing rights will not be deemed a waiver of any such right and each such right will be deemed an ongoing right which may be asserted at any time and from time to time. 15. REGULATORY APPROVALS; STATE TAKEOVER LAWS. General. Except as otherwise disclosed herein, based on a review of publicly available information filed by the Company with the Commission, neither Purchaser nor Parent is aware of (i) any license or regulatory permit that appears to be material to the business of the Company and its subsidiaries, taken as a whole, that might be adversely affected by the acquisition of Shares by Purchaser pursuant to the Offer or the Merger or 30 32 (ii) any approval or other action by any governmental, administrative or regulatory agency or authority, domestic or foreign, that would be required for the acquisition or ownership of Shares by Purchaser as contemplated herein. Should any such approval or other action be required, Purchaser currently contemplates that such approval or action would be sought. While Purchaser does not currently intend to delay the acceptance for payment of Shares tendered pursuant to the Offer pending the outcome of any such matter, there can be no assurance that any such approval or action, if needed, would be obtained or would be obtained without substantial conditions or that adverse consequences might not result to the business of the Company, Purchaser or Parent or that certain parts of the businesses of the Company, Purchaser or Parent might not have to be disposed of in the event that such approvals were not obtained or any other actions were not taken. Purchaser's obligation under the Offer to accept for payment and pay for Shares is subject to certain conditions. See Section 14. Antitrust. Under the HSR Act and the rules that have been promulgated thereunder by the Federal Trade Commission ("FTC"), certain acquisition transactions may not be consummated unless certain information has been furnished to the Antitrust Division of the Department of Justice (the "Antitrust Division") and the FTC and certain waiting period requirements have been satisfied. The acquisition of Shares by Purchaser pursuant to the Offer is subject to the HSR Act requirements. Under the provisions of the HSR Act applicable to the purchase of Shares pursuant to the Offer, such purchase may not be made until the expiration of a 15-calendar day waiting period following the required filing under the HSR Act by Parent, which Parent made on December 3, 1996. Accordingly, the waiting period under the HSR Act will expire at 11:59 P.M., New York City time, on December 18, 1996, unless early termination of the waiting period is granted or Parent receives a request for additional information of documentary material prior thereto. Pursuant to the HSR Act, Parent has requested early termination of the waiting period applicable to the Offer. There can be no assurances, however, that the 15-day HSR Act waiting period will be terminated early. If either the FTC or the Antitrust Division were to request additional information or documentary material from Parent, the waiting period would expire at 11:59 P.M., New York City time, on the tenth calendar day after the date of substantial compliance by Parent with such request. Thereafter, the waiting period could be extended only by court order or by consent of Parent. If the acquisition of Shares is delayed pursuant to a request by the FTC or the Antitrust Division for additional information or documentary material pursuant to the HSR Act, the purchase of and payment for Shares pursuant to the Offer will be deferred until ten days after the request is substantially complied with unless the waiting period is terminated sooner by the FTC or the Antitrust Division. See Section 2. Except by court order, only one extension of such waiting period pursuant to a request for additional information is authorized by the rules promulgated under the HSR Act. Although the Company is required to file certain information and documentary material with the Antitrust Division and the FTC in connection with the Offer, neither the Company's failure to make such filings nor a request to the Company from the Antitrust Division or the FTC for additional information or documentary material will extend the waiting period. No separate HSR Act requirements with respect to the Merger, the Merger Agreement and the Tender Agreement will apply if the 15-day waiting period relating to the Offer (as described above) has expired or been terminated. However, if the Offer is withdrawn or if the filing relating to the Offer is withdrawn prior to the expiration or termination of the 15-day waiting period relating to the Offer, and the Merger Agreement is not terminated, the acquisition of Shares under the Merger pursuant to the Merger Agreement may not be consummated until 30 calendar days after receipt by the Antitrust Division and the FTC of the Notification and Report Forms of both Parent and the Company unless the 30-day period is earlier terminated by the Antitrust Division and the FTC. Within such 30-day period, the Antitrust Division or the FTC may request additional information or documentary materials from Parent and/or the Company, in which event the acquisition of Shares pursuant to the Merger may not be consummated until 20 calendar days after such requests are substantially complied with by both Parent and the Company. Thereafter, the waiting periods may be extended only by court order or by consent. The Antitrust Division and the FTC frequently scrutinize the legality under the antitrust laws of transactions such as the proposed acquisition of Shares by Purchaser pursuant to the Offer. At any time before or after Purchaser's purchase of Shares, either the Antitrust Division or the FTC could take such action under 31 33 the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the acquisition of Shares pursuant to the Offer or seeking divestiture of Shares acquired by Purchaser or divestiture of substantial assets of Parent, the Company or any of their respective subsidiaries. Private parties may also bring legal action under the antitrust laws under certain circumstances. Based upon an examination of publicly available information relating to the businesses in which Parent and its subsidiaries and the Company and its subsidiaries are involved, Parent and Purchaser believe that the Offer will not violate the antitrust laws. Nevertheless, there can be no assurance that a challenge to the Offer on antitrust grounds will not be made or, if a challenge is made, what the result will be. State Takeover Laws. A number of states throughout the United States have enacted takeover statutes that purport, in varying degrees, to be applicable to attempts to acquire securities of corporations that are incorporated or have assets, stockholders, executive offices or places of business in such states. In Edgar v. MITE Corp., the Supreme Court of the United States held that the Illinois Business Takeover Act, which involved state securities laws that made the takeover of certain corporations more difficult, imposed a substantial burden on interstate commerce and therefore was unconstitutional. In CTS Corp. v. Dynamics Corp. of America, however, the Supreme Court of the United States held that a state may, as a matter of corporate law and, in particular, those laws concerning corporate governance, constitutionally disqualify a potential acquiror from voting on the affairs of a target corporation without prior approval of the remaining stockholders, provided that such laws were applicable only under certain conditions. The Company is incorporated under the laws of the State of New York. Section 912 of the New York Law prohibits certain "business combinations" (defined to include mergers and consolidations) involving a New York corporation that qualifies as a "resident domestic corporation" (which includes the Company) and an "interested shareholder" (defined generally as a person who is the beneficial owner of 20% or more of the outstanding voting stock of such New York corporation) for a period of five years following the date on which such interested shareholder became such (such date, a "stock acquisition date") unless such business combination or the purchase of stock made by such interested shareholder is approved by the board of directors of such New York corporation prior to such interested shareholder's stock acquisition date or certain other statutory conditions have been met. At a meeting on November 26, 1996, the Board of Directors of the Company approved the Merger Agreement, the Merger, the Offer and Purchaser's purchase of Shares pursuant to the Offer. Accordingly, the provisions of Section 912 of the New York Law have been satisfied with respect to the Offer and the Merger and such provisions will not delay the consummation of the Merger. Article 16 of the New York Law also requires a bidder for shares of a New York corporation to file a registration statement with the attorney general and satisfy certain disclosure requirements. Parent and the Purchaser have filed such a registration statement and this Offer to Purchase sets forth the information required to be disclosed pursuant to Article 16. Except for compliance with Section 912 and Article 16 of the New York Law described above, neither Purchaser nor Parent has currently complied with any state takeover statute or regulation. Purchaser reserves the right to challenge the applicability or validity of any state law purportedly applicable to the Offer or the Merger and nothing in this Offer to Purchaser or any action taken in connection with the Offer or the Merger is intended as a waiver of such right. If it is asserted that any state takeover statute is applicable to the Offer or the Merger and an appropriate court does not determine that it is inapplicable or invalid as applied to the Offer or the Merger, Purchaser might be required to file certain information with, or to receive approvals from, the relevant state authorities, and Purchaser might be unable to accept for payment or pay for Shares tendered pursuant to the Offer, or be delayed in consummating the Offer or the Merger. In such case, Purchaser may not be obliged to accept for payment or pay for any Shares tendered pursuant to the Offer. 16. FEES AND EXPENSES. Except as set forth below, neither Parent nor Purchaser will pay any fees or commissions to any broker, dealer or other person for soliciting tenders of Shares pursuant to the Offer. Peers has provided certain financial advisory services to Parent and Purchaser in connection with the Offer and the Merger. As compensation for Peers' services as financial advisor, Parent pays Peers a retainer fee of $5,000 per month and will pay Peers a transaction fee of $1,100,000 upon the consummation of the Merger. The monthly retainer fee will not be credited against the transaction fee. In addition, Parent has 32 34 agreed to reimburse Peers for all reasonable out-of-pocket expenses incurred by Peers in connection with its role as financial advisor, and Parent has agreed to indemnify Peers and certain related persons against certain liabilities and expenses in connection with its role as financial advisor. In addition, Parent will pay directly (i) all expenses relating to the preparation, printing, filing, mailing and publishing of all Offer materials, (ii) all fees and expenses of the Depositary and the Information Agent referred to in this Offer to Purchase, (iii) all advertising charges in connection with the Offer, including those of any public relations firm or other person or entity rendering services in connection therewith, and (iv) all fees, if any, payable to dealers (including Peers), and banks and trust companies as reimbursement for their customary mailing and handling expenses incurred in forwarding the Offer materials to their customers. All payments to be made by Parent pursuant to the agreement with Peers will be made promptly against delivery to Parent of statements therefor, which will be rendered on a quarterly basis; provided, however that the transaction fee will be payable only upon closing of the Merger. Parent will be liable for the foregoing payments (other than the transaction fee payable to Peers) whether or not the Offer is commenced, withdrawn, terminated or canceled prior to the purchase of any Shares or whether Purchaser or any of its affiliates acquires any Shares pursuant to the Offer or whether Peers withdraws from its engagement. Purchaser has retained MacKenzie Partners, Inc. to act as the Information Agent in connection with the Offer. The Information Agent may contact holders of Shares by mail, telephone, facsimile, telegraph and personal interviews and may request brokers, dealers and other nominee shareholders to forward materials relating to the Offer to beneficial owners of Shares. The Information Agent will receive reasonable and customary compensation for its services, will be reimbursed for certain reasonable out-of-pocket expenses and will be indemnified against certain liabilities and expenses in connection therewith, including certain liabilities under the Federal securities laws. In addition, Harris Trust Company of New York has been retained as the Depositary. The Depositary has not been retained to make solicitations or recommendations in its role as Depositary. The Depositary will receive reasonable and customary compensation for its services, will be reimbursed for certain reasonable out-of-pocket expenses and will be indemnified against certain liabilities and expenses in connection therewith, including certain liabilities under the Federal securities laws. Brokers, dealers, commercial banks and trust companies will be reimbursed by Purchaser for customary mailing and handling expenses incurred by them in forwarding offering materials to their customers. 17. MISCELLANEOUS. Purchaser is not aware of any jurisdiction where the making of the Offer is prohibited by any administrative or judicial action pursuant to any valid state statute. If Purchaser becomes aware of any valid state statute prohibiting the making of the Offer or the acceptance of the Shares pursuant thereto, Purchaser will make a good faith effort to comply with such state statute. If, after such good faith effort, Purchaser cannot comply with any such state statute, the Offer will not be made to (nor will tenders be accepted from or on behalf of) the holders of Shares in such state. In any jurisdiction where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer will be deemed to be made on behalf of Purchaser by one or more registered brokers or dealers which are licensed under the laws of such jurisdiction. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION ON BEHALF OF PARENT OR PURCHASER NOT CONTAINED IN THIS OFFER TO PURCHASE OR IN THE LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. Parent and Purchaser have filed with the Commission the Schedule 14D-1, together with exhibits, pursuant to Rule 14d-3 of the General Rules and Regulations under the Exchange Act, furnishing certain additional information with respect to the Offer, and may file amendments thereto. The Schedule 14D-1 and any amendments thereto, including exhibits, may be inspected at, and copies may be obtained from, the same places and in the same manner as set forth in Section 8 (except that they will not be available at the regional offices of the Commission). ME Acquisition, Inc. December 4, 1996 33 35 SCHEDULE I INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF PARENT AND PURCHASER 1. Directors and Executive Officers of Parent. Set forth below is the name, current business address, citizenship and the present principal occupation or employment and material occupations, positions, offices or employments for the past five years of each director and executive officer of Parent. Unless otherwise indicated, each person identified below is employed by Parent or its affiliates, and has been employed by Parent or its affiliates, in positions of increasing responsibility, for the past five years. The principal address of Parent and, unless otherwise indicated below, the current business address for each individual listed below is 11812 San Vicente Boulevard, Los Angeles, California 90049-5022. Each such person is a citizen of the United States. Directors are identified by an asterisk.
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; NAME MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS; AGE - ------------------------- ------------------------------------------------------------------ Theodore Williams*....... Chairman and Chief Executive Officer (1970-Present); President (1970-1995). In addition, Mr. Williams has served as President of Purchaser since November 1996. Mr. Williams is 76 years old. Gordon Graham*........... President and Chief Operating Officer since November 1996. In addition, Mr. Graham served as Senior Vice President of Parent from 1986 to November 1996. Mr. Graham is 62 years old. Paul F. Doucette......... Senior Vice President since 1988. Mr. Doucette is 50 years old. Tracy A. Edwards......... Vice President and Chief Financial Officer since 1991. In addition, Mr. Edwards has served as Vice President and Treasurer of Purchaser since November 1996. Mr. Edwards is 39 years old. D. J. Hough.............. Vice President since 1984. Mr. Hough is 59 years old. Stephen A. Weeks......... Treasurer (1994-Present); various accounting management positions (1985-1994). Mr. Weeks is 46 years old. Anthony L. Craig*........ President and Chief Executive Officer of Global Knowledge Network (1996-Present), 29 Sawyer Road, Waltham, Massachusetts 02154; Vice President of Digital Equipment Corporation (1993-1996), 111 Powdermill Road, Maynard, Massachusetts 01754; Senior Vice President of Oracle Systems Corp. (1992-1993), 5000 Oracle Road, Redwood Shores, California 94065; Chief Executive Officer of C3 Inc. (1990-1992), 19886 Ashburn Road, Ashburn, Virginia 20147. Mr. Craig is 50 years old. John J. Cost*............ Secretary (1987-Present); currently of counsel, and prior to 1995 partner, at Irell & Manella LLP, 333 So. Hope Street, Suite 3300, Los Angeles, California 90071. In addition, Mr. Cost has been Secretary of Purchaser since November 1996. Mr. Cost is 62 years old. Milton Rosenberg*........ Private investor and consultant to high technology companies, P.O. Box 9655, Rancho Santa Fe, California 92067. Member of Board of Directors of M.R.V. Communications, Woodland Hills, California. Mr. Rosenberg is 73 years old. Charles S. Troy*......... President and Chief Executive Officer of E&S Ring Management Corporation (more than five years), 5721 W. Slauson Avenue, Suite 200, Culver City, California 90230. Mr. Troy is 52 years old.
A-1 36 2. Directors and Executive Officers of Purchaser. Set forth below is the name, current business address, citizenship and the present principal occupation or employment and material occupations, positions, offices or employments for the past five years of each director and executive officer of Purchaser. The principal address of Purchaser and the current business address for each individual listed below, unless otherwise indicated, is 11812 San Vicente Boulevard, Los Angeles, California 90049-5022. Each such person is a citizen of the United States. Directors are identified by an asterisk.
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT; NAME MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS; AGE - ------------------------- ------------------------------------------------------------------ Theodore Williams*....... Please see "Directors and Executive Officers of Parent." John J. Cost*............ Please see "Directors and Executive Officers of Parent." Tracy A. Edwards......... Please see "Directors and Executive Officers of Parent."
A-2 37 SCHEDULE II CERTAIN INFORMATION ABOUT PURCHASER AND PARENT REQUIRED BY NEW YORK LAW INFORMATION ABOUT PURCHASER Purchaser was incorporated under the laws of the State of New York on November 13, 1996. Purchaser has not conducted any business since its incorporation other than in connection with the Offer, the Merger Agreement and the Tender Agreement. Accordingly, Purchaser has not engaged in any significant community activities nor has Purchaser made any significant charitable, cultural, educational or civic contributions. Except for the directors and executive officers of Purchaser set forth in Schedule I, Purchaser has no employees. Accordingly, Purchaser has no existing pension plans, profit-sharing plans or savings plans, has not provided any educational opportunities or relocation adjustments to its employees, and has had no labor or employment related claims or disputes, and is not involved in any pending legal or administrative proceedings. INFORMATION ABOUT PARENT Effective June 30, 1995, a plan was adopted to change the state of incorporation of Parent from Delaware to California. The following is a description of the potential impact on New York residents of Parent's plans and proposals, existing pension plans, profit-sharing plans and savings plans, educational opportunities or relocation adjustments provided to its employees, pending litigation and labor or employment related claims or disputes, and community activities, charitable, cultural, educational or civic contributions: a. POTENTIAL IMPACT ON NEW YORK RESIDENTS OF PARENT'S PLANS AND PROPOSALS It is expected that, initially following the Merger, except as set forth below, the business and operations of the Company will be conducted in a manner substantially similar to how they are conducted currently. However, Parent will continue to evaluate the business and operations of the Company during the pendency of the Offer and after the consummation of the Offer and the Merger and will take such further actions as it deems appropriate under the circumstances then existing. Following the Merger, Parent plans to investigate combining its existing distribution business, or segments thereof, with the Company, and where feasible or practicable, to combine such business, or segments thereof. Because no decision has yet been made by Parent whether to merge or otherwise combine such business, any potential effect on facilities and offices of the Company located in the State of New York cannot be predicted at this time. Parent intends to review the Company's policies with respect to community activities, charitable, cultural, educational and civic contributions and employment practices. b. PENSION PLANS, PROFIT-SHARING PLANS AND OTHER BENEFITS Parent sponsors various benefits plans for its employees and non-employee directors. Parent's executive compensation program is composed of base salary, annual incentive cash bonuses based on Parent earnings and long-term incentive compensation in the form of stock options. In the aggregate Parent's benefits plans cover substantially all employees of Parent. Parent is obligated separately to provide certain executives with post-retirement life and medical insurance benefits at least equal to the benefits in effect on the date of their retirement. (i) STOCK OPTION PLANS Parent sponsors stock option plans in which all employees of Parent may participate. For example, under Parent's 1990 Stock Option and Incentive Plan, 500,000 shares of Parent common stock are available for purchase by employees exercising rights granted under the plan. Under Parent's 1994 Stock Option Plan, an additional 500,000 shares of Parent common stock are authorized for issuance to employees of Parent. Incentive and non-qualified stock options, stock appreciation rights and restricted stock may be granted under each such stock option plan. As of December 31, 1995, an aggregate of 493,094 shares of Parent common stock were available for future issuance under the described stock option plans, and stock options were exercisable with respect to 100,239 shares of such stock. B-1 38 (ii) EMPLOYEES' STOCK PURCHASE PLAN Under the Bell Industries' Employees' Stock Purchase Plan (the "ESPP"), which was adopted in June 1994, 750,000 shares of Parent common stock are authorized for future issuance to eligible employees of Parent at a purchase price of 85% of the stock's fair market value. (iii) EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN In 1973, Parent established the Bell Industries' Employees' Savings and Profit Sharing Plan (the "PSP"), as a qualified, trusteed, savings and profit sharing plan for eligible employees. Employees must contribute at least one percent (1%) of their annual compensation to participate in the PSP, provided that Parent will match a certain portion of each employee's contribution to the PSP. The amount of Bell's contribution to the PSP varies each year, and is determined by the Board of Directors of Parent (the "Board") in its sole discretion. During the fiscal year ended December 31, 1995, Bell contributed $1,000,000 to the PSP. The PSP will continue until terminated by the Board. (iv) EXECUTIVE DEFERRED INCOME AND PENSION PLAN In July 1993, Parent adopted the Executive Deferred Income and Pension Plan (the "EDP"). Each officer of Parent and such other highly compensated employees as the Board may designate are eligible to participate in the EDP. Each participant may elect for deferral a percentage (not more than ten percent (10%)) of his or her salary. Parent matches the amount of the chosen deferral. Such deferred sums bear interest at a rate equal to the Lehman Brothers Long T-Bond index. If a plan participant dies while employed, his or her beneficiary is entitled to receive all accrued EDP benefits. If a plan participant voluntarily resigns or is terminated before reaching age 62, his or her EDP benefits are adjusted. (v) NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN The Non-Employee Directors' Stock Option Plan (the "Directors' Plan"), adopted in May 1996, is a non-discretionary stock option plan applicable to all non-employee directors of Parent. The Directors' Plan is designed to attract and retain non-employee directors, to align their long-term compensation with shareholders' long-term interests and previously to enable such directors to qualify as "disinterested persons" under former Exchange Act Rule 16b-3 for purposes of administering the Company's other stock option plans. An aggregate of 150,000 authorized shares of Parent common stock, no par value, are available for issuance under the Directors' Plan. The exercise price on each optioned share is its fair market value on the grant date. Each non-employee director is entitled to receive, upon appointment as director, options to purchase 10,000 shares of Parent common stock. Thereafter, on each anniversary of a non-employee director's re-election to the Board, Parent will grant him or her options to purchase 1,000 additional shares of Parent common stock. The described options are exercisable in the manner determined by the Board, provided that such options cannot be exercised for at least six months after the grant date and must be exercised no later than the termination of a director's association with Parent or the fifth anniversary of the grant date. The Directors' Plan replaced a directors' retirement plan that was terminated in January 1996 as to all but two persons, under which annual retirement benefits were payable to non-employee directors, age sixty-five or over, who had served as director for at least ten years. c. PENDING PROCEEDINGS There are no pending legal or administrative proceedings (other than routine and immaterial litigation) to which Parent or a subsidiary of Parent is a party or its property is subject. d. LABOR AND EMPLOYEE RELATIONS Parent believes that its labor and employment relations with its employees are generally good. There have been no violations by Parent of the Federal National Labor Relations Act, Occupational Safety and Health Act of 1970, Fair Labor Standards Act or Employee Retirement and Income Security Act, as amended, finally adjudicated or settled within five years of the commencement of the Offer. B-2 39 e. EDUCATIONAL OPPORTUNITIES Parent provides educational assistance to eligible employees who pursue programs of study that are related to the employees' field of work. f. RELOCATION ADJUSTMENTS Parent may reimburse certain job applicants, new employees and current employees for certain travel and relocation expenses. g. CHARITABLE AND CIVIC ACTIVITIES Consistent with Parent's commitment to responsible community involvement, Parent supports a variety of charitable foundations, particularly in communities in which Parent operates facilities or has offices. Additionally, Parent supports higher education by making contributions and matching gifts to certain accredited institutions of higher education, college associations and other educational organizations. B-3 40 Facsimile copies of the Letter of Transmittal, properly completed and duly signed, will be accepted. The Letter of Transmittal, certificates for the Shares and any other required documents should be sent by each shareholder of the Company or his or her broker, dealer, commercial bank, trust company or other nominee to the Depositary as follows: The Depositary for the Offer is: HARRIS TRUST COMPANY OF NEW YORK By Mail: By Overnight Courier: By Hand: Wall Street Station 77 Water Street, 4th Floor Receive Window P.O. Box 1010 New York, NY 10005 77 Water Street, 5th Floor New York, NY 10268-1010 New York, NY By Facsimile Transmission: (for Eligible Institutions Only) (212) 701-7636 (212) 701-7637 Confirm by Telephone: (212) 701-7624
Any questions or requests for assistance or additional copies of the Offer to Purchase, the Letter of Transmittal, the Notice of Guaranteed Delivery or other tender offer materials may be directed to the Information Agent at its telephone number and address listed below. You may also contact your broker, dealer, commercial bank or trust company or other nominee for assistance concerning the Offer. The Information Agent for the Offer is: MACKENZIE PARTNERS, INC. 156 Fifth Avenue New York, New York 10010 Banks and Brokers Call Collect (212) 929-5500 All Others Call Toll-Free (800) 322-2885 EX-99.(A)(2) 3 EXHIBIT (A)(2) 1 LETTER OF TRANSMITTAL TO TENDER SHARES OF COMMON STOCK OF MILGRAY ELECTRONICS, INC. PURSUANT TO THE OFFER TO PURCHASE DATED DECEMBER 4, 1996 BY ME ACQUISITION, INC. A WHOLLY OWNED SUBSIDIARY OF BELL INDUSTRIES, INC. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JANUARY 7, 1997, UNLESS THE OFFER IS EXTENDED. The Depositary for the Offer is: HARRIS TRUST COMPANY OF NEW YORK By Mail: By Overnight Courier: By Hand: Wall Street Station 77 Water Street, 4th Floor Receive Window P.O. Box 1010 New York, NY 10005 77 Water Street, 5th Floor New York, NY 10268-1010 New York, NY By Facsimile Transmission: (for Eligible Institutions Only) (212) 701-7636 (212) 701-7637 Confirm by Telephone: (212) 701-7624
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. This Letter of Transmittal is to be completed by shareholders either if certificates evidencing Shares (as defined below) are to be forwarded herewith or if delivery of Shares is to be made by book-entry transfer to the Depositary's account at The Depository Trust Company ("DTC") or the Philadelphia Depository Trust Company ("PDTC") (each, a "Book-Entry Transfer Facility" and collectively, the "Book-Entry Transfer Facilities") pursuant to the book-entry transfer procedure described in Section 3 of the Offer to Purchase (as defined below). Although delivery of shares may be effected through book-entry transfer into the Depositary's account at a Book-Entry Transfer Facility pursuant to such Book-Entry Transfer Facility's Automated Tender Offer Program ("ATOP") procedures, a Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees, or an Agent's Message (as defined in Section 3 of the Offer to Purchase) in connection with a book-entry transfer, and any other required documents must in each case be received by the Depositary at one of its addresses set forth above on or prior to the Expiration Date (as defined in Section 1 of the Offer to Purchase), or, if the guaranteed delivery procedures described below are complied with, within the time period provided under such procedures. DELIVERY OF DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. Shareholders whose certificates evidencing Shares ("Share Certificates") are not immediately available or who cannot deliver their Share Certificates and all other documents required hereby to the Depositary on or prior to the Expiration Date or who cannot complete the procedure for delivery by book-entry transfer on a timely basis and who wish to tender their Shares must do so pursuant to the guaranteed delivery procedure described in Section 3 of the Offer to Purchase. See Instruction 2. 2 [ ] CHECK HERE IF SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO THE DEPOSITARY'S ACCOUNT AT ONE OF THE BOOK-ENTRY TRANSFER FACILITIES AND COMPLETE THE FOLLOWING: Name of Tendering Institution _________________________________________ Check Box of Applicable Book-Entry Transfer Facility: (check one) [ ] DTC [ ] PDTC Account Number ____________________ Transaction Code Number ____________________ [ ] CHECK HERE IF SHARES ARE BEING TENDERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s): __________________________________________ Window Ticket No. (if any): _______________________________________________ Date of Execution of Notice of Guaranteed Delivery: _______________________ Name of Institution which Guaranteed Delivery: ____________________________ If Delivered by Book-Entry Transfer, Check Box of Book-Entry Transfer Facility: (check one) [ ] DTC [ ] PDTC Account Number ____________________ Transaction Code Number ____________________ - -------------------------------------------------------------------------------- DESCRIPTION OF SHARES TENDERED - --------------------------------------------------------------------------------
SHARE CERTIFICATE(S) AND SHARE(S) TENDERED (ATTACH ADDITIONAL LIST, IF NECESSARY) ----------------------------------------------- TOTAL NUMBER OF SHARES NAME(S) AND ADDRESS(ES) OF HOLDER(S) SHARE EVIDENCED NUMBER OF (PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) CERTIFICATE BY SHARE SHARES APPEAR(S) ON SHARE CERTIFICATE(S)) NUMBER(S)* CERTIFICATE(S)* TENDERED** - ------------------------------------------------------------------------------------------------------ ----------------------------------------------- ----------------------------------------------- ----------------------------------------------- ----------------------------------------------- ----------------------------------------------- Total Shares
- -------------------------------------------------------------------------------- * Need not be completed by shareholders delivering Shares by book-entry transfer. ** Unless otherwise indicated, it will be assumed that all Shares evidenced by each Share Certificate delivered to the Depositary are being tendered hereby. See Instruction 4. - -------------------------------------------------------------------------------- 3 NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE INSTRUCTIONS SET FORTH IN THIS LETTER OF TRANSMITTAL CAREFULLY. Ladies and Gentlemen: The undersigned hereby tenders to ME Acquisition, Inc. ("Purchaser"), a New York corporation and wholly owned subsidiary of Bell Industries, Inc., a California corporation, the above-described shares of common stock, $.25 par value per share (the "Shares") of Milgray Electronics, Inc., a New York corporation (the "Company"), pursuant to Purchaser's offer to purchase all outstanding Shares, at $14.77 per Share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated December 4, 1996 (the "Offer to Purchase"), receipt of which is hereby acknowledged, and in this Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"). The undersigned understands that Purchaser reserves the right to transfer or assign, in whole or from time to time in part, to one or more of its affiliates, the right to purchase all or any portion of the Shares tendered pursuant to the Offer. Subject to, and effective upon, acceptance for payment of the Shares tendered herewith, in accordance with the terms of the Offer (including, if the Offer is extended or amended, the terms and conditions of such extension or amendment), the undersigned hereby sells, assigns and transfers to, or upon the order of, Purchaser all right, title and interest in and to all the Shares that are being tendered hereby and all dividends, distributions (including, without limitation, distributions of additional Shares) and rights declared, paid or distributed in respect of such Shares on or after November 26, 1996 (collectively, "Distributions"), and irrevocably appoints the Depositary the true and lawful agent and attorney-in-fact of the undersigned with respect to such Shares and all Distributions, with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to (i) deliver Share Certificates evidencing such Shares and all Distributions, or transfer ownership of such Shares and all Distributions on the account books maintained by a Book-Entry Transfer Facility, together, in either case, with all accompanying evidences of transfer and authenticity, to or upon the order of Purchaser, (ii) present such Shares and all Distributions for transfer on the books of the Company and (iii) receive all benefits and otherwise exercise all rights of beneficial ownership of such Shares and all Distributions, all in accordance with the terms of the Offer. 4 The undersigned hereby irrevocably appoints Theodore Williams and Tracy A. Edwards, and each of them, as the attorneys and proxies of the undersigned, each with full power of substitution, to vote in such manner as each such attorney and proxy or his substitute shall, in his sole discretion, deem proper and otherwise act (by written consent or otherwise) with respect to all the Shares tendered hereby which have been accepted for payment by Purchaser prior to the time of such vote or other action and all Shares and other securities issued in Distributions in respect of such Shares, which the undersigned is entitled to vote at any meeting of shareholders of the Company (whether annual or special and whether or not an adjourned or postponed meeting) or consent in lieu of any such meeting or otherwise and Purchaser reserves the right to require that, in order for Shares or other securities to be deemed validly tendered, immediately upon Purchaser's acceptance for payment of such Shares Purchaser must be able to exercise full voting rights with respect to such Shares, except as otherwise limited by applicable New York law. This proxy and power of attorney is coupled with an interest in the Shares tendered hereby, is irrevocable and is granted in consideration of, and is effective upon, the acceptance for payment of such Shares by Purchaser in accordance with the terms of the Offer. Such acceptance for payment shall revoke all other proxies and powers of attorney granted by the undersigned at any time with respect to such Shares (and all Shares and other securities issued in Distributions in respect of such Shares), and no subsequent proxy or power of attorney shall be given or written consent executed (and if given or executed, shall not be effective) by the undersigned with respect thereto. The undersigned understands that, in order for Shares to be deemed validly tendered, immediately upon Purchaser's acceptance of such Shares for payment, Purchaser must be able to exercise full voting and other rights with respect to such Shares, including, without limitation, voting at any meeting of the Company's shareholders then scheduled. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Shares tendered hereby and all Distributions, and that when such Shares are accepted for payment by Purchaser, Purchaser will acquire good, marketable and unencumbered title thereto and to all Distributions, free and clear of all liens, restrictions, charges and encumbrances, and that none of such Shares and Distributions will be subject to any adverse claim or proxy, and the tender complies with Rule 14e-4 under the Securities Exchange Act of 1934, as amended. The undersigned, upon request, shall execute and deliver all additional documents deemed by the Depositary or Purchaser to be necessary or desirable to complete the sale, assignment and transfer of the Shares tendered hereby and all Distributions. In addition, the undersigned shall remit and transfer promptly to the Depositary for the account of Purchaser all Distributions in respect of the Shares tendered hereby, accompanied by appropriate documentation of transfer, and, pending such remittance and transfer or appropriate assurance thereof, Purchaser shall be entitled to all rights and privileges as owner of each such Distribution and may withhold the entire purchase price of the Shares tendered hereby or deduct from such purchase price, the amount or value of such Distribution as determined by Purchaser in its sole discretion. The undersigned understands that tenders of Shares pursuant to any one of the procedures described in Section 3 of the Offer to Purchase and in the instructions hereto will constitute the undersigned's acceptance of the terms and conditions of the Offer. Purchaser's acceptance of such Shares for payment will constitute a binding agreement between the undersigned and Purchaser upon the terms and subject to the conditions of the Offer. 5 Unless otherwise indicated herein in the box entitled "Special Payment Instructions," please issue the check for the purchase price of all Shares purchased, and return all Share Certificates evidencing Shares not purchased or not tendered, in the name(s) of the registered holder(s) appearing above under "Description of Shares Tendered." Similarly, unless otherwise indicated in the box entitled "Special Delivery Instructions," please mail the check for the purchase price of all Shares purchased and all Share Certificates evidencing Shares not tendered or not purchased (and accompanying documents, as appropriate) to the address(es) of the registered holder(s) appearing above under "Description of Shares Tendered." In the event that the boxes entitled "Special Payment Instructions" and "Special Delivery Instructions" are both completed, please issue the check for the purchase price of all Shares purchased and return all Share Certificates evidencing Shares not purchased or not tendered in the name(s) of, and mail such check and Share Certificates (and accompanying documents, as appropriate) to, the person(s) so indicated. The undersigned recognizes that Purchaser has no obligation, pursuant to the Special Payment Instructions, to transfer any Shares from the name of the registered holder(s) thereof if Purchaser does not purchase any of the Shares tendered hereby. All authority herein conferred or agreed to be conferred in this Letter of Transmittal shall survive the death or incapacity of the undersigned and any obligation of the undersigned hereunder shall be binding upon the heirs, executors, trustees in bankruptcy, legal representatives, successors and assigns of the undersigned. Except as stated in the Offer to Purchase, this tender is irrevocable. - --------------------------------------------------------- SPECIAL PAYMENT INSTRUCTIONS (See Instructions 1, 5, 6 and 7) To be completed ONLY if the check for the purchase price of Shares purchased or Share Certificates evidencing Shares not tendered or not purchased are to be issued in the name of someone other than the undersigned. Issue: [ ] Check [ ] Share Certificate(s) to: Name: ______________________________________ (Please Print) Address:____________________________________ ____________________________________ (Include Zip Code) ____________________________________ TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER (SEE SUBSTITUTE FORM W-9 ON REVERSE SIDE) - --------------------------------------------------------- - --------------------------------------------------------- SPECIAL DELIVERY INSTRUCTIONS (See Instructions 1, 5, 6 and 7) To be completed ONLY if the check for the purchase price of Shares purchased or Share Certificates evidencing Shares not tendered or not purchased are to be mailed to someone other than the undersigned, or to the undersigned at an address other than that shown under "Description of Shares Tendered." Issue: [ ] Check [ ] Share Certificate(s) to: Name: ______________________________________ (Please Print) Address:____________________________________ ____________________________________ (Include Zip Code) - --------------------------------------------------------- 6 - -------------------------------------------------------------------------------- IMPORTANT SHAREHOLDERS: SIGN HERE (PLEASE COMPLETE SUBSTITUTE FORM W-9 BELOW) X ________________________________________________________________________ Signature(s) of Holders(s) Dated: __________, 199_ (Must be signed by registered holder(s) exactly as name(s) appear(s) on Share Certificates or on a security position listing or by a person(s) authorized to become registered holder(s) by certificates and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, please provide the following information. See Instruction 5.) Name(s): -------------------------------------------------------------------------- (Please Print) Capacity (full title): -------------------------------------------------------------------------- Address: -------------------------------------------------------------------------- -------------------------------------------------------------------------- (Include Zip Code) Area Code and Telephone No.: -------------------------------------------------------------------------- Tax Identification or Social Security No.: -------------------------------------------------------------------------- (See Substitute Form W-9 below) GUARANTEE OF SIGNATURE(S) (IF REQUIRED -- SEE INSTRUCTIONS 1 AND 5) FOR USE BY FINANCIAL INSTITUTIONS ONLY. PLACE MEDALLION GUARANTEE IN SPACE BELOW. Authorized Signature: ____________________________________________________ Name: ____________________________________________________________________ (Please Print) Capacity or Title: _______________________________________________________ Name of Firm: -------------------------------------------------------------------------- Address: -------------------------------------------------------------------------- -------------------------------------------------------------------------- (Include Zip Code) Area Code and Telephone No.: -------------------------------------------------------------------------- Dated: ______, 199_ - -------------------------------------------------------------------------------- 7 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER 1. GUARANTEE OF SIGNATURES. Except as otherwise provided below, all signatures on this Letter of Transmittal must be guaranteed by a financial institution (including most banks, savings and loans associations and brokerage houses) that is a participant in the Security Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange Medallion Program (each an "Eligible Institution"). No signature guarantee is required on this Letter of Transmittal (a) if this Letter of Transmittal is signed by the registered holder(s) (which term, for purposes of this document, shall include any participant in a Book-Entry Transfer Facility whose name appears on a security position listing as the owner of Shares) of Shares tendered herewith, unless such holder(s) has completed the box entitled "Special Payment Instructions" above, or (b) if such Shares are tendered for the account of an Eligible Institution. See Instruction 5. 2. DELIVERY OF LETTER OF TRANSMITTAL AND SHARE CERTIFICATES. This Letter of Transmittal is to be used either if Share Certificates are to be forwarded herewith or if Shares are to be delivered by book-entry transfer (other than by Agent's Message) pursuant to the procedure set forth in Section 3 of the Offer to Purchase. Share Certificates evidencing all physically tendered Shares, or a confirmation of a book-entry transfer into the Depositary's account at a Book-Entry Transfer Facility of all Shares delivered by book-entry transfer, as well as a properly completed and duly executed Letter of Transmittal (or facsimile thereof) with any required signature guarantees, or an Agent's Message in connection with a book-entry transfer, and any other documents required by this Letter of Transmittal, must be received by the Depositary at one of its addresses set forth on the reverse hereof on or prior to the Expiration Date (as defined in Section 1 of the Offer to Purchase). If Share Certificates are forwarded to the Depositary in multiple deliveries, a properly completed and duly executed Letter of Transmittal (or an Agent's Message in connection with a book-entry transfer) must accompany each such delivery. Shareholders whose Share Certificates are not immediately available, who cannot deliver their Share Certificates and all other required documents to the Depositary prior to the Expiration Date or who cannot complete the procedure for delivery by book-entry transfer on a timely basis may tender their Shares pursuant to the guaranteed delivery procedure described in Section 3 of the Offer to Purchase. Pursuant to such procedure: (i) such tender must be made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form made available by Purchaser, must be received by the Depositary prior to the Expiration Date; and (iii) the Share Certificates evidencing all physically delivered Shares in proper form for transfer by delivery, or a confirmation of a book-entry transfer into the Depositary's account at a Book-Entry Transfer Facility of all Shares delivered by book-entry transfer, in each case together with a Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees, or an Agent's Message in connection with a book-entry transfer, and any other documents required by this Letter of Transmittal, must be received by the Depositary within three National Association of Securities Dealers, Inc. Automated Quotation System National Market trading days after the date of execution of such Notice of Guaranteed Delivery, all as described in Section 3 of the Offer to Purchase. THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, SHARE CERTIFICATES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH ANY BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION AND RISK OF THE TENDERING SHAREHOLDER, AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. DELIVERY OF DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. No alternative, conditional or contingent tenders will be accepted and no fractional Shares will be purchased. By execution of this Letter of Transmittal (or a facsimile hereof), or by causing an Agent's Message to be sent in connection with a book-entry transfer, all tendering shareholders waive any right to receive any notice of the acceptance of their Shares for payment. 3. INADEQUATE SPACE. If the space provided herein under "Description of Shares Tendered" is inadequate, the Share Certificate numbers, the number of Shares evidenced by such Share Certificates and the number of Shares tendered should be listed on a separate schedule and attached hereto. 4. PARTIAL TENDERS (NOT APPLICABLE TO SHAREHOLDERS WHO TENDER BY BOOK-ENTRY TRANSFER). If fewer than all the Shares evidenced by any Share Certificate delivered to the Depositary herewith are to be tendered hereby, fill in the number of Shares which are to be tendered in the box entitled "Number of Shares Tendered." In such cases, new Share Certificate(s) evidencing the remainder of the Shares that were evidenced by the Share Certificates delivered to the Depositary herewith will be sent to the person(s) signing this Letter of Transmittal, unless otherwise provided in the box entitled "Special Delivery Instructions" above, as soon as practicable after the expiration or termination of the Offer. All Shares evidenced by Share Certificates delivered to the Depositary will be deemed to have been tendered unless otherwise indicated. 5. SIGNATURES ON LETTER OF TRANSMITTAL; STOCK POWERS AND ENDORSEMENTS. If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, the signature(s) must correspond with the name(s) as written on the face of the Share Certificates evidencing such Shares without alteration, enlargement or any other change whatsoever. 8 If any Share tendered hereby is owned of record by two or more persons, all such persons must sign this Letter of Transmittal. If any of the Shares tendered hereby are registered in the names of different holders, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are different registrations of such Shares. If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, no endorsements of Share Certificates or separate stock powers are required, unless payment is to be made to, or Share Certificates evidencing Shares not tendered or not purchased are to be issued in the name of, a person other than the registered holder(s), in which case the Share Certificate(s) evidencing the Shares tendered hereby must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear(s) on such Share Certificate(s). Signatures on such Share Certificate(s) and stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal is signed by a person other than the registered holder(s) of the Shares tendered hereby, the Share Certificate(s) evidencing the Shares tendered hereby must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear(s) on such Share Certificate(s). Signatures on such Share Certificate(s) and stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal or any Share Certificate or stock power is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing, and proper evidence satisfactory to Purchaser of such person's authority so to act must be submitted. 6. STOCK TRANSFER TAXES. Except as otherwise provided in this Instruction, Purchaser will pay all stock transfer taxes with respect to the sale and transfer of any Shares to it or its order pursuant to the Offer. If, however, payment of the purchase price of any Shares purchased is to be made to, or Share Certificate(s) evidencing Shares not tendered or not purchased are to be issued in the name of, a person other than the registered holder(s), the amount of any stock transfer taxes (whether imposed on the registered holder(s), such other person or otherwise) payable on account of the transfer to such other person will be deducted from the purchase price of such Shares purchased, unless evidence satisfactory to Purchaser of the payment of such taxes, or exemption therefrom, is submitted. Except as provided in this Instruction 6, it will not be necessary for transfer tax stamps to be affixed to the Share Certificates evidencing the Shares tendered hereby. 7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If a check for the purchase price of any Shares tendered hereby is to be issued, or Share Certificate(s) evidencing Shares not tendered or not purchased are to be issued, in the name of a person other than the person(s) signing this Letter of Transmittal or if such check or any such Share Certificate is to be sent to someone other than the person(s) signing this Letter of Transmittal or to the person(s) signing this Letter of Transmittal but at an address other than that shown in the box entitled "Description of Shares Tendered" above, the appropriate boxes on the reverse of this Letter of Transmittal must be completed. 8. QUESTIONS AND REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for assistance may be directed to the Information Agent at its address or telephone numbers set forth below. Additional copies of the Offer to Purchase, this Letter of Transmittal and the Notice of Guaranteed Delivery may be obtained from the Information Agent or from brokers, dealers, commercial banks or trust companies. 9 9. TAX IDENTIFICATION NUMBER. Federal income tax law generally requires that a holder tendering Shares pursuant to the Offer must provide the Depositary with such holder's correct Taxpayer Identification Number ("TIN"), which, in the case of a holder who is an individual, is his or her social security number. If the Depositary is not provided with the correct TIN or an adequate basis for an exemption, such holder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, backup withholding at the rate of 31% may be imposed upon the gross proceeds resulting from the Offer. If such withholding results in an overpayment of taxes, a refund may be obtained. To prevent backup withholding, each tendering holder must provide such holder's correct TIN by completing the "Substitute Form W-9" set forth herein, which requires a holder to certify that the TIN provided is correct (or that such holder is awaiting a TIN) and that (i) the holder has not been notified by the Internal Revenue Service that such holder is subject to backup withholding as a result of a failure to report all interest or dividends or (ii) the Internal Revenue Service has notified the holder that such holder is no longer subject to backup withholding. Exempt holders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. To prevent possible erroneous backup withholding, an exempt holder should enter its correct TIN in Part 1 of Substitute Form W-9, write "Exempt" in Part 2 of such form, and sign and date the form. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for additional instructions. In order for a nonresident alien or foreign entity to qualify as exempt, such person must submit a completed Form W-8, "Certificate of Foreign Status." Such forms may be obtained from the Depositary. If the Shares are held in more than one name or are not in the same name of the actual owner, consult the W-9 Guidelines for information on which TIN to report. If you do not have a TIN, consult the W-9 Guidelines for instructions on applying for a TIN, write "Applied For" in the space for the TIN in Part 1 of the Substitute Form W-9, and sign and date the Substitute Form W-9 and the Certificate of Awaiting Taxpayer Identification Number set forth herein. If you do not provide your TIN to the Depositary within 60 days, backup withholding will begin and continue until you furnish your TIN to the Depositary. NOTE: WRITING "APPLIED FOR" ON THE FORM MEANS THAT YOU HAVE ALREADY APPLIED FOR A TIN OR THAT YOU INTEND TO APPLY FOR ONE IN THE NEAR FUTURE. 10. LOST, DESTROYED OR STOLEN CERTIFICATES. If any certificate(s) representing Shares has been lost, destroyed or stolen, the Shareholder should promptly notify the Depositary. The Shareholder will then be instructed as to the steps that must be taken in order to replace the certificate(s). This Letter of Transmittal and related documents cannot be processed until the procedures for replacing lost or destroyed certificate(s) have been followed. IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE HEREOF), PROPERLY COMPLETED AND DULY EXECUTED (TOGETHER WITH ANY REQUIRED SIGNATURE GUARANTEES AND SHARE CERTIFICATES OR CONFIRMATION OF BOOK-ENTRY TRANSFER (INCLUDING AN AGENT'S MESSAGE) AND ALL OTHER REQUIRED DOCUMENTS) OR A PROPERLY COMPLETED AND DULY EXECUTED NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE DEPOSITARY ON OR PRIOR TO THE EXPIRATION DATE (AS DEFINED IN THE OFFER TO PURCHASE). 10 TO BE COMPLETED BY ALL TENDERING REGISTERED HOLDERS OF SECURITIES - -------------------------------------------------------------------------------------- PAYOR'S NAME: HARRIS TRUST COMPANY OF NEW YORK - --------------------------------------------------------------------------------------
SUBSTITUTE PART 1 -- PLEASE TIN ______________________________ PROVIDE YOUR TIN FORM W-9 IN THE BOX AT RIGHT AND CERTIFY Social Security Number Department of the BY SIGNING AND OR Treasury Internal DATING BELOW Employer Identification Number Revenue Service ---------------------------------------------------------- Payee's Request for Taxpayer PART 2 -- FOR PART 3 -- CERTIFICATION -- UNDER THE Identification PAYEES EXEMPT PENALTIES OF PERJURY, I CERTIFY THAT Number (TIN) FROM BACKUP (1) The number shown on this form is WITHHOLDING (SEE my correct TIN (or I am waiting for INSTRUCTIONS) a number to be issued to me), (2) I am not subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding, and (3) any other information provided on this form is true and correct.
You must cross out all of item (2) (clauses (a) through (c)) above if you have been notified by the IRS that you are currently subject to backup withholding because of under-reporting interest or dividends on your tax return and you have not been notified by the IRS that you are no longer subject to backup withholding. --------------------------- --------------------- SIGNATURE DATE - -------------------------------------------------------------------------------- YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU WROTE "APPLIED FOR" IN PART 1 OF THE SUBSTITUTE FORM W-9 - -------------------------------------------------------------------------------- CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and that I mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office (or I intend to mail or deliver an application in the near future.) I understand that if I do not provide a taxpayer identification number to the Payor within 60 days, the Payor is required to withhold 31 percent of all cash payments made to me thereafter until I provide a number. ___________________________________________________ _______________, 199___ Signature Date - -------------------------------------------------------------------------------- NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY IN CERTAIN CIRCUMSTANCES RESULT IN BACKUP WITHHOLDING OF 31% OF ANY CASH PAYMENTS. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. 11 THE INFORMATION AGENT FOR THE OFFER IS: MacKenzie Partners, Inc. 156 Fifth Avenue New York, New York 10010 (212) 929-5500 (Call Collect) or (800) 322-2885 EX-99.(A)(3) 4 EXHIBIT (A)(3) 1 NOTICE OF GUARANTEED DELIVERY FOR TENDER OF SHARES OF COMMON STOCK OF MILGRAY ELECTRONICS, INC. BY ME ACQUISITION, INC. A WHOLLY OWNED SUBSIDIARY OF BELL INDUSTRIES, INC. (NOT TO BE USED FOR SIGNATURE GUARANTEES) This Notice of Guaranteed Delivery, or one substantially in the form hereof, must be used to accept the Offer (as defined below) (i) if certificates ("Shares Certificates") evidencing shares of common stock, par value $.25 per share (the "Shares"), of Milgray Electronics, Inc., a New York corporation (the "Company"), are not immediately available, (ii) if Share Certificates and all other required documents cannot be delivered to Harris Trust Company of New York, as Depositary (the "Depositary"), on or prior to the Expiration Date (as defined in Section 1 of the Offer to Purchase (as defined below)) or (iii) if the procedure for delivery by book-entry transfer cannot be completed on a timely basis. This Notice of Guaranteed Delivery may be delivered by hand or mail or transmitted by telegram or facsimile transmission to the Depositary. See Section 3 of the Offer to Purchase. The Depositary for the Offer is: HARRIS TRUST COMPANY OF NEW YORK By Mail: By Overnight Courier: By Hand: Wall Street Station 77 Water Street, 4th Floor Receive Window P.O. Box 1010 New York, NY 10005 77 Water Street, 5th Floor New York, NY 10268-1010 New York, NY By Facsimile Transmission: (for Eligible Institutions Only) (212) 701-7636 (212) 701-7637 Confirm by Telephone: (212) 701-7624
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. This Notice of Guaranteed Delivery is not to be used to guarantee signatures. If a signature on a Letter of Transmittal is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box on the Letter of Transmittal. The Guarantee on the reverse side must be completed. 2 Ladies and Gentlemen: The undersigned hereby tenders to ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of Bell Industries, Inc., a California corporation, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated December 4, 1996 (the "Offer to Purchase"), and the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"), receipt of each of which is hereby acknowledged, the aggregate number of Shares specified below pursuant to the guaranteed delivery procedures described in Section 3 of the Offer to Purchase. Number of Shares: ___________________________ Name(s) of Record Holder(s): Certificate Nos. (if available): ____________ _______________________________ _____________________________________________ _______________________________ (Please Print) Check ONE box if Shares will be tendered by Address(es): __________________ book-entry transfer: _______________________________ [ ] The Depository Trust Company (Zip Code) [ ] Philadelphia Depository Trust Company Area Code and Tel. No.: _______ Account Number: _____________________________ Signature(s): _________________ Dated: ______________________________________ _______________________________
GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a participant in the Security Transfer Agents Medallion Program or the New York Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange Medallion Program, hereby guarantees to deliver to the Depositary either the certificates representing the Shares tendered hereby, in proper form for transfer, or a Book-Entry Confirmation (as defined in Section 2 of the Offer to Purchase) of a transfer of such Shares, in any such case together with a properly completed and duly executed Letter of Transmittal, or a manually signed facsimile thereof, with any required signature guarantees, or an Agent's Message (as defined in Section 3 of the Offer to Purchase) in connection with a book-entry transfer, and any other documents required by the Letter of Transmittal within three National Association of Securities Dealers, Inc. Automated Quotation System National Market trading days after the date hereof. The Eligible Institution that completes this form must communicate the guarantee to the Depositary and must deliver the Letter of Transmittal and certificates for Shares to the Depositary (or an Agent's Message in connection with a book-entry transfer of shares) within the time period shown herein. Failure to do so could result in financial loss to such Eligible Institution. Name of Firm: ___________________________ _______________________________ (Authorized Signature) Address: ________________________________ Title: ________________________ _________________________________________ (Zip Code) Date: _________________________ Area Code and Tel. No.: _________________
NOTE: DO NOT SEND CERTIFICATES FOR SHARES WITH THIS NOTICE. SHARE CERTIFICATES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS. 2 EX-99.(A)(4) 5 EXHIBIT (A)(4) 1 OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF MILGRAY ELECTRONICS, INC. AT $14.77 NET PER SHARE BY ME ACQUISITION, INC. A WHOLLY OWNED SUBSIDIARY OF BELL INDUSTRIES, INC. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JANUARY 7, 1997, UNLESS THE OFFER IS EXTENDED. December 4, 1996 To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees ME Acquisition, Inc. ("Purchaser"), a New York corporation and wholly owned subsidiary of Bell Industries, Inc., a California corporation, hereby offers to purchase all outstanding shares of common stock, $.25 par value per share (the "Shares"), of Milgray Electronics, Inc., a New York corporation (the "Company"), at a price of $14.77 per Share, net to the seller in cash, upon the terms and subject to the conditions set forth in Purchaser's Offer to Purchase, dated December 4, 1996 (the "Offer to Purchase"), and the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer") enclosed herewith. Please furnish copies of the enclosed materials to those of your clients for whose accounts you hold Shares in your name or in the name of your nominee. The Offer is conditioned upon, among other things, (i) there being validly tendered and not withdrawn prior to the expiration of the Offer a number of Shares which, when added to the Shares owned by Parent, Purchaser and their affiliates, constitutes at least 66 2/3% of the outstanding Shares and (ii) Parent and Purchaser having completed the financing arrangements described in Section 9 of the Offer to Purchase. The Offer is also subject to other terms and conditions. See Section 14 of the Offer to Purchase. Enclosed for your information and use are copies of the following documents: 1. Offer to Purchase, dated December 4, 1996; 2. Letter of Transmittal to be used by holders of Shares in accepting the Offer and tendering Shares; 3. Notice of Guaranteed Delivery to be used to accept the Offer if the Shares and all other required documents are not immediately available or cannot be delivered to Harris Trust Company of New York, as depositary (the "Depositary"), or if the procedures for book-entry transfer cannot be completed, by the Expiration Date (as defined in the Offer to Purchase); 4. A letter to shareholders of the Company from Herbert S. Davidson, a director, Chief Executive Officer and President of the Company, together with a Solicitation/Recommendation Statement on Schedule 14D-9 filed with the Securities and Exchange Commission by the Company; 5. A letter which may be sent to your clients for whose accounts you hold Shares registered in your name or in the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Offer; 2 6. Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9; and 7. Return envelope addressed to the Depositary. WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JANUARY 7, 1997, UNLESS THE OFFER IS EXTENDED. In all cases, payment for Shares accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of certificates evidencing such Shares (or a confirmation of a book-entry transfer of such Shares into the Depositary's account at one of the Book-Entry Transfer Facilities (as defined in the Offer to Purchase)), a Letter of Transmittal (or facsimile thereof) properly completed and duly executed, or an Agent's Message (as defined in the Offer to Purchase) in connection with a book-entry transfer of Shares, and any other required documents in accordance with the instructions contained in the Letter of Transmittal. If a holder of Shares wishes to tender Shares, but cannot deliver such holder's certificates or other required documents, or cannot comply with the procedure for book-entry transfer, prior to the expiration of the Offer, a tender of Shares may be effected by following the guaranteed delivery procedure described in Section 3 of the Offer to Purchase. Purchaser will not pay any fees or commissions to any broker, dealer or other person (other than the Depositary and the Information Agent as described in the Offer) in connection with the solicitation of tenders of Shares pursuant to the Offer. However, Purchaser will reimburse you for customary mailing and handling expenses incurred by you in forwarding any of the enclosed materials to your clients. Purchaser will pay or cause to be paid any stock transfer taxes payable with respect to the transfer of Shares to it, except as otherwise provided in Instruction 6 of the Letter of Transmittal. The Offer is made solely by the Offer to Purchase and the related Letter of Transmittal and is being made to all holders of Shares. Purchaser is not aware of any state where the making of the Offer is prohibited by administrative or judicial action pursuant to any valid state statute. If Purchaser becomes aware of any valid state statute prohibiting the making of the Offer or the acceptance of Shares pursuant thereto, Purchaser will make a good faith effort to comply with such state statute. If, after such good faith effort, Purchaser cannot comply with such state statute, the Offer will not be made to (nor will tenders be accepted from or on behalf of) the holders of Shares in such state. In any jurisdiction where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of Purchaser by one or more registered brokers or dealers licensed under the laws of such jurisdiction. Any inquiries you may have with respect to the Offer should be addressed to the Information Agent at its address and telephone numbers as set forth on the back cover page of the Offer to Purchase. Requests for copies of the enclosed materials may also be directed to the Information Agent. Very truly yours, MACKENZIE PARTNERS, INC. 2 3 NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER PERSON THE AGENT OF PARENT, PURCHASER, THE COMPANY, THE INFORMATION AGENT OR THE DEPOSITARY, OR OF ANY AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR TO MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS EXPRESSLY CONTAINED THEREIN. 3 EX-99.(A)(5) 6 EXHIBIT (A)(5) 1 OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF MILGRAY ELECTRONICS, INC. AT $14.77 NET PER SHARE BY ME ACQUISITION, INC. A WHOLLY OWNED SUBSIDIARY OF BELL INDUSTRIES, INC. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JANUARY 7, 1997, UNLESS THE OFFER IS EXTENDED December 4, 1996 To Our Clients: Enclosed for your consideration is an Offer to Purchase, dated December 4, 1996 (the "Offer to Purchase"), and a related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer") in connection with the Offer by ME Acquisition, Inc. ("Purchaser"), a New York corporation and wholly owned subsidiary of Bell Industries, Inc. ("Parent"), a California corporation, to purchase all outstanding shares of common stock, $.25 par value per share (the "Shares"), of Milgray Electronics, Inc., a New York corporation (the "Company"), at a price of $14.77 per Share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer. We are the holder of record of Shares held by us for your account. A tender of such shares can be made only by us as the holder of record and pursuant to your instructions. The Letter of Transmittal is furnished to you for your information only and cannot be used by you to tender Shares held by us for your account. We request instructions as to whether you wish to have us tender on your behalf any or all of the Shares held by us for your account, upon the terms and subject to the conditions set forth in the Offer. Your attention is invited to the following: 1. The tender price is $14.77 per Share, net to the seller in cash. 2. The Offer is being made for all outstanding Shares. 3. The Board of Directors of the Company unanimously has determined that each of the Offer and the Merger (as defined in the Offer to Purchase) is fair to, and in the best interests of, the shareholders of the Company, as a group, and recommends that shareholders, as a group, accept the Offer and tender their Shares pursuant to the Offer; provided that shareholders should check with their financial or tax advisers prior to tendering their Shares in the Offer. 4. The Offer and withdrawal rights will expire at 5:00 p.m., New York City time, on January 7, 1997, unless the Offer is extended. 5. The Offer is conditioned upon, among other things, (i) there being validly tendered and not withdrawn prior to the expiration of the Offer at least 4,515,451 Shares, which represents at least 66 2/3% of the Shares outstanding (the "Minimum Condition") and (ii) Parent and Purchaser having completed the bank financing arrangements described in Section 9 of the Offer to Purchase (the 2 "Financing Condition"). Parent and Purchaser may terminate the Offer if either the Minimum Condition or the Financing Condition is not satisfied. The Offer is also subject to other terms and conditions. See Section 14 of the Offer to Purchase. 6. Parent and Purchaser have entered into the Tender Agreement with Herbert S. Davidson, a director, Chief Executive Officer and President of the Company (the "Selling Shareholder"), pursuant to which, among other things, the Selling Shareholder has agreed to tender and sell in the Offer, and upon the terms and subject to the conditions thereof, 3,742,064 Shares owned by the Selling Shareholder (or approximately 55.2% of the Company's outstanding Shares). 7. Tendering shareholders will not be obligated to pay brokerage fees or commissions or, except as otherwise provided in Instruction 6 of the Letter of Transmittal, stock transfer taxes with respect to the purchase of Shares by Purchaser pursuant to the Offer. However, federal income tax backup withholding at the rate of 31% may be imposed on the gross proceeds resulting from the Offer, unless an exemption is provided or unless the required taxpayer identification information is provided. See Instruction 9 to the Letter of Transmittal. 8. Notwithstanding any other provision of the Offer, payment for Shares accepted for payment pursuant to the Offer will in all cases be made only after timely receipt by Harris Trust Company of New York, as Depositary (the "Depositary"), of (a) certificates for Shares pursuant to the procedures set forth in Section 3 of the Offer to Purchase or timely Book-Entry Conformation (as defined in the Offer to Purchase) with respect to such Shares; (b) the Letter of Transmittal (or a manually signed facsimile thereof), properly completed and duly executed, with any required signature guarantees, or an Agent's Message (as defined in Section 3 of the Offer to Purchase) in connection with a book-entry transfer of Shares; and (c) any other documents required by the Letter of Transmittal. Accordingly, payment may not be made to all tendering shareholders at the same time depending upon when certificates representing Shares or confirmations for book-entry transfer of such Shares into the Depositary's account (including an Agent's Message) are actually received by the Depositary. If you wish to have us tender any or all of your Shares, please so instruct us by completing, executing and returning to us the instruction form contained in this letter. An envelope in which to return your instructions to us is enclosed. If you authorize the tender of your Shares, all such Shares will be tendered unless otherwise specified in your instructions. YOUR INSTRUCTIONS SHOULD BE FORWARDED TO US IN AMPLE TIME TO PERMIT US TO SUBMIT A TENDER ON YOUR BEHALF PRIOR TO THE EXPIRATION OF THE OFFER. The Offer is made solely by the Offer to Purchase and the related Letter of Transmittal and is being made to all holders of Shares. Purchaser is not aware of any state where the making of the Offer is prohibited by administrative or judicial action pursuant to any valid state statute. If Purchaser becomes aware of any valid state statute prohibiting the making of the Offer or the acceptance of Shares pursuant thereto, Purchaser will make a good faith effort to comply with such state statute. If, after such good faith effort, Purchaser cannot comply with such state statute, the Offer will not be made to (nor will tenders be accepted from or on behalf of) the holders of Shares in such state. In any jurisdiction where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of Purchaser by one or more registered brokers or dealers licensed under the laws of such jurisdiction. 3 INSTRUCTIONS The undersigned acknowledge(s) receipt of your letter and the enclosed Offer to Purchase, dated December 4, 1996, and the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"), in connection with the offer by ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of Bell Industries, Inc., a California corporation, to purchase all outstanding shares of common stock, $.25 par value per share (the "Shares"), of Milgray Electronics, Inc., a New York corporation. This will instruct you to, or to instruct your nominee to, tender the number of Shares indicated below (or, if no number is indicated below, all Shares) that are held for the account of the undersigned, upon the terms and subject to the conditions set forth in the Offer. SIGN HERE - ------------------------------------ Number of Shares to be Tendered: __________ Shares* - ------------------------------------ ------------------------------------ ------------------------------------ Signature(s) ------------------------------------ Please type or print name(s) Dated: ____________, 199_ ------------------------------------ ------------------------------------ Please type or print address ------------------------------------ Area Code and Telephone Number ------------------------------------ Taxpayer Identification or Social Security Number - --------------- * Unless otherwise indicated, it will be assumed that all Shares held by us for your account are to be tendered. EX-99.(A)(6) 7 EXHIBIT (A)(6) 1 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYOR--Social Security numbers have nine digits separated by two hyphens: i.e., 000-00-0000. Employer identification numbers have nine digits separated by one hyphen: i.e., 00-0000000. The table below will help determine the number to give the payor.
- ---------------------------------------------------------------- ---------------------------------------------------------- GIVE THE GIVE THE EMPLOYER FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY FOR THIS TYPE OF ACCOUNT: IDENTIFICATION NUMBER OF -- NUMBER OF -- - ---------------------------------------------------------------- ---------------------------------------------------------- 1. An individual's account The individual 6. A valid trust, estate, The legal entity (Do not or pension trust furnish the identifying 2. Two or more individuals The actual owner of number of the personal (joint account) the account or, if representative or trustee combined funds, the unless the legal entity first individual on itself is not designated the account(1) in the account title(4) 3. Custodian account of a minor The minor(2) (Uniform Gift to Minors Act) 4. a. The usual revocable savings The grantor-trustee(1) 7. Corporate account The corporation trust account (grantor is also trustee) 8. Association, club, The organization religious, charitable, educational or other b. So-called trust account that The actual owner(1) tax-exempt organization is not a legal or valid The partnership trust under State law 9. Partnership account The broker or nominee 5. Sole proprietorship account The owner(3) 10. A broker or registered nominee The public entity 11. Account with the Department of Agriculture in the name of a public entity (such as a State or local government, school district or prison) that receives agricultural program payments - ---------------------------------------------------------------- ----------------------------------------------------------
1 List first and circle the name of the person whose number you furnish. 2 Circle the minor's name and furnish the minor's social security number. 3 Show the name of the owner. 4 List first and circle the name of the valid trust, estate or pension trust. NOTE: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. 2 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 PAGE 2 OBTAINING A NUMBER If you don't have a taxpayer identification number or you don't know your number, obtain Form SS-5, Application for a Social Security Number Card, or Form SS-4, Application for Employer Identification Number, at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. PAYEES EXEMPT FROM BACKUP WITHHOLDING Payees specifically exempt from backup withholding on ALL payments include the following: - - A corporation. - - A financial institution. - - An organization exempt from tax under Section 501(a), or an individual retirement plan, or a custodial account under 403(b)(7). - - The United States or any agency or instrumentality thereof. - - A State, the District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof. - - A foreign government, a political subdivision of a foreign government, or any agency or instrumentality thereof. - - An international organization or any agency, or instrumentality thereof. - - A dealer in securities or commodities required to register in the U.S. or a possession of the U.S. - - A real estate investment trust. - - A common trust fund operated by a bank under Section 584(a). - - A trust exempt from tax under Section 644 or described in Section 4947. - - An entity registered at all times during the tax year under the Investment Company Act of 1940. - - A foreign central bank of issue. - - Payments made to a middleman known in the investment community as a nominee or listed in the most recent publication of the American Society of Corporate Secretaries, Inc., Nominee List. - - A futures commission merchant registered with the Commodity Futures Trading Commission. Payments of dividends and patronage dividends not generally subject to backup withholding include the following: - - Payments to nonresident aliens subject to withholding under Section 1441. - - Payments to partnerships not engaged in a trade or business in the U.S. and which have at least one nonresident partner. - - Payments of patronage dividends where the amount received is not paid in money. - - Payments made by certain foreign organizations. Payments of interest not generally subject to backup withholding include the following: - - Payments of interest on obligations issued by individuals. Note: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payor's trade or business and you have not provided your correct taxpayer identification number to the payor. - - Payments of tax-exempt interest (including exempt interest dividends under Section 852). - - Payments described in Section 6049(b)(5) to nonresident aliens. - - Payments of tax-free covenant bonds under Section 1451. - - Payments made by certain foreign organizations. - - Mortgage interest paid by you. Exempt payees described above should file Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYOR, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO THE PAYOR, IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM. Certain payments other than interest, dividends, and patronage dividends, that are not subject to information reporting are also not subject to backup withholding. For details, see Sections 6041, 6041A(a), 6042, 6044, 6045, 6049, 6050A, and 6050N, and the regulations thereunder. PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividend, interest or other payments to give taxpayer identification numbers to payors who must report the payments to IRS. IRS uses the numbers for identification purposes. Payors must be given the numbers whether or not recipients are required to file tax returns. Payors must generally withhold 20% of certain taxable payments to a payee who does not furnish a taxpayer identification number to a payor. Certain penalties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you fail to furnish your taxpayer identification number to a payor, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) FAILURE TO REPORT CERTAIN PAYMENTS.--If you fail to include properly on your tax return certain items reported to the IRS such failure will be treated as being due to negligence and will be subject to a penalty of 5% on any portion of an under payment of tax attributable to that failure unless there is clear and convincing evidence to the contrary. (3) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (4) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Willfully falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE EX-99.(A)(7) 8 EXHIBIT (A)(7) 1 [BELL INDUSTRIES LETTERHEAD] Contacts: BELL INDUSTRIES, INC. MILGRAY ELECTRONICS, INC. Gordon Graham Richard Hyman President and Executive Vice President and Chief Operating Officer Chief Operating Officer Tracy A. Edwards John Tortorici Vice President and Vice President - Chief Financial Officer Finance and Treasurer (310) 826-2355 (516) 420-9800 http://www.bellind.com FOR IMMEDIATE RELEASE BELL INDUSTRIES TO ACQUIRE MILGRAY ELECTRONICS FOR $100 MILLION COMBINED SALES OF THE TWO COMPANIES ARE RUNNING AT AN ANNUAL RATE EXCEEDING $900 MILLION Los Angeles, California and Farmingdale, New York - November 27, 1996 - Bell Industries, Inc. (NYSE,PSE:BI) and Milgray Electronics, Inc. (NASDAQ-MGRY) announced today that they have signed a merger agreement for Bell to acquire Milgray for $14.77 per share in cash, or approximately $100 million. Bell Industries, based in Los Angeles, California, and Milgray Electronics, headquartered in Farmingdale, New York, distribute electronic components throughout the United States. Milgray also has three sales facilities in Canada. Respectively, Bell and Milgray are the sixth and tenth largest publicly-traded industrial distributors of electronic components in the U.S. For the four quarters ended September 30, 1996, Bell had sales of $611 million and net income of $16.1 million, or $2.13 per share. Milgray, for the same four quarter period, had sales of $275 million and net income of $8.6 million. On a pro forma basis, assuming the transaction had occurred on October 1, 1995, the combined sales during the four quarters ended September 30, 1996, would have been $887 million, with net income of $18 million, or $2.37 per share of Bell stock. The pro forma earnings include adjustments for interest expense on the acquisition debt to be incurred by Bell and amortization of goodwill arising from the transaction. Based on reported operating results over the last six months, the combined annualized revenues of the two companies exceed $900 million. Theodore Williams, chairman and chief executive officer of Bell, said that the acquisition of Milgray should produce important benefits, including economies of scale, resulting from a higher sales base, and increased capabilities to serve the needs of Bell's and Milgray's many customers and suppliers. 2 "We are delighted with this opportunity to acquire a company of Milgray's quality and capabilities. Bell and Milgray, while operating in many of the same markets, have different customer bases and, in many cases, complementary, rather than competitive, product lines" Williams stated. "We believe these distinctive market profiles provide a tremendous opportunity to leverage the capabilities of each of the sales organizations of the two companies. Additionally, Bell will gain entry into the New York, Kansas City and Canadian markets, where Milgray has an established presence." Commenting on the merger agreement, Milgray's chairman, Herbert S. Davidson, said: "We believe that this transaction presents superior value to our shareholders. Given the combined size and expertise of Bell and Milgray, our customers, suppliers and employees should be well served by this transaction. In an industry like ours that is rapidly expanding, a company has to have growth and critical mass to stay in the game." Under the proposed agreement, Davidson will be named to Bell's board of directors and serve as vice chairman. Richard Hyman, Milgray's executive vice president, will become president of Milgray and executive vice president of Bell's Electronic Distribution Group. Milgray's management team and selling organization will be retained. It is anticipated that the senior management of the two companies will be integrated, although the electronics distribution organizations of both companies will continue to operate independently following completion of the transaction. The merger agreement is subject to customary closing conditions, including the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and the receipt of financing by Bell. Bell has received a commitment letter from Union Bank of California under which a $250 million credit facility will be established. Receipt of such financing is conditioned upon, among other things, execution of definitive loan documents. Bell will initiate a cash tender offer for Milgray's shares within five business days and has concurrently entered into a tender agreement with Davidson, Milgray's majority shareholder, who beneficially owns approximately 55 percent of Milgray's common stock. The tender will be subject to customary conditions, including the tender of at least 66 2/3 percent of Milgray's outstanding shares. Since Davidson has agreed to tender his shares, Bell needs to acquire less than 12 percent of the outstanding shares in the tender offer from other holders in order to satisfy this condition. The tender offer will be followed by a second-step cash merger at the same price. Bell expects to complete the acquisition in early 1997. Bell Industries distributes products for the electronics, computer, graphics and other industrial markets. Milgray distributes electronic components and computer products for the industrial market. # # # EX-99.(A)(8) 9 EXHIBIT (A)(8) 1 THIS ANNOUNCEMENT IS NEITHER AN OFFER TO PURCHASE NOR A SOLICITATION OF AN OFFER TO SELL SHARES. THE OFFER IS MADE SOLELY BY THE OFFER TO PURCHASE DATED DECEMBER 4, 1996 AND THE RELATED LETTER OF TRANSMITTAL, AND IS BEING MADE TO ALL HOLDERS OF SHARES. PURCHASER IS NOT AWARE OF ANY STATE WHERE THE MAKING OF THE OFFER IS PROHIBITED BY ADMINISTRATIVE OR JUDICIAL ACTION PURSUANT TO ANY VALID STATE STATUTE. IF PURCHASER BECOMES AWARE OF ANY VALID STATE STATUTE PROHIBITING THE MAKING OF THE OFFER OR THE ACCEPTANCE OF SHARES PURSUANT THERETO, PURCHASER WILL MAKE A GOOD FAITH EFFORT TO COMPLY WITH SUCH STATE STATUTE. IF, AFTER SUCH GOOD FAITH EFFORT, PURCHASER CANNOT COMPLY WITH SUCH STATE STATUTE, THE OFFER WILL NOT BE MADE TO (NOR WILL TENDERS BE ACCEPTED FROM OR ON BEHALF OF) THE HOLDERS OF SHARES IN SUCH STATE. IN ANY JURISDICTION WHERE THE SECURITIES, BLUE SKY OR OTHER LAWS REQUIRE THE OFFER TO BE MADE BY A LICENSED BROKER OR DEALER, THE OFFER SHALL BE DEEMED TO BE MADE ON BEHALF OF PURCHASER BY ONE OR MORE REGISTERED BROKERS OR DEALERS LICENSED UNDER THE LAWS OF SUCH JURISDICTION. Notice of Offer to Purchase for Cash All Outstanding Shares of Common Stock of MILGRAY ELECTRONICS, INC. at $14.77 NET PER SHARE by ME Acquisition, Inc. a wholly owned subsidiary of Bell Industries, Inc. ME Acquisition, Inc., a New York corporation ("Purchaser") and wholly owned subsidiary of Bell Industries, Inc. ("Parent"), a California corporation, is offering to purchase all outstanding shares of common stock, par value $.25 per share (the "Shares"), of Milgray Electronics, Inc., a New York corporation (the "Company"), at a price of $14.77 per Share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated December 4, 1996 (the "Offer to Purchase"), and in the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"). Following the Offer, Purchaser intends to effect the Merger described below. - -------------------------------------------------------------------------------- THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON TUESDAY, JANUARY 7, 1997, UNLESS THE OFFER IS EXTENDED. - -------------------------------------------------------------------------------- 2 THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (1) THERE BEING VALIDLY TENDERED AND NOT PROPERLY WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER THAT NUMBER OF SHARES WHICH WOULD REPRESENT, WHEN ADDED TO THE SHARES OWNED BY PURCHASER AND ITS AFFILIATES, AT LEAST 662/3% OF ALL OUTSTANDING SHARES (THE "MINIMUM CONDITION") AND (2) PURCHASER HAVING COMPLETED THE BANK FINANCING ARRANGEMENTS DESCRIBED IN THE OFFER TO PURCHASE (THE "FINANCING CONDITION"). PARENT AND PURCHASER MAY TERMINATE THE OFFER IF EITHER THE MINIMUM CONDITION OR THE FINANCING CONDITION IS NOT SATISFIED. THE OFFER IS ALSO SUBJECT TO OTHER TERMS AND CONDITIONS. The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of November 26, 1996 (the "Merger Agreement"), among Parent, Purchaser and the Company. The Merger Agreement provides that, among other things, as soon as practicable following the satisfaction or waiver of the conditions set forth in the Merger Agreement, Purchaser will be merged with and into the Company (the "Merger"). Following consummation of the Merger, the Company will continue as the surviving corporation and will be a wholly owned subsidiary of Parent. At the effective time of the Merger (the "Effective Time"), each Share issued and outstanding immediately prior to the Effective Time (other than Shares held in the treasury of the Company or owned by Purchaser, Parent or any direct or indirect wholly owned subsidiary of Parent) will be cancelled and converted automatically into the right to receive $14.77 in cash, or any higher price that may be paid per Share in the Offer, without interest. In connection with the Merger Agreement, Parent and Purchaser have entered into a Tender Agreement with Mr. Herbert S. Davidson, a director, Chief Executive Officer and President of the Company (the "Selling Shareholder"), pursuant to which, among other things, the Selling Shareholder has agreed to tender and sell in the Offer, upon the terms and subject to the conditions thereof, 3,742,064 Shares owned by the Selling Shareholder (or approximately 55.2% of the Company's outstanding shares). THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY HAS DETERMINED THAT EACH OF THE OFFER AND THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, THE SHAREHOLDERS OF THE COMPANY, AS A GROUP, AND UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS, AS A GROUP, ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO THE OFFER (PROVIDED THAT SHAREHOLDERS SHOULD CONSULT WITH THEIR FINANCIAL OR TAX ADVISERS PRIOR TO TENDERING THEIR SHARES IN THE OFFER OR VOTING TO APPROVE THE MERGER). For purposes of the Offer, Purchaser will be deemed to have accepted for payment, and thereby purchased, Shares validly tendered and not withdrawn if, as and when Purchaser gives oral or written notice to Harris Trust Company of New York (the "Depositary") of Purchaser's acceptance of such Shares for payment pursuant to the Offer. Upon the terms and subject to the conditions of the Offer, payment for Shares accepted for payment pursuant to the Offer will be made by deposit of the purchase price therefor with the Depositary, which will act as agent for tendering shareholders for the purpose of receiving payments from Purchaser and transmitting such payments to tendering shareholders whose Shares have been accepted for payment. Under no circumstances will interest on the purchase price for Shares be paid, regardless of any delay in making such payment. In all cases, payment for Shares tendered and accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (i) the certificates evidencing such Shares (the "Share Certificates") or timely confirmation of a book-entry transfer of such Shares into the Depositary's account at one of the Book-Entry Transfer Facilities (as defined in Section 2 of the Offer to Purchase) pursuant to the procedures set forth in Section 3 of the Offer to Purchase, (ii) the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees, or an Agent's Message (as defined in Section 3 of the Offer to Purchase) in connection with a book-entry transfer, and (iii) any other documents required under the Letter of Transmittal. Purchaser expressly reserves the right, in its sole discretion (but subject to the terms and conditions of the Merger Agreement), at any time and from time to time, to extend for any reason the period of time during which the Offer is open, including the occurrence of any of the events specified in Section 14 of the Offer to Purchase, by giving oral or written notice of such extension to the Depositary. Any such extension will be followed as promptly as practicable by public announcement thereof. During any such extension, all Shares previously tendered and not withdrawn will remain subject to the Offer, subject to the rights of tendering shareholders to withdraw their Shares. Tenders of Shares made pursuant to the Offer are irrevocable except that such Shares may be withdrawn at any time prior to 5:00 p.m., New York City time, on Tuesday, January 7, 1997 (or the latest time and date at which the Offer, if extended by Purchaser, shall expire) and, unless theretofore accepted for payment by Purchaser pursuant to the Offer, may also be withdrawn at any time after February 1, 1997. For a withdrawal to be effective, a written, telegraphic or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover of the Offer to Purchase. Any such notice of withdrawal must specify the name of the person who tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder, if different from that of the person who tendered such Shares. If Share Certificates evidencing Shares to be withdrawn have been delivered or otherwise identified to the Depositary, then, prior to the physical release of such Share Certificates, the serial 3 numbers shown on such Share Certificates must be submitted to the Depositary and the signature(s) on the notice of withdrawal must be guaranteed by an Eligible Institution (as defined in Section 3 of the Offer to Purchase), unless such Shares have been tendered for the account of an Eligible Institution. If Shares have been tendered pursuant to the procedure for book-entry transfer as set forth in Section 3 of the Offer to Purchase, any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Shares. All questions as to the form and validity (including time of receipt) of any notice of withdrawal will be determined by Purchaser, in its sole discretion, whose determination will be final and binding. The information required to be disclosed by Rule 14d-6(e)(1)(vii) of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, is contained in the Offer to Purchase and is incorporated herein by reference. The Company has provided Purchaser with the Company's shareholder list and security position listings for the purpose of disseminating the Offer to holders of Shares. The Offer to Purchase and the related Letter of Transmittal will be mailed to record holders of Shares whose names appear on the Company's shareholder list and will be furnished to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the shareholder list or, if applicable, who are listed as participants in a clearing agency's security position listing for subsequent transmittal to beneficial owners of Shares. THE OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION WHICH SHOULD BE READ BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER. Questions and requests for assistance or for additional copies of the Offer to Purchase and the related Letter of Transmittal and other tender offer materials may be directed to the Information Agent as set forth below, and copies will be furnished promptly at Purchaser's expense. No fees or commissions will be paid to brokers, dealers or other persons for soliciting tenders of Shares pursuant to the Offer. THE INFORMATION AGENT FOR THE OFFER IS: MacKenzie Partners, Inc. 156 Fifth Avenue New York, New York 10010 (212) 929-5500 (Call Collect) or CALL TOLL-FREE (800) 322-2885 December 4, 1996 EX-99.(A)(9) 10 EXHIBIT (A)(9) 1 LOGO December 4, 1996 To Our Shareholders: I am pleased to inform you that Milgray Electronics, Inc. ("Milgray"), Bell Industries, Inc. ("Bell") and ME Acquisition, Inc. ("Purchaser"), a wholly owned subsidiary of Bell Industries, Inc., have entered into an Agreement and Plan of Merger dated as of November 26, 1996 pursuant to which Purchaser has commenced a cash tender offer (the "Offer") to purchase all of the outstanding shares of Milgray common stock (the "Shares") for $14.77 per share. Under the Merger Agreement, the Offer will be followed by a merger of Purchaser into Milgray (the "Merger") in which any remaining Shares of Milgray common stock (other than Shares as to which appraisal rights have been properly exercised and perfected) will be converted into the right to receive $14.77 per share in cash, without interest. Your Board of Directors has unanimously determined that the Offer and the Merger are fair to and in the best interests of the Company's shareholders, as a group, and unanimously recommends that shareholders accept the Offer and tender their Shares pursuant to the Offer, provided that each shareholder should consult with his or her financial or tax adviser regarding the impact thereof on such shareholder prior to tendering his or her Shares in the Offer or voting to approve the Merger. In arriving at its recommendations, the Board of Directors gave careful consideration to a number of factors described in the attached Schedule 14D-9 that is being filed today with the Securities and Exchange Commission, including, among other things, the opinion of Mesirow Financial, Inc., the financial adviser retained by Milgray, that the consideration to be received by holders of Milgray common stock in the Offer and the Merger is fair to such holders from a financial point of view. In addition to the attached Schedule 14D-9 relating to the Offer, also enclosed is the Offer to Purchase, dated December 4, 1996, of Purchaser, together with related materials, including a Letter of Transmittal to be used for tendering your Shares. These documents set forth the terms and conditions of the Offer and the Merger and provide instructions as to how to tender your Shares. We urge you to read the enclosed material carefully. Sincerely, /s/ Herbert S. Davidson Herbert S. Davidson, President and Chief Executive Officer EX-99.(B) 11 EXHIBIT (B) 1 [UNION BANK OF CALIFORNIA LETTERHEAD] October 2, 1996 Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049 Attention: Mr. Tracy Edwards Chief Financial Officer Re: Bank Facility for Acquisition of EL PASO Gentlemen: You have advised us that Bell Industries, Inc. ("you" or "Company") will form a new subsidiary ("Merger Sub") for the purpose of acquiring (the "Acquisition") all of the outstanding capital stock (the "Shares") of a corporation you have referred to as "EL PASO". We understand that the Acquisition will be accomplished through a tender offer (the "Tender Offer") by Merger Sub for up to 100% of the Shares at a price not to exceed $14.77 per Share followed by a merger (the "Merger") of Merger Sub with and into EL PASO in which EL PASO will be the surviving corporation, and in which any Shares not tendered in the Tender Offer will be cancelled in exchange for cash consideration not exceeding $14.77 per Share (except that Shares held by persons who exercise rights to dissent from the Merger and demand appraisal of their Shares pursuant to Section 623 of the New York Business Corporation Law (the "NYBCL") shall receive such consideration as may be due to them under the NYBCL). We further understand that the Tender Offer will be conditioned on, among other things, the tender and purchase of at least 66-2/3% of the outstanding shares of stock of EL PASO on a fully diluted basis, the number of Shares required to permit Merger Sub to cause the Merger to occur (the "Minimum Shares"). Upon the consummation of the Merger, EL PASO will be wholly-owned by Company. 2 Bell Industries, Inc. October 2, 1996 Page 2 We understand that you are presently engaged in discussions with the owner of a majority of the Shares ("Majority Owner") with the objective that Company and Majority Owner would enter into an agreement to tender shares pursuant to which Majority Owner would agree to tender his Shares in the Tender Offer (the "Tender Agreement"). We understand that Company will not commence the Tender Offer until after the Tender Agreement has been executed. Union Bank of California, N.A. ("UBOC") is pleased to confirm its commitment to provide all of the up to $250,000,000 of senior bank credit facilities (the "Bank Facilities") described in the Summary of Terms attached hereto as Annex A (the "Term Sheet"). UBOC intends to arrange for other banks, financial institutions and other "accredited investors" (as defined in SEC regulations; each such bank, financial institution and accredited investor, including UBOC, being a "Lender" and, collectively, the "Lenders") to provide a portion of the Bank Facilities, and UBOC will act as agent for the Lenders (in such capacity, the "Agent"). Certain of the terms of each of the Bank Facilities are set forth in the Term Sheet. All terms defined in the Term Sheet shall have the same meanings when used herein. We have reviewed certain historical and pro forma financial statements of Company and EL PASO and have met with representatives of Company regarding the transactions contemplated hereby, and we are pleased to advise you that the results of our due diligence investigation of EL PASO and Company to date are satisfactory. However, neither we nor our counsel have had the opportunity to complete the due diligence efforts necessary to substantiate the premises upon which our commitment is based. Accordingly, UBOC's commitment to provide the financings described in this letter is subject to our satisfaction, upon completion of our due diligence, with the business, operations, properties, assets, liabilities (whether contractual or otherwise, and including without limitation environmental liabilities), condition (financial or otherwise) or prospects of EL PASO. In the event that our continuing review of EL PASO discloses information relating to conditions or events not previously disclosed to us or relating to new information or additional developments concerning conditions or events previously disclosed to us which we believe may have a material adverse effect on the business, operations, properties, assets, liabilities, condition (financial or otherwise) or prospects of EL PASO, we may, in our sole discretion, suggest alternative financing amounts or structures that ensure adequate protection for the Lenders or decline to participate in the proposed financing. In addition, UBOC's commitment is subject to the accuracy and completeness of the Information and the Projections described in the immediately succeeding paragraph, our satisfaction with the structure of the Acquisition, and the satisfaction of the conditions to be set forth in the definitive documentation relating to the Bank Facilities, including without limitation those conditions set forth in the Term Sheet. 3 Bell Industries, Inc. October 2, 1996 Page 3 Company hereby represents that, based on its review and analysis, to its knowledge (a) all information, other than Projections (as defined below), which has been or is hereafter made available to UBOC or the other Lenders by Company or EL PASO or any of their representatives (to the extent Company is aware of such information made available by EL PASO or its representatives) in connection with the transactions contemplated hereby (the "Information") has been reviewed and analyzed by Company in connection with the performance of its own due diligence and, as supplemented as contemplated by the next sentence, is (or will be, in the case of Information made available after the date hereof) complete and correct in all material respects and does not (or will not, as the case may be) contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein not materially misleading in light of the circumstances under which such statements were or are made, and (b) all financial projections concerning EL PASO that have been or are hereafter made available to UBOC or the other Lenders by Company or EL PASO or any of their representatives (to the extent Company is aware of such financial projections made available by EL PASO or its representatives) in connection with the transactions contemplated hereby (the "Projections") have been (or will be, in the case of Projections made available after the date hereof) prepared in good faith based upon reasonable assumptions. Company agrees to supplement the Information and the Projections from time to time until the closing date so that the representation and warranty in the preceding sentence is correct on the closing date. In arranging and syndicating the Bank Facilities, UBOC will be using and relying on the Information and the Projections without independent verification thereof. The representations and covenants contained in this paragraph shall remain effective until a definitive financing agreement is executed and thereafter the disclosure representations contained herein shall be superseded by those contained in such definitive financing agreement. Company shall pay the reasonable costs and expenses (including the reasonable fees and expenses of counsel to UBOC, reasonable professional fees of consultants and other experts and reasonable, documented out-of-pocket expenses of UBOC, including without limitation syndication expenses) arising in connection with the preparation, execution and delivery of this letter and the definitive financing agreements and the syndication of the Bank Facilities, whether or not the definitive financing agreements are executed. Company further agrees, to the extent permitted by applicable law, to indemnify and hold harmless each of the Lenders (including UBOC) and each director, officer, employee, agent, attorney and affiliate thereof (each an "indemnified person") from and against any losses, claims, damages, liabilities or other expenses to which a Lender or such indemnified persons may become subject, insofar as such losses, claims, damages, liabilities (or actions or other proceedings commenced or threatened in respect thereof) or other expenses arise out of or in any way relate to or result from the actions of 4 Bell Industries, Inc. October 2, 1996 Page 4 Company or EL PASO or any of their respective affiliates in connection with the Acquisition, any of the statements contained in this letter or relating to the extension of the financing contemplated by this letter, or any use or intended use of the proceeds of any of the loans and other extensions of credit contemplated by this letter, and to reimburse each of the Lenders and each indemnified person for any reasonable legal or other expenses incurred in connection with investigating, defending or participating in any such investigation, litigation or other proceeding (whether or not any such investigation, litigation or other proceeding involves claims made between Company or any third party and such Lender or any such indemnified person, and whether or not such Lender or any such indemnified person is a party to any investigation, litigation or proceeding out of which any such expenses arise); PROVIDED, HOWEVER, that the indemnity contained herein shall not apply to the extent that such losses, claims, damages, liabilities or other expenses result from the gross negligence or willful misconduct of such Lender or indemnified person. The obligations to indemnify each Lender and such indemnified persons and to pay such legal and other expenses shall remain effective until the effectiveness of a definitive financing agreement and thereafter the indemnification and expense reimbursement obligations contained herein shall be superseded by those contained in such definitive financing agreement. Neither UBOC nor any other Lender shall be responsible or liable to any other party or any other person for consequential damages which may be alleged as a result of this letter. The foregoing provisions of this paragraph shall be in addition to any rights that any Lender or any indemnified person may have at common law or otherwise. This letter and the Term Sheet are confidential and shall not be disclosed by you to any person other than your accountants, attorneys and, to the extent approved by UBOC, other advisors. After this letter has been accepted by you, it and the Term Sheet may also be disclosed to EL PASO and its accountants, attorneys and financial advisors (other than commercial banks and their affiliates). In each case such disclosure shall be only on a confidential basis and in connection with the Acquisition and the related transactions contemplated herein, and each such accountant, attorney and financial advisor shall agree to abide by this confidentiality agreement. Additionally, you may make such disclosures of this letter and the Term Sheet as are required by law or judicial process or as may be required or appropriate in response to any summons or subpoena or in connection with any litigation; PROVIDED that you will use your best efforts to notify us of any such disclosure prior to making such disclosure. In the event you accept this commitment letter, you agree to pay to UBOC the following fees, in addition to those set forth in the Term Sheet: 5 Bell Industries, Inc. October 2, 1996 Page 5 1. A financing fee equal to .90% of the aggregate principal amount of the Bank Facilities, such fee to be payable on the Closing Date; a portion of such financing fee may be distributed by us to the other Lenders if we elect to do so in our sole discretion; 2. (a) In the event the EL PASO Acquisition is not consummated on or before March 31, 1997, you shall pay UBOC a work fee of $100,000 payable on the earlier of the date the EL PASO Acquisition is abandoned by you or March 31, 1997, provided that such work fee shall not be payable unless you commence the Tender Offer or publicly announce your intention to commence the Tender Offer; or (b) in the event the EL PASO Acquisition is consummated on or before March 31, 1997 and the financing contemplated by the Term Sheet is not utilized in connection therewith, you shall pay UBOC an alternative fee equal to $350,000, all payable on the date the EL PASO Acquisition is consummated; and 3. An annual administrative fee of $50,000, such fee to be payable in arrears on the first anniversary of the Closing Date and annually in arrears thereafter. UBOC reserves the right to allocate, in whole or in part, the fees payable under this letter to one or more of its affiliates. Our offer will terminate at 5:00 P.M. October 4, 1996, unless at or before that time you sign and return an enclosed counterpart of this letter. Our commitment will automatically expire at 5:00 P.M. on the date that is 30 days after the date of your acceptance of this commitment letter unless you advise us in writing prior to such date that the Tender Agreement has been executed by the parties thereto. The Bank Facilities referred to herein shall in no event be available unless the Tender Offer has been consummated on or prior to December 31, 1996. This letter agreement shall be governed by and construed in accordance with the internal laws of the State of California. This letter agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 6 Bell Industries, Inc. October 2, 1996 Page 6 We appreciate having been given the opportunity by you to be involved in this transaction. Very truly yours, UNION BANK OF CALIFORNIA, N.A. By: /s/ Robert Peterson ------------------------------- Title: Vice President ---------------------------- AGREED AND ACCEPTED this 2 day of October, 1996 --- BELL INDUSTRIES, INC. By: /s/ Tracy A. Edwards ---------------------------- Title: Vice President ------------------------- 7 ANNEX A BELL INDUSTRIES, INC. SUMMARY OF TERMS BANK FACILITIES The following summarizes selected terms of senior bank facilities to be utilized in connection with the proposed acquisition of EL PASO by BELL INDUSTRIES, INC. This Summary of Terms is intended merely as an outline of certain of the material terms of such bank facilities. It does not include descriptions of all of the terms, conditions and other provisions that are to be contained in the definitive documentation relating to such bank facilities and it is not intended to limit the scope of discussion and negotiation of any matters not inconsistent with the specific matters set forth herein. I. THE BANK FACILITIES Borrower: Bell Industries, Inc. ("Company"). Lenders: Union Bank of California, N.A. ("UBOC") and, if UBOC so elects, a syndicate of banks, financial institutions and other accredited investors (the "Lenders"). Agent for the UBOC (in such capacity, the "Agent"). Lenders: Type and Amount: The Bank Facilities shall consist of (a) a Tender Loan made on the Closing Date (as defined below) in the principal amount of up to $175,000,000 which Tender Loan shall be due on the earlier of the Merger Date (as defined below) and 75 days after the Closing Date; (b) a five-year Term Loan made on the Merger Date in the original principal amount of $50,000,000 and (c) a five-year Revolving Credit Facility available from time to time on and after the Merger Date in the maximum amount of $200,000,000. A-1 8 Quarterly amortization of the Term Loan will be required, commencing on March 31, 1997, resulting in aggregate annual amounts as follows: Year Aggregate Annual Amortization ---- ----------------------------- 1 $ 7,500,000 2 7,500,000 3 10,000,000 4 12,500,000 5 12,500,000 ----------- $50,000,000 The Revolving Credit Facility shall not reduce in maximum amount (other than pursuant to the provisions described under the heading ("Mandatory Prepayments and Commitment Reductions") but borrowings thereunder shall be subject to a borrowing base. Letters of credit may be issued up to a sublimit of $15 million ($6 million if the proposed acquisition in Ontario, California (the "Ontario Acquisition") is not consummated). EL PASO Acquisition: The Bank Facilities shall be available to fund the purchase (the "EL PASO Acquisition") of all of the shares of capital stock of Milgray Electronics, Inc., a New York corporation ("EL PASO"). The EL PASO Acquisition shall be consummated by a tender offer (the "Tender Offer") by a subsidiary of Company ("Merger Sub") at a price not exceeding $14.77 per share of EL PASO common stock (the purchase of such shares pursuant to the Tender Offer being made on the Closing Date) followed by a merger (the "Merger") of such subsidiary with and into EL PASO on a date not later than 75 days after the Closing Date (the "Merger Date") in which each share of EL PASO not purchased in the Tender Offer shall be converted into the right to receive not more than $14.77 (except that Shares held by persons who exercise rights to dissent from the Merger and demand appraisal of their shares pursuant to Section 623 of the New York Business Corporation Law (the "NYBCL") shall receive such consideration as may be due to them under the NYBCL. The aggregate purchase price of all shares of EL PASO whether acquired in the Tender Offer, the Merger or otherwise shall not exceed $101 million. The Tender Offer shall be conditioned upon, among other things, the tender and purchase of at least 66-2/3% of the outstanding shares of stock of EL PASO on a fully diluted basis, the number of shares of EL PASO required to permit Company to cause the Merger to occur (the "Minimum Shares"). Use of Proceeds: The proceeds of the Tender Loan shall be made available on the A-2 9 date on or before December 31, 1996 (the "Closing Date") that the conditions set forth in Part II below are satisfied and shall be used as follows: 1. To pay the consideration for the EL PASO Acquisition in an aggregate amount not exceeding $101,000,000; 2. To refinance the existing insurance company indebtedness of Company (together with make-whole payments) of approximately $25 million and to repay its existing bank debt; and 3. To pay fees and expenses in connection with the EL PASO Acquisition and the related financings in an aggregate maximum amount of approximately $6 million. The proceeds of the Term Loan and the Revolving Credit Facility shall be made available, subject to the conditions set forth in Part II below, on the Merger Date (which shall, if at least 90% of the outstanding shares of stock of EL PASO is tendered pursuant to the Tender Offer, be the Closing Date) and shall be used as follows: 1. To refinance the Tender Loan; 2. To refinance the existing bank indebtedness of EL PASO; and 3. To pay additional consideration for the EL PASO Acquisition and related fees and expenses not exceeding (when added to the amounts paid on the Closing Date) the respective maximum amounts set forth in clauses 1 and 3 of the first paragraph of this heading. The revolving facility will also be available to provide for the working capital requirements and general corporate purposes of Company and its subsidiaries and, subject to the sublimit referred to above, to issue standby letters of credit to support workers' compensation contingencies, certain industrial revenue bond financings and for other corporate purposes to be agreed upon. Guarantors: All domestic subsidiaries of Company (including from and after the Merger Date EL PASO and its domestic subsidiaries). Security: All extensions of credit to Company and all guaranties of subsidiaries of Company will be secured by all accounts A-3 10 receivable and inventory of Company and the subsidiary Guarantors, including a pledge of 100% of the stock of all subsidiaries of Company (except the stock of EL PASO during the period from the Closing Date to the Merger Date). The foregoing security shall be released at such time as Company maintains a Leverage Ratio (as defined under "Interest Rates" below) of not more than 2.00 to 1.00 for four consecutive fiscal quarters. To effect such liens securing the Bank Facilities, Company and the subsidiary Guarantors shall execute and deliver to the Agent all security agreements, financing statements, and other documents and instruments as are necessary to grant a first priority perfected security interest in and lien upon all such property of Company and the subsidiary Guarantors, subject to customary permitted liens to be agreed upon. Negative pledge on all assets of Company and its subsidiaries, subject to exceptions to be agreed upon. Borrowing Base: Loans made under the revolving credit facility shall not exceed the sum of 85% of Eligible Receivables (to be defined) plus 50% of Eligible Inventory (to be defined). Interest Rates: All amounts outstanding under the Bank Facilities shall bear interest, at Company's option, (y) until the date of the delivery of financial statements for the period ending December 31, 1996 at a rate equal to the reserve-adjusted LIBOR Rate plus the rate per annum applicable to the Leverage Ratio (as defined below) as of the Closing Date, or the Base Rate and (z) thereafter as determined by reference to the ratio (the "Leverage Ratio") of the total funded indebtedness (to be defined) of Company and its subsidiaries to EBITDA (to be defined) of Company and its subsidiaries (on a pro forma basis giving effect to the EL PASO Acquisition) for the most recent trailing four fiscal quarters for which financial statements are available, as follows: A-4 11 Reserve Adjusted Base Rate Leverage Ratio LIBOR Rate plus plus -------------- ---------------- --------- greater than or equal to 3.5 to 1.00 1.50% per annum 0% less than 3.5 but greater than or equal to 3.0 to 1.00 1.25% 0% less than 3.0 but greater than or equal to 2.25 to 1.00 1.00% 0% less than 2.25 but greater than or equal to 1.5 to 1.00 .75% 0% less than 1.5 to 1.00 .50% 0% As used herein, the terms "Base Rate" and "reserve adjusted LIBOR Rate" shall have meanings customary and appropriate for financings of this type, and the basis for calculating accrued interest and the interest periods for loans bearing interest at the reserve adjusted LIBOR Rate ("LIBOR Loans") shall be customary and appropriate for financings of this type. After the occurrence and during the continuation of an event of default, interest shall accrue at a rate equal to the rate on loans bearing interest at the Base Rate plus an additional two percentage points (2.00%) per annum and shall be payable on demand. Interest Payments: Quarterly for Base Rate Loans; on the last day of selected interest periods (which shall be 1, 2, 3 and 6 months) for LIBOR Loans (and at the end of every three months, in the case of interest periods of longer than three months); and upon prepayment, in each case payable in arrears and computed on the basis of a 360-day year in the case of LIBOR Rate loans and a 365-day year in the case of Base Rate loans. Interest Rate Protection: Within 90 days after the Closing Date, Company will obtain interest rate protection to be mutually agreed between Company and UBOC, such arrangements to remain in effect through a date mutually agreed between Company and UBOC, and shall thereafter be maintained until such time as the Leverage Ratio is reduced below an amount to be determined. Letter of Credit Fee: The standby letter of credit fee shall be a percentage equal to the applicable margin for LIBOR Loans under the Bank Facilities, which shall be shared by all Lenders, and an additional 0.25% per annum, which shall be retained by Agent as issuer of the letter of credit (provided that so long as no Default or Event of Default is continuing, such additional fee shall not be payable in respect of the letter of credit issued in connection with the Ontario Acquisition), in each case based upon the applicable percentage multiplied by the amount available from time to time for drawing A-5 12 under such letter of credit. Fees with respect to commercial letters of credit shall be UBOC's customary fees for such letters of credit. Commitment Fees: Commitment fees equal to (y) 0.375% per annum times the daily average unused portion of the Bank Facilities (reduced by the amount of letters of credit issued and outstanding) shall accrue during such times as the Leverage Ratio is greater than or equal to 3.00 to 1.00 or (z) 0.25% per annum times the daily average unused portion of the Bank Facilities (as so reduced) shall accrue during such times as the Leverage Ratio is less than 3.00 to 1.00 and in either case shall be computed on the basis of a 360-day year and payable quarterly in arrears and upon the maturity or termination of the Bank Facilities. Voluntary Prepayments The Bank Facilities may be prepaid in whole or in part and Commitment without premium or penalty (LIBOR Loans prepayable only Reductions: on the last days of related interest periods) and the Lenders' commitments relative thereto reduced or terminated upon such notice and in such amounts as may be agreed upon. Voluntary reductions of the Bank Facilities shall be applied first to prepay the term loans in inverse order of maturity and thereafter to reduce the amount of the revolving credit facility. Mandatory Prepayments Company shall prepay the loans, and/or the commitments and Commitment Reduc- under the Bank Facilities shall be reduced, in amounts tions: equal to: Asset Sale Proceeds: the net after-tax cash proceeds of the sale or other disposition of any property or assets of Company or any of its subsidiaries, other than (a) net cash proceeds of sales or other dispositions of inventory in the ordinary course of business (b) net cash proceeds that are reinvested in similar assets within 180 days after the receipt thereof; and (c) an amount not exceeding $5 million per fiscal year, in each case payable no later than the third business day following the date of receipt; Proceeds of Equity Offerings: 100% of the net cash proceeds received from the issuance of equity securities of Company or any of its subsidiaries (excluding (a) proceeds from the exercise of stock options, (b) cash of corporations acquired by Company or its subsidiaries in exchange for equity securities of Company, (c) proceeds of the sale of stock pursuant to stock purchase plans, and (d) proceeds from the exercise of warrants issued in connection with Company's existing senior notes), in each case payable no later than the third business day following the date of receipt; and A-6 13 Proceeds of Debt Issuances: 100% of the net cash proceeds received from certain issuances of debt securities by Company or any of its subsidiaries, in each case payable no later than the third business day following the date of receipt; All such amounts shall be applied first to prepay the term loans in inverse order of maturity and thereafter to reduce the amount of the revolving credit facility. Representations and Customary and appropriate, including without limitation Warranties: due organization and authorization, enforceability, financial condition, no material adverse changes, title to properties, liens, litigation, payment of taxes, no material adverse agreements, compliance with laws, employee benefit liabilities, environmental liabilities, perfection and priority of liens securing the Bank Facilities, full disclosure, and the accuracy of all representations and warranties in the Definitive Acquisition Documents (as defined below under the heading "Acquisition Structure and Documentation"). Covenants: Customary and appropriate affirmative and negative covenants, including but not limited to limitations on other indebtedness, liens, investments, guarantees, restricted junior payments (dividends, share redemptions or purchases and payments on subordinated debt), mergers and acquisitions, sales of assets (exceeding $5,000,000 per fiscal year), capital expenditures, leases, transactions with affiliates, conduct of business and other provisions customary and appropriate for financings of this type, including exceptions and baskets to be mutually agreed upon. Notwithstanding the $5,000,000 basket set forth above, from and after the Closing Date, Company shall not sell, and shall not permit Merger Sub to sell, any Shares of EL PASO unless (a) such sale is for cash at fair market value, and (b) after giving effect to such sale, Merger Sub continues to own not less than 66-2/3% of the outstanding Shares of EL PASO on a fully-diluted basis. Acquisitions shall be permitted so long as (x) the aggregate cash consideration paid and indebtedness assumed in such acquisitions does not exceed (i) $25,000,000 for any single acquisition or related series of acquisitions or (ii) $50,000,000 for all acquisitions made during the term of the Bank Facilities (provided that during the first 12 months following the Merger, the aggregate cash consideration paid and indebtedness assumed in such acquisitions shall not exceed $15,000,000), (y) after giving effect to each acquisition, Company shall be in compliance with all financial performance covenants on a pro forma basis and A-7 14 (z) business acquired shall be in the same line of business as Company and its subsidiaries (materiality standard to be discussed). Financial performance covenants will include a minimum fixed charge coverage test (measuring EBITDA less capital expenditures to the sum of dividends, interest expense, scheduled principal repayments and income taxes on a trailing rolling four quarters basis), a minimum interest coverage test (measuring EBITDA to interest expense on a trailing rolling four quarters basis), and a maximum leverage test (measuring total debt to EBITDA on a trailing rolling four quarters basis). Events of Default: Customary and appropriate (subject to customary and appropriate grace periods), including without limitation failure to make payments when due, defaults under other agreements or instruments of indebtedness, prior to the Merger either party to the merger agreement stating its intention not to proceed with the Merger, noncompliance with covenants, breaches of representations and warranties, bankruptcy, judgments in excess of specified amounts, invalidity of guaranties, impairment of security interests in collateral, and "changes of control" (to be defined in a mutually agreed upon manner). II. CONDITIONS TO LOANS Certain Conditions Conditions precedent to the funding of the Tender Loan Precedent to Tender will include, without limitation, the following: Loan: 1. Satisfactory Documentation. The definitive documentation evidencing the Bank Facilities (the "Definitive Financing Documents") shall be prepared by counsel to UBOC and shall be in form and substance satisfactory to the Agent and the Lenders. 2. Corporate Structure, etc. The corporate, capital and ownership structure of Company and its subsidiaries (including EL PASO and its subsidiaries) shall be satisfactory to the Agent and the Lenders in all respects. 3. Acquisition Structure and Documentation. The structure utilized to consummate the EL PASO Acquisition (including the Tender Offer and the Merger) and the definitive documentation including the Agreement and Plan of Merger relating thereto (the "Definitive Acquisition Documents") shall be in form and substance satisfactory to A-8 15 the Agent and the Lenders, and the Definitive Acquisition Documents shall be executed and in full force and effect. 4. Consummation of Tender Offer. Concurrently, Company shall have acquired not less than the Minimum Shares pursuant to the Tender Offer, and all other aspects of the Tender Offer shall have been consummated pursuant to the Definitive Acquisition Documents, no provision of which shall have been amended, supplemented, waived or otherwise modified in any material respect without the prior written consent of the Agent and the Lenders which consent shall not be unreasonably withheld; there shall be no material litigation pending which challenges the EL PASO Acquisition or the Merger. 5. Discharge of Existing Debt. Concurrently, the existing bank indebtedness of Company and its subsidiaries and the existing insurance company indebtedness of Company shall have been repaid in full, all commitments relating thereto shall have been terminated, and all liens or security interests related thereto shall have been terminated or released, in each case on terms satisfactory to the Agent and the Lenders, and no other existing indebtedness of Company or its subsidiaries shall remain outstanding. 6. Certain Approvals and Agreements. All governmental and third party approvals necessary in order to consummate the EL PASO Acquisition and the financings contemplated thereby and to continue operations of the business of Company and its subsidiaries shall have been obtained and be in full force and effect, and all applicable waiting periods shall have expired without any action being taken or threatened by any competent authority which would restrain, prevent or otherwise impose adverse conditions on the Acquisition or the financing thereof. 7. Transaction Expenses. The Agent shall have received satisfactory evidence that the fees and expenses to be incurred in connection with the Acquisition and the related financings will not exceed $6 million in the aggregate. 8. Security. The Agent, for the benefit of the Lenders, shall have been granted on the Closing Date a perfected security interest in all assets to the extent described above under the heading "Security". A-9 16 9. Closing Balance Sheet; Minimum Net Worth. The Lenders shall have received a proforma balance sheet of Company and its subsidiaries as of the end of the prior month after giving effect to the EL PASO Acquisition, the financings contemplated hereby and appropriate closing adjustments and such proforma balance sheet shall indicate a consolidated net worth of not less than $120 million. 10. No Material Adverse Change. Since June 30, 1996, there shall have occurred no material adverse change in the business, operations, properties, assets, liabilities, condition (financial or otherwise) or prospects of Company and its subsidiaries, taken as a whole and since June 30, 1996, there shall have occurred no material adverse change in the business, operations, properties, assets, liabilities, condition (financial or otherwise) or prospects of EL PASO and its subsidiaries, taken as a whole. 11. Due Diligence. The results of UBOC's continuing financial, legal, tax and accounting due diligence investigations with respect to EL PASO and its subsidiaries, the EL PASO Acquisition and the other transactions contemplated hereby shall be satisfactory in all respects to UBOC, and any supplemental business or financial due diligence that UBOC reasonably determines has become necessary shall not have disclosed information not previously disclosed to UBOC which causes the results of such diligences not to be satisfactory in all material respects to UBOC. UBOC shall also have received any information reasonably necessary to conduct its continuing due diligence and shall have an opportunity to meet with the management of EL PASO and to visit its principal facilities. UBOC shall also have received a copy of the fairness opinion rendered to the board of directors of EL PASO in connection with the Tender and the Merger. 12. Solvency. The Agent and the Lenders shall have received a certificate of the chief financial officer of Company, in form and substance satisfactory to the Agent and the Lenders, supporting the conclusions that, after giving effect to the Acquisition and the related transactions contemplated hereby, Company will not be insolvent or be rendered insolvent by the indebtedness incurred in connection therewith, or will not be left with unreasonably small capital with which to engage in its businesses, or A-10 17 will not have incurred debts beyond its ability to pay such debts as they mature. 13. Collateral Audit. The Agent shall have conducted an audit of the accounts receivable and inventory of Company, EL PASO and their subsidiaries and shall have obtained an appraisal of such inventory; and such audit and appraisal shall be satisfactory to the Agent and the Lenders. 14. Customary Closing Documents. All documents required to be delivered under the Definitive Financing Documents, including customary legal opinions, corporate records, documents from public officials and officers' certificates, shall have been delivered. Certain Conditions Conditions precedent to the funding of the Term Loan and to Term Loan the availability of the Revolving Credit Facility will and Revolving include, without limitation, the following: Credit Facility: 1. Consummation of Merger. The Merger shall have been consummated. 2. Repayment of Tender Loan. Concurrently, the Tender Loan shall have been paid in full with proceeds of the Term Loan and a borrowing under the Revolving Credit Facility. 3. Existing EL PASO Debt. The existing bank indebtedness of EL PASO and its subsidiaries shall have been paid in full, all commitments relating thereto shall have been terminated, and all liens or security interests related thereto shall have been terminated or released, in each case on terms satisfactory to the Agent and the Lenders, and no other existing indebtedness of EL PASO or its subsidiaries shall remain outstanding other than certain mortgage indebtedness and equipment financing indebtedness not exceeding $1,000,000 in the aggregate, which shall remain outstanding on terms and conditions satisfactory to the Agent and the Lenders. 4. Guaranties and Security. The Agent, for the benefit of the Lenders, shall have received the guaranties of EL PASO and its domestic subsidiaries described under the heading "Guarantors" and shall have been granted a perfected security interest in all assets of such Guarantors to the extent described above under the heading "Security". A-11 18 5. Customary Closing Documents. All documents required to be delivered under the Definitive Financing Documents, including customary legal opinions, corporate records, documents from public officials and officers' certificates, shall have been delivered. Conditions to All The conditions to all borrowings will include Borrowings: requirements relating to prior written notice of borrowing, the accuracy of representations and warranties, and the absence of any default or potential event of default, and will otherwise be customary and appropriate for financings of this type. III. MISCELLANEOUS Syndication: A syndicate of financial institutions will be arranged by UBOC. Company shall, and shall use its best efforts to cause EL PASO to, cooperate with UBOC in the syndication of the Bank Facilities (such cooperation to include, without limitation, participating in meetings with the Lenders and assisting in the preparation of a Confidential Information Memorandum and other materials to be used in connection with such syndication) and shall provide and cause their respective advisors to provide all information reasonably deemed necessary by UBOC to successfully complete such syndication. The Lenders may assign all or, in an amount of not less than $5 million (or such lesser amount as may constitute the assigning Lender's entire commitment), any part of their shares of the Bank Facilities to their affiliates, to other Lenders, or to one or more banks or other entities that are eligible assignees (to be defined in the Definitive Financing Documents) which are acceptable to Company and the Agent, such consent not to be unreasonably withheld, and upon such assignment any such affiliate, bank of entity shall become a Lender for all purposes of the Definitive Financing Documents; PROVIDED that assignments made to affiliates and other Lenders shall not be subject to the $5 million minimum assignment requirement. Assignment shall require payment of a $2,500 processing fee to the Agent, it being understood that Company shall have no obligation with respect to such fee. The Lenders will have the right to sell participations, subject to customary limitations on voting rights, in their shares of the Bank Facilities. Requisite Lenders: Requisite Lenders shall mean Lenders holding in the aggregate more than 66-2/3% of the commitments under the Bank Facilities. A-12 19 Taxes, Reserve All payments are to be made free and clear of any present or Requirements & future taxes (other than franchise taxes and taxes on Indemnities: overall net income), imposts, assessments, withholdings, or other deductions whatsoever. Foreign Lenders shall furnish to the Agent (for delivery to Company) appropriate certificates or other evidence of exemption from U.S. federal income tax withholding. Company shall indemnify the Lenders against all increased costs of capital resulting from reserve requirements or otherwise imposed, in each case subject to customary increased costs, capital adequacy and similar provisions. Expenses: Company shall pay the reasonable and itemized fees and expenses of counsel to UBOC, all out-of-pocket expenses of UBOC and all syndication expenses. Governing Law and Company will submit to the non-exclusive jurisdiction and Jurisdiction: venue of the federal and state courts of the State of California and will waive any right to trial by jury. California law shall govern the Definitive Loan Documents. UBOC's Counsel: O'Melveny & Myers LLP. A-13 20 [Union Bank of California Letterhead] November 13, 1996 Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049 Attention: Mr. Tracy Edwards Chief Financial Officer Re: Bank Facility for Acquisition of EL PASO ----------------------------- Gentlemen: Reference is made to the letter (the "Commitment Letter") dated October 2, 1996 from Union Bank of California, N.A. to you describing our commitment (the "Commitment") to provide certain senior bank credit facilities described in the Summary of Terms attached to and made a part of the Commitment Letter. Capitalized terms not otherwise defined herein shall have the definitions set forth in the Commitment Letter. Notwithstanding anything to the contrary contained in the Commitment letter we hereby extend our Commitment until January 31, 1997, such extension to be conditioned upon the Tender Agreement being executed by all parties thereto no later than December 25, 1996. This letter agreement shall be governed by and construed in accordance with the internal laws of the State of California. This letter agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. [Remainder of page intentionally left blank] 21 We appreciate having been given the opportunity by you to be involved in this transaction. Very truly yours, UNION BANK OF CALIFORNIA, N.A. By: /s/ Robert Peterson -------------------------- Title: Vice President ----------------------- AGREED AND ACCEPTED this 15 day of November, 1996 -- BELL INDUSTRIES, INC. By:/s/ Tracy A. Edwards --------------------- Title: Vice President ------------------ EX-99.(C)(1) 12 EXHIBIT (C)(1) 1 AGREEMENT AND PLAN OF MERGER BY AND AMONG BELL INDUSTRIES, INC., a California corporation, ME ACQUISITION, INC., a New York corporation, AND MILGRAY ELECTRONICS, INC., a New York corporation DATED AS OF NOVEMBER 26, 1996 2 TABLE OF CONTENTS
Page ARTICLE I THE OFFER AND MERGER.................................................................. 2 1.1 The Offer............................................................................. 2 1.2 Company Actions....................................................................... 4 1.3 Directors............................................................................. 5 1.4 The Merger............................................................................ 6 1.5 Effective Time........................................................................ 7 1.6 Closing............................................................................... 7 1.7 Directors and Officers of the Surviving Corporation................................... 7 1.8 Shareholders' Meeting................................................................. 8 1.9 Merger Without Approval of Company Shareholders....................................... 8 ARTICLE II CONVERSION OF SHARES............................................................................ 9 2.1 Conversion of Capital Stock........................................................... 9 2.2 Exchange of Certificates.............................................................. 10 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................................................................................ 11 3.1 Organization and Qualification; Subsidiaries.......................................... 11 3.2 Capitalization........................................................................ 12 3.3 Authority............................................................................. 13 3.4 Consents and Approvals; No Violation.................................................. 14 3.5 Company SEC Reports................................................................... 15 3.6 Financial Statements.................................................................. 15
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Page 3.7 Absence of Undisclosed Liabilities.................................................... 16 3.8 Absence of Certain Changes............................................................ 16 3.9 Taxes................................................................................. 17 3.10 Litigation............................................................................ 18 3.11 Employee Benefit Plans; ERISA......................................................... 18 3.12 Environmental Liability............................................................... 19 3.13 Compliance with Applicable Laws....................................................... 19 3.14 Material Contracts.................................................................... 20 3.15 Patents, Marks, Trade Names, Etc...................................................... 21 3.16 Insurance............................................................................. 21 3.17 Opinion of Financial Advisor.......................................................... 21 3.18 Vote Required......................................................................... 21 3.19 Information Supplied; Company Proxy Statement......................................... 22 3.20 Company Stock Options................................................................. 22 3.21 Inventory............................................................................. 22 3.22 Major Customers and Suppliers; Backlog................................................ 22 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER........................................................................... 23 4.1 Organization.......................................................................... 23 4.2 Authority Relative to this Agreement.................................................. 23 4.3 Consent and Approvals; No Violation................................................... 23 4.4 Information Supplied.................................................................. 24 4.5 Financing............................................................................. 24
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Page 4.6 Purchaser's Operations................................................................ 25 4.7 No Shares Owned by Parent, Purchaser or Affiliates.................................... 25 4.8 Capitalization........................................................................ 25 ARTICLE V CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO EFFECTIVE DATE.............................................................................. 25 5.1 Ordinary Course....................................................................... 25 5.2 Dividends; Changes in Stock........................................................... 25 5.3 Issuance or Repurchase of Securities.................................................. 26 5.4 Governing Documents; Board of Directors............................................... 26 5.5 No Dispositions....................................................................... 26 5.6 Indebtedness.......................................................................... 26 5.7 Compensation.......................................................................... 26 5.8 Benefit Plans......................................................................... 27 5.9 Taxes................................................................................. 27 5.10 Consultation and Cooperation.......................................................... 27 5.11 Additional Matters.................................................................... 28 ARTICLE VI ADDITIONAL COVENANTS............................................................................ 29 6.1 No Solicitation....................................................................... 29 6.2 Access to Information; Confidentiality................................................ 31 6.3 HSR Act............................................................................... 31 6.4 Consents and Approvals................................................................ 32 6.5 Notification of Certain Matters....................................................... 32 6.6 Brokers or Finders.................................................................... 32
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Page 6.7 Additional Actions.................................................................... 33 6.8 Benefit Plans and Certain Contracts; Severance Arrangements.......................................................................... 33 6.9 Directors' and Officers' Indemnification.............................................. 34 6.10 Tender Agreement; New York Law........................................................ 35 6.11 Publicity............................................................................. 36 6.12 Opinion of Company Counsel............................................................ 36 6.13 Election of Directors................................................................. 36 ARTICLE VII CONDITIONS..................................................................................... 36 7.1 Conditions to each Party's Obligations to Effect the Merger................................................................................ 36 7.2 Additional Condition to Obligations of the Company to Effect the Merger.................................................................. 37 ARTICLE VIII TERMINATION................................................................................... 37 8.1 Termination........................................................................... 37 8.2 Effect of Termination................................................................. 39 ARTICLE IX GENERAL PROVISIONS.............................................................................. 39 9.1 Fees and Expenses..................................................................... 39 9.2 Amendment and Modification............................................................ 40 9.3 Nonsurvival of Representations and Warranties......................................... 40 9.4 Notices............................................................................... 40 9.5 Definitions; Interpretation........................................................... 41 9.6 Counterparts.......................................................................... 42 9.7 Entire Agreement; No Third Party Beneficiaries........................................ 42
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Page 9.8 Severability.......................................................................... 42 9.9 Governing Law......................................................................... 42 9.10 Assignment............................................................................ 42
A-v 7 AGREEMENT AND PLAN OF MERGER This Agreement and Plan of Merger (the "Agreement") is entered into as of November 26, 1996 by and among Bell Industries, Inc., a California corporation ("Parent"), ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of Parent ("Purchaser"), and Milgray Electronics, Inc., a New York corporation (the "Company"). RECITALS WHEREAS, the respective Boards of Directors of Parent and Purchaser have determined that it is advisable and in the best interests of Parent and Purchaser to engage in a transaction whereby Parent will acquire the Company on the terms and subject to the conditions set forth herein; and WHEREAS, the Board of Directors of the Company has determined that it is advisable and in the best interests of the Company and its shareholders to engage in a transaction whereby Parent will acquire the Company on the terms and subject to the conditions set forth in this Agreement; and WHEREAS, Herbert S. Davidson, a director, Chief Executive Officer and President of the Company (the "Shareholder"), is the beneficial owner of 3,742,064 shares of the Company Common Stock (as defined below); and WHEREAS, as an inducement to Parent to acquire the Company, and as a condition to Parent's willingness to enter into this Agreement, concurrently with the execution and delivery of this Agreement, Parent, Purchaser and the Shareholder are entering into a tender agreement (the "Tender Agreement") pursuant to which the Shareholder has agreed to (i) tender his Shares in the Offer (as defined below) and vote his Shares in favor of the Merger (as defined below) and (ii) not compete with Parent, Purchaser, the Company or the Surviving Corporation (as defined below) to the extent set forth therein, in each case upon the terms and subject to the conditions set forth therein; and WHEREAS, in furtherance of its acquisition of the Company, Parent proposes to cause Purchaser to make a tender offer (as it may be amended from time to time as permitted under this Agreement, the "Offer") to purchase all of the issued and outstanding shares of common stock, par value $0.25 per share, of the Company (hereinafter referred to as either the "Shares" or the "Company Common Stock") at a price per share of Company Common Stock of $14.77, net to the seller in cash, upon the terms and subject to the conditions set forth in this Agreement, and the Board of Directors of the Company has adopted resolutions approving, among other things, the Offer and the Merger and recommending that the Company's shareholders accept the Offer, provided that such shareholders should consult with their financial or tax advisers prior to tendering their Shares in the Offer or voting to approve the Merger; and -1- 8 WHEREAS, the respective Boards of Directors of Parent, Purchaser and the Company have approved the merger (the "Merger") of Purchaser into the Company, upon the terms and subject to the conditions set forth in this Agreement, whereby each issued and outstanding share of Company Common Stock not owned directly or indirectly by Parent or the Company, except shares of Company Common Stock held by persons who object to the Merger and comply with all the provisions of New York law concerning the right of holders of Company Common Stock to dissent from the Merger and demand appraisal of their shares of Company Common Stock ("Dissenting Shareholder"), will be converted into the right to receive the per share consideration paid pursuant to the Offer; and WHEREAS, the Company, Parent and Purchaser wish to make certain representations, warranties, covenants and agreements in connection with the Offer and the Merger and also to prescribe various conditions to the Offer and the Merger. NOW, THEREFORE, in consideration of the premises and the representations, warranties and agreements contained herein, the parties hereto agree as follows: ARTICLE I THE OFFER AND MERGER 1.1 The Offer. (a) As promptly as practicable (but in no event later than five business days after the public announcement of the execution hereof), Purchaser shall commence (within the meaning of Rule 14d-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) the Offer to purchase for cash all of the issued and outstanding shares of Company Common Stock at a price of $14.77 per Share, net to the seller in cash (such price, or such higher price per Share as may be paid in the Offer, being referred to herein as the "Offer Price"), subject to there being validly tendered and not withdrawn prior to the expiration of the Offer that number of Shares which, together with the Shares beneficially owned by Parent or Purchaser, represents at least 66-2/3% of the Shares outstanding on a fully diluted basis (the "Minimum Condition") and to the other conditions set forth in Annex A hereto. The Offer shall remain open for tender of Shares or withdrawal of Shares previously tendered until January 7, 1997, unless previously terminated prior to such date in accordance with the terms thereof or of this Agreement or pursuant to applicable law without any Shares having been accepted for payment or paid for under the Offer. Purchaser shall, on the terms and subject to the prior satisfaction or waiver of the conditions of the Offer (including without limitation the Minimum Condition), accept for payment and pay for Shares tendered as soon as practicable after it is legally permitted to do so under applicable law; PROVIDED, HOWEVER, that Purchaser will not, without the written consent of the Company, accept for payment and pay for any Shares prior to January 7, 1997. The obligations of Purchaser to commence the Offer and to accept for payment and to pay for any Shares validly tendered on or prior to the expiration of the Offer and not withdrawn shall be subject -2- 9 only to the Minimum Condition and the other conditions set forth in Annex A hereto. The Offer shall be made by means of an offer to purchase (the "Offer to Purchase") containing the terms set forth in this Agreement, the Minimum Condition and the other conditions set forth in Annex A hereto. Without the written consent of the Company, Purchaser shall not decrease the Offer Price, decrease the number of Shares sought, change the form of consideration to be paid in the Offer, amend or waive the Minimum Condition, or amend any other condition of the Offer in any manner adverse to the holders of the Shares (other than with respect to insignificant changes or amendments); PROVIDED, HOWEVER, that if on the initial scheduled expiration date of the Offer (as it may be extended) all conditions to the Offer shall not have been satisfied or waived, the Offer may be extended from time to time until February 6, 1997 without the consent of the Company; PROVIDED FURTHER, HOWEVER, that, notwithstanding the foregoing proviso, Purchaser may extend the Offer without the Company's consent until February 28, 1997 if the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, has not expired or terminated by February 6, 1997. In addition, the Offer Price may be increased and the Offer may be extended to the extent required by law in connection with such increase, in each case without the consent of the Company. Purchaser shall terminate the Offer upon termination of this Agreement pursuant to its terms. (b) As soon as practicable on the date the Offer is commenced, Parent and Purchaser shall file with the United States Securities and Exchange Commission (the "SEC") a Tender Offer Statement on Schedule 14D-1 with respect to the Offer (together with all amendments and supplements thereto and including the exhibits thereto, the "Schedule 14D-1"). The Schedule 14D-1 will include, as exhibits, the Offer to Purchase and a form of letter of transmittal and summary advertisement (collectively, together with any amendments and supplements thereto, the "Offer Documents") with respect to the Offer. The Offer Documents will comply in all material respects with the provisions of applicable Federal securities laws and, on the date filed with the SEC and on the date first published, sent or given to the Company's shareholders, shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that no representation is made by Parent or Purchaser with respect to information supplied by the Company for inclusion in the Offer Documents. Each of the Parent and Purchaser further agrees to take all steps necessary to cause the Offer Documents to be filed with the SEC and to be disseminated to holders of Shares, in each case as and to the extent required by applicable Federal securities laws. Each of Parent and Purchaser, on the one hand, and the Company, on the other hand, agrees promptly to correct any information provided by it for use in the Offer Documents if and to the extent that it shall have become false and misleading in any material respect and Purchaser further agrees to take all steps necessary to cause the Offer Documents as so corrected to be filed with the SEC and to be disseminated to holders of Shares, in each case as and to the extent required by applicable Federal securities laws. The Company and its counsel shall be given the opportunity to review the Schedule 14D-1 before it is filed with the SEC. In addition, Parent and Purchaser agree to provide the Company and its counsel -3- 10 in writing with any comments Parent, Purchaser or their counsel may receive from time to time from the SEC or its staff with respect to the Offer Documents promptly after the receipt of such comments. 1.2 Company Actions. (a) The Company hereby approves of and consents to the Offer and represents that the Board of Directors, at a meeting duly called and held on the date or dates on which the relevant parties entered into this Agreement and the Tender Agreement, has unanimously (i) determined that each of the Offer, the Merger and the transactions contemplated thereby is fair to and in the best interests of the Company's shareholders, as a group (other than Parent and Purchaser), provided that each shareholder should consult with his financial or tax advisor regarding the impact thereof on such shareholder; (ii) approved this Agreement and the transactions contemplated hereby (including without limitation (x) the acquisition of the Company by Parent or any of its affiliates, and any purchase of Shares in connection therewith, by means of this Agreement, the Offer, the Merger, and/or any other transactions pursuant to this Agreement conducted to effectuate the acquisition of the Company by Parent or its affiliates in accordance with this Agreement ("Other Transactions") and (y) any other transactions contemplated hereby and by the foregoing clause (x); (iii) resolved to recommend that the shareholders of the Company, as a group, accept the Offer, tender their Shares thereunder to Purchaser and approve and adopt this Agreement and the Merger, PROVIDED, HOWEVER, that shareholders should consult with their financial or tax advisers prior to tendering their Shares in the Offer or voting to approve the Merger and PROVIDED FURTHER that such recommendation may be withdrawn, modified or amended if, in the opinion of the Board of Directors of the Company, after consultation with independent legal counsel to the Company, the failure to take such action would be inconsistent with their fiduciary duties under applicable law, and any such withdrawal, modification or amendment of the recommendation will not be deemed a breach of this Agreement; and (iv) adopted resolutions approving all of the actions and transactions referenced herein and such approval constitutes approval of the Offer, this Agreement and the Merger for purposes of (A) Sections 902 and 912 of the New York Business Corporation Law (the "NYBCL") and similar provisions of any other similar state statutes that might be deemed applicable to the transactions contemplated hereby. (b) Concurrently with the commencement of the Offer, the Company shall file with the SEC a Solicitation/Recommendation Statement on Schedule 14D-9 (together with all amendments and supplements thereto, and including the exhibits thereto, the "Schedule 14D-9") which shall, subject to the fiduciary duties of the Company's Board of Directors under applicable law and the provisions of this Agreement, contain the statements referred to in Section 1.2(a) hereof. In connection with making such recommendations, the Company may include a statement to the effect that the Company's shareholders should consult with their financial or tax advisers prior to tendering their Shares in the Offer or voting to approve the Merger. The Schedule 14D-9 will comply in all material respects with the provisions of applicable Federal securities laws and, on the date filed with the SEC and on the date first published, sent -4- 11 or given to the Company's shareholders, shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that no representation is made by the Company with respect to information supplied by Parent or Purchaser for inclusion in the Schedule 14D-9. The Company further agrees to take all steps necessary to cause the Schedule 14D-9 to be filed with the SEC and to be disseminated to holders of Shares, in each case as and to the extent required by applicable Federal securities laws. Each of the Company, on the one hand, and Parent and Purchaser, on the other hand, agrees promptly to correct any information provided by it for use in the Schedule 14D-9 if and to the extent that it shall have become false and misleading in any material respect and the Company further agrees to take all steps necessary to cause the Schedule 14D-9 as so corrected to be filed with the SEC and to be disseminated to holders of the Shares, in each case as and to the extent required by applicable Federal securities laws. Parent and its counsel shall be given the opportunity to review the Schedule 14D-9 before it is filed with the SEC. In addition, the Company agrees to provide Parent, Purchaser and their counsel in writing any comments the Company or its counsel may receive from time to time from the SEC or its staff with respect to the Schedule 14D-9 promptly after the receipt of such comments. The Company and its counsel will provide Parent and its counsel with a reasonable opportunity to participate in all communications with the SEC and its staff, including any meetings and telephone conferences relating to the Schedule 14D-9, the Merger, this Agreement or the transactions contemplated hereby. (c) In connection with the Offer, the Company will promptly furnish or cause to be furnished to Purchaser mailing labels, security position listings and any available listing or computer file containing the names and addresses of the record holders of the Shares as of a recent date and those of persons becoming record holders after such date, together with copies of all other information in the Company's control regarding the beneficial owners of shares of Company Common Stock that Parent may reasonably request, and shall furnish Purchaser with such other information and assistance as Purchaser or its agents may reasonably request in communicating the Offer to the shareholders of the Company. 1.3 Directors. (a) Promptly upon the purchase of and payment for any Shares (including without limitation all Shares subject to the Tender Agreement) by Purchaser or any other subsidiary of Parent pursuant to the Offer, Parent shall be entitled to designate such number of directors, rounded to the nearest whole number, on the Board of Directors of the Company as is equal to the product of the total number of directors then serving on such Board (which, immediately prior to such calculation, shall not consist of more than five directors) multiplied by the ratio of the aggregate number of Shares beneficially owned by Parent, Purchaser and any of their affiliates to the total number of Shares then outstanding. The Company shall, upon request of Purchaser, take all action necessary to cause Parent's designees to be elected or appointed to the Company's Board of Directors, including without limitation securing the resignations of -5- 12 such number of its incumbent directors as is necessary to enable Parent's designees to be so elected or appointed to the Company's Board, and shall cause Parent's designees to be so elected or appointed. At such time, the Company shall also cause persons designated by Parent to constitute the same percentage (rounded to the nearest whole number) as is on the Company's Board of Directors of (i) each committee of the Company's Board of Directors, (ii) each board of directors (or similar body) of each Subsidiary (as defined below) of the Company and (iii) each committee (or similar body) of each such board. (b) The Company shall promptly take all actions required pursuant to Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder in order to fulfill its obligations under Section 1.3(a), including mailing to shareholders as part of the Schedule 14D-9 the information required by such Section 14(f) and Rule 14f-1, as is necessary to enable Parent's designees to be elected to the Company's Board of Directors. Parent or Purchaser shall supply the Company with any information with respect to either of them and their nominees, officers, directors and affiliates required by such Section 14(f) and Rule 14f-1. The provisions of Section 1.3(a) are in addition to and shall not limit any rights which Parent, Purchaser or any of their affiliates may have as a holder or beneficial owner of Shares as a matter of law with respect to the election of directors or otherwise. (c) From and after the time, if any, that Parent's designees constitute a majority of the Company's Board of Directors, any amendment of this Agreement, any termination of this Agreement by the Company, any extension of time for performance of any of the obligations of Parent or Purchaser hereunder, any waiver of any condition or any of the Company's rights hereunder or other action by the Company hereunder (other than the actions contemplated by Section 1.8 hereof) may be effected only if the action is approved by a majority of the directors of the Company then in office who were directors of the Company on the date hereof, which action shall be deemed to constitute the action of the Board of Directors; PROVIDED, HOWEVER, that if there shall be no such directors, such actions may be effected by majority vote of the entire Board of Directors of the Company. 1.4 The Merger. (a) Subject to the terms and conditions of this Agreement, and pursuant to Sections of the NYBCL, at the Effective Time the Company and Purchaser shall consummate the Merger pursuant to which (i) Purchaser shall be merged with and into the Company and the separate corporate existence of Purchaser shall thereupon cease, (ii) the Company shall be the successor or surviving corporation in the Merger (the "Surviving Corporation") and shall continue to be governed by the laws of the State of New York, and (iii) the separate corporate existence of the Company with all its rights, privileges, immunities, powers and franchises shall continue unaffected by the Merger. (b) Pursuant to the Merger, (i) the certificate of incorporation of the Company, as in effect immediately prior to the Effective Time, shall be the certificate of -6- 13 incorporation of the Surviving Corporation until thereafter amended as provided by applicable law and such certificate of incorporation, and (ii) the bylaws of the Company, as in effect immediately prior to the Effective Time, shall be the bylaws of the Surviving Corporation until thereafter amended as provided by law, the certificate of incorporation and such bylaws. The corporation surviving the Merger is sometimes hereinafter referred to as the "Surviving Corporation." The Merger shall have the effects set forth in the NYBCL. (c) The Merger shall have the effects set forth in the NYBCL (including, without limitation, Section 906 thereof). Without limiting the generality of the foregoing, and subject thereto, at the Effective Time (as defined in Section 1.5), all the properties, rights, privileges, powers and franchises of the Company and Purchaser shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Purchaser shall become the debts, liabilities and duties of the Surviving Corporation. 1.5 Effective Time. On the date of Closing (as defined in Section 1.6) as soon as practicable following the satisfaction or waiver of the conditions set forth in Article VII (or on such other date as Parent and the Company may agree) the parties shall cause certificate of merger or other appropriate documents (in any such case, the "Certificate of Merger") to be executed and filed with the Department of State of the State of New York and make all other filings and recordings or recordings required by the NYBCL in connection with the Merger. The Merger shall become effective at the time and on the date on which the Certificate of Merger has been duly filed with the Department of State of the State of New York or such later time as is agreed upon by the parties and specified in the Certificate of Merger, and such time is hereinafter referred to as the "Effective Time." Parent and the Company agree to use their best efforts to cause the Merger to become effective as soon as practicable following the purchase of and payment for Shares pursuant to the Offer. 1.6 Closing. The Closing of the Merger (the "Closing") will take place at 10:00 a.m., New York time, on a date to be specified by the parties, which shall be no later than the second business day after satisfaction or waiver of all of the conditions set forth in Article VII hereof (the "Closing Date"), at the offices of the Company, 77 Schmitt Boulevard, Farmingdale, New York 11735, unless another date or place is agreed to in writing by the parties hereto. 1.7 Directors and Officers of the Surviving Corporation. The directors and officers of Purchaser at the Effective Time shall, from and after the Effective Time, be the directors and officers, respectively, of the Surviving Corporation until their successors shall have been duly elected or appointed or qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation's certificate of incorporation and bylaws. -7- 14 1.8 Shareholders' Meeting. (a) If required by applicable law in order to consummate the Merger, the Company, acting through its Board of Directors, shall, in accordance with applicable law: (i) duly call, give notice of, convene and hold a special meeting of its shareholders (the "Special Meeting") as soon as practicable following the acceptance for payment and purchase of Shares by Purchaser pursuant to the Offer for the purpose of considering and taking action upon this Agreement; (ii) prepare and file with the SEC a preliminary proxy or information statement relating to the Merger and this Agreement and use its reasonable efforts (x) to obtain and furnish the information required to be included by the SEC in the Company Proxy Statement (as defined below) and, after consultation with Parent, to respond promptly to any comments made by the SEC with respect to the preliminary proxy or information statement and cause a definitive proxy or information statement (the "Company Proxy Statement") to be mailed to its shareholders and (y) to obtain the necessary approvals of the Merger and this Agreement by its shareholders; and (iii) include in the Company Proxy Statement the recommendation of the Board of Directors that shareholders of the Company, as a group, vote in favor of the approval of the Merger and the adoption of this Agreement (provided that shareholders should consult with their financial or tax advisers prior to voting to approve the Merger) unless, in the opinion of the Board of Directors after consultation with independent counsel, the inclusion of such recommendation would be inconsistent with its fiduciary duties under applicable law. (b) Parent and Purchaser agree that Purchaser shall, and shall cause any permitted assignee of Purchaser to, vote all Shares then owned by it which are entitled to vote in favor of the approval of the Merger and the adoption of this Agreement. 1.9 Merger Without Approval of Company Shareholders. Notwithstanding Section 1.8 hereof, in the event that Parent, Purchaser or any permitted assignee of Purchaser shall acquire at least 90% of the outstanding shares of each class of capital stock of the Company, pursuant to the Offer or otherwise, the parties hereto agree, at the request of Parent and subject to Article VII hereof, to take all necessary and appropriate action to cause the Merger to become effective as soon as practicable after such acquisition, without approval of the Company shareholders, in accordance with Section 905 of the NYBCL. In connection therewith, the Company and its Board of Directors may take all action necessary to approve a plan of merger under Section 905 of the NYBCL, which plan of merger shall supersede the plan of merger adopted by the Board of Directors as contemplated by Section 1.2(a) hereof, solely to cause the Merger hereunder to become effective without approval of the Company shareholders. If the Board of Directors of the Company so approves a merger pursuant to Section 905, -8- 15 Parent or Purchaser shall, and shall cause any permitted assignee to, continue to hold not less than 90% of the issued and outstanding shares of Company Common Stock until the consummation or abandonment of such merger. ARTICLE II CONVERSION OF SHARES 2.1 Conversion of Capital Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of the holders of any share of Company Common Stock or common stock, par value $.01 per share, of Purchaser (the "Purchaser Common Stock"): (a) Purchaser Common Stock. Each issued and outstanding share of Purchaser Common Stock shall be converted into and become one fully paid and nonassessable share of common stock of the Surviving Corporation. (b) Cancellation of Treasury Stock and Parent-Owned Stock. All shares of Company Common Stock that are owned by the Company as treasury stock and any shares of Company Common Stock owned by Parent, Purchaser or any other wholly owned subsidiary of Parent shall be cancelled and retired and shall cease to exist and no consideration shall be delivered in exchange therefor. (c) Conversion of Shares. Each issued and outstanding share of Company Common Stock (other than shares to be cancelled in accordance with Section 2.1(b)) shall be converted into the right to receive the Offer Price, payable to the holder thereof, without interest (the "Merger Consideration"), upon surrender of the certificate formerly representing such share of Company Common Stock in the manner provided in Section 2.2. All such shares of Company Common Stock, when so converted, shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of a certificate representing any such Shares shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration therefor upon the surrender of such certificate in accordance with Section 2.2, without interest. (d) Shares of Dissenting Shareholders. Notwithstanding anything in this Agreement to the contrary, any issued and outstanding shares of Company Common Stock held by a Dissenting Shareholder shall not be converted as described in Section 2.1(c) but shall become the right to receive such consideration as may be determined to be due to such Dissenting Shareholder pursuant to the laws of the State of New York; PROVIDED, HOWEVER, that the shares of Company Common Stock outstanding immediately prior to the Effective Time and held by a Dissenting Shareholder who shall, after the Effective Time, fail to perfect his right to appraisal, withdraw his demand for appraisal or lose his right of appraisal, in any case pursuant to Section 623 of the NYBCL, shall be deemed to be converted as of the Effective Time into the right to receive the Merger -9- 16 Consideration. The Company shall give Parent (i) prompt notice of any written demands for appraisal of shares of Company Common Stock received by the Company and (ii) the opportunity to direct all negotiations and proceedings with respect to any such demands. The Company shall not, without the prior written consent of Parent, voluntarily make any payment with respect to, or settle, offer to settle or otherwise negotiate, any such demands. 2.2 Exchange of Certificates. (a) Paying Agent. Parent shall designate a bank or trust company to act as agent for the holders of shares of Company Common Stock in connection with the Merger (the "Paying Agent") to receive the funds to which holders of shares of Company Common Stock shall become entitled pursuant to Section 2.1(c). Such funds shall be invested by the Paying Agent as directed by Parent or the Surviving Corporation. (b) Exchange Procedures. As soon as reasonably practicable after the Effective Time, the Paying Agent shall mail to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Company Common Stock (the "Certificates"), whose Shares were converted pursuant to Section 2.1 into the right to receive the Merger Consideration (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Paying Agent and shall be in such form and have such other provisions as Parent and the Company may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for payment of the Merger Consideration. Upon surrender of a Certificate for cancellation to the Paying Agent or to such other agent or agents as may be appointed by Parent, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration for each share of Company Common Stock formerly represented by such Certificate and the Certificate so surrendered shall forthwith be cancelled. If payment of the Merger Consideration is to be made to a person other than the person in whose name the surrendered Certificate is registered, it shall be a condition of payment that the Certificate so surrendered shall be properly endorsed or shall be otherwise in proper form for transfer and that the person requesting such payment shall have paid any transfer and other taxes required by reason of the payment of the Merger Consideration to a person other than the registered holder of the Certificate surrendered or shall have established to the satisfaction of the Surviving Corporation that such tax either has been paid or is not applicable. Until surrendered as contemplated by this Section 2.2, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive the Merger Consideration in cash as contemplated by this Section 2.2. (c) Transfer Books; No Further Ownership Rights in Company Common Stock. At the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers of shares of Company Common Stock on the records of the Company. From and after the Effective -10- 17 Time, the holders of Certificates evidencing ownership of shares of Company Common Stock outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such Shares, except as otherwise provided for herein or by applicable law. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be cancelled and exchanged as provided in this Article II. (d) Termination of Fund; No Liability. At any time following six months after the Effective Time, the Surviving Corporation shall be entitled to require the Paying Agent to deliver to it any funds (including any interest received with respect thereto) which had been made available to the Paying Agent and which have not been disbursed to holders of Certificates, and thereafter such holders shall be entitled to look to the Surviving Corporation (subject to abandoned property, escheat or other similar laws) only as general creditors thereof with respect to the Merger Consideration payable upon due surrender of their Certificates, without any interest thereon. Notwithstanding the foregoing, neither the Surviving Corporation nor the Paying Agent shall be liable to any holder of a Certificate for Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Parent and Purchaser as follows: 3.1 Organization and Qualification; Subsidiaries. (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of New York, is duly qualified to do business as a foreign corporation and is in good standing in the jurisdictions listed on Schedule 3.1(a), which include each jurisdiction in which the character of the Company's properties or the nature of its business makes such qualification necessary, except in jurisdictions, if any, where the failure to be so qualified would not result in a Material Adverse Effect (as defined below). The Company has all requisite corporate or other power and authority to own, use or lease its properties and to carry on its business as it is now being conducted and as it is now proposed to be conducted. The Company has made available to Parent and Purchaser a complete and correct copy of its certificate of incorporation and bylaws, each as amended to date, and the Company's certificate of incorporation and bylaws as so delivered are in full force and effect. The Company is not in default in any respect in the performance, observation or fulfillment of any provision of its certificate of incorporation or bylaws. (b) Schedule 3.1(b) lists the name and jurisdiction of organization of each Subsidiary of the Company and the jurisdictions in which each such Subsidiary is qualified or holds licenses to do business as a foreign corporation as of the date hereof. Each of the Company's Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, is duly qualified to -11- 18 do business as a foreign corporation and is in good standing in the jurisdictions listed on Schedule 3.1(b), which include each jurisdiction in which the character of the Company's properties or the nature of its business makes such qualification necessary, except in jurisdictions, if any, where the failure to be so qualified would not result in a Material Adverse Effect. Each of the Company's Subsidiaries has the requisite corporate or other power and authority to own, use or lease its properties and to carry on its business as it is now being conducted and as it is now proposed to be conducted. Each of such Subsidiaries is operating in accordance with all applicable laws and regulations of its jurisdiction of incorporation, except where the failure so to operate would not result in a Material Adverse Effect. The Company has made available or will make available within 10 days of the date of this Agreement, to Parent and Purchaser a complete and correct copy of the certificate of incorporation and bylaws (or similar charter documents) of each of the Company's Subsidiaries, each as amended to date, and the certificate of incorporation and bylaws (or similar charter documents) as so delivered are in full force and effect. No Subsidiary of the Company is in default in any respect in the performance, observation or fulfillment of any provision of its certificate of incorporation or bylaws (or similar charter documents). (c) For purposes of this Agreement, (i) a "Material Adverse Effect" shall mean any event, circumstance, condition, development or occurrence causing, resulting in or having a material adverse effect on the financial condition, business, assets, properties, prospects or results of operations of the Company and its Subsidiaries taken as a whole; (ii) "subsidiary" shall mean, with respect to any party, any corporation or other organization, whether incorporated or unincorporated, of which (x) at least a majority of the securities or other interests having by their terms voting power to elect a majority of the Board of Directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such party or by any one or more of its subsidiaries, or by such party and one or more of its subsidiaries, or (y) such party or any other subsidiary of such party is a general partner (excluding such partnerships where such party or any subsidiary of such party do not have a majority of the voting interest in such partnership); (iii) "Subsidiary" shall mean any subsidiary of the Company; and (iv) "independent legal counsel to the Company" shall include, but not be limited to, Herschel M. Weinberg, Esq., who is a director and secretary of the Company and of various of its Subsidiaries. 3.2 Capitalization. (a) The authorized capital stock of the Company consists solely of 60,000,000 shares of the Company Common Stock. As of the date hereof, (i) 6,773,176 shares of Company Common Stock are issued and outstanding and (ii) 43,726 shares of Company Common Stock are issued and held in the treasury of the Company. No agreement or other document grants or imposes on any shares of the Company Common Stock any right, preference, privilege or restriction with respect to the transactions contemplated hereby (including, without limitation, any rights of first refusal), other than the right to dissent from the Merger as provided in Section 2.1(d) above. All of the issued and outstanding shares of the Company Common Stock are duly authorized, -12- 19 validly issued, fully paid, nonassessable and free of preemptive rights. There are no bonds, debentures, notes or other indebtedness having general voting rights (or convertible into securities having such rights) ("Voting Debt") of the Company or any of its Subsidiaries issued and outstanding. Except as set forth above and except for the transactions contemplated by this Agreement, as of the date hereof, (i) there are no shares of capital stock of the Company authorized, issued or outstanding and (ii) except as otherwise set forth on Schedule 3.2(a) hereto, there are no existing options, warrants, calls, preemptive rights, subscriptions or other rights, agreements, arrangements or commitments of any character (including without limitation "earn-out" arrangements) relating to the issued or unissued capital stock of the Company or any of its Subsidiaries, obligating the Company or any of its Subsidiaries to issue, transfer or sell or cause to be issued, transferred or sold any shares of capital stock or Voting Debt of, or other equity interest in, the Company or any of its Subsidiaries or securities convertible into or exchangeable for such shares or equity interests or obligations of the Company or any of its Subsidiaries to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement, arrangement or commitment. There are no outstanding contractual obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any Shares or the capital stock of the Company or any Subsidiary or affiliate of the Company or to provide funds to make any investment (in the form of a loan, capital contribution or otherwise) in any Subsidiary or any other entity. (b) There are no voting trusts or other agreements or understandings to which the Company or any of its Subsidiaries is a party with respect to the voting of the capital stock of the Company or any of the Subsidiaries. None of the Company or its Subsidiaries is required to redeem, repurchase or otherwise acquire shares of capital stock of the Company or any of its Subsidiaries, respectively, as a result of the transactions contemplated by this Agreement. (c) All of the issued and outstanding shares of capital stock of each of the Subsidiaries of the Company are owned beneficially and of record by the Company or a wholly owned subsidiary of the Company, free and clear of all liens, charges, pledges, encumbrances, equities, voting restrictions, claims and options of any nature, and all such shares have been duly authorized, validly issued and are fully paid, nonassessable and free of preemptive rights. The Company has not made, directly or indirectly, any material investment in, advance to or purchase or guaranty of any obligations of, any entity other than such Subsidiaries. 3.3 Authority. (a) The Company has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Company's Board of Directors, and no other corporate proceedings on the part of the Company are necessary, as a matter of law or otherwise in order to satisfy the requirements for business combinations contained in Section 912(c)(1) of the NYBCL. This Agreement has been -13- 20 duly and validly executed and delivered by the Company and, assuming this Agreement constitutes a valid and binding agreement of Parent and Purchaser, is a valid and binding agreement of the Company, enforceable against it in accordance with its terms, except (a) as such enforcement may be subject to bankruptcy, insolvency or similar laws now or hereafter in effect relating to creditors rights, and (b) as the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. (b) Except for the action contemplated by Section 1.9 hereof, the Board of Directors of the Company has duly and validly approved and taken all corporate action required to be taken by the Board of Directors for the consummation of the transactions contemplated by this Agreement, including the Offer, the Merger and the acquisition of Shares pursuant to the Offer, the Merger, and any Other Transactions, including without limitation all matters contemplated by Section 1.2(a)(ii) hereof. The Company represents to Parent and Purchaser that the actions of the Board of Directors of the Company set forth in Section 1.2(a) are all the actions of the Board of Directors of the Company required, and are sufficient, to satisfy the requirements of Section 912(c)(1) of the NYBCL in connection with the Offer, the Merger, the Tender Agreement and any Other Transactions and the other matters referred to in Section 1.2(a)(ii) above so long as this Agreement has not been terminated in accordance with its terms. 3.4 Consents and Approvals; No Violation. The execution and delivery of this Agreement, the consummation of the transactions contemplated hereby and the performance by the Company of its obligations hereunder will not: (a) subject to the obtaining of any requisite approvals of the Company's shareholders as contemplated by Sections 1.8 and 1.9 hereof, conflict with any provision of the Company's certificate of incorporation or bylaws or the certificate of incorporation or bylaws (or other similar charter documents) of any of its Subsidiaries; (b) require any consent, approval, order, authorization or permit of, or registration, filing or notification to, any governmental or regulatory authority or agency (a "Governmental Entity"), except for (i) the filing of a premerger notification and report form by the Company under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (ii) the filing with the SEC of (x) the Schedule 14D-9, (y) the Company Proxy Statement relating to the approval by the Company's shareholders of this Agreement, if such approval is required by law, and (z) such reports under Section 13(a) of the Exchange Act as may be required in connection with this Agreement, the Tender Agreement and the transactions contemplated hereby and thereby, and (iii) the filing of the Certificate of Merger with the Department of State of the State of New York; -14- 21 (c) except as disclosed on Schedule 3.4(c), result in any violation of or the breach of or constitute a default (with notice or lapse of time or both) under, or give rise to any right of termination, cancellation or acceleration or guaranteed payments under or to a loss of a material benefit under, any of the terms, conditions or provisions of any note, lease, mortgage, license, agreement or other instrument or obligation to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or any of their respective properties or assets may be bound, except for such violations, breaches, defaults, or rights of termination, cancellation or acceleration, or losses as to which requisite waivers or consents have been obtained or will be obtained prior to the Effective Time or which, individually or in the aggregate, would not (i) result in a Material Adverse Effect, (ii) materially impair the ability of the Company to perform its obligations under this Agreement or (iii) prevent the consummation of any of the transactions contemplated by this Agreement; (d) violate the provisions of any order, writ, injunction, judgment, decree, statute, rule or regulation applicable to the Company or any Subsidiary, in such a manner as to (i) result in a Material Adverse Effect, (ii) materially impair the ability of the Company to perform its obligations under this Agreement or (iii) prevent the consummation of any of the transactions contemplated by this Agreement; or (e) result in the creation of any lien, charge or encumbrance upon any shares of capital stock, properties or assets of the Company or its Subsidiaries under any agreement or instrument to which the Company or its Subsidiaries is a party or by which the Company or its Subsidiaries is bound. 3.5 Company SEC Reports. The Company has filed with the SEC, and has heretofore made available to Parent and Purchaser true and complete copies of, each form, registration statement, report, schedule, proxy or information statement and other document (including exhibits and amendments thereto), including without limitation its Annual Reports to Shareholders incorporated by reference in certain of such reports, required to be filed with the SEC since September 30, 1992 under the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act (collectively, the "Company SEC Reports"). As of the respective dates such Company SEC Reports were filed or, if any such Company SEC Reports were amended, as of the date such amendment was filed, each of the Company SEC Reports, including without limitation any financial statements or schedules included therein, (a) complied in all material respects with all applicable requirements of the Securities Act and the Exchange Act, as the case may be, and the applicable rules and regulations promulgated thereunder, and (b) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. None of the Subsidiaries is required to file any forms, reports or other documents with the SEC pursuant to Section 12 or 15 of the Exchange Act. 3.6 Financial Statements. Each of the audited consolidated financial statements and unaudited consolidated interim financial statements of the Company -15- 22 (including any related notes and schedules) included (or incorporated by reference) in its Annual Reports on Form 10-K for each of the three fiscal years ended September 30, 1993, 1994 and 1995 and its Quarterly Reports on Form 10-Q for all interim periods during such period and subsequent thereto and the audited consolidated financial statements of the Company (including any related notes and schedules) for the fiscal year ended September 30, 1996 provided to Parent and Purchaser (collectively, the "Financial Statements") have been prepared from, and are in accordance with, the books and records of the Company and its consolidated Subsidiaries, comply or shall comply (as the case may be) in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been or shall be (as the case may be) prepared in accordance with United States generally accepted accounting principles ("GAAP") applied on a consistent basis (except as may be indicated in the notes thereto and subject, in the case of quarterly financial statements, to normal and recurring year-end adjustments) and fairly present or shall fairly present (as the case may be), in conformity with GAAP applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of the Company and its Subsidiaries as of the date thereof and the consolidated results of operations and cash flows (and changes in financial position, if any) of the Company and its Subsidiaries for the periods presented therein (subject to normal year-end adjustments and the absence of financial footnotes in the case of any unaudited interim financial statements). 3.7 Absence of Undisclosed Liabilities. Except (a) as specifically disclosed in the Company SEC Reports and (b) for liabilities and obligations incurred in the ordinary course of business and consistent with past practice since June 30, 1996, neither the Company nor any of its Subsidiaries has incurred any liabilities or obligations of any nature (contingent or otherwise) that have, or would be reasonably likely to have, a Material Adverse Effect or would be required by GAAP to be reflected on a consolidated balance sheet of the Company and its Subsidiaries or the notes thereto which is not so reflected. As of the date hereof, the total amounts of principal and unpaid interest outstanding under the Company's bank credit line do not exceed thirty seven million dollars ($37,000,000) in the aggregate, and the long-term principal portions thereof (including such amounts as are required to be classified as current debt under GAAP) do not exceed thirty seven million dollars ($37,000,000). 3.8 Absence of Certain Changes. Except as disclosed in the Company SEC Reports, since September 30, 1996 the Company and its Subsidiaries have conducted their respective businesses only in, have not engaged in any transaction other than according to, the ordinary and usual course, and there has not been (a) except as set forth on Schedule 3.8(a), any Material Adverse Effect; (b) any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to the capital stock of the Company or any of its Subsidiaries; (c) any change by the Company in accounting principles, practices or methods; (d) any labor dispute or difficulty which is reasonably likely to result in any Material Adverse Effect, and to the Company's knowledge no such dispute or difficulty is now threatened; (e) any material asset sold, disposed of (except inventory sold in the ordinary course of business), mortgaged, pledged or subjected to any lien, charge or other encumbrance; (f) -16- 23 except as set forth on Schedule 3.8(f), any increase in the salary, bonus or commission rate payable or which could become payable by the Company or any of its Subsidiaries to their directors, officers, branch managers, marketing managers, distributors, dealers or sales representatives; (g) any amendment of any employee benefit plan; (h) any issuance, transfer, sale or pledge by the Company or its Subsidiaries of any shares of stock or other securities or of any commitments, options, rights or privileges under which the Company or its Subsidiaries is or may become obligated to issue any shares of stock or other securities; (i) any indebtedness incurred by the Company or its Subsidiaries, except as such may have been incurred in the ordinary course of business and consistent with past practice; (j) any loan made or agreed to be made by the Company or its Subsidiaries, nor has the Company or its Subsidiaries become liable or agreed to become liable as a guarantor with respect to any loan; (k) any waiver by the Company or its Subsidiaries of any right or rights of material value or any payment, direct or indirect, of any material debt, liability or other obligation; or (l) except as set forth on Schedule 3.8(l), any change in or amendment to the certificate of incorporation or bylaws (or similar charter documents) of the Company or its Subsidiaries. 3.9 Taxes. (a) The Company and each of its Subsidiaries have timely filed (or have had timely filed on their behalf) or will file or cause to be timely filed, all material Tax Returns (as defined below) required by applicable law to be filed by any of them prior to or as of the Closing Date. All such Tax Returns and amendments thereto are or will be true, complete and correct in all material respects. (b) The Company and each of its Subsidiaries have paid (or have had paid on their behalf), or where payment is not yet due, have established (or have had established on their behalf and for their sole benefit and recourse), or will establish or cause to be established on or before the Closing Date, an adequate accrual for the payment of all material Taxes (as defined below) due with respect to any period ending prior to or as of the Closing Date. (c) The appropriate Tax Returns of the Company and/or any of its Subsidiaries have been examined by (i) the Internal Revenue Service for all periods up to and including September 30, 1994 and (ii) the Taxing Authorities other than the Internal Revenue Service for the periods and jurisdictions shown in Schedule 3.9(c). Except as disclosed on Schedule 3.9(c), no Audit (as defined below) by a Tax Authority (as defined below) is pending or threatened with respect to any Tax Returns filed by, or Taxes due from, the Company or any Subsidiary. No issue has been raised by any Tax Authority in any Audit of the Company or any of its Subsidiaries that if raised with respect to any other period not so audited could be expected to result in a material proposed deficiency for any period not so audited. No material deficiency or adjustment for any Taxes has been threatened, proposed, asserted or assessed against the Company or any of its Subsidiaries. There are no liens for Taxes upon the assets of the Company or any of its Subsidiaries, except liens for current Taxes not yet due. -17- 24 (d) Except as disclosed on Schedule 3.9(d), neither the Company nor any of its Subsidiaries has given or been requested to give any waiver of statutes of limitations relating to the payment of Taxes or have executed powers of attorney with respect to Tax matters, which will be outstanding as of the Closing Date. (e) Schedule 3.9(e) sets forth all material tax sharing, tax indemnity, or similar agreements to which the Company or its Subsidiaries are a party to, is bound by, or has any obligation or liability for Taxes. (f) As used in this Agreement, (i) "Audit" shall mean any audit, assessment of Taxes, other examination by any Tax Authority, proceeding or appeal of such proceeding relating to Taxes; (ii) "Taxes" shall mean all Federal, state, local and foreign taxes, and other assessments of a similar nature (whether imposed directly or through withholding), including any interest, additions to tax, or penalties applicable thereto; (iii) "Tax Authority" shall mean the Internal Revenue Service and any other domestic or foreign governmental authority responsible for the administration of any Taxes; and (iv) "Tax Returns" shall mean all Federal, state, local and foreign tax returns, declarations, statements, reports, schedules, forms and information returns and any amended Tax Return relating to Taxes. 3.10 Litigation. Except as disclosed in Schedule 3.10, there is no suit, claim, action, proceeding or investigation pending or, to the Company's knowledge, threatened against or affecting the Company, any Subsidiaries of the Company or any of the directors or officers of the Company or any of its Subsidiaries in their capacity as such that, individually or in the aggregate, allege damages of $100,000 or more. Neither the Company nor any of its Subsidiaries, nor any officer, director or employee of the Company or any of its Subsidiaries, has been permanently or temporarily enjoined by any order, judgment or decree of any court or any other governmental or regulatory authority from engaging in or continuing any conduct or practice in connection with the business, assets or properties of the Company or such Subsidiary nor, to the knowledge of the Company, is the Company, any Subsidiary or any officer, director or employee of the Company or its Subsidiaries under investigation by any Governmental Entity related to the conduct of the Company's business. There is not in existence any order, judgment or decree of any court or other tribunal or other agency enjoining or requiring the Company or any of its Subsidiaries to take any action of any kind with respect to its business, assets or properties. 3.11 Employee Benefit Plans; ERISA. All "employee benefit plans" as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), maintained or contributed to by the Company and its Subsidiaries are in compliance with the applicable provisions of ERISA and the Internal Revenue Code of 1986, as amended (the "Code"), except for instances of non-compliance that individually or in the aggregate would not have a Material Adverse Effect on the Company. Schedule 3.11 contains a true and complete list of each employment, bonus, deferred compensation, incentive compensation, stock purchase, stock option, severance or termination pay, hospitalization or other medical, life or other insurance, -18- 25 supplemental unemployment benefits, profit-sharing, pension, or retirement plan, program, agreement or arrangement, and each other employee benefit plan, program, agreement or arrangement, sponsored, maintained or contributed to or required to be contributed to by the Company or by any trade or business, whether or not incorporated (an "ERISA Affiliate"), that together with the Company would be deemed a "single employer" within the meaning of section 4001(b)(1) of ERISA, for the benefit of any employee or former employee of the Company or any ERISA Affiliate whether formal or informal and whether legally binding or not (the "Plans"), other than salary, bonus and commission arrangements with the Company's or any of its Subsidiaries' sales personnel. Schedule 3.11 identifies each of the Plans that is an "employee welfare benefit plan" or "employee pension benefit plan" as such terms are defined in sections 3(1) and 3(2) of the ERISA (such plans being hereinafter referred to collectively as the "ERISA Plans"). Neither the Company nor any ERISA Affiliate has any formal plan or commitment, whether legally binding or not, to create any additional Plan or modify or change any existing Plan that would affect any employee or terminated employee of the Company or any ERISA Affiliate. 3.12 Environmental Liability. (a) Except as publicly disclosed by the Company, (i) the Company and each of its Subsidiaries is in material compliance with all applicable federal, state and local laws and regulations relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) (collectively, "Environmental Laws"), except for non-compliance that individually or in the aggregate would not have a Material Adverse Effect on the Company, which compliance includes, but is not limited to, the possession by the Company and its Subsidiaries of all material permits and other governmental authorizations required under applicable Environmental Laws, and compliance with the terms and conditions thereof; (ii) neither the Company nor any of its Subsidiaries has received written notice of, or, to the best knowledge of the Company, is the subject of, any action, cause of action, claim, investigation, demand or notice by any person or entity alleging liability under or non-compliance with any Environmental Law (an "Environmental Claim") that individually or in the aggregate would have a Material Adverse Effect on the Company; and (iii) to the best knowledge of the Company, there are no circumstances that are reasonably likely to prevent or interfere with such material compliance in the future. (b) Except as publicly disclosed by the Company, there are no Environmental Claims which individually or in the aggregate would have a Material Adverse Effect on the Company that are pending or, to the best knowledge of the Company, threatened against the Company or any of its Subsidiaries or, to the best knowledge of the Company, against any person or entity whose liability for any Environmental Claim the Company or any of its Subsidiaries has or may have retained or assumed either contractually or by operation of law. 3.13 Compliance with Applicable Laws. The Company and each of its Subsidiaries hold all material licenses, permits and authorizations necessary for the lawful conduct of its respective businesses, as now conducted, and such businesses are -19- 26 not being, and the Company has not received any notice from any authority or person that such businesses have been or are being, conducted in violation of any law, ordinance or regulation, including without limitation any law, ordinance or regulation relating to (a) the protection of the environment, or (b) occupational health and safety, except for possible violations which either singly or in the aggregate have not resulted and in the future will not result in a Material Adverse Effect. 3.14 Material Contracts. Schedule 3.14 hereto sets forth a true and correct list of any and all agreements, contracts, purchase or installment agreements, indentures, leases, mortgages, licenses, plans, arrangements, commitments (whether written or oral) and instruments (collectively, "contracts") that, to the knowledge of the Company, are deemed by management of the Company to be material to the Company and its Subsidiaries (the "Material Contracts"), including without limitation the following types of contracts to which the Company or any of its Subsidiaries is a party: (a) any franchise contract with a manufacturer or supplier of electronic or computer components from which the Company purchased (on an annualized basis for the past twelve months), products which accounted for more than 5% of the Company's total sales during such period; (b) any contract for the employment of any officer, employee, consultant or other person or entity on a full-time, part-time, consulting or other basis (excluding independent sales representatives), including any severance or other termination provisions with respect to such employment; (c) any contract which provides for volume or other price rebates between the Company or its Subsidiaries and any customer thereof which represented more than $250,000 of sales by the Company in either of the fiscal year ended September 30, 1996; (d) any contract with a term of at least six months which provides for the provision of "value added" services by the Company or any of its Subsidiaries and which provides for annual payments to the Company or any of its Subsidiaries of $250,000 or more; (e) any noncompetition agreement, other than customary agreements with employees who are not officers, directors or key employees, or any other contract that in any way restricts the Company or any of its Subsidiaries from carrying on their business any place in the world; and (f) any contract with the Company and any of its Subsidiaries or any of their affiliates or with any officers, directors or key employees of the Company or any of its Subsidiaries. -20- 27 True and complete copies of each written Material Contract, or form thereof and true and complete written summaries of each oral Material Contract have been made available to Parent and Purchaser by the Company prior to the date hereof. 3.15 Patents, Marks, Trade Names, Etc. The present operations of the Company and its Subsidiaries requires no intellectual property rights other than those intellectual property rights listed on Schedule 3.15 and rights granted to the Company and its Subsidiaries pursuant to agreements or licenses listed on Schedule 3.15. No claims have been asserted by any person as to the use of any such intellectual property by the Company or its Subsidiaries. No claim adverse to the interests of the Company and its Subsidiaries in any of the intellectual property listed in these Schedules has been asserted or threatened and no basis exists for any such claim. The Company's and its Subsidiaries' business does not infringe on, or misappropriate, any intellectual property or right owned by, or belonging to, any other person, and the Company and its Subsidiaries do not have any material liability for any past infringement or misappropriation. "Intellectual property," as used herein, means domestic or foreign patents, patent applications, registered and unregistered trademarks and service marks, registered and unregistered copyrights, computer programs, trade secrets and proprietary information. 3.16 Insurance. Schedule 3.16(a) lists each of the insurance policies relating to the Company or any of its Subsidiaries which are currently in effect. The Company has provided Parent and Purchaser with a true, complete and correct copy of each such policy or the binder therefor. With respect to each such insurance policy or binder none of the Company, any of its Subsidiaries or any other party to the policy is in breach or default thereunder (including with respect to the payment of premiums or the giving of notices), and the Company does not know of any occurrence or any event which (with notice or the lapse of time or both) would constitute such a breach or default or permit termination, modification or acceleration under the policy, except for such breaches or defaults which, individually or in the aggregate, would not result in a Material Adverse Effect. Schedule 3.16(b) describes any self-insurance arrangements affecting the Company or any of its Subsidiaries. The insurance policies listed on Schedule 3.16(a) include all policies which are required in connection with the operation of the businesses of the Company and its Subsidiaries as currently conducted by applicable laws and all agreements relating to the Company and its Subsidiaries. 3.17 Opinion of Financial Advisor. The Company has received, and delivered to Parent a copy of, the opinion of Mesirow Financial, Inc., the Company's financial advisor ("Mesirow"), to the effect that the consideration to be received by the Company's shareholders in the Offer and the Merger, is fair to the Company and the Company's shareholders from a financial point of view. 3.18 Vote Required. If Parent, Purchaser or any permitted assignee thereof acquires and holds shares of Company Common Stock constituting at least 90% of all of the issued and outstanding shares of Company Common Stock, no vote of the holders of -21- 28 the Company Common Stock shall be required to approve this Agreement or the transactions contemplated hereby. Otherwise, the Merger contemplated by this Agreement must be approved by the affirmative vote of at least 66-2/3% of the outstanding Shares entitled to vote on a proposal to approve the Merger at a duly convened special or regular meeting of the shareholders of the Company. 3.19 Information Supplied; Company Proxy Statement. None of the information supplied or to be supplied by the Company for inclusion in the Offer Documents will, at the date such Offer Documents are filed with the SEC and the date they are disseminated to the Company's shareholders, contain any untrue statement of a material fact regarding the Company or will omit to state any material fact regarding the Company required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they are made, not misleading. The Company Proxy Statement (and any amendment or supplement thereto) will, at the date mailed to the Company shareholders and at the time of the Special Meeting, not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they are made, not misleading. The Company Proxy Statement will comply in all material respects with the Exchange Act and the rules and regulations thereunder. With respect to the Offer Documents and the Company Proxy Statement, no representation is made by the Company with respect to statements made therein based on information supplied in writing by Parent or Purchaser for inclusion therein. 3.20 Company Stock Options. There are no plans, arrangements or understandings of the Company and its Subsidiaries which provides for the option or right (an "Option") by any employee, director or officer of the Company or any of its Subsidiaries or any other person to acquire Shares or other securities of the Company and there are no outstanding Options. 3.21 Inventory. The values at which inventories are carried on the Financial Statements reflect the inventory valuation policy of the Company consistent with its past practice and in accordance with GAAP, consistently applied. 3.22 Major Customers and Suppliers; Backlog. Schedule 3.22 sets forth the name of each of the top fifty (50) customers and top twenty (20) product lines of the Company and in its Subsidiaries (on a consolidated basis), in each case ranked by revenue, for each of the calendar years ended December 31, 1994 and 1995 and the nine-month period ended September 30, 1996. Except as set forth in Schedule 3.22, since September 30, 1995, there has not been, or as a result of the Merger there is not presently anticipated to be, any material adverse change in relations with any of the major suppliers of the Company and its Subsidiaries which, individually or in the aggregate, would have a Material Adverse Effect. The Company has provided to Parent and Purchaser true, correct and accurate summaries of all unfilled sales orders as of September 30, 1996 for (a) the Company and each of its Subsidiaries (separately considered) and (b) each product line of the Company and its Subsidiaries that accounted -22- 29 for at least five percent (5%) of the consolidated sales of the Company and its Subsidiaries for the fiscal year ended September 30, 1996. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER Parent and Purchaser represent and warrant to the Company as follows: 4.1 Organization. Each of Parent and Purchaser is a corporation duly organized, validly existing and in good standing under the laws of their respective jurisdictions of incorporation and has the requisite corporate power to carry on its business. Purchaser has made available to the Company a complete and correct copy of its certificate of incorporation and bylaws, each as amended to date and as in full force and effect. Purchaser is not in default in any material respect in the performance, observation or fulfillment of any provision of its certificate of incorporation or bylaws. 4.2 Authority Relative to this Agreement. Each of Parent and Purchaser has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby on the part of Parent and Purchaser have been duly and validly authorized by the Boards of Directors of Parent and of Purchaser and by Parent as the sole shareholder of Purchaser and no other corporate proceedings on the part of Parent and Purchaser are necessary to authorize this Agreement or to consummate the transactions contemplated hereby, except as contemplated hereby. This Agreement has been duly and validly executed and delivered by Parent and Purchaser and, assuming this Agreement constitutes a valid and binding obligation of the Company and the requisite approval of the Company's shareholders has been obtained, this Agreement constitutes a valid and binding agreement of both Parent and Purchaser, enforceable against each of them in accordance with its terms, except (a) as such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights, and (b) as the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 4.3 Consent and Approvals; No Violation. Neither the execution and delivery of this Agreement by Parent and Purchaser, nor the consummation of the transactions contemplated hereby, will: (a) conflict with any provision of the articles of incorporation or bylaws of Parent or the certificate of incorporation or bylaws of Purchaser; -23- 30 (b) require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, except (i) the filing of a premerger notification and report form under the HSR Act, (ii) the filing with the SEC of (x) the Schedule 14D-1, (y) the Company Proxy Statement relating to the approval by the Company's shareholders of the Agreement as contemplated by Section 1.8 of the Agreement, if such approval is required by law, and (z) such reports under Section 13(a) of the Exchange Act as may be required in connection with this Agreement, the Tender Agreement and the transactions contemplated hereby and thereby, (iii) the filing of the Certificate of Merger with the Department of State of the State of New York, (iv) the filing of a registration statement by Purchaser with the New York attorney general and the satisfaction of certain disclosure requirements under Article 16 of the NYBCL, and (v) except to the extent that consents are required from, or early repayment would be required to, the Company's current lenders in connection with the financing contemplated by Section 4.5, where the failure to obtain such consents, approvals, authorizations or permits or the failure to make such filings or notifications would not have a material adverse effect on the financial condition, business, properties or results of operations of Parent and its subsidiaries, taken as a whole; (c) except as disclosed to the Company in writing by Parent or Purchaser, conflict with, result in the breach of or constitute a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any material note, lease, mortgage, license, agreement or other instrument or obligation to which Parent or Purchaser is a party or by which Parent or Purchaser or any of their respective assets may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or which, in the aggregate, would not have a material adverse effect on the financial condition, business, properties or results of operations of Parent and its subsidiaries, taken as a whole; or (d) conflict with or violate the provisions of any order, writ, injunction, judgment, decree, statute, rule or regulation applicable to Parent or Purchaser in such a manner as to result in a material adverse effect on the financial condition, business, properties or results of operations of Parent and its subsidiaries, taken as a whole. 4.4 Information Supplied. None of the information supplied or to be supplied by Parent or Purchaser expressly for inclusion in the Company Proxy Statement or the Schedule 14D-9 will, at the date mailed to the Company's shareholders and at the time of the Special Meeting, contain any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they are made, not misleading. 4.5 Financing. Parent has received a commitment letter (the "Commitment Letter") from Union Bank of California, N.A. in which such bank has agreed, subject to the terms and conditions set forth in the Commitment Letter, to provide a senior secured -24- 31 credit facility for Parent aggregating $250.0 million for purposes of the Offer and the Merger and related transactions and to provide for Parent's working capital requirements. A copy of the Commitment Letter has been provided to the Company. Notwithstanding the foregoing, Purchaser's receipt of such financing on the terms and conditions set forth in the Commitment Letter (the "Financing Condition") is a condition to Purchaser's obligation to consummate the Tender Offer. 4.6 Purchaser's Operations. The Purchaser was formed solely for the purpose of engaging in the transactions contemplated hereby and has not engaged in any business activities or conducted any operations other than in connection with the transactions contemplated hereby. 4.7 No Shares Owned by Parent, Purchaser or Affiliates. As of the date hereof, neither Parent nor Purchaser nor any of their affiliates owns any Shares. 4.8 Capitalization. The authorized capital stock of Purchaser consists of 1,000 shares of common stock, all of which have been duly and validly issued and are held of record and beneficially by Parent. ARTICLE V CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO EFFECTIVE DATE The Company agrees that, except (i) as expressly contemplated by this Agreement, or (ii) as agreed in writing by Parent, after the date hereof, and prior to the time the directors of the Purchaser have been elected to the Board of Directors of the Company pursuant to Section 1.3, as follows: 5.1 Ordinary Course. The Company and each of its Subsidiaries shall carry on their respective businesses in the usual, regular and ordinary course, in substantially the same manner as heretofore conducted, and use their reasonable efforts consistent with past practice and policies to preserve intact their present business organizations, keep available the services of their present officers and employees and preserve their existing relationships with customers, suppliers, lessors, lessees, creditors and others having business dealings with them. The Company will continue to maintain a standard system of accounting established and administered in accordance with GAAP. 5.2 Dividends; Changes in Stock. The Company shall not, and shall not cause or permit any of its Subsidiaries to, (a) declare, set aside or pay any dividends on or make other distributions in respect of any shares of its capital stock, (b) split, combine or reclassify any shares of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any shares of its capital stock or (c) propose to do any of the foregoing. -25- 32 5.3 Issuance or Repurchase of Securities. The Company shall not, and shall not cause or permit any of its Subsidiaries to, issue, pledge, deliver, sell or transfer or authorize or propose the issuance, pledge, delivery, sale or transfer of, or repurchase, redeem or otherwise acquire directly or indirectly, or propose the repurchase, redemption or other acquisition of, any shares of capital stock of any class of the Company or its Subsidiaries, or any options, warrants or other rights exercisable for or securities convertible into or exchangeable for, any such shares (or enter into any agreements, arrangements, plans or understandings with respect to any of the foregoing), other than pursuant to the exercise of outstanding Options pursuant to the terms thereof as of the date hereof. 5.4 Governing Documents; Board of Directors. The Company shall not, and shall not cause or permit any of its Subsidiaries to, propose or adopt any amendment to its or their certificate of incorporation or bylaws (or similar charter documents) or take any action to alter the size or composition of its Board of Directors, except as specifically contemplated by Section 1.3(a) hereof. 5.5 No Dispositions. The Company shall not, and shall not cause or permit any of its Subsidiaries to, transfer, sell, lease, license, mortgage or otherwise dispose of or encumber any material assets, or enter into any commitment to do any of the foregoing, other than in the ordinary and usual course of business, consistent with past practice. 5.6 Indebtedness. (a) The Company shall not, and shall not cause or permit any of its Subsidiaries to, incur, become subject to, or agree to incur any debt for borrowed money or incur or become subject to any other material obligation or liability (absolute or contingent), except current liabilities incurred, monies borrowed under the Company's current bank loan agreement and obligations under contracts entered into, in the ordinary course of business consistent with prior practice. (b) The Company shall not pay or be liable for prepayment or other penalties in connection with the early retirement of any Company indebtedness for borrowed money. 5.7 Compensation. The Company shall not, and shall not cause or permit any of its Subsidiaries to, make any change in the compensation payable or to become payable to any of its officers, directors, branch managers, marketing managers, agents or consultants, enter into or amend any employment, severance, termination or other agreement or make any loans to any of its officers, directors, branch managers, marketing managers, agents or consultants or make any change in its existing borrowing or lending arrangements for or on behalf of any of such persons, whether contingent on consummation of the Offer, the Merger or otherwise; provided, however, that the foregoing shall not prohibit the Company or any of its Subsidiaries from increasing the -26- 33 compensation payable to any branch manager or marketing manager after three days' advance written notice to Parent's Chief Executive Officer or President. 5.8 Benefit Plans. The Company shall not, and shall not cause or permit any of its Subsidiaries to (a) pay, agree to pay or make any accrual or arrangement for payment of any pension, retirement allowance or other employee benefit pursuant to any existing plan, agreement or arrangement to any officer, director or employee except in the ordinary course of business and consistent with past practice or as permitted by this Agreement; (b) pay or agree to pay or make any accrual or arrangement for payment to any employees of the Company or any of its Subsidiaries of any amount relating to unused vacation days; (c) commit itself or themselves to adopt or pay, grant, issue, accelerate or accrue salary or other payments or benefits pursuant to any pension, profit-sharing, bonus, extra compensation, incentive, deferred compensation, stock purchase, stock option, stock appreciation right, group insurance, severance pay, retirement or other employee benefit plan, agreement or arrangement, or any employment or consulting agreement with or for the benefit of any director, officer, employee, agent or consultant, whether past or present; or (d) amend in any material respect any such existing plan, agreement or arrangement; PROVIDED, HOWEVER, that nothing contained in this Section 5.8 shall prohibit the Company or any of its Subsidiaries from (i) accruing or paying any bonus payable for the fiscal year ended September 30, 1996 determined in a manner consistent with past practice and in any event not to exceed the bonus paid for the fiscal year ended September 30, 1995 or (ii) providing for the deferral until calendar year 1997 of compensation earned in, and accrued on the Company's consolidated financial statements for, the fiscal year ended September 30, 1996. 5.9 Taxes. The Company and each of its Subsidiaries shall (i) properly prepare and file all material reports or Tax Returns required by the Company or any Subsidiary to be filed with any governmental or regulatory authorities with respect to its business, operations, or affairs, and (ii) pay in full and when due all Taxes indicated on such Tax Returns or otherwise levied or assessed upon the Company, its Subsidiaries or any of their assets and properties unless such Taxes are being contested in good faith by appropriate proceedings and reasonable reserves therefor have been established in accordance with GAAP. The preparation of any such Tax Returns filed by the Company shall be subject to the timely review and approval of Parent, which approval shall not be unreasonably withheld. 5.10 Consultation and Cooperation. The Company and each of its Subsidiaries shall (i) report on a regular basis, at reasonable times, to a representative designated by Parent regarding material operational matters and financial matters (including monthly unaudited financial information); (ii) promptly and regularly notify Parent of any material change in the normal course or operation of its business or its properties and of any material development in the business or operations of the Company or any of its Subsidiaries (including without limitation any Material Adverse Effect or any governmental or third party claims, complaints, investigations or hearings, or communications indicating that the same may be forthcoming or contemplated); and (iii) cooperate with Parent and its affiliates and representatives in arranging for an -27- 34 orderly transition in connection with the transfer of control of the Company, including without limitation arranging meetings among the Company, its vendors, suppliers and customers and the Chief Executive Officer, President, Sales Manager for the electronics distribution division and Chief Financial Officer of Parent (and such other officers and employees of Parent as Parent may request, subject to the Company's approval, not to be unreasonably withheld), accompanied by an appropriate representative of the Company. 5.11 Additional Matters. The Company shall not, and shall not cause or permit any of its Subsidiaries to: (a) enter into, amend or terminate any agreements, commitments or contracts which, individually or in the aggregate, are material to the financial condition, business, assets, properties, prospects or results of operations of the Company and its Subsidiaries taken as a whole, or waive, release, assign or relinquish any material rights or claims thereunder, except in the ordinary course of business, consistent with past practice; (b) discharge or satisfy any lien or encumbrance or payment of any obligation or liability (absolute or contingent) other than current liabilities in the ordinary course of business; (c) cancel or agree to cancel any material debts or claims, except in each case in the ordinary course of business; (d) waive any rights of substantial value; (e) pay, discharge, satisfy or settle any litigation or other claims, liabilities or obligations (absolute, accrued, asserted, unasserted, contingent or otherwise) involving the payment by the Company or any of its Subsidiaries of more than $50,000; (f) make any equity investments in third parties; (g) (i) incur, pay, or be subject to any material obligation to make any payment of, or in respect of, any Tax on or before the Effective Time, except in the ordinary course of business consistent with past practice, (ii) settle any material Audit, make or change any material Tax election or file any amended Tax Returns, or (iii) agree to extend or waive any statute of limitations on the assessment or collection of Tax; (h) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company or any of its Subsidiaries (other than the Merger) or otherwise make any material change in the conduct of the business or operations of the Company and its Subsidiaries taken as a whole; or -28- 35 (i) agree in writing or otherwise to take any of the foregoing actions or any other action which would constitute a Material Adverse Effect in any of the items and matters covered by the representations and warranties of the Company set forth in Article III, or make any representation or warranty of the Company in this Agreement materially inaccurate in any respect. ARTICLE VI ADDITIONAL COVENANTS 6.1 No Solicitation. (a) The Company and its Subsidiaries and affiliates will not, and the Company and its Subsidiaries and affiliates will use their reasonable efforts to ensure that their respective officers, directors, employees, investment bankers, attorneys, accountants and other representatives and agents do not, directly or indirectly, initiate, solicit, encourage or participate in, or provide any information to any Person (as defined below) concerning, or take any action to facilitate the making of, any offer or proposal which constitutes or is reasonably likely to lead to any Acquisition Proposal (as defined below) of the Company or any Subsidiary or affiliate or an inquiry with respect thereto. The Company shall, and shall cause its Subsidiaries and affiliates, and their respective officers, directors, employees, investment bankers, attorneys, accountants and other agents to, immediately cease and cause to be terminated all existing activities, discussions and negotiations, if any, with any parties conducted heretofore with respect to any of the foregoing. Notwithstanding the foregoing, the Company may, directly or indirectly, provide access and furnish information concerning its business, properties or assets to any corporation, partnership, person or other entity or group pursuant to an appropriate confidentiality agreement, and may negotiate and participate in discussions and negotiations with such entity or group concerning an Acquisition Proposal (x) if such entity or group has submitted a bona fide written proposal to the Board of Directors of the Company relating to any such transaction and (y) if, in the opinion of the Board of Directors of the Company, after consultation with independent legal counsel to the Company, the failure to provide such information or access or to engage in such discussions or negotiations would be inconsistent with their fiduciary duties under applicable law. (b) The Company shall promptly notify Parent and Purchaser of any such offers, proposals or Acquisition Proposals (including without limitation the terms and conditions thereof and the identity of the Person making it), and will keep Parent apprised of all developments with respect to any such Acquisition Proposal. The Company shall give Parent written notice (an "Intent Notice") of any Acquisition Proposal that the Company intends to accept as an Acceptable Offer (as defined below) in accordance with the terms hereof at least two business days prior to accepting such offer or otherwise entering into any agreement or understanding with respect thereto. -29- 36 For purposes hereof, any modification of an Acquisition Proposal shall constitute a new Acquisition Proposal. (c) Nothing contained in this Section 6.1 shall prohibit the Company or its Board of Directors from (i) taking and disclosing to the Company's shareholders a position with respect to a tender offer by a third party pursuant to Rules 14d-9 and 14e-2 promulgated under the Exchange Act, or (ii) making such disclosure to the Company's shareholders which, in the opinion of the Board of Directors of the Company, after consultation with independent legal counsel to the Company, may be required under applicable law. (d) As used in this Agreement, "Acquisition Proposal" when used in connection with any Person shall mean any tender or exchange offer involving such Person, any proposal for a merger, consolidation or other business combination involving such Person or any subsidiary of such Person, any proposal or offer to acquire in any manner a substantial equity interest in, or a substantial portion of the business or assets of, such Person or any subsidiary of such Person, any proposal or offer with respect to any recapitalization or restructuring with respect to such Person or any subsidiary of such Person or any proposal or offer with respect to any other transaction similar to any of the foregoing with respect to such Person, or any subsidiary of such Person; PROVIDED, HOWEVER, that, as used in this Agreement, the term "Acquisition Proposal" shall not apply to (i) any transaction of the type described in this subsection (d) involving Parent, Purchaser or their affiliates. As used in this Agreement, "Person" shall mean any corporation, partnership, person or other entity or group (including the Company and its affiliates and representatives, but excluding Parent or any of its affiliates or representatives). (e) As used in this Agreement, "Acceptable Offer" shall mean an executed written offer for an Acquisition Proposal received by the Company in accordance with Section 6.1 hereof (i) in which the offeror demonstrates proof reasonably satisfactory to the Company's Board of Directors of its financial capability and authority to consummate the transactions contemplated by such offer (including without limitation the payments required by Section 9.1(b) hereof); and (ii) which provides for (x) net cash proceeds to the Company or all of its shareholders (in addition to amounts paid pursuant to clause (i) above) in an amount greater than that provided for hereunder, at a per Share purchase price greater than that contained herein (or, in the event such amount has been increased by Parent hereunder, such greater amount) or (y) the issuance of publicly traded stock as the consideration payable to the Company or all of it shareholders (in addition to amounts paid pursuant to clause (i) above) which has an established market value in excess of the per Share purchase price contained herein (or, in the event such amount has been increased by Parent hereunder, such greater amount). -30- 37 6.2 Access to Information; Confidentiality. (a) Between the date of this Agreement and the Effective Time, upon reasonable notice the Company shall (and shall cause each of its Subsidiaries to) (i) give Parent, Purchaser and their respective officers, employees, accountants, counsel, financing sources and other agents and representatives full access to all plants, offices, warehouses and other facilities and to all contracts, internal reports, data processing files and records, Federal, state, local and foreign tax returns and records, commitments, books, records and affairs of the Company and its Subsidiaries, whether located on the premises of the Company or one of its Subsidiaries or at another location; (ii) furnish promptly to Parent a copy of each report, schedule, registration statement and other document filed or received by it during such period pursuant to the requirements of Federal securities laws or regulations; (iii) permit Parent and Purchaser to make such inspections as they may require; (iv) cause its officers and the officers of its Subsidiaries to furnish Parent and Purchaser such financial, operating, technical and product data and other information with respect to the business and properties of the Company and its Subsidiaries as Parent and Purchaser from time to time may request, including without limitation financial statements and schedules; (v) allow the Chief Executive Officer, President, Sales Manager for the electronics distribution division and Chief Financial Officer of Parent (and such other officers and employees of Parent as Parent may request, subject to the Company's approval, not to be unreasonably withheld), accompanied by an appropriate representative of the Company, the opportunity to interview such employees, vendors, customers, sales representatives, distributors and other personnel of the Company with the Company's prior written consent, which consent shall not be unreasonably withheld; and (vi) assist and cooperate with Parent and Purchaser in the development of integration plans for implementation by Parent and the Surviving Corporation following the Effective Time; PROVIDED, HOWEVER, that no investigation pursuant to this Section 6.2 shall affect or be deemed to modify any representation or warranty made by the Company herein. Until the Effective Time, materials furnished to Parent pursuant to this Section 6.2 may be used by Parent for strategic and integration planning purposes relating to accomplishing the transactions contemplated hereby. (b) Until Parent or Purchaser acquires Shares pursuant to the Offer, Parent and Purchaser shall continue to be bound by the terms of that certain confidentiality letter agreement between Parent and the Company dated September 17, 1996. 6.3 HSR Act. The Company and Parent shall take all reasonable actions necessary to file as soon as practicable notifications under the HSR Act and to respond as promptly as practicable to any inquiries received from the Federal Trade Commission and the Antitrust Divisions of the Department of Justice for additional information or documentation and to respond as promptly as practicable to all inquiries and requests received from any state attorney general or other Governmental Entity in connection with antitrust matters. -31- 38 6.4 Consents and Approvals. Each of the Company, Parent and Purchaser will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on it with respect to this Agreement and the transactions contemplated hereby (which actions shall include without limitation furnishing all information required under the HSR Act and in connection with approvals of or filings with any other Governmental Entity) and will promptly cooperate with and furnish information to each other in connection with any such requirements imposed upon any of them or any of their respective subsidiaries in connection with this Agreement and the transactions contemplated hereby. Each of the Company, Parent and Purchaser will, and will cause its respective subsidiaries to, take all reasonable actions necessary to obtain (and will cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity or other public or private third party required to be obtained or made by Parent, Purchaser, the Company or any of their respective subsidiaries in connection with the Merger or the taking of any action contemplated thereby or by this Agreement. 6.5 Notification of Certain Matters. The Company will give prompt notice to Parent, and Parent and Purchaser will give prompt notice to the Company, of (a) any notice of default received by either of them or any of their subsidiaries subsequent to the date of this Agreement and prior to the Effective Time under any material instrument or material agreement to which either of them, or any of their subsidiaries, is a party or by which either is bound, which default would, if not remedied, result in a Material Adverse Effect or which would render materially incomplete or untrue any representation made herein, (b) any suit, action or proceeding instituted or, to the knowledge of any of them, threatened against or affecting any of them subsequent to the date of this Agreement and prior to the Effective Time which, if adversely determined, would have a material adverse effect on the financial condition or results of operations of Parent or Purchaser or result in a Material Adverse Effect in the Company and its Subsidiaries or which would render materially incorrect any representation made herein and (c) any material breach of the Company's, or Parent's or Purchaser's, as the case may be, covenants hereunder or the occurrence of any event that is reasonably likely to cause any of its representations and warranties hereunder to become incomplete or untrue in any material respect. 6.6 Brokers or Finders. Each of Parent and the Company represents, as to itself, its subsidiaries and its affiliates, that no agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any brokers' or finders' fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement except Peers & Co. and Mesirow and Carl Marks & Co., Inc. whose fees and expenses will be paid by Parent and the Company, respectively, in accordance with the agreements with such firms (copies of which have been delivered by each of the Company and Parent to the other prior to the date of this Agreement), and Parent and Company each agrees to indemnify and hold the other harmless from and against any and all claims, liabilities or obligations with respect to any other fees, commissions or expenses asserted by any person on the basis of any act or statement alleged to have been made by such party or its affiliates. -32- 39 6.7 Additional Actions. Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use all reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations, or to remove any injunctions or other impediments or delays, to consummate and make effective the Merger and the other transactions contemplated by this Agreement, subject, however, to the appropriate vote of shareholders of the Company required so to vote as described in Section 3.18 hereof. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement or to vest the Surviving Corporation with full title to all properties, assets, rights, approvals, immunities and franchises of either of Purchaser or the Company, the proper officers and directors of each corporation which is a party to this Agreement shall take all such necessary action. 6.8 Benefit Plans and Certain Contracts; Severance Arrangements. (a) Parent hereby agrees to cause the Surviving Corporation to pay, in accordance with their terms as in effect on the date hereof, without offset, deduction, counterclaim, interruption or deferment (other than as required by applicable law) all amounts due and payable under the terms of all written employment contracts, agreements, plans, policies and commitments of the Company and its Subsidiaries with or with respect to its current or former employees, officers and directors as such contracts, agreements, plans, policies and commitments are described on Schedule 3.14 hereto and in the Company SEC Reports filed on or before the date of this Agreement (other than any such contracts, agreements, plans, policies or commitments to the extent that such arrangements provide benefits that relate to severance or termination which are addressed in Section 6.8(b) below) to the extent such amounts are vested on or prior to the date of this Agreement or will become vested as a result of the transactions contemplated hereby. It is Parent's current intention to cause the Surviving Corporation to provide its employees for at least two years following the Effective Time employee benefit plans providing welfare benefits substantially comparable in the aggregate to those provided to employees generally by the Company as of the date of this Agreement, except for any changes thereto that may be required by law. Such welfare benefit plans shall (i) recognize expenses and claims that were incurred by the Company's employees in the year in which the Effective Time occurs and recognized for purposes of computing deductible amounts and copayments under the Company's plans as of the Effective Time and (ii) provide coverage for pre-existing health conditions to the extent covered under the applicable plans or programs of the Company as of the Effective Time. In addition, employees of the Surviving Corporation shall receive credit for their prior service with the Company and its Subsidiaries for eligibility and vesting purposes and for vacation accrual purposes. (b) Contemporaneously with the execution of this Agreement, Parent and/or the Company, as applicable, shall enter into employment agreements with each officer and key employee of the Company identified on Schedule 6.8(b)(1) hereto in substantially the forms set forth in Exhibit 6.8(b). -33- 40 (c) Notwithstanding anything to the contrary contained above, the Surviving Corporation shall be permitted to amend, modify, supplement or terminate any Plan, policy, agreement, commitment or other arrangement to the extent not prohibited by the terms thereof or by applicable law. (d) Nothing contained in this Agreement (other than as specifically provided in any employment agreement entered into pursuant to Section 6.8(b)), including without limitation this Section 6.8, shall confer on any person not a party to this Agreement, or constitute or be evidence of any agreement or understanding, express or implied, that any person has a right to be employed as an employee of or consultant to Parent or the Surviving Corporation for any period of time or at any specific rate of compensation. 6.9 Directors' and Officers' Indemnification. (a) The bylaws of the Surviving Corporation shall contain the provisions with respect to indemnification set forth in the bylaws of the Company on the date hereof, which provisions shall not be amended, repealed or otherwise modified from the date hereof up to a date which is six years from the Effective Time in any manner that would adversely affect the rights thereunder of individuals who on or at any time prior to the Effective Time were directors, officers, employees or agents of the Company, unless such modification is required by law. (b) For six years after the earlier of (i) the date on which the designees of Parent have been elected to the Board of Directors of the Company pursuant to Section 1.3 hereof and constitute a majority of the members thereof and (ii) the Effective Time, Parent shall, or shall cause the Surviving Corporation to, indemnify, defend and hold harmless the present and former officers, directors, employees and agents of the Company and its Subsidiaries (each an "Indemnified Party") against all losses, claims, damages, liabilities, fees and expenses (including reasonable fees and disbursements of counsel and judgments, fines, losses, claims, liabilities and amounts paid in settlement (provided that any such settlement is effected with the prior written consent of Parent or the Surviving Corporation, which consent shall not be unreasonably withheld)) arising out of actions or omissions occurring at or prior to the Effective Time (including without limitation matters arising out of or pertaining to the transactions contemplated by this Agreement) to the full extent permitted under New York law, or the Company's certificate of incorporation or bylaws, in each case as in effect at the date hereof, including provisions therein relating to the advancement of expenses incurred in the defense of any action or suit; PROVIDED, HOWEVER, that in the event any claim or claims are asserted or made within such six-year period, all rights to indemnification in respect of any such claim or claims shall continue until disposition of any and all such claims; and PROVIDED FURTHER, that any determination required to be made with respect to whether an Indemnified Party's conduct complies with the standards set forth under New York law or the Company's certificate of incorporation or bylaws or agreements referred to in Section 6.9(c), as the case may be, shall be made by independent counsel mutually acceptable to Parent and the Indemnified Party; and -34- 41 PROVIDED FURTHER that nothing herein shall impair any rights or obligations of any present or former directors or officers of the Company. (c) In addition, Parent and the Surviving Corporation shall honor and fulfill in all respects the obligations of the Company pursuant to indemnification agreements with the Company's directors and officers existing at or within five (5) business days after the date hereof which are listed on Schedule 6.9(c) hereto in the forms which have been delivered to Parent and Purchaser at the time of or prior to the delivery by the Company of an executed copy of this Agreement. (d) The Company's directors' and officers' liability insurance as presently in effect (including without limitation all coverages and terms thereunder) shall be maintained through the Effective Time. As of the Effective Time, Parent shall, or shall cause the Surviving Corporation to, purchase and pay for run-off coverage (i.e., coverage for an extended reporting period) for a six-year term, covering those persons who are currently covered by the Company's directors' and officers' liability insurance policy with coverages and terms substantially similar to those now applicable under the Company's present directors' and officers' liability insurance policy. The parties hereto acknowledge and agree that the remedy at law for any breach of the obligations under this Section is and will be insufficient and inadequate and that the persons having rights to coverage under the Company's Directors' and Officers' Liability Insurance Policy pursuant to this Section 6.9 ("Covered Persons"), in addition to any remedies at law, shall be entitled to equitable relief. Without limiting any remedies Covered Persons may otherwise have hereunder or under applicable law, in the event of nonperformance of any obligation under this Section, the Covered Persons shall have, in addition to any other rights at law or equity, the right to specific performance. (e) The rights under this Section 6.9 are contingent upon the occurrence of, and shall survive the consummation of, the Merger at the Effective Time, are intended to benefit the Company, the Surviving Corporation and each Indemnified Party, shall be binding on all successors and assigns of Parent and the Surviving Corporation and shall be enforceable by each Indemnified Party. 6.10 Tender Agreement; New York Law. Unless this Agreement has been terminated in accordance with its terms, the Company shall not (a) take any action which, in the reasonable judgment of Parent, would impede, interfere with or attempt to discourage the transactions contemplated by this Agreement or the Tender Agreement, or (b) amend, revoke, withdraw or modify the approval of the Purchaser's acquisition of the Company Common Stock, the Merger and the other transactions contemplated hereby so as to render the restrictions of Section 912 of the NYBCL applicable to the Merger as a result of the failure to satisfy the requirements of Section 912(c)(1) thereof or make Section 905 unavailable for the Merger; PROVIDED, HOWEVER, that any of the above actions may be taken if, in the opinion of the Board of Directors of the Company after consultation with independent legal counsel to the Company, the failure to take such action would be inconsistent with their fiduciary duties under applicable law; and PROVIDED FURTHER that the Company may not take any such action if this Agreement has -35- 42 been terminated pursuant to Section 8.1(c)(i) hereof unless Parent has been paid the expenses contemplated by Section 9.1 hereof. 6.11 Publicity. So long as this Agreement is in effect and subject to Section 6.1 hereof, neither the Company, Parent nor any of their respective affiliates shall issue or cause the publication of any press release or other announcement with respect to the Merger, this Agreement or the other transactions contemplated hereby without the prior consultation of the other party, except as may be required by law or by any listing agreement with a national securities exchange. 6.12 Opinion of Company Counsel. The Company shall deliver to Parent, concurrently with the execution and delivery of this Agreement, the opinion of Herschel M. Weinberg, counsel for the Company, in substantially the form set forth in Exhibit 6.12 attached hereto. 6.13 Election of Directors. Parent will, immediately after the Effective Time, cause its Board of Directors to be expanded by one member and the Shareholder will thereupon be elected to Parent's Board of Directors. ARTICLE VII CONDITIONS 7.1 Conditions to each Party's Obligations to Effect the Merger. The respective obligations of the parties to effect the Merger shall be subject to the satisfaction or waiver, on or prior to the Closing Date, of the following conditions: (a) Governmental Approvals. All authorizations, consents, orders or approvals of, or declarations or filings with, or expiration of waiting periods imposed by, any Federal, state, local or foreign governmental or regulatory authority necessary for the consummation of the Merger and the transactions contemplated by this Agreement shall have been filed, occurred or been obtained and shall be in effect at the Effective Time. (b) Legal Action. No temporary restraining order, preliminary injunction or permanent injunction or other order precluding, restraining, enjoining, preventing or prohibiting the consummation of the Merger shall have been issued by any Federal, state or foreign court or other governmental or regulatory authority and remain in effect. (c) Statutes. No Federal, state, local or foreign statute, rule or regulation shall have been enacted which prohibits the consummation of the Merger or would make the consummation of the Merger illegal. (d) Shareholder Approval. This Agreement shall have been approved and adopted by the affirmative vote required by the shareholders of the Company, if -36- 43 required pursuant to the Company's certificate of incorporation and applicable New York law, in order to consummate the Merger. 7.2 Additional Condition to Obligations of the Company to Effect the Merger. The obligations of the Company to effect the Merger shall be subject to the satisfaction or waiver, on or prior to the Closing Date, of the additional condition that Parent, Purchaser or their affiliates shall have purchased Shares (including without limitation the Shares subject to the Tender Agreement) pursuant to the Offer. ARTICLE VIII TERMINATION 8.1 Termination. Anything herein or elsewhere to the contrary notwithstanding, this Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, whether before or after shareholder approval thereof: (a) By Mutual Consent. By mutual consent of the Board of Directors of Parent and the Board of Directors of the Company. (b) By Parent and Purchaser, or the Company. By either the Board of Directors of Parent or the Board of Directors of the Company: (i) (x) if all conditions to the Offer shall not have been satisfied or waived within the relevant time periods specified in Section 1.1(a), (y) if all such conditions to the Offer have been so satisfied or waived and the Purchaser shall not have accepted for purchase and purchased all Shares validly tendered and not withdrawn prior to the Expiration Date within ten (10) business days following such Expiration Date, or (z) if the Merger shall not have been consummated on or prior to May 31, 1997; PROVIDED, HOWEVER, that the right to terminate this Agreement under this Section 8.1(b)(i) shall not be available to any party whose failure to fulfill any material obligation under this Agreement has been the cause of, or resulted in, the failure of the Offer or the Merger, as applicable, to be consummated on or prior to the applicable date(s); or (ii) if a court of competent jurisdiction or other governmental or regulatory authority shall have issued an order, decree or ruling or taken any other action (which order, decree, ruling or other action the parties hereto shall use their reasonable efforts to lift), in each case permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and non-appealable. -37- 44 (c) By the Company. By the Board of Directors of the Company: (i) if, prior to the purchase of Shares by Parent, Purchaser or their affiliates pursuant to the Offer, the Company shall have (A) accepted an Acceptable Offer in compliance with the terms of Section 6.1 hereof and (B) paid or caused to be paid the fees provided for in Section 9.1(b) hereof; or (ii) if, prior to the purchase of Shares pursuant to the Offer, Parent or Purchaser breaches or fails in any material respect to perform or comply with any of its material covenants and agreements contained herein or breaches its representations and warranties in any material respect; (iii) if Parent, Purchaser or any of their affiliates shall have failed to commence the Offer on or prior to five business days following the date of the initial public announcement of the Offer (the "Offer Deadline") other than due to an occurrence that if occurring after the commencement of the Offer would result in a failure to satisfy any of the conditions set forth in Annex A hereto; PROVIDED that the Company may not terminate this Agreement pursuant to this Section 8.1(c)(iii) if the Company is in material breach of this Agreement; or (iv) if prior to the purchase of Shares pursuant to the Offer, there shall have been instituted, pending or threatened any action, suit or proceeding which challenges, seeks to make illegal, prohibits, or makes illegal the acceptance for payment, payment for or purchase of Shares or the consummation of the Offer or the Merger and which, in the opinion of independent counsel acceptable to the parties (consent not to be unreasonably withheld), has reasonable possibility of success. (d) By Parent and Purchaser. By the Board of Directors of Parent: (i) if, due to an occurrence that if occurring after the commencement of the Offer would result in a failure to satisfy any of the conditions set forth in Annex A hereto, Parent, Purchaser or any of their affiliates shall have failed to commence the Offer on or prior to the Offer Deadline; PROVIDED that Parent and Purchaser may not terminate this Agreement pursuant to this Section 8.1(d)(i) if Parent or Purchaser (x) is in material breach of this Agreement or (y) has not exercised such right by the close of business on or before the fifth business day following the Offer Deadline; or (ii) if Parent or Purchaser is not in material breach of the Agreement and prior to the purchase of shares of Company Common Stock pursuant to the Offer, the Company shall have received an Acceptable Offer and the Board of Directors of the Company shall have withdrawn, or modified or changed (including by amendment of the Schedule 14D-9) in a manner adverse to Parent or Purchaser its approval or recommendation of the Offer, this Agreement or the Merger or shall have recommended an Acquisition Proposal, PROVIDED, HOWEVER, that if the Company's Board of Directors modifies or changes its recommendation of the Offer, this Agreement or the -38- 45 Merger to either express no opinion and remain neutral with respect thereto, or to provide that it is unable to take a position with respect thereto, such modification or change shall not be deemed to be adverse to Parent or Purchaser for purposes of this Section 8.1(d)(ii); or (iii) if Parent or Purchaser, as the case may be, shall have terminated the Offer, or the Offer shall have expired without Parent or Purchaser, as the case may be, purchasing any shares of Company Common Stock thereunder, provided that Parent or Purchaser may not terminate this Agreement pursuant to this Section 8.1(d)(iii) if (x) it or the Purchaser has failed to purchase shares of Company Common Stock in the Offer in violation of the material terms thereof or (y) Parent or Purchaser has not exercised such right by the close of business on or before the fifth business day following the termination or expiration of the Offer in accordance with its terms; or (iv) if, prior to the purchase of Company Common Stock pursuant to the Offer, the Company breaches or fails in any material respect to perform or comply with any of its material covenants and agreements contained herein or breaches its representations and warranties in any material respect. 8.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 8.1 above, written notice thereof shall forthwith be given to the other party or parties specifying the provision hereof pursuant to which such termination is made, and this Agreement shall forthwith become null and void and there shall be no liability or obligation on the part of Parent and Purchaser, or either of them, or the Company, or their respective officers, directors or employees, except (a) for fraud or for material breach of this Agreement and (b) as set forth in this Section 8.2, Sections 6.2(b), 6.10, 6.11 and 9.1 hereof and, to the extent that, and for so long as, Parent's designees to the Company's Board of Directors pursuant to Section 1.3 hereof constitute at least a majority of the members of such Board of Directors, Section 6.9(b) hereof. ARTICLE IX GENERAL PROVISIONS 9.1 Fees and Expenses. (a) Except as contemplated by this Agreement, including Section 9.1(b) hereof, all costs and expenses incurred in connection with this Agreement and the consummation of the transactions contemplated hereby shall be paid by the party incurring such expenses. (b) If (i) the Board of Directors of the Company shall terminate this Agreement pursuant to Section 8.1(c)(i) hereof, (ii) the Board of Directors of Parent shall terminate this Agreement pursuant to Section 8.1(d)(ii) hereof, or (iii) the Board of Directors of Parent shall fail to commence the Offer or shall terminate this Agreement -39- 46 pursuant to Section 8.1(d) due to (x) a material breach of the representations and warranties of the Company set forth in this Agreement or (y) a material breach of, or failure to perform or comply with, any material obligation, agreement or covenant contained in this Agreement, including but not limited to the covenants contained in Article V hereof, by the Company, then in any such case as described in clause (i), (ii) or (iii), the Company shall reimburse Parent for all of its fees and expenses incurred in connection with the Offer and the Merger Agreement and the transactions contemplated thereby. Any such amounts must be paid by the Company concurrently with the termination of the Merger Agreement in the case of a termination referred to in clause (i) and otherwise not later than two business days after termination of the Merger Agreement (or, if later, after Parent provides reasonable documentation to the Company of the amount of such fees and expenses). Any such fees and expenses not paid when due shall accrue interest at the rate of ten percent per annum from the due date until paid in full. (c) If (i) the Board of Directors of the Company shall terminate this Agreement pursuant to Section 8.1(c)(ii) or (iii) hereof, or (ii) Parent is unable to obtain the financing necessary to satisfy the Financing Condition (other than because of the occurrence of any event that would result in a failure to satisfy any of the conditions set forth in Annex A hereto (and for this purpose only, disregarding the provisos to the condition set forth in paragraph (d) of Annex A), or because of a Material Adverse Effect with respect to Parent and its consolidated subsidiaries, whether such event or Material Adverse Effect occurs before or after commencement of the Offer), then Parent shall reimburse the Company for all of its fees and expenses incurred in connection with the Offer and the Merger Agreement and the transactions contemplated thereby, such reimbursement to occur not later than two business days after termination of the Merger Agreement (or, if later, after the Company provides reasonable documentation to Parent of the amount of such fees and expenses). Any such fees and expenses not paid when due shall accrue interest at the rate of ten percent per annum from the due date until paid in full. 9.2 Amendment and Modification. Subject to applicable law, this Agreement may be amended, modified and supplemented in any and all respects, whether before or after any vote of the shareholders of the Company contemplated hereby, by written agreement of the parties hereto, by action taken by their respective Boards of Directors (which in the case of the Company shall include approvals as contemplated in Section 1.3(c) hereof), at any time prior to the Closing Date with respect to any of the terms contained herein; PROVIDED, HOWEVER, that after the approval of this Agreement by the shareholders of the Company, no such amendment, modification or supplement shall reduce or change the Merger Consideration. 9.3 Nonsurvival of Representations and Warranties. None of the representations and warranties in this Agreement shall survive the Effective Time. 9.4 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given upon personal delivery, facsimile transmission (which -40- 47 is confirmed), telex or delivery by an overnight express courier service (delivery, postage or freight charges prepaid), or on the fourth day following deposit in the United States mail (if sent by registered or certified mail, return receipt requested, delivery, postage or freight charges prepaid), addressed to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Parent or Purchaser, to: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049-5022 Telecopy No. (310) 447-3265 Attention: Tracy A. Edwards Vice President and Chief Financial Officer with a copy to: Irell & Manella LLP 1800 Avenue of the Stars Suite 900 Los Angeles, California 90067 Telecopy No. (310) 203-7199 Attention: Andrew W. Gross, Esq. (b) if to the Company, to: Milgray Electronics, Inc. 77 Schmitt Boulevard Farmingdale, New York 11735 Telecopy No. (516) 752-9221 Attention: Herbert S. Davidson with a copy to: Herschel M. Weinberg, Esq. 110 East 59th Street, 23rd Floor New York, New York 10022 Telecopy No. (212) 223-4911 9.5 Definitions; Interpretation. As used in this Agreement, the term "affiliate(s)" shall have the meaning set forth in Rule 12b-2 of the Exchange Act. When a reference is made in this Agreement to an Article, Section, Exhibit or Schedule, such reference shall be to an Article, Section, Exhibit or Schedule to this Agreement unless otherwise indicated. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." The -41- 48 table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 9.6 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart. 9.7 Entire Agreement; No Third Party Beneficiaries. This Agreement (including the documents and the instruments referred to herein and therein) (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and (b) except as provided in Section 6.9 hereof, is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder; PROVIDED, HOWEVER, that the officers and key employees of the Company identified on Schedule 6.8(b) shall have such rights as are specified in the employment agreements entered into by them pursuant to Section 6.8(b). 9.8 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void, unenforceable or against its regulatory policy, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 9.9 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York (without giving effect to the principles of conflicts of law thereof). 9.10 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties, except that Purchaser may assign, in its sole discretion, any or all of its rights, interests and obligations hereunder to Parent or to any direct or indirect wholly owned subsidiary of Parent. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by, the parties and their respective successors and assigns. -42- 49 IN WITNESS WHEREOF, Parent, Purchaser and the Company have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. MILGRAY ELECTRONICS, INC. BELL INDUSTRIES, INC. /s/ Richard Hyman /s/ Theodore Williams - ---------------------------------- -------------------------------------- Name: Richard Hyman Name: Theodore Williams Title: Executive Vice President Title: Chairman and Chief Executive Officer ME ACQUISITION, INC. /s/ Theodore Williams -------------------------------------- Name: Theodore Williams Title: President -43- 50 ANNEX A CONDITIONS TO THE TENDER OFFER Notwithstanding any other provisions of the Offer, and in addition to (and not in limitation of) Purchaser's rights to extend and amend the Offer at any time in its sole discretion (subject to the provisions of the Merger Agreement), Purchaser shall not be required to accept for payment or, subject to any applicable rules and regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating to Purchaser's obligation to pay for or return tendered Shares promptly after termination or withdrawal of the Offer), pay for, and may delay the acceptance for payment of or, subject to the restriction referred to above, the payment for, any tendered Shares, and may terminate the Offer as to any Shares not then paid for, if (i) the applicable waiting period under the HSR Act has not expired or terminated, (ii) the Minimum Condition has not been satisfied or waived, (iii) the Financing Condition has not been satisfied or waived, or (iv) at any time on or after November 26, 1996 and before the time for payment of any such Shares, any of the following events shall occur or shall be determined by Purchaser to have occurred: (a) there shall have been instituted, pending or threatened any action, proceeding, application, claim or suit, or any statute, rule, regulation, judgment, order or injunction promulgated, entered, enforced, enacted, proposed, issued or applicable to the Offer or the Merger by any domestic or foreign Federal, state or local governmental regulatory or administrative agency or authority or court or legislative body or commission which directly or indirectly (1) challenges, seeks to make illegal, prohibits or makes illegal, or imposes any material limitations on, Parent's or Purchaser's ownership or operation (or that of any of their respective subsidiaries or affiliates) of all or a material portion of the businesses or assets of them or of the Company or its Subsidiaries, or compels Parent or Purchaser or their respective subsidiaries and affiliates to dispose of or hold separate any material portion of the business or assets of the Company or Parent and their respective subsidiaries, in each case taken as a whole, (2) challenges, seeks to make illegal, prohibits or makes illegal the acceptance for payment, payment for or purchase of Shares or the consummation of the Offer or the Merger, (3) results in the delay in or restricts the ability of Purchaser, or renders Purchaser unable, to accept for payment, pay for or purchase some or all of the Shares, (4) imposes material limitations on the ability of Parent or Purchaser to exercise full rights of ownership of the Shares, including without limitation the right to vote the Shares purchased by it on all matters presented to the Company's shareholders, (5) seeks to obtain or obtains material damages or otherwise directly or indirectly relates to the transactions contemplated by the Offer or the Merger, (6) seeks to require divestiture by Parent, Purchaser or any of their respective subsidiaries or affiliates of any Shares, or (7) could otherwise have a Material Adverse Effect, provided that Parent shall have used reasonable efforts to cause any such judgment, order or injunction to be vacated or lifted; A-1 51 (b) there shall have occurred (1) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States (whether or not mandatory), (2) a commencement of a war, armed hostilities or other international or national calamity directly or indirectly involving the United States, (3) any limitation (whether or not mandatory) by any foreign or United States governmental authority on the extension of credit by banks or other financial institutions, or (4) in the case of any of the foregoing existing at the time of the commencement of the Offer, a material acceleration or worsening thereof; (c) the representations and warranties of the Company set forth in the Merger Agreement shall not be true and correct in any material respect when made or at and as of the date of consummation of the Offer as though made on or as of such date, except (i) for changes specifically permitted by the Merger Agreement, and (ii) those representations and warranties that address matters only as of a particular date are true and correct as of such date, or the Company shall have breached or failed in any material respect to perform or comply with any material obligation, agreement or covenant required by the Merger Agreement to be performed or complied with by it; (d) any change in the financial condition, business, assets, properties, prospects or results of operations of the Company and its Subsidiaries taken as a whole that would constitute a Material Adverse Effect shall have occurred, or there shall be any event, condition, occurrence or development of a state of circumstances or facts which individually or in the aggregate causes, results in or could cause or result in such a Material Adverse Effect; PROVIDED, HOWEVER, that any decrease in net sales or net income before taxes (including, without limitation, losses) of the Company and its Subsidiaries on a consolidated basis that may have occurred at any time subsequent to September 30, 1996 (whether before, on or after the date of the Merger Agreement) shall not be deemed to constitute, or to cause or result in, or be a factor in the determination of, a Material Adverse Effect; and PROVIDED FURTHER that the occurrence of any possible material adverse change disclosed in Schedule 3.22 shall not be deemed to constitute, or to cause or result in, a Material Adverse Effect; (e) the Merger Agreement shall have been terminated in accordance with its terms; (f) any person or group shall have entered into a definitive agreement or agreement in principle with the Company with respect to an Acquisition Proposal or other business combination with the Company; and (g) the Company's Board of Directors shall have withdrawn, or modified or changed (including by amendment of the Schedule 14D-9) in a manner adverse to Parent or Purchaser its approval or recommendation of the Offer, the Merger Agreement or the Merger or shall have recommended an A-2 52 Acquisition Proposal, PROVIDED, HOWEVER, that if the Company's Board of Directors modifies or changes its recommendation of the Offer, the Merger Agreement or the Merger to either express its opinion and remain neutral with respect thereto, or to provide that it is unable to take a position with respect thereto, such modification or change shall not be deemed to be adverse to Parent or Purchaser for purposes of this paragraph (h); which in the sole judgment of Parent or Purchaser, in any such case, and regardless of the circumstances (including any action or inaction by Parent or Purchaser giving rise to such condition) makes it inadvisable to proceed with the Offer or with such acceptance for payment or payments. The foregoing conditions are for the sole benefit of Parent and Purchaser and may be waived by Parent or Purchaser, in whole or in part at any time and from time to time in the sole discretion of Parent or Purchaser. The failure by Parent or Purchaser at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. A-3 53 EXHIBIT 6.8(b)-(i) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of November 26, 1996, by and between Herbert S. Davidson (the "Executive") and Bell Industries, Inc., a California corporation (the "Company"), to be effective as of the effective date of the Merger (as defined below) with reference to the following facts: A. Executive is currently a director, Chief Executive Officer and President of Milgray Electronics, Inc., a New York corporation ("Milgray"); B. Pursuant to an agreement dated as of November 26, 1996, ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of the Company ("Acquisition Sub") will make a tender offer to acquire all of the outstanding capital stock of Milgray (the "Tender Offer"). After completion of the Tender Offer, it is intended that Acquisition Sub will be merged with and into Milgray, and Milgray will become a wholly-owned subsidiary of the Company (the "Merger"); C. The Company wishes to ensure the continued services of Executive after the Merger by having him serve as Vice Chairman of the Board and an Assistant Secretary of the Company; and D. Executive is willing to accept employment by the Company on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT The Company does hereby employ Executive and Executive hereby accepts such employment as Vice Chairman of the Board and an Assistant Secretary of the Company, such employment to commence on the effective date of the Merger. Executive shall be entitled to an office and access to secretarial services at Milgray's executive offices during the Term of this Agreement comparable to those Executive presently has at Milgray. Executive's duties under this Agreement are to be performed on Long Island in New York State. Executive shall devote such time to performance of his services as Vice Chairman of the Board and an Assistant Secretary of the Company as Executive and the Company shall mutually agree from time to time. 2. TERM This Agreement shall be in full force and effect for a period (the "Term") which shall commence as of the effective date of the Merger (the "Effective Date") and shall continue for a period of one (1) year, unless sooner terminated as hereafter provided. 54 Thereafter, this Agreement will automatically renew for annual one year periods, unless both parties mutually agree to the contrary. 3. COMPENSATION As compensation for the services to be performed by Executive during the continuance of this Agreement, the Company shall pay Executive a salary of $100,000 per year during the first year of his employment hereunder (the "Base Salary"). Executive's Base Salary in any subsequent year of employment under this Agreement shall be a nominal amount to be set by the Company, it being understood that such amount shall be sufficient to enable Executive to participate in the Company's medical insurance plan. Executive's Base Salary shall be payable in substantially equal bi-weekly installments and reduced on a pro rata basis for any fraction of a year or month during which Executive is not so employed. Executive shall be entitled to reimbursement for all amounts reasonably expended on behalf of the Company, subject to verification similar to that required of and provided by the Company's other senior executives. The Company shall deduct from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. At all such times as Executive may be a member of the Company's Board of Directors, Executive will be deemed to be an "employee director". 4. INDEMNIFICATION Executive shall be indemnified by the Company to the full extent permitted by law in respect of his actions as an officer or director of the Company and shall be provided with such liability insurance coverage in this connection as is provided to other Company executives. In addition, the Company shall enter into an Indemnification Agreement with Executive in the form attached as Exhibit 4. 5. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: 5.1 Mutual Agreement Whenever the Company and Executive mutually agree in writing to termination; 5.2 Termination for Cause At any time for Cause. For purposes of this Agreement, "Cause" shall mean conviction of Executive by, or a plea of guilty in, a court of competent jurisdiction of a felony or other major crime (a plea of nolo contendere shall be deemed a conviction). -2- 55 5.3 Voluntary Termination Executive may terminate his employment under this Agreement at any time upon thirty days written notice. 6. NONDISCLOSURE Both during and after Executive's employment with the Company, Executive shall keep secret all confidential matters of the Company not in the public domain and will not disclose them to anyone outside of the Company. 7. MISCELLANEOUS 7.1 Arbitration All disputes, controversies or claims arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall be submitted to binding arbitration taking place in the State of New York before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Expenses of the arbitration shall be apportioned between the parties by the arbitrator on the basis of relative fault. 7.2 No Third-Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. 7.3 Entire Agreement This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. 7.4 Succession and Assignment This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the other. -3- 56 7.5 Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 7.6 Headings The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 7.7 Notices All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO THE COMPANY: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049-5022 Attn: President IF TO EXECUTIVE: Herbert S. Davidson c/o Milgray Electronics, Inc. 77 Schmitt Boulevard Farmingdale, New York 11735 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. -4- 57 7.8 Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. 7.9 Amendments and Waivers No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Company and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 7.10 Severability Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. -5- 58 IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. BELL INDUSTRIES, INC. By:____________________________ Name: Title: HERBERT S. DAVIDSON _______________________________ -6- 59 EXHIBIT 5 FORM OF INDEMNIFICATION AGREEMENT INDEMNITY AGREEMENT This Agreement is made as of the _____ day of __________, 1996, by and between Bell Industries, Inc., a California corporation (the "Corporation"), and Herbert S. Davidson (the "Indemnitee"), a Director and/or Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability of Directors' and Officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, the Corporation does not regard the protection available to Indemnitee as adequate in the present circumstances, and realizes that Indemnitee may not be willing to serve as a Director or Officer without adequate protection, and the Corporation desires Indemnitee to serve in such capacity; NOW, THEREFORE, in consideration of Indemnitee's service as a Director or Officer after the date hereof the parties agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature. (b) The term "Expenses" shall include, but is not limited to, expenses of investigations, judicial or administrative proceedings or appeals, damages, judgments, fines, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under this Agreement. 60 (c) The terms "Director" and "Officer" shall include Indemnitee's service at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise as well as a Director and/or Officer of the Corporation. 2. Indemnity of Director or Officer. Subject only to the limitations set forth in Section 3, Corporation will pay on behalf of the Indemnitee all Expenses actually and reasonably incurred by Indemnitee because of any claim or claims made against him in a Proceeding by reason of the fact that he is or was a Director and/or Officer. 3. Limitations on Indemnity. Corporation shall not be obligated under this Agreement to make any payment of Expenses to the Indemnitee (a) which payment it is prohibited by applicable law from paying as indemnity; (b) for which payment is actually made to the Indemnitee under an insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) for which payment the Indemnitee is indemnified by Corporation otherwise than pursuant to this Agreement and payment is actually made to the Indemnitee except in respect of any excess beyond the amount of the payment under such indemnification; (d) resulting from a claim decided in a Proceeding adversely to the Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he was not legally entitled; and, if the Indemnitee is a Director, based upon any of the exceptions set forth in clauses (i) through (iv) of Article Tenth of this Corporation's Articles of Incorporation; (e) resulting from a claim decided in a Proceeding adversely to the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of Corporation within the meaning of Section 16(b) or 16(c) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; or (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be indemnified under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless it shall be decided in a Proceeding that he committed (i) acts of active and deliberate dishonesty (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated. -2- 61 For purposes of Sections 3 and 4, the phrase "decided in a Proceeding" shall mean a decision by a court, arbitrator(s), hearing officer or other judicial agent having the requisite legal authority to make such a decision, which decision has become final and from which no appeal or other review proceeding is permissible. 4. Advance Payment of Costs. Expenses incurred by Indemnitee in defending a claim against him in a Proceeding shall be paid by the Corporation as incurred and in advance of the final disposition of such Proceeding; provided, however, that Expenses of defense need not be paid as incurred and in advance where the judicial agent of first impression has decided the Indemnitee is not entitled to be indemnified pursuant to this Agreement or otherwise. Indemnitee hereby agrees and undertakes to repay such amounts advanced if it shall be decided in a Proceeding that he is not entitled to be indemnified by the Corporation pursuant to this Agreement or otherwise. 5. Enforcement. If a claim under this Agreement is not paid by Corporation, or on its behalf, within thirty days after a written claim has been received by Corporation, the Indemnitee may at any time thereafter bring suit against Corporation to recover the unpaid amount of the claim and if successful in whole or in part, the Indemnitee shall be entitled to be paid also the Expenses of prosecuting such claim. 6. Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Corporation effectively to bring suit to enforce such rights. Notwithstanding the foregoing, if any of the provisions hereof would impair or jeopardize Indemnitee's coverage under the Corporation's Directors' and Officers' Liability Policy, such provisions shall be ineffective and shall be deemed deleted from this Agreement. 7. Notice. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to Corporation shall be given at its principal office and shall be directed to the President (or such other address as Corporation shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, the Indemnitee shall give Corporation such information and cooperation as it may reasonably require. 8. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. -3- 62 9. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Articles of Incorporation or Bylaws of the Corporation or under California law. 10. Applicable Law. This Agreement shall be governed by and construed in accordance with California law. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 12. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns. 13. Continuation of Indemnification. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 14. Coverage of Indemnification. The indemnification under this Agreement shall cover Indemnitee's service as a Director and/or Officer prior to or after the date of the Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. INDEMNITEE CORPORATION By:_______________________ By:___________________ -4- 63 EXHIBIT 6.8(b)-(ii) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of November 26, 1996, by and between Richard Hyman (the "Executive") and Bell Industries, Inc., a California corporation (the "Company"), to be effective as of the effective date of the Merger (as defined below) with reference to the following facts: A. Executive is currently employed as Executive Vice President, Vice President--Sales/Marketing and Chief Operating Officer of Milgray Electronics, Inc., a New York corporation ("Milgray"); B. Pursuant to an agreement dated as of November 26, 1996, ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of the Company ("Acquisition Sub") will make a tender offer to acquire all of the outstanding capital stock of Milgray (the "Tender Offer"). After completion of the Tender Offer, it is intended that Acquisition Sub will be merged with and into Milgray, and Milgray will become a wholly-owned subsidiary of the Company (the "Merger"); C. The Company wishes to ensure the continued services of Executive after the Merger by having him serve as Executive Vice President--Electronics Distribution Group of the Company and President of Milgray; and D. Executive is willing to accept employment by the Company and Milgray on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT 1.1 Duties and Responsibilities The Company does hereby employ Executive and Executive hereby accepts such employment as President of Milgray and Executive Vice President--Electronics Distribution Group of Bell performing the functions of principal executive officer in charge of a significant segment of the Company's business - i.e., the business presently being conducted by Milgray, such employment to commence on the effective date of the Merger. Executive shall report to the President of the Company, and subject to the directions of the Board of Directors of Milgray and/or the President of the Company, shall have general supervision, direction and control of the business, officers and employees of Milgray and its subsidiaries; provided, however, that Executive shall not be required to undertake duties not commensurate with his position as President of Milgray and Executive Vice President--Electronics Distribution Group of Bell. Notwithstanding anything contained in the preceding sentence, Executive acknowledges that, following the Merger, the Company plans to investigate combining its existing 64 distribution business, or segments thereof, with those of Milgray, and where feasible or practicable, to combine such business, or segments thereof, and that as a result of such combination, the Company may change the exact nature of Executive's responsibilities (but not Executive's job title), but in no event will Executive be required to accept job responsibilities in an area outside of his current expertise or to act in less than an executive capacity; moreover, Executive's status and position in the Company (or its successor) organization chart (i.e., the status and position of the person to whom Executive reports and the class of employees who report to Executive) shall be similar to other Vice Presidents of the Company with responsibilities similar to those of Executive. Any such change in responsibility will not constitute a breach of this Agreement by the Company. During the term of this Agreement, Executive shall devote his full business time and attention to the business of the Company and Milgray and shall not be engaged in any other duties which interfere with the performance of his duties hereunder. Executive shall be entitled to an office, secretarial help and other accommodations and amenities comparable to those Executive presently has at Milgray. 1.2 Place of Performance Executive's duties under this Agreement are to be performed on Long Island in New York State and Executive shall not be required to travel or be assigned away from this location more than sixty days in any twelve-month period or more than five consecutive days in any thirty-day period. 2. TERM This Agreement shall be in full force and effect for a period (the "Term") which shall commence as of the effective date of the Merger (the "Effective Date") and shall continue for a period of five (5) years, unless sooner terminated as hereafter provided. 3. COMPENSATION 3.1 Base Salary As compensation for the services to be performed by Executive during the continuance of this Agreement, the Company shall pay Executive a base salary of $400,000 per year for each year of his employment hereunder (the "Base Salary"). Base Salary shall be payable in substantially equal bi-weekly installments and reduced on a pro rata basis for any fraction of a year or month during which Executive is not so employed. 3.2 Bonus Executive shall be entitled to earn an incentive bonus based upon achievement of financial and other goals established from time to time by the Company, provided that the minimum bonus for each fiscal year of the Company shall be $135,000. For the initial year of this Agreement, such bonus shall be prorated from the Effective Date and -2- 65 the bonus for any other partial year shall be similarly prorated. Any such bonus earned by Executive shall be paid at the same time that annual incentive bonuses for the Company's other senior executive officers are paid in accordance with the Company's policies as in effect from time to time (but in no event will the guaranteed minimum bonus be paid later than 30 days after the end of the Company's fiscal year, with the remainder, if any, to be paid within 90 days after the end of the Company's fiscal year). 3.3 Additional Benefits Executive shall be entitled to participate in all of the Company's employee benefit plans as listed in the Company's employee handbook, as the same may change from time to time, and, in addition, to participate on the same terms as senior Company executives in any benefit plans available to members of the Company's management (whether or not listed in the employee handbook). Among other things, Executive shall be entitled to participate in the Company's Health Care Benefits Program, 401(k) Plan, Stock Purchase Plan, Stock Option Plan, Short-term and Long-term Disability Programs and the Company's Executive Medical Plan, which provides coverage for all medical expenses not otherwise covered by the basic policy, up to $25,000. If any health, medical or disability plan or program existing at the time of commencement of Executive's employment pursuant to this Agreement is terminated or the benefits thereunder reduced, the Company shall provide Executive with benefits similar to those in existence at the time of commencement of Executive's employment hereunder. 3.4 Stock Options (A) As an additional element of compensation to Executive in consideration of the services to be rendered hereunder, the Company shall grant to Executive options to acquire 25,000 shares of Company's common stock at an exercise price equal to the closing price on the Effective Date. The options shall vest in 10%, 20%, 30% and 40% increments, respectively, on the first, second, third and fourth anniversaries of this Agreement. In addition, all of the options will vest if (i) the Company terminates this agreement other than for Cause (as defined in Section 6.2) or (ii) the Executive terminates this Agreement for Good Reason (as defined in Section 6.3(B)). The options shall remain exercisable for a period of five (5) years from the date of grant. The specific terms of the above-referenced option shall be as set forth in a separate option agreement in the form annexed hereto as Exhibit 3.4. (B) Executive shall be entitled to participate in the Company's stock option programs, although Executive understands that any grants under such programs are completely discretionary with the Compensation Committee of the Company's Board of Directors. -3- 66 3.5 Reimbursements Executive shall be entitled to reimbursement for all amounts reasonably expended on behalf of the Company and Milgray, subject to verification similar to that required of and provided by the Company's other senior executives. 3.6 Deductions The Company shall deduct from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. 3.7 Disability Except in the case of Executive's Total Disability (as defined in Section 6.4), Executive's full compensation and benefits under this Agreement shall be continued during any period when he is absent or unable to perform his duties due to illness, disability or other incapacity; and Executive's inability to perform his duties by reason of the foregoing shall not constitute a failure to perform his obligations under this Agreement and shall not be deemed a default by Executive hereunder. The consequences of Executive's Total Disability is covered in Section 7.2 of this Agreement. 4. VACATION Executive shall be entitled to four weeks of vacation in each twelve-month period; provided, however, that no more than six weeks may be taken during any eighteen-month period. Such vacation will accrue on a pro rata basis from the date employment commences under this Agreement. At the end of his employment hereunder, Executive shall be paid for any accrued but unused vacation time. Executive agrees that he will coordinate his vacation plans and schedules in order to prevent any undue disruption of the Company's and Milgray's business. 5. INDEMNIFICATION Executive shall be indemnified by the Company to the full extent permitted by law in respect of his actions as an officer or director of the Company and shall be provided with such liability insurance coverage in this connection as is provided to other Company executives. In addition, the Company shall enter into an Indemnification Agreement with Executive in the form attached as Exhibit 5. -4- 67 6. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: 6.1 Mutual Agreement Whenever the Company and Executive mutually agree in writing to termination; 6.2 Termination for Cause At any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) material breach by Executive of this Agreement or material failure by Executive to perform his duties under this Agreement (other than by reason of Executive's Total Disability) followed by (a) written notice from the Company to Executive specifying such material failure or such material breach, plus (b) Executive not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, Executive not having taken reasonable steps toward curing such material failure or material breach within thirty days of his actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable, or (ii) conviction of Executive by, or a plea of guilty in, a court of competent jurisdiction of a felony or other major crime (a plea of nolo contendere shall be deemed a conviction). 6.3 Termination without Cause by the Company or for Good Reason by Executive (A) By the Company. Notwithstanding any other provision of this Agreement, the Company shall have the right to terminate Executive's employment with the Company and Milgray without Cause at any time, and upon such termination Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. (B) By Executive. If the Company materially breaches any of its obligations, or any material violation by the Company of Executive's rights, under this Agreement followed by (i) written notice from Executive specifying such material breach or violation, plus (ii) the Company not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, the Company not having taken reasonable steps toward curing such material breach or failure within thirty days of actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable (the foregoing being referred to as "Good Reason"), Executive will have the right at Executive's election to terminate his employment hereunder by sending notice to the Company of his election to so terminate. Termination pursuant to this subsection will be effective from and after the effective date of Executive's notice to the Company terminating Executive's employment as aforesaid. Upon any such termination, Executive shall have the rights to receive the amounts -5- 68 described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. 6.4 Death/Disability The death or Total Disability of Executive. For the purposes of this Agreement, "Total Disability" shall mean the inability of Executive due to illness or other incapacity to perform his duties hereunder in a normal manner for a period of six months (whether or not consecutive) during any consecutive eighteen-month period. If there shall be a Total Disability involving Executive, his employment may be terminated by written notice by the Company to Executive. In the event of Executive's death during the term of this Agreement, the persons designated by Executive (or if Executive does not make such a designation, then Executive's estate) shall be entitled to receive his Base Salary plus guaranteed bonus provided for Executive in this Agreement for a period of twelve months following Executive's death (regardless of the time of such death). 6.5 Voluntary Termination Executive may terminate his employment under this Agreement at any time upon thirty days written notice. 7. CONSEQUENCES OF TERMINATION OF EMPLOYMENT 7.1 Termination by the Company other than for Cause or Termination by Executive for Good Reason. If the Company terminates Executive's employment other than for Cause or if Executive, for Good Reason terminates his employment, Executive shall be entitled to receive from the Company (at Executive's election which must be exercised within 30 days of termination), either (i) within twenty days of such election, a lump sum payment in an amount equal to the sum of his Base Salary (plus guaranteed bonus) payments to which Executive would be entitled under this Agreement as a full-time employee of the Company for the balance of Executive's term of employment under this Agreement (from the date of termination); such lump sum payment discounted to present value using the interest rate offered at the date of termination by The Chase Manhattan Bank, N.A., on a certificate of deposit for a period of time equal to the remaining term of this Agreement at the date of termination and subject to the noncompetition covenant for the then balance of the Term as set forth in Section 8.1; or (ii) receive all Base Salary plus guaranteed bonus payments payable for the remaining term of this Agreement; provided, however, that should Executive elect to become employed by a competitor of the Company after termination (whether as an officer, director, employee, consultant or otherwise), the Company may offset against the amounts it owes Executive all compensation derived from such competitive employment. Executive agrees to notify the Company within five (5) business days of being employed by a competitor of the Company and to provide the Company with such documentation as the Company may reasonably request (including, but not limited to, copies of his Forms W-2) in order to enable the Company to verify the amount of Executive's compensation from any competitor. -6- 69 7.2 Termination by the Company because of Executive's Total Disability. If the Company terminates Executive's employment hereunder because of Executive's Total Disability, Executive shall be entitled to receive from the Company for the full balance of the Term of this Agreement regular bi-weekly payments equal to 75% of Executive's regular bi-weekly Base Salary payment plus guaranteed bonus. This amount shall be reduced by all benefits provided to Executive under any Company disability plan or plans. Executive agrees to participate in such plan(s) to as full an extent and amount as permitted under such plans. 7.3 Voluntary Termination by Executive or Termination by the Company for Cause. If Executive voluntarily terminates his employment hereunder (other than for Good Reason or Total Disability) or if the Company terminates Executive's employment for Cause, Executive shall not be entitled to any further compensation following such termination. The Company shall not be entitled to recover any damages or other amount from Executive by reason of any such termination. 8. RESTRICTIVE COVENANTS 8.1 Covenant Not to Compete. During Executive's employment with the Company, Executive shall not, directly or indirectly, be engaged in the distribution or sale of any products that are directly competitive with products presently distributed or sold by the Company or any of its subsidiaries within the geographical area in which the Company or any of its subsidiaries conducts its business (except for passive investments by Executive of up to 5% of the outstanding stock of a publicly-held company engaged in any such activities). Following termination of Executive's employment with the Company, both in the case of voluntary termination by Executive (whether or not for Good Reason) or in the case of termination by the Company (whether or not for Cause), there shall be no restrictions on Executive's employment by another entity (whether or not competitive with the Company) unless Executive shall have elected the compensation option set forth in Section 7.1(i), in which case the restrictions set forth in the first sentence of this Section 8.1 (except as provided in the last sentence of this Section 8.1) shall continue to apply for the balance of the term of this Agreement as of the date of termination; provided, however, that if Executive elects the option set forth in Section 7.1(i) and then determines at a subsequent date that he wishes to take actions that would otherwise violate such restrictions, Executive will be relieved from such restrictions if he repays to the Company, in advance of taking such actions, a pro rata portion of the payments he received pursuant to that election (based on the length of the time remaining on the non-competition covenant at that time in comparison to the total remaining term of the non-competition covenant at the time of termination). For example, if Executive were terminated without Cause after two years, and elected to receive his remaining three years of pay under this Agreement in a lump sum, and one year later wanted to work for a competitor, the Executive could do so if he repaid the Company two-thirds of the amount he received as -7- 70 severance (3 years severance pay lump-sum, 1 year of which was "earned" by not competing, with the portion relating to the remaining 2 years to be repaid to the Company in exchange for a release from the non-compete). The Company may, at any time and from time to time, attach an annex to this Agreement specifying specific jurisdictions in which the covenant not-to-compete set forth in this Section 8.1 is applicable. Notwithstanding anything to the contrary contained in the second sentence of this Section 8.1, Executive shall not be restricted from employment by a manufacturer or manufacturer's sales representative which manufactures and/or sells any products referred to in the first sentence of this Section 8.1 or from the sale of any of such products in connection with such employment. 8.2 Nondisclosure and Nonsolicitation. Both during and after Executive's employment with the Company, Executive shall keep secret all material confidential matters of the Company not in the public domain and will not disclose them to anyone outside of the Company. Further, after termination Executive will not seek to hire Company employees. 9. MISCELLANEOUS 9.1 Arbitration All disputes, controversies or claims arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall be submitted to binding arbitration taking place in the State of New York before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Expenses of the arbitration shall be apportioned between the parties by the arbitrator on the basis of relative fault. 9.2 Legal Fees The Company shall pay all legal fees incurred by Executive arising out of the Company's failing to make any payment or withholding any employee benefits under this Agreement or contesting the validity, enforceability or interpretation of this Agreement in the event it is determined that (i) such action was not justified under this Agreement or (ii) if it is determined that both the Company and the Executive acted in violation of this Agreement, the Company's actions constituted a more serious violation than did the Executive's actions. Determination as to Executive's entitlement to legal fees pursuant to this Agreement may be made by the arbitrator if arbitration is sought or by independent legal counsel acceptable to both parties. 9.3 No Third-Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. -8- 71 9.4 Entire Agreement This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. 9.5 Succession and Assignment This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the other. 9.6 Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 9.7 Headings The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.8 Notices All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO THE COMPANY: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049-5022 Attn: President IF TO EXECUTIVE: Richard Hyman 22 Bondsburry Lane Melville, New York 11747 -9- 72 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. 9.9 Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. 9.10 Amendments and Waivers No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Company and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 9.11 Severability Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. -10- 73 IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. BELL INDUSTRIES, INC. By: ---------------------------- Name: Title: RICHARD HYMAN ------------------------------- -11- 74 EXHIBIT 3.4 FORM OF STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION AGREEMENT This Incentive Stock Option Agreement ("Agreement") is made as of this _________ day of _______________, 199_, between Bell Industries, Inc., a California corporation (the "Company"), and Richard Hyman (the "Participant"). R E C I T A L S 1. The Board of Directors of the Company and its shareholders have adopted the 1990 Stock Option Plan as of October 29, 1990 and the 1994 Stock Option Plan as of November 1, 1994 (the "Plans"). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Plans. 2. The Plans provide for the selling or granting to selected executive and other key employees, and other persons furnishing services to the Company or any subsidiary of the Company, as the Compensation Committee (the "Committee") may from time to time determine, of Restricted Stock or options to purchase shares of Common Stock of the Company. 3. Pursuant to the Plans, the Committee has determined that it is to the advantage and best interest of the Company and its stockholders to grant an Incentive Stock Option to the Participant covering 25,000 shares of the Company's Common Stock as an inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Incentive Stock Option Agreement between the Company and the Participant. 4. The Option granted hereby is intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. The Company grants to the Participant the right and option (the "Option") to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate 25,000 shares of Common Stock at the purchase price of $___________ per share, exercisable in installment periods in accordance with the provisions of this Agreement during a period expiring on the 5th anniversary of the date of this Agreement (the "Expiration Date") or earlier in accordance with Section 5 hereof; provided, however, if the Participant does not in any given installment period purchase all of the shares that the Participant is entitled to purchase in such installment period, then 75 the Participant's right to purchase any shares not purchased in such installment period shall continue until the Expiration Date or sooner termination of the Participant's option. 2. Vesting. This Option shall vest and become exercisable in the percentages and on the dates set forth below: Percentage Cumulative Initially Percentage Date Exercisable Exercisable ---- ----------- ----------- 10% 10% 20% 30% 30% 60% 40% 100% Subject to earlier termination under Section 5 hereof, at any time after the 4th anniversary date of this Agreement, but no later than the Expiration Date, the Participant may purchase all or any part of the shares subject to this Option which the Participant theretofore failed to purchase. In each case, the number of shares which may be purchased shall be calculated to the nearest full share. Notwithstanding the foregoing vesting schedule, but subject to Section 5 hereof, this Option shall become immediately exercisable in full, if (i) the Company terminates Participant's employment agreement (the "Employment Agreement") dated as of ____________, 1996 other than for Cause (as defined in the Employment Agreement) or (ii) Participant terminates the Employment Agreement for Good Reason (as defined in the Employment Agreement). 3. Manner of Exercise. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company, specifying the number of shares to be purchased and accompanied by payment to the Company of the full purchase price of the shares to be purchased either (i) in cash or by certified or cashier's check payable to the order of the Company, or (ii) by delivery of shares of Common Stock already owned by, and in the possession of, the Participant. Shares of Common Stock used to satisfy any portion of the exercise price of this Option shall be valued at their fair market value determined (in accordance with Section 4 below) as of the close of the business day immediately preceding the date of exercise. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (i) one hundred (100) shares or (ii) the total number of shares then eligible for exercise if less than one hundred (100) shares. This Option may be exercised (i) during the lifetime of the Participant, only by the Participant or, in the event a conservator, guardian or legal representative is appointed during the Participant's lifetime to handle the affairs of the Participant, by such conservator, guardian or legal representative; and (ii) after the Participant's death, -2- 76 by his or her transferee by will or the laws of descent or distribution, and not otherwise, regardless of any community property interest therein of the spouse of the Participant or such spouse's successors in interest. If the spouse of the Participant shall have acquired a community property interest in this Option, the Participant, or the Participant's permitted successors in interest, may exercise the Option on behalf of the spouse of the Participant or such spouse's successors in interest. Except in the event of the Participant's death or permanent disability, the Option may not be exercised prior to the date six months from the date hereof. 4. Fair Market Value of Common Stock. The fair market value of a share of Company Common Stock shall be determined for purposes of this Agreement by reference to the closing price on the New York Stock Exchange (or other principal stock exchange on which such shares are then listed) or, if such shares are not then listed on such exchange (or other principal stock exchange), by reference to the closing price (if a National Market Issue) or the mean between the bid and asked price (if other over-the-counter issue) of a share as supplied by the National Association of Securities Dealers through NASDAQ (or its successor in function), in each case as reported by The Wall Street Journal, for the date on which the option is granted or exercised, or if such date is not a business day, for the business day immediately preceding such date (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof). 5. Cessation of Services, Death or Permanent Disability. If a Participant ceases to be employed by the Company or one of its subsidiaries for any reason other than the Participant's death or permanent disability (within the meaning of Section 22(e) (3) of the Code), the Participant's Option shall be exercisable for a period of three (3) months after the date the Participant ceases to be an employee of the Company or such subsidiary (unless by its terms it sooner expires) to the extent exercisable on the date of such cessation of employment and shall thereafter expire and be void and of no further force or effect. A leave of absence approved in writing by the Committee shall not be deemed a termination of employment for the purposes of this paragraph 5, but no Option may be exercised during any such leave of absence, except during the first three (3) months thereof. If the Participant dies or becomes permanently disabled while employed by the Company or one of its subsidiaries, the Participant's Option shall expire one (1) year after the date of such death or permanent disability unless by its terms it sooner expires. During such period after death, such Option may, to the extent that it remained unexercised (but exercisable by the Participant according to such Option's terms) on the date of such death, be exercised by the person or persons to whom the Participant's rights under the Option shall pass by the Participant's will or by the laws of descent and distribution. -3- 77 6. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules. No shares issuable upon the exercise of this Option shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended, and all applicable state securities or "Blue Sky" laws (whether by registration or qualification or satisfaction of exemption conditions), all applicable listing requirements of any principal securities exchange on which shares of the same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made. 7. Withholding of Taxes. If the Participant or the Participant's permitted successors in interest disposes of shares of Common Stock acquired pursuant to the exercise of this Option within two years after the date of this Agreement or within one year after exercise of this Option, the Company may deduct and withhold from the wages, salary, bonus and other compensation paid by the Company to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of this Option or the sale of Common Stock issued to the Participant upon exercises hereof, all taxes as may be required from time to time under federal or state tax laws and regulations. This withholding of tax shall be made from the Company's concurrent or next payment of wages, salary, bonus or other compensation to the Participant or by payment to the Company by the Participant of required withholding tax, as the Committee may determine. 8. Adjustments for Reorganizations, Stock Splits, etc. If the outstanding shares of the Common Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares or securities receivable upon the exercise of this Option, without change in the aggregate purchase price applicable to the unexercised portion of this Option but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon the sale of substantially all the property of the Company, the Committee shall provide in writing for appropriate satisfaction of this Option by one or more of the following alternatives to be made in connection with such transaction: (i) the immediate exercisability of this Option (provided that this Option was granted more than six months before such transaction) notwithstanding the provisions of Section 3 hereof, except that this Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (a) one hundred (100) shares or (b) the total number of shares then eligible for exercise if less than one hundred (100) shares; (ii) the assumption of this Option or the substitution therefore of a new option covering the stock of a successor corporation, with -4- 78 appropriate adjustments as to number and kind of shares and prices; (iii) the continuance of the Plan by such successor corporation in which event this Option shall remain in full effect under the terms so provided; or (iv) the payment of an amount in cash or stock, or any combination thereof, in lieu of and in complete satisfaction of this Option. Adjustments under this paragraph 8 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment. 9. Participation by Participant in Other Company Plans. Nothing herein contained shall affect the right of the Participant to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, profit sharing or other employee welfare plan or program of the Company or of any subsidiary of the Company. 10. No Rights as a Shareholder Until Issuance of Stock Certificate. Neither the Participant nor any other person legally entitled to exercise this Option shall be entitled to any of the rights or privileges of a shareholder of the Company in respect of any shares issuable upon any exercise of this Option unless and until a certificate or certificates representing such shares shall have been actually issued and delivered to the Participant. 11. Not an Employment or Service Contract. Nothing contained herein shall be construed as agreement by the Company, express or implied, to employ Participant or contract for Participant's services, to restrict the Company's right to discharge Participant or cease contracting for Participant's services or to modify, extend or otherwise affect in any manner whatsoever the terms of any employment agreement or contract for services which may exist between the Participant and the Company. 12. Agreement Subject to Plan. The Option hereby granted is subject to, and the Company and the Participant agree to be bound by, all of the terms and conditions of the Plan, as the same shall be amended from time to time in accordance with the terms thereof, but no such amendment shall adversely affect the Participant's rights under this Option without the prior written consent of the Participant. 13. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 14. Notices. Any notice or other paper or payment required to be given or sent pursuant to the terms of this Agreement shall be sufficiently given or served hereunder to any party when transmitted by registered or certified mail, postage prepaid, addressed to the party to be served as follows: (a) if to the Company: Bell Industries, Inc. 11812 San Vicente Boulevard -5- 79 Los Angeles, CA 90049-5022 Attention: President (b) if to Participant: Richard Hyman 22 Bondsburry Lane Melville, New York 11747 Any party, by written notice, may designate another address for notices to be sent from time to time. -6- 80 15. Execution. This Option has been granted, executed and delivered the day and year first above written at Los Angeles, California, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. COMPANY ------- BELL INDUSTRIES, INC. BY: --------------------------- PARTICIPANT ----------- ------------------------------ Richard Hyman By his or her signature below, the spouse of the Participant agrees to be bound by all of the terms and conditions of the foregoing Agreement. ------------------------------ NAME: -7- 81 EXHIBIT 5 FORM OF INDEMNIFICATION AGREEMENT INDEMNITY AGREEMENT This Agreement is made as of the _____ day of __________, 1996, by and between Bell Industries, Inc., a California corporation (the "Corporation"), and Richard Hyman (the "Indemnitee"), a Director and/or Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability of Directors' and Officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, the Corporation does not regard the protection available to Indemnitee as adequate in the present circumstances, and realizes that Indemnitee may not be willing to serve as a Director or Officer without adequate protection, and the Corporation desires Indemnitee to serve in such capacity; NOW, THEREFORE, in consideration of Indemnitee's service as a Director or Officer after the date hereof the parties agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature. (b) The term "Expenses" shall include, but is not limited to, expenses of investigations, judicial or administrative proceedings or appeals, damages, judgments, fines, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under this Agreement. 82 (c) The terms "Director" and "Officer" shall include Indemnitee's service at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise as well as a Director and/or Officer of the Corporation. 2. Indemnity of Director or Officer. Subject only to the limitations set forth in Section 3, Corporation will pay on behalf of the Indemnitee all Expenses actually and reasonably incurred by Indemnitee because of any claim or claims made against him in a Proceeding by reason of the fact that he is or was a Director and/or Officer. 3. Limitations on Indemnity. Corporation shall not be obligated under this Agreement to make any payment of Expenses to the Indemnitee (a) which payment it is prohibited by applicable law from paying as indemnity; (b) for which payment is actually made to the Indemnitee under an insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) for which payment the Indemnitee is indemnified by Corporation otherwise than pursuant to this Agreement and payment is actually made to the Indemnitee except in respect of any excess beyond the amount of the payment under such indemnification; (d) resulting from a claim decided in a Proceeding adversely to the Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he was not legally entitled; (e) resulting from a claim decided in a Proceeding adversely to the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of Corporation within the meaning of Section 16(b) or 16(c) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; or (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be indemnified under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless it shall be decided in a Proceeding that he committed (i) acts of active and deliberate dishonesty (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated. For purposes of Sections 3 and 4, the phrase "decided in a Proceeding" shall mean a decision by a court, arbitrator(s), hearing officer or other judicial agent having the -2- 83 requisite legal authority to make such a decision, which decision has become final and from which no appeal or other review proceeding is permissible. 4. Advance Payment of Costs. Expenses incurred by Indemnitee in defending a claim against him in a Proceeding shall be paid by the Corporation as incurred and in advance of the final disposition of such Proceeding; provided, however, that Expenses of defense need not be paid as incurred and in advance where the judicial agent of first impression has decided the Indemnitee is not entitled to be indemnified pursuant to this Agreement or otherwise. Indemnitee hereby agrees and undertakes to repay such amounts advanced if it shall be decided in a Proceeding that he is not entitled to be indemnified by the Corporation pursuant to this Agreement or otherwise. 5. Enforcement. If a claim under this Agreement is not paid by Corporation, or on its behalf, within thirty days after a written claim has been received by Corporation, the Indemnitee may at any time thereafter bring suit against Corporation to recover the unpaid amount of the claim and if successful in whole or in part, the Indemnitee shall be entitled to be paid also the Expenses of prosecuting such claim. 6. Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Corporation effectively to bring suit to enforce such rights. Notwithstanding the foregoing, if any of the provisions hereof would impair or jeopardize Indemnitee's coverage under the Corporation's Directors' and Officers' Liability Policy, such provisions shall be ineffective and shall be deemed deleted from this Agreement. 7. Notice. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to Corporation shall be given at its principal office and shall be directed to the President (or such other address as Corporation shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, the Indemnitee shall give Corporation such information and cooperation as it may reasonably require. 8. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 9. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Articles of Incorporation or Bylaws of the Corporation or under California law. -3- 84 10. Applicable Law. This Agreement shall be governed by and construed in accordance with California law. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 12. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns. 13. Continuation of Indemnification. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 14. Coverage of Indemnification. The indemnification under this Agreement shall cover Indemnitee's service as a Director and/or Officer prior to or after the date of the Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. INDEMNITEE CORPORATION By: By: ----------------------- ------------------- -4- 85 EXHIBIT 6.8(b)-(iii) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of November 26, 1996, by and between John Tortorici (the "Executive"), Milgray Electronics, Inc., a New York corporation (the "Company"), and Bell Industries, Inc., a California corporation (the "Guarantor"), to be effective as of the effective date of the Merger (as defined below) with reference to the following facts: A. Executive is currently employed as Vice President-Finance and Treasurer of the Company with executive responsibilities in the financial and administrative areas; B. Pursuant to an agreement dated as of November 26, 1996, ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of the Company ("Acquisition Sub") will make a tender offer to acquire all of the outstanding capital stock of Milgray (the "Tender Offer"). After completion of the Tender Offer, it is intended that Acquisition Sub will be merged with and into Milgray, and Milgray will become a wholly-owned subsidiary of the Guarantor (the "Merger"); C. The Company wishes to ensure the continued services of Executive after the Merger; and D. Executive is willing to continue his employment with the Company on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT 1.1 Duties and Responsibilities The Company does hereby employ Executive and Executive hereby accepts such employment as Vice President--Finance and Treasurer. Executive shall report to the President of the Company, and subject to the directions of the President, shall be responsible for performing various executive functions in the financial and administrative areas similar or relating to the functions presently performed by Executive at the Company; provided, however, that Executive shall not be required to undertake duties not commensurate with his position as Vice President--Finance and Treasurer of the Company. Notwithstanding anything contained in the preceding sentence, Executive acknowledges that, following the Merger, the Guarantor plans to investigate combining its existing distribution business, or segments thereof, with those of the Company, and where feasible or practicable, to combine such business, or segments thereof, and that as a result of such combination, the Company may change the exact nature of Executive's responsibilities (but not Executive's job title), but in no event will Executive be required to accept job responsibilities in an area outside of his current expertise or to act in less 86 than an executive capacity; moreover, Executive's status and position in the Company (or its successor) organization chart (i.e., the status and position of the person to whom Executive reports and the class of employees who report to Executive) shall be similar to other Vice Presidents of the Company and/or the Guarantor with responsibilities similar to those of Executive. Any such change in responsibility will not constitute a breach of this Agreement by the Company or the Guarantor. During the term of this Agreement, Executive shall devote his full business time and attention to the business of the Company and shall not be engaged in any other duties which interfere with the performance of his duties hereunder. Executive shall be entitled to an office, secretarial help and other accommodations and amenities comparable to those Executive presently has at the Company. 1.2 Place of Performance Executive's duties under this Agreement are to be performed on Long Island in New York State and Executive shall not be required to travel or be assigned away from this location more than forty days in any twelve-month period or more than five consecutive days in any thirty-day period. 2. TERM This Agreement shall be in full force and effect for a period (the "Term") which shall commence as of the effective date of the Merger (the "Effective Date") and shall continue for a period of three (3) years, unless sooner terminated as hereafter provided. 3. COMPENSATION 3.1 Base Salary As compensation for the services to be performed by Executive during the continuance of this Agreement, the Company shall pay Executive a base salary of $175,000 per year for each year of his employment hereunder (the "Base Salary"). Base Salary shall be payable in substantially equal bi-weekly installments and reduced on a pro rata basis for any fraction of a year or month during which Executive is not so employed. 3.2 Bonus Executive shall be entitled to earn an incentive bonus based upon achievement of financial and other goals established from time to time by the Company, provided that the minimum bonus for each fiscal year shall be $70,000. For the initial year of this Agreement, such bonus shall be prorated from the Effective Date and the bonus for any partial year shall be similarly prorated. Any such bonus earned by Executive shall be paid at the same time that annual incentive bonuses for the Company's other senior executive officers are paid in accordance with the Company's policies as in effect from time to time (but in no event will the guaranteed minimum bonus be paid later than 30 -2- 87 days after the end of the Company's fiscal year, with the remainder, if any, to be paid within 90 days after the end of the Company's fiscal year). 3.3 Additional Benefits Executive shall be entitled to participate in all of Guarantor's employee benefit plans as listed in the Guarantor's employee handbook, as the same may change from time to time, and, in addition, to participate on the same terms as senior Guarantor executives in any benefit plans available to members of the Guarantor's management (whether or not listed in the employee handbook). Among other things, Executive shall be entitled to participate in the Guarantor's Health Care Benefits Program, 401(k) Plan, Stock Purchase Plan, Stock Option Plan, Short-term and Long-term Disability Programs and the Guarantor's Executive Medical Plan, which provides coverage for all medical expenses not otherwise covered by the basic policy, up to $25,000. If any health, medical or disability plan or program existing at the time of commencement of Executive's employment pursuant to this Agreement is terminated or the benefits thereunder reduced, the Company or Guarantor shall provide Executive with benefits similar to those in existence at the time of commencement of Executive's employment hereunder. 3.4 Stock Options (A) As an additional element of compensation to Executive in consideration of the services to be rendered hereunder, Guarantor shall grant to Executive options to acquire 10,000 shares of Guarantor's common stock at an exercise price equal to the closing price on the Effective Date. The options shall vest in 25%, 25% and 50% increments, respectively, on the first, second and third anniversaries of this Agreement. In addition, all of the options will vest if the Company terminates this agreement other than for Cause (as defined in Section 6.2) or if the Executive quits for Good Reason (as defined in Section 6.3(B)). The options shall remain exercisable for a period of five (5) years from the date of grant. The specific terms of the above-referenced option shall be as set forth in a separate option agreement in the form annexed hereto as Exhibit 3.4. (B) Executive shall be entitled to participate in the Guarantor's stock option programs, although Executive understands that any grants under such programs are completely discretionary with the Compensation Committee of the Guarantor's Board of Directors. 3.5 Reimbursements Executive shall be entitled to reimbursement for all amounts reasonably expended on behalf of the Company, subject to verification similar to that required of and provided by the Company's other senior executives. -3- 88 3.6 Deductions The Company shall deduct from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. 3.7 Disability Except in the case of Executive's Total Disability (as defined in Section 6.4), Executive's full compensation and benefits under this Agreement shall be continued during any period when he is absent or unable to perform his duties due to illness, disability or other incapacity; and Executive's inability to perform his duties by reason of the foregoing shall not constitute a failure to perform his obligations under this Agreement and shall not be deemed a default by Executive hereunder. The consequences of Executive's Total Disability is covered in Section 7.2 of this Agreement. 4. VACATION Executive shall be entitled to four weeks of vacation in each twelve-month period; provided, however, that no more than six weeks may be taken during any eighteen-month period. Such vacation will accrue on a pro rata basis from the date employment commences under this Agreement. At the end of his employment hereunder, Executive shall be paid for any accrued but unused vacation time. Executive agrees that he will coordinate his vacation plans and schedules in order to prevent any undue disruption of the Company's business. 5. INDEMNIFICATION Executive shall be indemnified by Guarantor and the Company to the full extent permitted by law in respect of his actions as an officer or director of the Company and shall be provided with such liability insurance coverage in this connection as is provided to other Company executives. In addition, the Company and Guarantor shall enter into an Indemnification Agreement with Executive in the form attached as Exhibit 5. 6. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: 6.1 Mutual Agreement Whenever the Company and Executive mutually agree in writing to termination; -4- 89 6.2 Termination for Cause At any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) material breach by Executive of this Agreement or material failure by Executive to perform his duties under this Agreement (other than by reason of Executive's Total Disability) followed by (a) written notice from the Company to Executive specifying such material failure or such material breach, plus (b) Executive not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, Executive not having taken reasonable steps toward curing such material failure or material breach within thirty days of his actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable, or (ii) conviction of Executive by, or a plea of guilty in, a court of competent jurisdiction of a felony or other major crime (a plea of nolo contendere shall be deemed a conviction). 6.3 Termination without Cause by the Company or for Good Reason by Executive (A) By the Company. Notwithstanding any other provision of this Agreement, the Company shall have the right to terminate Executive's employment with the Company without Cause at any time, and upon such termination Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. (B) By Executive. If the Company materially breaches any of its obligations, or any material violation by the Company of Executive's rights, under this Agreement followed by (i) written notice from Executive specifying such material breach or violation, plus (ii) the Company not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, the Company not having taken reasonable steps toward curing such material breach or failure within thirty days of actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable (the foregoing being referred to as "Good Reason"), Executive will have the right at Executive's election to terminate his employment hereunder by sending notice to the Company of his election to so terminate. Termination pursuant to this subsection will be effective from and after the effective date of Executive's notice to the Company terminating Executive's employment as aforesaid. Upon any such termination, Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. 6.4 Death/Disability The death or Total Disability of Executive. For the purposes of this Agreement, "Total Disability" shall mean the inability of Executive due to illness or other incapacity to perform his duties hereunder in a normal manner for a period of six months (whether or not consecutive) during any consecutive eighteen-month period. If there shall be a -5- 90 Total Disability involving Executive, his employment may be terminated by written notice by the Company to Executive. In the event of Executive's death during the term of this Agreement, the persons designated by Executive (or if Executive does not make such a designation, then Executive's estate) shall be entitled to receive his Base Salary plus guaranteed bonus provided for Executive in this Agreement for a period of twelve months following Executive's death (regardless of the time of such death). 6.5 Voluntary Termination Executive may terminate his employment under this Agreement at any time upon thirty days written notice. 7. CONSEQUENCES OF TERMINATION OF EMPLOYMENT 7.1 Termination by the Company other than for Cause or Termination by Executive for Good Reason. If the Company terminates Executive's employment other than for Cause or if Executive, for Good Reason terminates his employment, Executive shall be entitled to receive from the Company (at Executive's election which must be exercised within 30 days of termination), either (i) within twenty days of such election, a lump sum payment in an amount equal to the sum of his Base Salary (plus guaranteed bonus) payments to which Executive would be entitled under this Agreement as a full-time employee of the Company for the balance of Executive's term of employment under this Agreement (from the date of termination); such lump sum payment discounted to present value using the interest rate offered at the date of termination by The Chase Manhattan Bank, N.A., on a certificate of deposit for a period of time equal to the remaining term of this Agreement at the date of termination and subject to the noncompetition covenant for the then balance of the Term as set forth in Section 8.1; or (ii) receive all Base Salary plus guaranteed bonus payments for the remaining term of this Agreement; provided, however, that should Executive elect to become employed by a competitor of the Company after termination (whether as an officer, director, employee, consultant or otherwise), the Company may offset against the amounts it owes Executive all compensation derived from such competitive employment. Executive agrees to notify the Company within five (5) business days of being employed by a competitor of the Company and to provide the Company with such documentation as the Company may reasonably request (including, but not limited to, copies of his Forms W-2) in order to enable the Company to verify the amount of Executive's compensation from any competitor. 7.2 Termination by the Company because of Executive's Total Disability. If the Company terminates Executive's employment hereunder because of Executive's Total Disability, Executive shall be entitled to receive from the Company for the full balance of the Term of this Agreement regular bi-weekly payments equal to 75% of Executive's regular bi-weekly Base Salary payment plus guaranteed bonus. This amount shall be reduced by all benefits provided to Executive under any Company disability plan or plans. Executive agrees to participate in such plan(s) to as full an extent and amount as permitted under such plans. -6- 91 7.3 Voluntary Termination by Executive or Termination by the Company for Cause. If Executive voluntarily terminates his employment hereunder (other than for Good Reason or Total Disability) or if the Company terminates Executive's employment for Cause, Executive shall not be entitled to any further compensation following such termination. The Company shall not be entitled to recover any damages or other amount from Executive by reason of any such termination. 8. RESTRICTIVE COVENANTS 8.1 Covenant Not to Compete During Executive's employment with the Company, Executive shall not, directly or indirectly, be engaged in the distribution or sale of any products that are directly competitive with products presently distributed or sold by the Company or any of its subsidiaries within the geographical area in which the Company or any of its subsidiaries conducts its business (except for passive investments by Executive of up to 5% of the outstanding stock of a publicly-held company engaged in any such activities). Following termination of Executive's employment with the Company, both in the case of voluntary termination by Executive (whether or not for Good Reason) or in the case of termination by the Company (whether or not for Cause), there shall be no restrictions on Executive's employment by another entity (whether or not competitive with the Company) unless Executive shall have elected the compensation option set forth in Section 7.1(i), in which case the restrictions set forth in the first sentence of this Section 8.1 (except as provided in the last sentence of this Section 8.1) shall continue to apply for the balance of the term of this Agreement as of the date of termination; provided, however, that if Executive elects the option set forth in Section 7.1(i) and then determines at a subsequent date that he wishes to take actions that would otherwise violate such restrictions, Executive will be relieved from such restrictions if he repays to the Company, in advance of taking such actions, a pro rata portion of the payments he received pursuant to that election (based on the length of the time remaining on the non-competition covenant at that time in comparison to the total remaining term of the non-competition covenant at the time of termination). For example, if Executive were terminated without Cause after one year, and elected to receive his remaining two years of pay under this Agreement in a lump sum, and one year later wanted to work for a competitor, the Executive could do so if he repaid the Company one-half of the amount he received as severance (2 years severance pay lump-sum, 1 year of which was "earned" by not competing, with the portion relating to the remaining 1 year to be repaid to the Company in exchange for a release from the non-compete). The Company may, at any time and from time to time, attach an annex to this Agreement specifying specific jurisdictions in which the covenant not-to-compete set forth in this Section 8.1 is applicable. Notwithstanding anything to the contrary contained in the second sentence of this Section 8.1, Executive shall not be restricted from employment by a manufacturer or manufacturer's sales representative which manufactures and/or sells any products -7- 92 referred to in the first sentence of this Section 8.1 or from the sale of any of such products in connection with such employment. 8.2 Nondisclosure and Nonsolicitation. Both during and after Executive's employment with the Company, Executive shall keep secret all material confidential matters of the Company not in the public domain and will not disclose them to anyone outside of the Company. Further, after termination Executive will not seek to hire Company employees. 9. MISCELLANEOUS 9.1 Arbitration All disputes, controversies or claims arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall be submitted to binding arbitration taking place in the State of New York before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Expenses of the arbitration shall be apportioned between the parties by the arbitrator on the basis of relative fault. 9.2 Legal Fees The Company shall pay all legal fees incurred by Executive arising out of the Company's failing to make any payment or withholding any employee benefits under this Agreement or contesting the validity, enforceability or interpretation of this Agreement in the event it is determined that (i) such action was not justified under this Agreement or (ii) if it is determined that both the Company and the Executive acted in violation of this Agreement, the Company's actions constituted a more serious violation than did the Executive's actions. Determination as to Executive's entitlement to legal fees pursuant to this Agreement may be made by the arbitrator if arbitration is sought or by independent legal counsel acceptable to both parties. 9.3 No Third-Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. 9.4 Entire Agreement This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. -8- 93 9.5 Succession and Assignment This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the other. 9.6 Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 9.7 Headings The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.8 Notices All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO THE COMPANY: Milgray Electronics, Inc. 77 Schmitt Boulevard Farmingdale, New York 11735 Attn: President IF TO THE GUARANTOR: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049-5022 Attn: President IF TO EXECUTIVE: Mr. John Tortorici 12 Lorenz Drive Valhalla, New York 10595 -9- 94 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. 9.9 Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. 9.10 Amendments and Waivers No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Company and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 9.11 Severability Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 9.12 Guarantee Guarantor unconditionally guarantees all of the Company's obligations hereunder. Guarantor agrees that Executive may proceed directly against Guarantor in the event of the Company's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Company. -10- 95 IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. MILGRAY ELECTRONICS, INC. By:____________________________ Name: Title: BELL INDUSTRIES, INC. By:____________________________ Name: Title: _______________________________ John Tortorici -11- 96 EXHIBIT 3.4 FORM OF STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION AGREEMENT This Incentive Stock Option Agreement ("Agreement") is made as of this _________ day of _______________, 199_, between Bell Industries, Inc., a California corporation (the "Company"), and John Tortorici (the "Participant"). RECITALS 1. The Board of Directors of the Company and its shareholders have adopted the 1990 Stock Option Plan as of October 29, 1990 and the 1994 Stock Option Plan as of November 1, 1994 (the "Plans"). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Plans. 2. The Plans provide for the selling or granting to selected executive and other key employees, and other persons furnishing services to the Company or any subsidiary of the Company, as the Compensation Committee (the "Committee") may from time to time determine, of Restricted Stock or options to purchase shares of Common Stock of the Company. 3. Pursuant to the Plans, the Committee has determined that it is to the advantage and best interest of the Company and its stockholders to grant an Incentive Stock Option to the Participant covering 10,000 shares of the Company's Common Stock as an inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Incentive Stock Option Agreement between the Company and the Participant. 4. The Option granted hereby is intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. The Company grants to the Participant the right and option (the "Option") to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate 10,000 shares of Common Stock at the purchase price of $___________ per share, exercisable in installment periods in accordance with the provisions of this Agreement during a period expiring on the 5th anniversary of the date of this Agreement (the "Expiration Date") or earlier in accordance with Section 5 hereof; provided, however, if the Participant does not in any given installment period purchase all of the shares that the Participant is entitled to purchase in such installment period, then 97 the Participant's right to purchase any shares not purchased in such installment period shall continue until the Expiration Date or sooner termination of the Participant's option. 2. Vesting. This Option shall vest and become exercisable in the percentages and on the dates set forth below: Percentage Cumulative Initially Percentage Date Exercisable Exercisable ---- ----------- ----------- 25% 25% 25% 50% 50% 100% Subject to earlier termination under Section 5 hereof, at any time after the 3rd anniversary date of this Agreement, but no later than the Expiration Date, the Participant may purchase all or any part of the shares subject to this Option which the Participant theretofore failed to purchase. In each case, the number of shares which may be purchased shall be calculated to the nearest full share. Notwithstanding the foregoing vesting schedule, but subject to Section 5 hereof, this Option shall become immediately exercisable in full, if (i) the Company terminates Participant's employment agreement (the "Employment Agreement") dated as of ____________, 1996 other than for Cause (as defined in the Employment Agreement) or (ii) Participant terminates the Employment Agreement for Good Reason (as defined in the Employment Agreement). 3. Manner of Exercise. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company, specifying the number of shares to be purchased and accompanied by payment to the Company of the full purchase price of the shares to be purchased either (i) in cash or by certified or cashier's check payable to the order of the Company, or (ii) by delivery of shares of Common Stock already owned by, and in the possession of, the Participant. Shares of Common Stock used to satisfy any portion of the exercise price of this Option shall be valued at their fair market value determined (in accordance with Section 4 below) as of the close of the business day immediately preceding the date of exercise. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (i) one hundred (100) shares or (ii) the total number of shares then eligible for exercise if less than one hundred (100) shares. This Option may be exercised (i) during the lifetime of the Participant, only by the Participant or, in the event a conservator, guardian or legal representative is appointed during the Participant's lifetime to handle the affairs of the Participant, by such conservator, guardian or legal representative; and (ii) after the Participant's death, by his or her transferee by will or the laws of descent or distribution, and not otherwise, regardless of any community property interest therein of the spouse of the Participant or -2- 98 such spouse's successors in interest. If the spouse of the Participant shall have acquired a community property interest in this Option, the Participant, or the Participant's permitted successors in interest, may exercise the Option on behalf of the spouse of the Participant or such spouse's successors in interest. Except in the event of the Participant's death or permanent disability, the Option may not be exercised prior to the date six months from the date hereof. 4. Fair Market Value of Common Stock. The fair market value of a share of Company Common Stock shall be determined for purposes of this Agreement by reference to the closing price on the New York Stock Exchange (or other principal stock exchange on which such shares are then listed) or, if such shares are not then listed on such exchange (or other principal stock exchange), by reference to the closing price (if a National Market Issue) or the mean between the bid and asked price (if other over-the-counter issue) of a share as supplied by the National Association of Securities Dealers through NASDAQ (or its successor in function), in each case as reported by The Wall Street Journal, for the date on which the option is granted or exercised, or if such date is not a business day, for the business day immediately preceding such date (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof). 5. Cessation of Services, Death or Permanent Disability. If a Participant ceases to be employed by the Company or one of its subsidiaries for any reason other than the Participant's death or permanent disability (within the meaning of Section 22(e)(3) of the Code), the Participant's Option shall be exercisable for a period of three (3) months after the date the Participant ceases to be an employee of the Company or such subsidiary (unless by its terms it sooner expires) to the extent exercisable on the date of such cessation of employment and shall thereafter expire and be void and of no further force or effect. A leave of absence approved in writing by the Committee shall not be deemed a termination of employment for the purposes of this paragraph 5, but no Option may be exercised during any such leave of absence, except during the first three (3) months thereof. If the Participant dies or becomes permanently disabled while employed by the Company or one of its subsidiaries, the Participant's Option shall expire one (1) year after the date of such death or permanent disability unless by its terms it sooner expires. During such period after death, such Option may, to the extent that it remained unexercised (but exercisable by the Participant according to such Option's terms) on the date of such death, be exercised by the person or persons to whom the Participant's rights under the Option shall pass by the Participant's will or by the laws of descent and distribution. 6. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules. No shares issuable upon the exercise of this Option shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended, and all applicable state securities -3- 99 or "Blue Sky" laws (whether by registration or qualification or satisfaction of exemption conditions), all applicable listing requirements of any principal securities exchange on which shares of the same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made. 7. Withholding of Taxes. If the Participant or the Participant's permitted successors in interest disposes of shares of Common Stock acquired pursuant to the exercise of this Option within two years after the date of this Agreement or within one year after exercise of this Option, the Company may deduct and withhold from the wages, salary, bonus and other compensation paid by the Company to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of this Option or the sale of Common Stock issued to the Participant upon exercises hereof, all taxes as may be required from time to time under federal or state tax laws and regulations. This withholding of tax shall be made from the Company's concurrent or next payment of wages, salary, bonus or other compensation to the Participant or by payment to the Company by the Participant of required withholding tax, as the Committee may determine. 8. Adjustments for Reorganizations, Stock Splits, etc. If the outstanding shares of the Common Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares or securities receivable upon the exercise of this Option, without change in the aggregate purchase price applicable to the unexercised portion of this Option but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon the sale of substantially all the property of the Company, the Committee shall provide in writing for appropriate satisfaction of this Option by one or more of the following alternatives to be made in connection with such transaction: (i) the immediate exercisability of this Option (provided that this Option was granted more than six months before such transaction) notwithstanding the provisions of Section 3 hereof, except that this Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (a) one hundred (100) shares or (b) the total number of shares then eligible for exercise if less than one hundred (100) shares; (ii) the assumption of this Option or the substitution therefore of a new option covering the stock of a successor corporation, with appropriate adjustments as to number and kind of shares and prices; (iii) the continuance of the Plan by such successor corporation in which event this Option shall remain in full -4- 100 effect under the terms so provided; or (iv) the payment of an amount in cash or stock, or any combination thereof, in lieu of and in complete satisfaction of this Option. Adjustments under this paragraph 8 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment. 9. Participation by Participant in Other Company Plans. Nothing herein contained shall affect the right of the Participant to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, profit sharing or other employee welfare plan or program of the Company or of any subsidiary of the Company. 10. No Rights as a Shareholder Until Issuance of Stock Certificate. Neither the Participant nor any other person legally entitled to exercise this Option shall be entitled to any of the rights or privileges of a shareholder of the Company in respect of any shares issuable upon any exercise of this Option unless and until a certificate or certificates representing such shares shall have been actually issued and delivered to the Participant. 11. Not an Employment or Service Contract. Nothing contained herein shall be construed as agreement by the Company, express or implied, to employ Participant or contract for Participant's services, to restrict the Company's right to discharge Participant or cease contracting for Participant's services or to modify, extend or otherwise affect in any manner whatsoever the terms of any employment agreement or contract for services which may exist between the Participant and the Company. 12. Agreement Subject to Plan. The Option hereby granted is subject to, and the Company and the Participant agree to be bound by, all of the terms and conditions of the Plan, as the same shall be amended from time to time in accordance with the terms thereof, but no such amendment shall adversely affect the Participant's rights under this Option without the prior written consent of the Participant. 13. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 14. Notices. Any notice or other paper or payment required to be given or sent pursuant to the terms of this Agreement shall be sufficiently given or served hereunder to any party when transmitted by registered or certified mail, postage prepaid, addressed to the party to be served as follows: -5- 101 (a) if to the Company: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, CA 90049-5022 Attention: President (b) if to Participant: Mr. John Tortorici 12 Lorenz Drive Valhalla, New York 10595 Any party, by written notice, may designate another address for notices to be sent from time to time. -6- 102 15. Execution. This Option has been granted, executed and delivered the day and year first above written at Los Angeles, California, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. COMPANY BELL INDUSTRIES, INC. BY:______________________ PARTICIPANT _________________________ John Tortorici By his or her signature below, the spouse of the Participant agrees to be bound by all of the terms and conditions of the foregoing Agreement. _________________________ NAME: -7- 103 EXHIBIT 5 FORM OF INDEMNIFICATION AGREEMENT INDEMNITY AGREEMENT This Agreement is made as of the _____ day of __________, 1996, by and between Milgray Electronics, Inc., a New York corporation (the "Corporation"), Bell Industries, Inc., a California corporation (the "Guarantor"), and John Tortorici (the "Indemnitee"), a Director and/or Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability of Directors' and Officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, the Corporation does not regard the protection available to Indemnitee as adequate in the present circumstances, and realizes that Indemnitee may not be willing to serve as a Director or Officer without adequate protection, and the Corporation desires Indemnitee to serve in such capacity; NOW, THEREFORE, in consideration of Indemnitee's service as a Director or Officer after the date hereof the parties agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature. (b) The term "Expenses" shall include, but is not limited to, expenses of investigations, judicial or administrative proceedings or appeals, damages, judgments, fines, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under this Agreement. 104 (c) The terms "Director" and "Officer" shall include Indemnitee's service at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise as well as a Director and/or Officer of the Corporation. 2. Indemnity of Director or Officer. Subject only to the limitations set forth in Section 3, Corporation will pay on behalf of the Indemnitee all Expenses actually and reasonably incurred by Indemnitee because of any claim or claims made against him in a Proceeding by reason of the fact that he is or was a Director and/or Officer. 3. Limitations on Indemnity. Corporation shall not be obligated under this Agreement to make any payment of Expenses to the Indemnitee (a) which payment it is prohibited by applicable law from paying as indemnity; (b) for which payment is actually made to the Indemnitee under an insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) for which payment the Indemnitee is indemnified by Corporation otherwise than pursuant to this Agreement and payment is actually made to the Indemnitee except in respect of any excess beyond the amount of the payment under such indemnification; (d) resulting from a claim decided in a Proceeding adversely to the Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he was not legally entitled; (e) resulting from a claim decided in a Proceeding adversely to the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of Corporation within the meaning of Section 16(b) or 16(c) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; or (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be indemnified under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless it shall be decided in a Proceeding that he committed (i) acts of active and deliberate dishonesty (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated. For purposes of Sections 3 and 4, the phrase "decided in a Proceeding" shall mean a decision by a court, arbitrator(s), hearing officer or other judicial agent having the -2- 105 requisite legal authority to make such a decision, which decision has become final and from which no appeal or other review proceeding is permissible. 4. Advance Payment of Costs. Expenses incurred by Indemnitee in defending a claim against him in a Proceeding shall be paid by the Corporation as incurred and in advance of the final disposition of such Proceeding; provided, however, that Expenses of defense need not be paid as incurred and in advance where the judicial agent of first impression has decided the Indemnitee is not entitled to be indemnified pursuant to this Agreement or otherwise. Indemnitee hereby agrees and undertakes to repay such amounts advanced if it shall be decided in a Proceeding that he is not entitled to be indemnified by the Corporation pursuant to this Agreement or otherwise. 5. Enforcement. If a claim under this Agreement is not paid by Corporation, or on its behalf, within thirty days after a written claim has been received by Corporation, the Indemnitee may at any time thereafter bring suit against Corporation to recover the unpaid amount of the claim and if successful in whole or in part, the Indemnitee shall be entitled to be paid also the Expenses of prosecuting such claim. 6. Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Corporation effectively to bring suit to enforce such rights. Notwithstanding the foregoing, if any of the provisions hereof would impair or jeopardize Indemnitee's coverage under the Corporation's Directors' and Officers' Liability Policy, such provisions shall be ineffective and shall be deemed deleted from this Agreement. 7. Notice. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to Corporation shall be given at its principal office and shall be directed to the President (or such other address as Corporation shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, the Indemnitee shall give Corporation such information and cooperation as it may reasonably require. 8. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 9. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Articles of Incorporation or Bylaws of the Corporation or under California law. -3- 106 10. Applicable Law. This Agreement shall be governed by and construed in accordance with California law. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 12. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns. 13. Continuation of Indemnification. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 14. Coverage of Indemnification. The indemnification under this Agreement shall cover Indemnitee's service as a Director and/or Officer prior to or after the date of the Agreement. 15. Guaranty. Guarantor unconditionally guarantees all of the Corporation's obligations hereunder. Guarantor agrees that Indemnitee may proceed directly against Guarantor in the event of the Corporation's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Corporation. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. INDEMNITEE CORPORATION By:_______________________ By:_______________________ GUARANTOR By:_______________________ -4- 107 EXHIBIT 6.8(b)-(iv) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of November 26, 1996, by and between Gary Adams (the "Executive"), Milgray Electronics, Inc., a New York corporation (the "Company"), and Bell Industries, Inc., a California corporation (the "Guarantor"), to be effective as of the effective date of the Merger (as defined below) with reference to the following facts: A. Executive is currently employed as Regional Vice President--Sales of the Company; B. Pursuant to an agreement dated as of November 26, 1996, ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of the Company ("Acquisition Sub") will make a tender offer to acquire all of the outstanding capital stock of Milgray (the "Tender Offer"). After completion of the Tender Offer, it is intended that Acquisition Sub will be merged with and into Milgray, and Milgray will become a wholly-owned subsidiary of the Guarantor (the "Merger"); C. The Company wishes to ensure the continued services of Executive after the Merger; and D. Executive is willing to continue his employment with the Company on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT 1.1 Duties and Responsibilities The Company does hereby employ Executive and Executive hereby accepts such employment as Regional Vice President--Sales. Executive shall report to the President of the Company, and subject to the directions of the President, shall be responsible for supervising sales activities of branches assigned to Executive and related matters, including profit and loss for assigned branches and region, customer relations and agreements with significant customers and performing other functions similar to the functions presently performed by Executive at the Company connected with the foregoing; provided, however, that Executive shall not be required to undertake duties not commensurate with his position as Regional Vice President--Sales of the Company. Notwithstanding anything contained in the preceding sentence, Executive acknowledges that, following the Merger, the Guarantor plans to investigate combining its existing distribution business, or segments thereof, with those of the Company, and where feasible or practicable, to combine such business, or segments thereof, and that as a result of such combination, the Company may change the exact nature of Executive's 108 responsibilities (but not Executive's job title), but in no event will Executive be required to accept job responsibilities in an area outside of his current expertise or to act in less than an executive capacity; moreover, Executive's status and position in the Company (or its successor) organization chart (i.e., the status and position of the person to whom Executive reports and the class of employees who report to Executive) shall be similar to other Vice Presidents of the Company and/or the Guarantor with responsibilities similar to those of Executive. Any such change in responsibility will not constitute a breach of this Agreement by the Company or the Guarantor. During the term of this Agreement, Executive shall devote his full business time and attention to the business of the Company and shall not be engaged in any other duties which interfere with the performance of his duties hereunder. Executive shall be entitled to an office, secretarial help and other accommodations and amenities comparable to those Executive presently has at the Company. 1.2 Place of Performance Executive's duties under this Agreement are to be performed in Orlando, Florida and Executive shall not be required to travel or be assigned away from this location more than one hundred days in any twelve-month period or more than five consecutive days in any thirty-day period. 2. TERM This Agreement shall be in full force and effect for a period (the "Term") which shall commence as of the effective date of the Merger (the "Effective Date") and shall continue for a period of three (3) years, unless sooner terminated as hereafter provided. 3. COMPENSATION 3.1 Base Salary As compensation for the services to be performed by Executive during the continuance of this Agreement, the Company shall pay Executive a base salary of $150,000 per year for each year of his employment hereunder (the "Base Salary"). Base Salary shall be payable in substantially equal bi-weekly installments and reduced on a pro rata basis for any fraction of a year or month during which Executive is not so employed. 3.2 Bonus Executive shall be entitled to earn an incentive bonus based upon achievement of financial and other goals established from time to time by the Company, provided that the minimum bonus for each fiscal year shall be $61,000 (the "Minimum Bonus"). For the initial year of this Agreement, such bonus shall be prorated from the Effective Date and the bonus for any partial year shall be similarly prorated. The incentive bonus shall be paid as follows: (i) the Minimum Bonus shall be paid in four equal quarterly -2- 109 installments within 30 days following the end of each calendar quarter, and (ii) if the annual incentive bonus earned by Executive for any year shall exceed the Minimum Bonus paid for such year, such excess shall be paid to Executive at the same time that annual incentive bonuses for the Company's other senior executive officers are paid in accordance with the Company's policies as in effect from time to time (but in no event later than 60 days following the date of payment of the last quarterly installment of Minimum Bonus). 3.3 Additional Benefits Executive shall be entitled to participate in all of Guarantor's employee benefit plans as listed in the Guarantor's employee handbook, as the same may change from time to time, and, in addition, to participate on the same terms as senior Guarantor executives in any benefit plans available to members of the Guarantor's management (whether or not listed in the employee handbook). Among other things, Executive shall be entitled to participate in the Guarantor's Health Care Benefits Program, 401(k) Plan, Stock Purchase Plan, Stock Option Plan, Short-term and Long-term Disability Programs and the Guarantor's Executive Medical Plan, which provides coverage for all medical expenses not otherwise covered by the basic policy, up to $25,000. If any health, medical or disability plan or program existing at the time of commencement of Executive's employment pursuant to this Agreement is terminated or the benefits thereunder reduced, the Company or Guarantor shall provide Executive with benefits similar to those in existence at the time of commencement of Executive's employment hereunder. 3.4 Stock Options (A) As an additional element of compensation to Executive in consideration of the services to be rendered hereunder, Guarantor shall grant to Executive options to acquire 10,000 shares of Guarantor's common stock at an exercise price equal to the closing price on the Effective Date. The options shall vest in 25%, 25% and 50% increments, respectively, on the first, second and third anniversaries of this Agreement. In addition, all of the options will vest if the Company terminates this agreement other than for Cause (as defined in Section 6.2) or if the Executive quits for Good Reason (as defined in Section 6.3(B)). The options shall remain exercisable for a period of five (5) years from the date of grant. The specific terms of the above-referenced option shall be as set forth in a separate option agreement in the form annexed hereto as Exhibit 3.4. (B) Executive shall be entitled to participate in the Guarantor's stock option programs, although Executive understands that any grants under such programs are completely discretionary with the Compensation Committee of the Guarantor's Board of Directors. -3- 110 3.5 Reimbursements Executive shall be entitled to reimbursement for all amounts reasonably expended on behalf of the Company, subject to verification similar to that required of and provided by the Company's other senior executives. 3.6 Deductions The Company shall deduct from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. 3.7 Disability Except in the case of Executive's Total Disability (as defined in Section 6.4), Executive's full compensation and benefits under this Agreement shall be continued during any period when he is absent or unable to perform his duties due to illness, disability or other incapacity; and Executive's inability to perform his duties by reason of the foregoing shall not constitute a failure to perform his obligations under this Agreement and shall not be deemed a default by Executive hereunder. The consequences of Executive's Total Disability is covered in Section 7.2 of this Agreement. 4. VACATION Executive shall be entitled to four weeks of vacation in each twelve-month period; provided, however, that no more than six weeks may be taken during any eighteen-month period. Such vacation will accrue on a pro rata basis from the date employment commences under this Agreement. At the end of his employment hereunder, Executive shall be paid for any accrued but unused vacation time. Executive agrees that he will coordinate his vacation plans and schedules in order to prevent any undue disruption of the Company's business. 5. INDEMNIFICATION Executive shall be indemnified by Guarantor and the Company to the full extent permitted by law in respect of his actions as an officer or director of the Company and shall be provided with such liability insurance coverage in this connection as is provided to other Company executives. In addition, the Company and Guarantor shall enter into an Indemnification Agreement with Executive in the form attached as Exhibit 5. 6. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: -4- 111 6.1 Mutual Agreement Whenever the Company and Executive mutually agree in writing to termination; 6.2 Termination for Cause At any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) material breach by Executive of this Agreement or material failure by Executive to perform his duties under this Agreement (other than by reason of Executive's Total Disability) followed by (a) written notice from the Company to Executive specifying such material failure or such material breach, plus (b) Executive not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, Executive not having taken reasonable steps toward curing such material failure or material breach within thirty days of his actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable, or (ii) conviction of Executive by, or a plea of guilty in, a court of competent jurisdiction of a felony or other major crime (a plea of nolo contendere shall be deemed a conviction). 6.3 Termination without Cause by the Company or for Good Reason by Executive (A) By the Company. Notwithstanding any other provision of this Agreement, the Company shall have the right to terminate Executive's employment with the Company and Milgray without Cause at any time, and upon such termination Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. (B) By Executive. If the Company materially breaches any of its obligations, or any material violation by the Company of Executive's rights, under this Agreement followed by (i) written notice from Executive specifying such material breach or violation, plus (ii) the Company not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, the Company not having taken reasonable steps toward curing such material breach or failure within thirty days of actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable (the foregoing being referred to as "Good Reason"), Executive will have the right at Executive's election to terminate his employment hereunder by sending notice to the Company of his election to so terminate. Termination pursuant to this subsection will be effective from and after the effective date of Executive's notice to the Company terminating Executive's employment as aforesaid. Upon any such termination, Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. -5- 112 6.4 Death/Disability The death or Total Disability of Executive. For the purposes of this Agreement, "Total Disability" shall mean the inability of Executive due to illness or other incapacity to perform his duties hereunder in a normal manner for a period of six months (whether or not consecutive) during any consecutive eighteen-month period. If there shall be a Total Disability involving Executive, his employment may be terminated by written notice by the Company to Executive. In the event of Executive's death during the term of this Agreement, the persons designated by Executive (or if Executive does not make such a designation, then Executive's estate) shall be entitled to receive his Base Salary plus guaranteed bonus provided for Executive in this Agreement for a period of twelve months following Executive's death (regardless of the time of such death). 6.5 Voluntary Termination Executive may terminate his employment under this Agreement at any time upon thirty days written notice. 7. CONSEQUENCES OF TERMINATION OF EMPLOYMENT 7.1 Termination by the Company other than for Cause or Termination by Executive for Good Reason. If the Company terminates Executive's employment other than for Cause or if Executive, for Good Reason terminates his employment, Executive shall be entitled to receive from the Company (at Executive's election which must be exercised within 30 days of termination), either (i) within twenty days of such election, a lump sum payment in an amount equal to the sum of his Base Salary (plus guaranteed bonus) payments to which Executive would be entitled under this Agreement as a full-time employee of the Company for the balance of Executive's term of employment under this Agreement (from the date of termination); such lump sum payment discounted to present value using the interest rate offered at the date of termination by The Chase Manhattan Bank, N.A., on a certificate of deposit for a period of time equal to the remaining term of this Agreement at the date of termination and subject to the noncompetition covenant for the then balance of the Term as set forth in Section 8.1; or (ii) receive all Base Salary plus guaranteed bonus payments for the remaining term of this Agreement; provided, however, that should Executive elect to become employed by a competitor of the Company after termination (whether as an officer, director, employee, consultant or otherwise), the Company may offset against the amounts it owes Executive all compensation derived from such competitive employment. Executive agrees to notify the Company within five (5) business days of being employed by a competitor of the Company and to provide the Company with such documentation as the Company may reasonably request (including, but not limited to, copies of his Forms W-2) in order to enable the Company to verify the amount of Executive's compensation from any competitor. 7.2 Termination by the Company because of Executive's Total Disability. If the Company terminates Executive's employment hereunder because of -6- 113 Executive's Total Disability, Executive shall be entitled to receive from the Company for the full balance of the Term of this Agreement regular bi-weekly payments equal to 75% of Executive's regular bi-weekly Base Salary payment plus guaranteed bonus. This amount shall be reduced by all benefits provided to Executive under any Company disability plan or plans. Executive agrees to participate in such plan(s) to as full an extent and amount as permitted under such plans. 7.3 Voluntary Termination by Executive or Termination by the Company for Cause. If Executive voluntarily terminates his employment hereunder (other than for Good Reason or Total Disability) or if the Company terminates Executive's employment for Cause, Executive shall not be entitled to any further compensation following such termination. The Company shall not be entitled to recover any damages or other amount from Executive by reason of any such termination. 8. RESTRICTIVE COVENANTS 8.1 Covenant Not to Compete. During Executive's employment with the Company, Executive shall not, directly or indirectly, be engaged in the distribution or sale of any products that are directly competitive with products presently distributed or sold by the Company or any of its subsidiaries within the geographical area in which the Company or any of its subsidiaries conducts its business (except for passive investments by Executive of up to 5% of the outstanding stock of a publicly-held company engaged in any such activities). Following termination of Executive's employment with the Company, both in the case of voluntary termination by Executive (whether or not for Good Reason) or in the case of termination by the Company (whether or not for Cause), there shall be no restrictions on Executive's employment by another entity (whether or not competitive with the Company) unless Executive shall have elected the compensation option set forth in Section 7.1(i), in which case the restrictions set forth in the first sentence of this Section 8.1 (except as provided in the last sentence of this Section 8.1) shall continue to apply for the balance of the term of this Agreement as of the date of termination; provided, however, that if Executive elects the option set forth in Section 7.1(i) and then determines at a subsequent date that he wishes to take actions that would otherwise violate such restrictions, Executive will be relieved from such restrictions if he repays to the Company, in advance of taking such actions, a pro rata portion of the payments he received pursuant to that election (based on the length of the time remaining on the non-competition covenant at that time in comparison to the total remaining term of the non-competition covenant at the time of termination). For example, if Executive were terminated without Cause after one year, and elected to receive his remaining two years of pay under this Agreement in a lump sum, and one year later wanted to work for a competitor, the Executive could do so if he repaid the Company one-half of the amount he received as severance (2 years severance pay lump-sum, 1 year of which was "earned" by not competing, with the portion relating to the remaining 1 year to be repaid to the Company -7- 114 in exchange for a release from the non-compete). The Company may, at any time and from time to time, attach an annex to this Agreement specifying specific jurisdictions in which the covenant not-to-compete set forth in this Section 8.1 is applicable. Notwithstanding anything to the contrary contained in the second sentence of this Section 8.1, Executive shall not be restricted from employment by a manufacturer or manufacturer's sales representative which manufactures and/or sells any products referred to in the first sentence of this Section 8.1 or from the sale of any of such products in connection with such employment. 8.2 Nondisclosure and Nonsolicitation. Both during and after Executive's employment with the Company, Executive shall keep secret all material confidential matters of the Company not in the public domain and will not disclose them to anyone outside of the Company. Further, after termination Executive will not seek to hire Company employees. 9. MISCELLANEOUS 9.1 Arbitration All disputes, controversies or claims arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall be submitted to binding arbitration taking place in the state of New York before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Expenses of the arbitration shall be apportioned between the parties by the arbitrator on the basis of relative fault. 9.2 Legal Fees The Company shall pay all legal fees incurred by Executive arising out of the Company's failing to make any payment or withholding any employee benefits under this Agreement or contesting the validity, enforceability or interpretation of this Agreement in the event it is determined that (i) such action was not justified under this Agreement or (ii) if it is determined that both the Company and the Executive acted in violation of this Agreement, the Company's actions constituted a more serious violation than did the Executive's actions. Determination as to Executive's entitlement to legal fees pursuant to this Agreement may be made by the arbitrator if arbitration is sought or by independent legal counsel acceptable to both parties. 9.3 No Third-Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. -8- 115 9.4 Entire Agreement This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. 9.5 Succession and Assignment This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the other. 9.6 Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 9.7 Headings The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.8 Notices All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO THE COMPANY: Milgray Electronics, Inc. 77 Schmitt Boulevard Farmingdale, New York 11735 Attn: President IF TO THE GUARANTOR: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049-5022 Attn: President -9- 116 IF TO EXECUTIVE: Gary Adams 74 Sweetbriar Branch Longwood, Florida 32750 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. 9.9 Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. 9.10 Amendments and Waivers No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Company and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 9.11 Severability Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 9.12 Guarantee Guarantor unconditionally guarantees all of the Company's obligations hereunder. Guarantor agrees that Executive may proceed directly against Guarantor in the event of the Company's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Company. -10- 117 IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. MILGRAY ELECTRONICS, INC. By:____________________________ Name: Title: BELL INDUSTRIES, INC. By:____________________________ Name: Title: ________________________________ Gary Adams -11- 118 EXHIBIT 3.4 FORM OF STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION AGREEMENT This Incentive Stock Option Agreement ("Agreement") is made as of this _________ day of _______________, 199_, between Bell Industries, Inc., a California corporation (the "Company"), and Gary Adams (the "Participant"). R E C I T A L S 1. The Board of Directors of the Company and its shareholders have adopted the 1990 Stock Option Plan as of October 29, 1990 and the 1994 Stock Option Plan as of November 1, 1994 (the "Plans"). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Plans. 2. The Plans provide for the selling or granting to selected executive and other key employees, and other persons furnishing services to the Company or any subsidiary of the Company, as the Compensation Committee (the "Committee") may from time to time determine, of Restricted Stock or options to purchase shares of Common Stock of the Company. 3. Pursuant to the Plans, the Committee has determined that it is to the advantage and best interest of the Company and its stockholders to grant an Incentive Stock Option to the Participant covering 10,000 shares of the Company's Common Stock as an inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Incentive Stock Option Agreement between the Company and the Participant. 4. The Option granted hereby is intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. The Company grants to the Participant the right and option (the "Option") to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate 10,000 shares of Common Stock at the purchase price of $___________ per share, exercisable in installment periods in accordance with the provisions of this Agreement during a period expiring on the 5th anniversary of the date of this Agreement (the "Expiration Date") or earlier in accordance with Section 5 hereof; provided, however, if the Participant does not in any given installment period purchase all of the shares that the Participant is entitled to purchase in such installment period, then 119 the Participant's right to purchase any shares not purchased in such installment period shall continue until the Expiration Date or sooner termination of the Participant's option. 2. Vesting. This Option shall vest and become exercisable in the percentages and on the dates set forth below: Percentage Cumulative Initially Percentage Date Exercisable Exercisable ---- ----------- ----------- 25% 25% 25% 50% 50% 100% Subject to earlier termination under Section 5 hereof, at any time after the 3rd anniversary date of this Agreement, but no later than the Expiration Date, the Participant may purchase all or any part of the shares subject to this Option which the Participant theretofore failed to purchase. In each case, the number of shares which may be purchased shall be calculated to the nearest full share. Notwithstanding the foregoing vesting schedule, but subject to Section 5 hereof, this Option shall become immediately exercisable in full, if (i) the Company terminates Participant's employment agreement (the "Employment Agreement") dated as of ____________, 1996 other than for Cause (as defined in the Employment Agreement) or (ii) Participant terminates the Employment Agreement for Good Reason (as defined in the Employment Agreement). 3. Manner of Exercise. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company, specifying the number of shares to be purchased and accompanied by payment to the Company of the full purchase price of the shares to be purchased either (i) in cash or by certified or cashier's check payable to the order of the Company, or (ii) by delivery of shares of Common Stock already owned by, and in the possession of, the Participant. Shares of Common Stock used to satisfy any portion of the exercise price of this Option shall be valued at their fair market value determined (in accordance with Section 4 below) as of the close of the business day immediately preceding the date of exercise. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (i) one hundred (100) shares or (ii) the total number of shares then eligible for exercise if less than one hundred (100) shares. This Option may be exercised (i) during the lifetime of the Participant, only by the Participant or, in the event a conservator, guardian or legal representative is appointed during the Participant's lifetime to handle the affairs of the Participant, by such conservator, guardian or legal representative; and (ii) after the Participant's death, by his or her transferee by will or the laws of descent or distribution, and not otherwise, regardless of any community property interest therein of the spouse of the Participant or -2- 120 such spouse's successors in interest. If the spouse of the Participant shall have acquired a community property interest in this Option, the Participant, or the Participant's permitted successors in interest, may exercise the Option on behalf of the spouse of the Participant or such spouse's successors in interest. Except in the event of the Participant's death or permanent disability, the Option may not be exercised prior to the date six months from the date hereof. 4. Fair Market Value of Common Stock. The fair market value of a share of Company Common Stock shall be determined for purposes of this Agreement by reference to the closing price on the New York Stock Exchange (or other principal stock exchange on which such shares are then listed) or, if such shares are not then listed on such exchange (or other principal stock exchange), by reference to the closing price (if a National Market Issue) or the mean between the bid and asked price (if other over-the-counter issue) of a share as supplied by the National Association of Securities Dealers through NASDAQ (or its successor in function), in each case as reported by The Wall Street Journal, for the date on which the option is granted or exercised, or if such date is not a business day, for the business day immediately preceding such date (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof). 5. Cessation of Services, Death or Permanent Disability. If a Participant ceases to be employed by the Company or one of its subsidiaries for any reason other than the Participant's death or permanent disability (within the meaning of Section 22(e) (3) of the Code), the Participant's Option shall be exercisable for a period of three (3) months after the date the Participant ceases to be an employee of the Company or such subsidiary (unless by its terms it sooner expires) to the extent exercisable on the date of such cessation of employment and shall thereafter expire and be void and of no further force or effect. A leave of absence approved in writing by the Committee shall not be deemed a termination of employment for the purposes of this paragraph 5, but no Option may be exercised during any such leave of absence, except during the first three (3) months thereof. If the Participant dies or becomes permanently disabled while employed by the Company or one of its subsidiaries, the Participant's Option shall expire one (1) year after the date of such death or permanent disability unless by its terms it sooner expires. During such period after death, such Option may, to the extent that it remained unexercised (but exercisable by the Participant according to such Option's terms) on the date of such death, be exercised by the person or persons to whom the Participant's rights under the Option shall pass by the Participant's will or by the laws of descent and distribution. -3- 121 6. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules. No shares issuable upon the exercise of this Option shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended, and all applicable state securities or "Blue Sky" laws (whether by registration or qualification or satisfaction of exemption conditions), all applicable listing requirements of any principal securities exchange on which shares of the same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made. 7. Withholding of Taxes. If the Participant or the Participant's permitted successors in interest disposes of shares of Common Stock acquired pursuant to the exercise of this Option within two years after the date of this Agreement or within one year after exercise of this Option, the Company may deduct and withhold from the wages, salary, bonus and other compensation paid by the Company to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of this Option or the sale of Common Stock issued to the Participant upon exercises hereof, all taxes as may be required from time to time under federal or state tax laws and regulations. This withholding of tax shall be made from the Company's concurrent or next payment of wages, salary, bonus or other compensation to the Participant or by payment to the Company by the Participant of required withholding tax, as the Committee may determine. 8. Adjustments for Reorganizations, Stock Splits, etc. If the outstanding shares of the Common Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares or securities receivable upon the exercise of this Option, without change in the aggregate purchase price applicable to the unexercised portion of this Option but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon the sale of substantially all the property of the Company, the Committee shall provide in writing for appropriate satisfaction of this Option by one or more of the following alternatives to be made in connection with such transaction: (i) the immediate exercisability of this Option (provided that this Option was granted more than six months before such transaction) notwithstanding the provisions of Section 3 hereof, except that this Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (a) one hundred (100) shares or (b) the total number of shares then eligible for exercise if less than one hundred (100) shares; (ii) the assumption of this Option or the -4- 122 substitution therefore of a new option covering the stock of a successor corporation, with appropriate adjustments as to number and kind of shares and prices; (iii) the continuance of the Plan by such successor corporation in which event this Option shall remain in full effect under the terms so provided; or (iv) the payment of an amount in cash or stock, or any combination thereof, in lieu of and in complete satisfaction of this Option. Adjustments under this paragraph 8 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment. 9. Participation by Participant in Other Company Plans. Nothing herein contained shall affect the right of the Participant to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, profit sharing or other employee welfare plan or program of the Company or of any subsidiary of the Company. 10. No Rights as a Shareholder Until Issuance of Stock Certificate. Neither the Participant nor any other person legally entitled to exercise this Option shall be entitled to any of the rights or privileges of a shareholder of the Company in respect of any shares issuable upon any exercise of this Option unless and until a certificate or certificates representing such shares shall have been actually issued and delivered to the Participant. 11. Not an Employment or Service Contract. Nothing contained herein shall be construed as agreement by the Company, express or implied, to employ Participant or contract for Participant's services, to restrict the Company's right to discharge Participant or cease contracting for Participant's services or to modify, extend or otherwise affect in any manner whatsoever the terms of any employment agreement or contract for services which may exist between the Participant and the Company. 12. Agreement Subject to Plan. The Option hereby granted is subject to, and the Company and the Participant agree to be bound by, all of the terms and conditions of the Plan, as the same shall be amended from time to time in accordance with the terms thereof, but no such amendment shall adversely affect the Participant's rights under this Option without the prior written consent of the Participant. 13. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 14. Notices. Any notice or other paper or payment required to be given or sent pursuant to the terms of this Agreement shall be sufficiently given or served hereunder to any party when transmitted by registered or certified mail, postage prepaid, addressed to the party to be served as follows: (a) if to the Company: Bell Industries, Inc. -5- 123 11812 San Vicente Boulevard Los Angeles, CA 90049-5022 Attention: President (b) if to Participant: Gary Adams 74 Sweetbriar Branch Longwood, Florida 32750 Any party, by written notice, may designate another address for notices to be sent from time to time. -6- 124 15. Execution. This Option has been granted, executed and delivered the day and year first above written at Los Angeles, California, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. COMPANY BELL INDUSTRIES, INC. BY: _________________ PARTICIPANT _____________________ Gary Adams By his or her signature below, the spouse of the Participant agrees to be bound by all of the terms and conditions of the foregoing Agreement. ____________________ NAME: -7- 125 EXHIBIT 5 FORM OF INDEMNIFICATION AGREEMENT INDEMNITY AGREEMENT This Agreement is made as of the _____ day of __________, 1996, by and between Milgray Electronics, Inc., a New York corporation (the "Corporation") Bell Industries, Inc., a California corporation (the "Guarantor"), and Gary Adams (the "Indemnitee"), a Director and/or Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability of Directors' and Officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, the Corporation does not regard the protection available to Indemnitee as adequate in the present circumstances, and realizes that Indemnitee may not be willing to serve as a Director or Officer without adequate protection, and the Corporation desires Indemnitee to serve in such capacity; NOW, THEREFORE, in consideration of Indemnitee's service as a Director or Officer after the date hereof the parties agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature. (b) The term "Expenses" shall include, but is not limited to, expenses of investigations, judicial or administrative proceedings or appeals, damages, judgments, fines, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under this Agreement. 126 (c) The terms "Director" and "Officer" shall include Indemnitee's service at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise as well as a Director and/or Officer of the Corporation. 2. Indemnity of Director or Officer. Subject only to the limitations set forth in Section 3, Corporation will pay on behalf of the Indemnitee all Expenses actually and reasonably incurred by Indemnitee because of any claim or claims made against him in a Proceeding by reason of the fact that he is or was a Director and/or Officer. 3. Limitations on Indemnity. Corporation shall not be obligated under this Agreement to make any payment of Expenses to the Indemnitee (a) which payment it is prohibited by applicable law from paying as indemnity; (b) for which payment is actually made to the Indemnitee under an insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) for which payment the Indemnitee is indemnified by Corporation otherwise than pursuant to this Agreement and payment is actually made to the Indemnitee except in respect of any excess beyond the amount of the payment under such indemnification; (d) resulting from a claim decided in a Proceeding adversely to the Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he was not legally entitled; (e) resulting from a claim decided in a Proceeding adversely to the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of Corporation within the meaning of Section 16(b) or 16(c) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; or (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be indemnified under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless it shall be decided in a Proceeding that he committed (i) acts of active and deliberate dishonesty (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated. For purposes of Sections 3 and 4, the phrase "decided in a Proceeding" shall mean a decision by a court, arbitrator(s), hearing officer or other judicial agent having the -2- 127 requisite legal authority to make such a decision, which decision has become final and from which no appeal or other review proceeding is permissible. 4. Advance Payment of Costs. Expenses incurred by Indemnitee in defending a claim against him in a Proceeding shall be paid by the Corporation as incurred and in advance of the final disposition of such Proceeding; provided, however, that Expenses of defense need not be paid as incurred and in advance where the judicial agent of first impression has decided the Indemnitee is not entitled to be indemnified pursuant to this Agreement or otherwise. Indemnitee hereby agrees and undertakes to repay such amounts advanced if it shall be decided in a Proceeding that he is not entitled to be indemnified by the Corporation pursuant to this Agreement or otherwise. 5. Enforcement. If a claim under this Agreement is not paid by Corporation, or on its behalf, within thirty days after a written claim has been received by Corporation, the Indemnitee may at any time thereafter bring suit against Corporation to recover the unpaid amount of the claim and if successful in whole or in part, the Indemnitee shall be entitled to be paid also the Expenses of prosecuting such claim. 6. Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Corporation effectively to bring suit to enforce such rights. Notwithstanding the foregoing, if any of the provisions hereof would impair or jeopardize Indemnitee's coverage under the Corporation's Directors' and Officers' Liability Policy, such provisions shall be ineffective and shall be deemed deleted from this Agreement. 7. Notice. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to Corporation shall be given at its principal office and shall be directed to the President (or such other address as Corporation shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, the Indemnitee shall give Corporation such information and cooperation as it may reasonably require. 8. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 9. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Articles of Incorporation or Bylaws of the Corporation or under California law. -3- 128 10. Applicable Law. This Agreement shall be governed by and construed in accordance with California law. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 12. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns. 13. Continuation of Indemnification. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 14. Coverage of Indemnification. The indemnification under this Agreement shall cover Indemnitee's service as a Director and/or Officer prior to or after the date of the Agreement. 15. Guaranty. Guarantor unconditionally guarantees all of the Corporation's obligations hereunder. Guarantor agrees that Indemnitee may proceed directly against Guarantor in the event of the Corporation's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Corporation. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. INDEMNITEE CORPORATION By:_______________________ By:_________________________ GUARANTOR By:_________________________ -4- 129 EXHIBIT 6.8(b)-(v) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of November 26, 1996, by and between Andrew Epstein (the "Executive"), Milgray Electronics, Inc., a New York corporation (the "Company"), and Bell Industries, Inc., a California corporation (the "Guarantor"), to be effective as of the effective date of the Merger (as defined below) with reference to the following facts: A. Executive is currently employed as Vice President--Operations of the Company; B. Pursuant to an agreement dated as of November 26, 1996, ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of the Company ("Acquisition Sub") will make a tender offer to acquire all of the outstanding capital stock of Milgray (the "Tender Offer"). After completion of the Tender Offer, it is intended that Acquisition Sub will be merged with and into Milgray, and Milgray will become a wholly-owned subsidiary of the Guarantor (the "Merger"); C. The Company wishes to ensure the continued services of Executive after the Merger; and D. Executive is willing to continue his employment with the Company on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT 1.1 Duties and Responsibilities The Company does hereby employ Executive and Executive hereby accepts such employment as Vice President--Operations. Executive shall report to the President of the Company, and subject to the directions of the President, shall be responsible for performing functions similar to the functions presently performed by Executive at the Company, including supervision of physical handling of inventory, management of security, quality and efficiency of the Company's warehouses, purchasing of supplies and equipment (other than computer equipment) and maintenance and repair of facilities; provided, however, that Executive shall not be required to undertake duties not commensurate with his position as Vice President--Operations of the Company. Notwithstanding anything contained in the preceding sentence, Executive acknowledges that, following the Merger, the Guarantor plans to investigate combining its existing distribution business, or segments thereof, with those of the Company, and where feasible or practicable, to combine such business, or segments thereof, and that as a result of such combination, the Company may change the exact nature of Executive's 130 responsibilities (but not Executive's job title), but in no event will Executive be required to accept job responsibilities in an area outside of his current expertise or to act in less than an executive capacity; moreover, Executive's status and position in the Company (or its successor) organization chart (i.e., the status and position of the person to whom Executive reports and the class of employees who report to Executive) shall be similar to other Vice Presidents of the Company and/or the Guarantor with responsibilities similar to those of Executive. Any such change in responsibility will not constitute a breach of this Agreement by the Company or the Guarantor. During the term of this Agreement, Executive shall devote his full business time and attention to the business of the Company and shall not be engaged in any other duties which interfere with the performance of his duties hereunder. Executive shall be entitled to an office, secretarial help and other accommodations and amenities comparable to those Executive presently has at the Company. 1.2 Place of Performance Executive's duties under this Agreement are to be performed on Long Island in New York State and Executive shall not be required to travel or be assigned away from this location more than forty days in any twelve-month period or more than five consecutive days in any thirty-day period. 2. TERM This Agreement shall be in full force and effect for a period (the "Term") which shall commence as of the effective date of the Merger (the "Effective Date") and shall continue for a period of three (3) years, unless sooner terminated as hereafter provided. 3. COMPENSATION 3.1 Base Salary As compensation for the services to be performed by Executive during the continuance of this Agreement, the Company shall pay Executive a base salary of $175,000 per year for each year of his employment hereunder (the "Base Salary"). Base Salary shall be payable in substantially equal bi-weekly installments and reduced on a pro rata basis for any fraction of a year or month during which Executive is not so employed. 3.2 Bonus Executive shall be entitled to earn an incentive bonus based upon achievement of financial and other goals established from time to time by the Company, provided that the minimum bonus for each fiscal year shall be $66,000. For the initial year of this Agreement, such bonus shall be prorated from the Effective Date and the bonus for any partial year shall be similarly prorated. Any such bonus earned by Executive shall be paid at the same time that annual incentive bonuses for the Company's other senior -2- 131 executive officers are paid in accordance with the Company's policies as in effect from time to time (but in no event will the guaranteed minimum bonus be paid later than 30 days after the end of the Company's fiscal year, with the remainder, if any, to be paid within 90 days after the end of the Company's fiscal year). 3.3 Additional Benefits Executive shall be entitled to participate in all of Guarantor's employee benefit plans as listed in the Guarantor's employee handbook, as the same may change from time to time, and, in addition, to participate on the same terms as senior Guarantor executives in any benefit plans available to members of the Guarantor's management (whether or not listed in the employee handbook). Among other things, Executive shall be entitled to participate in the Guarantor's Health Care Benefits Program, 401(k) Plan, Stock Purchase Plan, Stock Option Plan, Short-term and Long-term Disability Programs and the Guarantor's Executive Medical Plan, which provides coverage for all medical expenses not otherwise covered by the basic policy, up to $25,000. If any health, medical or disability plan or program existing at the time of commencement of Executive's employment pursuant to this Agreement is terminated or the benefits thereunder reduced, the Company or Guarantor shall provide Executive with benefits similar to those in existence at the time of commencement of Executive's employment hereunder. 3.4 Stock Options (A) As an additional element of compensation to Executive in consideration of the services to be rendered hereunder, Guarantor shall grant to Executive options to acquire 10,000 shares of Guarantor's common stock at an exercise price equal to the closing price on the Effective Date. The options shall vest in 25%, 25% and 50% increments, respectively, on the first, second and third anniversaries of this Agreement. In addition, all of the options will vest if (i) the Company terminates this Agreement other than for Cause (as defined in Section 6.2) or (ii) the Executive terminates this Agreement for Good Reason (as defined in Section 6.3(B)). The options shall remain exercisable for a period of five (5) years from the date of grant. The specific terms of the above-referenced option shall be as set forth in a separate option agreement in the form annexed hereto as Exhibit 3.4. (B) Executive shall be entitled to participate in the Guarantor's stock option programs, although Executive understands that any grants under such programs are completely discretionary with the Compensation Committee of the Guarantor's Board of Directors. 3.5 Reimbursements Executive shall be entitled to reimbursement for all amounts reasonably expended on behalf of the Company, subject to verification similar to that required of and provided by the Company's other senior executives. -3- 132 3.6 Deductions The Company shall deduct from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. 3.7 Disability Except in the case of Executive's Total Disability (as defined in Section 6.4), Executive's full compensation and benefits under this Agreement shall be continued during any period when he is absent or unable to perform his duties due to illness, disability or other incapacity; and Executive's inability to perform his duties by reason of the foregoing shall not constitute a failure to perform his obligations under this Agreement and shall not be deemed a default by Executive hereunder. The consequences of Executive's Total Disability is covered in Section 7.2 of this Agreement. 4. VACATION Executive shall be entitled to four weeks of vacation in each twelve-month period; provided, however, that no more than six weeks may be taken during any eighteen-month period. Such vacation will accrue on a pro rata basis from the date employment commences under this Agreement. At the end of his employment hereunder, Executive shall be paid for any accrued but unused vacation time. Executive agrees that he will coordinate his vacation plans and schedules in order to prevent any undue disruption of the Company's business. 5. INDEMNIFICATION Executive shall be indemnified by Guarantor and the Company to the full extent permitted by law in respect of his actions as an officer or director of the Company and shall be provided with such liability insurance coverage in this connection as is provided to other Company executives. In addition, the Company and Guarantor shall enter into an Indemnification Agreement with Executive in the form attached as Exhibit 5. 6. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: 6.1 Mutual Agreement Whenever the Company and Executive mutually agree in writing to termination; -4- 133 6.2 Termination for Cause At any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) material breach by Executive of this Agreement or material failure by Executive to perform his duties under this Agreement (other than by reason of Executive's Total Disability) followed by (a) written notice from the Company to Executive specifying such material failure or such material breach, plus (b) Executive not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, Executive not having taken reasonable steps toward curing such material failure or material breach within thirty days of his actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable, or (ii) conviction of Executive by, or a plea of guilty in, a court of competent jurisdiction of a felony or other major crime (a plea of nolo contendere shall be deemed a conviction). 6.3 Termination without Cause by the Company or for Good Reason by Executive (A) By the Company. Notwithstanding any other provision of this Agreement, the Company shall have the right to terminate Executive's employment with the Company and Milgray without Cause at any time, and upon such termination Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. (B) By Executive. If the Company materially breaches any of its obligations, or any material violation by the Company of Executive's rights, under this Agreement followed by (i) written notice from Executive specifying such material breach or violation, plus (ii) the Company not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, the Company not having taken reasonable steps toward curing such material breach or failure within thirty days of actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable (the foregoing being referred to as "Good Reason"), Executive will have the right at Executive's election to terminate his employment hereunder by sending notice to the Company of his election to so terminate. Termination pursuant to this subsection will be effective from and after the effective date of Executive's notice to the Company terminating Executive's employment as aforesaid. Upon any such termination, Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. 6.4 Death/Disability The death or Total Disability of Executive. For the purposes of this Agreement, "Total Disability" shall mean the inability of Executive due to illness or other incapacity to perform his duties hereunder in a normal manner for a period of six months (whether or not consecutive) during any consecutive eighteen-month period. If there shall be a -5- 134 Total Disability involving Executive, his employment may be terminated by written notice by the Company to Executive. In the event of Executive's death during the term of this Agreement, the persons designated by Executive (or if Executive does not make such a designation, then Executive's estate) shall be entitled to receive his Base Salary plus guaranteed bonus provided for Executive in this Agreement for a period of twelve months following Executive's death (regardless of the time of such death). 6.5 Voluntary Termination Executive may terminate his employment under this Agreement at any time upon thirty days written notice. 7. CONSEQUENCES OF TERMINATION OF EMPLOYMENT 7.1 Termination by the Company other than for Cause or Termination by Executive for Good Reason. If the Company terminates Executive's employment other than for Cause or if Executive, for Good Reason terminates his employment, Executive shall be entitled to receive from the Company (at Executive's election which must be exercised within 30 days of termination), either (i) within twenty days of such election, a lump sum payment in an amount equal to the sum of his Base Salary (plus guaranteed bonus) payments to which Executive would be entitled under this Agreement as a full-time employee of the Company for the balance of Executive's term of employment under this Agreement (from the date of termination); such lump sum payment discounted to present value using the interest rate offered at the date of termination by The Chase Manhattan Bank, N.A., on a certificate of deposit for a period of time equal to the remaining term of this Agreement at the date of termination and subject to the noncompetition covenant for the then balance of the Term as set forth in Section 8.1; or (ii) receive all Base Salary plus guaranteed bonus payments for the remaining term of this Agreement; provided, however, that should Executive elect to become employed by a competitor of the Company after termination (whether as an officer, director, employee, consultant or otherwise), the Company may offset against the amounts it owes Executive all compensation derived from such competitive employment. Executive agrees to notify the Company within five (5) business days of being employed by a competitor of the Company and to provide the Company with such documentation as the Company may reasonably request (including, but not limited to, copies of his Forms W-2) in order to enable the Company to verify the amount of Executive's compensation from any competitor. 7.2 Termination by the Company because of Executive's Total Disability. If the Company terminates Executive's employment hereunder because of Executive's Total Disability, Executive shall be entitled to receive from the Company for the full balance of the Term of this Agreement regular bi-weekly payments equal to 75% of Executive's regular bi-weekly Base Salary payment plus guaranteed bonus. This amount shall be reduced by all benefits provided to Executive under any Company disability plan or plans. Executive agrees to participate in such plan(s) to as full an extent and amount as permitted under such plans. -6- 135 7.3 Voluntary Termination by Executive or Termination by the Company for Cause. If Executive voluntarily terminates his employment hereunder (other than for Good Reason or Total Disability) or if the Company terminates Executive's employment for Cause, Executive shall not be entitled to any further compensation following such termination. The Company shall not be entitled to recover any damages or other amount from Executive by reason of any such termination. 8. RESTRICTIVE COVENANTS 8.1 Covenant Not to Compete. During Executive's employment with the Company, Executive shall not, directly or indirectly, be engaged in the distribution or sale of any products that are directly competitive with products presently distributed or sold by the Company or any of its subsidiaries within the geographical area in which the Company or any of its subsidiaries conducts its business (except for passive investments by Executive of up to 5% of the outstanding stock of a publicly-held company engaged in any such activities). Following termination of Executive's employment with the Company, both in the case of voluntary termination by Executive (whether or not for Good Reason) or in the case of termination by the Company (whether or not for Cause), there shall be no restrictions on Executive's employment by another entity (whether or not competitive with the Company) unless Executive shall have elected the compensation option set forth in Section 7.1(i), in which case the restrictions set forth in the first sentence of this Section 8.1 (except as provided in the last sentence of this Section 8.1) shall continue to apply for the balance of the term of this Agreement as of the date of termination; provided, however, that if Executive elects the option set forth in Section 7.1(i) and then determines at a subsequent date that he wishes to take actions that would otherwise violate such restrictions, Executive will be relieved from such restrictions if he repays to the Company, in advance of taking such actions, a pro rata portion of the payments he received pursuant to that election (based on the length of the time remaining on the non-competition covenant at that time in comparison to the total remaining term of the non-competition covenant at the time of termination). For example, if Executive were terminated without Cause after one year, and elected to receive his remaining two years of pay under this Agreement in a lump sum, and one year later wanted to work for a competitor, the Executive could do so if he repaid the Company one-half of the amount he received as severance (2 years severance pay lump-sum, 1 year of which was "earned" by not competing, with the portion relating to the remaining 1 year to be repaid to the Company in exchange for a release from the non-compete). The Company may, at any time and from time to time, attach an annex to this Agreement specifying specific jurisdictions in which the covenant not-to-compete set forth in this Section 8.1 is applicable. Notwithstanding anything to the contrary contained in the second sentence of this Section 8.1, Executive shall not be restricted from employment by a manufacturer or manufacturer's sales representative which manufactures and/or sells any products -7- 136 referred to in the first sentence of this Section 8.1 or from the sale of any of such products in connection with such employment. 8.2 Nondisclosure and Nonsolicitation. Both during and after Executive's employment with the Company, Executive shall keep secret all material confidential matters of the Company not in the public domain and will not disclose them to anyone outside of the Company. Further, after termination Executive will not seek to hire Company employees. 9. MISCELLANEOUS 9.1 Arbitration All disputes, controversies or claims arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall be submitted to binding arbitration taking place in the State of New York before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Expenses of the arbitration shall be apportioned between the parties by the arbitrator on the basis of relative fault. 9.2 Legal Fees The Company shall pay all legal fees incurred by Executive arising out of the Company's failing to make any payment or withholding any employee benefits under this Agreement or contesting the validity, enforceability or interpretation of this Agreement in the event it is determined that (i) such action was not justified under this Agreement or (ii) if it is determined that both the Company and the Executive acted in violation of this Agreement, the Company's actions constituted a more serious violation than did the Executive's actions. Determination as to Executive's entitlement to legal fees pursuant to this Agreement may be made by the arbitrator if arbitration is sought or by independent legal counsel acceptable to both parties. 9.3 No Third-Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. 9.4 Entire Agreement This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. -8- 137 9.5 Succession and Assignment This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the other. 9.6 Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 9.7 Headings The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.8 Notices All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO THE COMPANY: Milgray Electronics, Inc. 77 Schmitt Boulevard Farmingdale, New York 11735 Attn: President IF TO THE GUARANTOR: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049-5022 Attn: President IF TO EXECUTIVE: Andrew Epstein 52 Rustic Gate Lane Dix Hills, New York 11746 -9- 138 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. 9.9 Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. 9.10 Amendments and Waivers No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Company and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 9.11 Severability Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 9.12 Guarantee Guarantor unconditionally guarantees all of the Company's obligations hereunder. Guarantor agrees that Executive may proceed directly against Guarantor in the event of the Company's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Company. -10- 139 IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. MILGRAY ELECTRONICS, INC. By:____________________________ Name: Title: BELL INDUSTRIES, INC. By:____________________________ Name: Title: _______________________________ Andrew Epstein -11- 140 EXHIBIT 3.4 FORM OF STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION AGREEMENT This Incentive Stock Option Agreement ("Agreement") is made as of this _________ day of _______________, 199_, between Bell Industries, Inc., a California corporation (the "Company"), and Andrew Epstein (the "Participant"). R E C I T A L S 1. The Board of Directors of the Company and its shareholders have adopted the 1990 Stock Option Plan as of October 29, 1990 and the 1994 Stock Option Plan as of November 1, 1994 (the "Plans"). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Plans. 2. The Plans provide for the selling or granting to selected executive and other key employees, and other persons furnishing services to the Company or any subsidiary of the Company, as the Compensation Committee (the "Committee") may from time to time determine, of Restricted Stock or options to purchase shares of Common Stock of the Company. 3. Pursuant to the Plans, the Committee has determined that it is to the advantage and best interest of the Company and its stockholders to grant an Incentive Stock Option to the Participant covering 10,000 shares of the Company's Common Stock as an inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Incentive Stock Option Agreement between the Company and the Participant. 4. The Option granted hereby is intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. The Company grants to the Participant the right and option (the "Option") to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate 10,000 shares of Common Stock at the purchase price of $___________ per share, exercisable in installment periods in accordance with the provisions of this Agreement during a period expiring on the 5th anniversary of the date of this Agreement (the "Expiration Date") or earlier in accordance with Section 5 hereof; provided, however, if the Participant does not in any given installment period purchase all of the shares that the Participant is entitled to purchase in such installment period, then 141 the Participant's right to purchase any shares not purchased in such installment period shall continue until the Expiration Date or sooner termination of the Participant's option. 2. Vesting. This Option shall vest and become exercisable in the percentages and on the dates set forth below: Percentage Cumulative Initially Percentage Date Exercisable Exercisable ---- ----------- ----------- 25% 25% 25% 50% 50% 100% Subject to earlier termination under Section 5 hereof, at any time after the 3rd anniversary date of this Agreement, but no later than the Expiration Date, the Participant may purchase all or any part of the shares subject to this Option which the Participant theretofore failed to purchase. In each case, the number of shares which may be purchased shall be calculated to the nearest full share. Notwithstanding the foregoing vesting schedule, but subject to Section 5 hereof, this Option shall become immediately exercisable in full, if (i) the Company terminates Participant's employment agreement (the "Employment Agreement") dated as of ____________, 1996 other than for Cause (as defined in the Employment Agreement) or (ii) Participant terminates the Employment Agreement for Good Reason (as defined in the Employment Agreement). 3. Manner of Exercise. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company, specifying the number of shares to be purchased and accompanied by payment to the Company of the full purchase price of the shares to be purchased either (i) in cash or by certified or cashier's check payable to the order of the Company, or (ii) by delivery of shares of Common Stock already owned by, and in the possession of, the Participant. Shares of Common Stock used to satisfy any portion of the exercise price of this Option shall be valued at their fair market value determined (in accordance with Section 4 below) as of the close of the business day immediately preceding the date of exercise. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (i) one hundred (100) shares or (ii) the total number of shares then eligible for exercise if less than one hundred (100) shares. This Option may be exercised (i) during the lifetime of the Participant, only by the Participant or, in the event a conservator, guardian or legal representative is appointed during the Participant's lifetime to handle the affairs of the Participant, by such conservator, guardian or legal representative; and (ii) after the Participant's death, by his or her transferee by will or the laws of descent or distribution, and not otherwise, regardless of any community property interest therein of the spouse of the Participant or -2- 142 such spouse's successors in interest. If the spouse of the Participant shall have acquired a community property interest in this Option, the Participant, or the Participant's permitted successors in interest, may exercise the Option on behalf of the spouse of the Participant or such spouse's successors in interest. Except in the event of the Participant's death or permanent disability, the Option may not be exercised prior to the date six months from the date hereof. 4. Fair Market Value of Common Stock. The fair market value of a share of Company Common Stock shall be determined for purposes of this Agreement by reference to the closing price on the New York Stock Exchange (or other principal stock exchange on which such shares are then listed) or, if such shares are not then listed on such exchange (or other principal stock exchange), by reference to the closing price (if a National Market Issue) or the mean between the bid and asked price (if other over-the-counter issue) of a share as supplied by the National Association of Securities Dealers through NASDAQ (or its successor in function), in each case as reported by The Wall Street Journal, for the date on which the option is granted or exercised, or if such date is not a business day, for the business day immediately preceding such date (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof). 5. Cessation of Services, Death or Permanent Disability. If a Participant ceases to be employed by the Company or one of its subsidiaries for any reason other than the Participant's death or permanent disability (within the meaning of Section 22(e)(3) of the Code), the Participant's Option shall be exercisable for a period of three (3) months after the date the Participant ceases to be an employee of the Company or such subsidiary (unless by its terms it sooner expires) to the extent exercisable on the date of such cessation of employment and shall thereafter expire and be void and of no further force or effect. A leave of absence approved in writing by the Committee shall not be deemed a termination of employment for the purposes of this paragraph 5, but no Option may be exercised during any such leave of absence, except during the first three (3) months thereof. If the Participant dies or becomes permanently disabled while employed by the Company or one of its subsidiaries, the Participant's Option shall expire one (1) year after the date of such death or permanent disability unless by its terms it sooner expires. During such period after death, such Option may, to the extent that it remained unexercised (but exercisable by the Participant according to such Option's terms) on the date of such death, be exercised by the person or persons to whom the Participant's rights under the Option shall pass by the Participant's will or by the laws of descent and distribution. 6. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules. No shares issuable upon the exercise of this Option shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended, and all applicable state securities -3- 143 or "Blue Sky" laws (whether by registration or qualification or satisfaction of exemption conditions), all applicable listing requirements of any principal securities exchange on which shares of the same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made. 7. Withholding of Taxes. If the Participant or the Participant's permitted successors in interest disposes of shares of Common Stock acquired pursuant to the exercise of this Option within two years after the date of this Agreement or within one year after exercise of this Option, the Company may deduct and withhold from the wages, salary, bonus and other compensation paid by the Company to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of this Option or the sale of Common Stock issued to the Participant upon exercises hereof, all taxes as may be required from time to time under federal or state tax laws and regulations. This withholding of tax shall be made from the Company's concurrent or next payment of wages, salary, bonus or other compensation to the Participant or by payment to the Company by the Participant of required withholding tax, as the Committee may determine. 8. Adjustments for Reorganizations, Stock Splits, etc. If the outstanding shares of the Common Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares or securities receivable upon the exercise of this Option, without change in the aggregate purchase price applicable to the unexercised portion of this Option but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon the sale of substantially all the property of the Company, the Committee shall provide in writing for appropriate satisfaction of this Option by one or more of the following alternatives to be made in connection with such transaction: (i) the immediate exercisability of this Option (provided that this Option was granted more than six months before such transaction) notwithstanding the provisions of Section 3 hereof, except that this Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (a) one hundred (100) shares or (b) the total number of shares then eligible for exercise if less than one hundred (100) shares; (ii) the assumption of this Option or the substitution therefore of a new option covering the stock of a successor corporation, with appropriate adjustments as to number and kind of shares and prices; (iii) the continuance of the Plan by such successor corporation in which event this Option shall remain in full effect under the terms so provided; or (iv) the payment of an amount in cash or stock, or any combination thereof, in lieu of and in complete satisfaction of this Option. -4- 144 Adjustments under this paragraph 8 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment. 9. Participation by Participant in Other Company Plans. Nothing herein contained shall affect the right of the Participant to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, profit sharing or other employee welfare plan or program of the Company or of any subsidiary of the Company. 10. No Rights as a Shareholder Until Issuance of Stock Certificate. Neither the Participant nor any other person legally entitled to exercise this Option shall be entitled to any of the rights or privileges of a shareholder of the Company in respect of any shares issuable upon any exercise of this Option unless and until a certificate or certificates representing such shares shall have been actually issued and delivered to the Participant. 11. Not an Employment or Service Contract. Nothing contained herein shall be construed as agreement by the Company, express or implied, to employ Participant or contract for Participant's services, to restrict the Company's right to discharge Participant or cease contracting for Participant's services or to modify, extend or otherwise affect in any manner whatsoever the terms of any employment agreement or contract for services which may exist between the Participant and the Company. 12. Agreement Subject to Plan. The Option hereby granted is subject to, and the Company and the Participant agree to be bound by, all of the terms and conditions of the Plan, as the same shall be amended from time to time in accordance with the terms thereof, but no such amendment shall adversely affect the Participant's rights under this Option without the prior written consent of the Participant. 13. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 14. Notices. Any notice or other paper or payment required to be given or sent pursuant to the terms of this Agreement shall be sufficiently given or served hereunder to any party when transmitted by registered or certified mail, postage prepaid, addressed to the party to be served as follows: -5- 145 (a) if to the Company: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, CA 90049-5022 Attention: President (b) if to Participant: Andrew Epstein 52 Rustic Gate Lane Dix Hills, New York 11746 Any party, by written notice, may designate another address for notices to be sent from time to time. 15. Execution. This Option has been granted, executed and delivered the day and year first above written at Los Angeles, California, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. COMPANY BELL INDUSTRIES, INC. BY: _________________ PARTICIPANT _____________________ Andrew Epstein By his or her signature below, the spouse of the Participant agrees to be bound by all of the terms and conditions of the foregoing Agreement. ____________________ NAME: -6- 146 EXHIBIT 5 FORM OF INDEMNIFICATION AGREEMENT INDEMNITY AGREEMENT This Agreement is made as of the _____ day of __________, 1996, by and between Milgray Electronics, Inc., a New York corporation (the "Corporation"), Bell Industries, Inc., a California corporation (the "Guarantor"), and Andrew Epstein (the "Indemnitee"), a Director and/or Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability of Directors' and Officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, the Corporation does not regard the protection available to Indemnitee as adequate in the present circumstances, and realizes that Indemnitee may not be willing to serve as a Director or Officer without adequate protection, and the Corporation desires Indemnitee to serve in such capacity; NOW, THEREFORE, in consideration of Indemnitee's service as a Director or Officer after the date hereof the parties agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature. (b) The term "Expenses" shall include, but is not limited to, expenses of investigations, judicial or administrative proceedings or appeals, damages, judgments, fines, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under this Agreement. 147 (c) The terms "Director" and "Officer" shall include Indemnitee's service at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise as well as a Director and/or Officer of the Corporation. 2. Indemnity of Director or Officer. Subject only to the limitations set forth in Section 3, Corporation will pay on behalf of the Indemnitee all Expenses actually and reasonably incurred by Indemnitee because of any claim or claims made against him in a Proceeding by reason of the fact that he is or was a Director and/or Officer. 3. Limitations on Indemnity. Corporation shall not be obligated under this Agreement to make any payment of Expenses to the Indemnitee (a) which payment it is prohibited by applicable law from paying as indemnity; (b) for which payment is actually made to the Indemnitee under an insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) for which payment the Indemnitee is indemnified by Corporation otherwise than pursuant to this Agreement and payment is actually made to the Indemnitee except in respect of any excess beyond the amount of the payment under such indemnification; (d) resulting from a claim decided in a Proceeding adversely to the Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he was not legally entitled; (e) resulting from a claim decided in a Proceeding adversely to the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of Corporation within the meaning of Section 16(b) or 16(c) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; or (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be indemnified under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless it shall be decided in a Proceeding that he committed (i) acts of active and deliberate dishonesty (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated. For purposes of Sections 3 and 4, the phrase "decided in a Proceeding" shall mean a decision by a court, arbitrator(s), hearing officer or other judicial agent having the -2- 148 requisite legal authority to make such a decision, which decision has become final and from which no appeal or other review proceeding is permissible. 4. Advance Payment of Costs. Expenses incurred by Indemnitee in defending a claim against him in a Proceeding shall be paid by the Corporation as incurred and in advance of the final disposition of such Proceeding; provided, however, that Expenses of defense need not be paid as incurred and in advance where the judicial agent of first impression has decided the Indemnitee is not entitled to be indemnified pursuant to this Agreement or otherwise. Indemnitee hereby agrees and undertakes to repay such amounts advanced if it shall be decided in a Proceeding that he is not entitled to be indemnified by the Corporation pursuant to this Agreement or otherwise. 5. Enforcement. If a claim under this Agreement is not paid by Corporation, or on its behalf, within thirty days after a written claim has been received by Corporation, the Indemnitee may at any time thereafter bring suit against Corporation to recover the unpaid amount of the claim and if successful in whole or in part, the Indemnitee shall be entitled to be paid also the Expenses of prosecuting such claim. 6. Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Corporation effectively to bring suit to enforce such rights. Notwithstanding the foregoing, if any of the provisions hereof would impair or jeopardize Indemnitee's coverage under the Corporation's Directors' and Officers' Liability Policy, such provisions shall be ineffective and shall be deemed deleted from this Agreement. 7. Notice. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to Corporation shall be given at its principal office and shall be directed to the President (or such other address as Corporation shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, the Indemnitee shall give Corporation such information and cooperation as it may reasonably require. 8. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 9. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Articles of Incorporation or Bylaws of the Corporation or under California law. -3- 149 10. Applicable Law. This Agreement shall be governed by and construed in accordance with California law. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 12. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns. 13. Continuation of Indemnification. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 14. Coverage of Indemnification. The indemnification under this Agreement shall cover Indemnitee's service as a Director and/or Officer prior to or after the date of the Agreement. 15. Guaranty. Guarantor unconditionally guarantees all of the Corporation's obligations hereunder. Guarantor agrees that Indemnitee may proceed directly against Guarantor in the event of the Corporation's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Corporation. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. INDEMNITEE CORPORATION By:_______________________ By:________________________ GUARANTOR By:________________________ -4- 150 EXHIBIT 6.8(b)-(vi) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of November 26, 1996, by and between James Darren O'Donnell (the "Executive"), Milgray Electronics, Inc., a New York corporation (the "Company"), and Bell Industries, Inc., a California corporation (the "Guarantor"), to be effective as of the effective date of the Merger (as defined below) with reference to the following facts: A. Executive is currently employed as Vice President--Marketing of the Company; B. Pursuant to an agreement dated as of November 26, 1996, ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of the Company ("Acquisition Sub") will make a tender offer to acquire all of the outstanding capital stock of Milgray (the "Tender Offer"). After completion of the Tender Offer, it is intended that Acquisition Sub will be merged with and into Milgray, and Milgray will become a wholly-owned subsidiary of the Guarantor (the "Merger"); C. The Company wishes to ensure the continued services of Executive after the Merger; and D. Executive is willing to continue his employment with the Company on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT 1.1 Duties and Responsibilities The Company does hereby employ Executive and Executive hereby accepts such employment as Vice President--Marketing. Executive shall report to the President of the Company, and subject to the directions of the President, shall be responsible for marketing, product and asset management and related matters and performing other functions similar to the functions presently performed by Executive at the Company with respect to passives, electromechanical and power supplies; provided, however, that Executive shall not be required to undertake duties not commensurate with his position as Vice President--Marketing of the Company. Notwithstanding anything contained in the preceding sentence, Executive acknowledges that, following the Merger, the Guarantor plans to investigate combining its existing distribution business, or segments thereof, with those of the Company, and where feasible or practicable, to combine such business, or segments thereof, and that as a result of such combination, the Company may change the exact nature of Executive's responsibilities (but not Executive's job title), but in no event will Executive be required to accept job responsibilities in an area 151 outside of his current expertise or to act in less than an executive capacity; moreover, Executive's status and position in the Company (or its successor) organization chart (i.e., the status and position of the person to whom Executive reports and the class of employees who report to Executive) shall be similar to other Vice Presidents of the Company and/or the Guarantor with responsibilities similar to those of Executive. Any such change in responsibility will not constitute a breach of this Agreement by the Company or the Guarantor. During the term of this Agreement, Executive shall devote his full business time and attention to the business of the Company and shall not be engaged in any other duties which interfere with the performance of his duties hereunder. Executive shall be entitled to an office, secretarial help and other accommodations and amenities comparable to those Executive presently has at the Company. 1.2 Place of Performance Executive's duties under this Agreement are to be performed on Long Island in New York State and Executive shall not be required to travel or be assigned away from this location more than seventy five days in any twelve-month period or more than five consecutive days in any thirty-day period. 2. TERM This Agreement shall be in full force and effect for a period (the "Term") which shall commence as of the effective date of the Merger (the "Effective Date") and shall continue for a period of three (3) years, unless sooner terminated as hereafter provided. 3. COMPENSATION 3.1 Base Salary As compensation for the services to be performed by Executive during the continuance of this Agreement, the Company shall pay Executive a base salary of $225,000 per year for each year of his employment hereunder (the "Base Salary"). Base Salary shall be payable in substantially equal bi-weekly installments and reduced on a pro rata basis for any fraction of a year or month during which Executive is not so employed. 3.2 Bonus Executive shall be entitled to earn an incentive bonus based upon achievement of financial and other goals established from time to time by the Company, provided that the minimum bonus for each fiscal year shall be $75,000 (the "Minimum Bonus"). For the initial year of this Agreement, such bonus shall be prorated from the Effective Date and the bonus for any partial year shall be similarly prorated. The incentive bonus shall be paid as follows: (i) the Minimum Bonus shall be paid in four equal quarterly installments within 30 days following the end of each calendar quarter, and (ii) if the -2- 152 annual incentive bonus earned by Executive for any year shall exceed the Minimum Bonus paid for such year, such excess shall be paid to Executive at the same time that annual incentive bonuses for the Company's other senior executive officers are paid in accordance with the Company's policies as in effect from time to time (but in no event later than 60 days following the date of payment of the last quarterly installment of Minimum Bonus). 3.3 Additional Benefits Executive shall be entitled to participate in all of Guarantor's employee benefit plans as listed in the Guarantor's employee handbook, as the same may change from time to time, and, in addition, to participate on the same terms as senior Guarantor executives in any benefit plans available to members of the Guarantor's management (whether or not listed in the employee handbook). Among other things, Executive shall be entitled to participate in the Guarantor's Health Care Benefits Program, 401(k) Plan, Stock Purchase Plan, Stock Option Plan, Short-term and Long-term Disability Programs and the Guarantor's Executive Medical Plan, which provides coverage for all medical expenses not otherwise covered by the basic policy, up to $25,000. If any health, medical or disability plan or program existing at the time of commencement of Executive's employment pursuant to this Agreement is terminated or the benefits thereunder reduced, the Company or Guarantor shall provide Executive with benefits similar to those in existence at the time of commencement of Executive's employment hereunder. 3.4 Stock Options (A) As an additional element of compensation to Executive in consideration of the services to be rendered hereunder, Guarantor shall grant to Executive options to acquire 10,000 shares of Guarantor's common stock at an exercise price equal to the closing price on the Effective Date. The options shall vest in 25%, 25% and 50% increments, respectively, on the first, second and third anniversaries of this Agreement. In addition, all of the options will vest if the Company terminates this Agreement other than for Cause (as defined in Section 6.2) or if the Executive quits for Good Reason (as defined in Section 6.3(B)). The options shall remain exercisable for a period of five (5) years from the date of grant. The specific terms of the above-referenced option shall be as set forth in a separate option agreement in the form annexed hereto as Exhibit 3.4. (B) Executive shall be entitled to participate in the Guarantor's stock option programs, although Executive understands that any grants under such programs are completely discretionary with the Compensation Committee of the Guarantor's Board of Directors. -3- 153 3.5 Reimbursements Executive shall be entitled to reimbursement for all amounts reasonably expended on behalf of the Company, subject to verification similar to that required of and provided by the Company's other senior executives. 3.6 Deductions The Company shall deduct from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. 3.7 Disability Except in the case of Executive's Total Disability (as defined in Section 6.4), Executive's full compensation and benefits under this Agreement shall be continued during any period when he is absent or unable to perform his duties due to illness, disability or other incapacity; and Executive's inability to perform his duties by reason of the foregoing shall not constitute a failure to perform his obligations under this Agreement and shall not be deemed a default by Executive hereunder. The consequences of Executive's Total Disability is covered in Section 7.2 of this Agreement. 4. VACATION Executive shall be entitled to four weeks of vacation in each twelve-month period; provided, however, that no more than six weeks may be taken during any eighteen-month period. Such vacation will accrue on a pro rata basis from the date employment commences under this Agreement. At the end of his employment hereunder, Executive shall be paid for any accrued but unused vacation time. Executive agrees that he will coordinate his vacation plans and schedules in order to prevent any undue disruption of the Company's business. 5. INDEMNIFICATION Executive shall be indemnified by Guarantor and the Company to the full extent permitted by law in respect of his actions as an officer or director of the Company and shall be provided with such liability insurance coverage in this connection as is provided to other Company executives. In addition, the Company and Guarantor shall enter into an Indemnification Agreement with Executive in the form attached as Exhibit 5. -4- 154 6. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: 6.1 Mutual Agreement Whenever the Company and Executive mutually agree in writing to termination; 6.2 Termination for Cause At any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) material breach by Executive of this Agreement or material failure by Executive to perform his duties under this Agreement (other than by reason of Executive's Total Disability) followed by (a) written notice from the Company to Executive specifying such material failure or such material breach, plus (b) Executive not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, Executive not having taken reasonable steps toward curing such material failure or material breach within thirty days of his actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable, or (ii) conviction of Executive by, or a plea of guilty in, a court of competent jurisdiction of a felony or other major crime (a plea of nolo contendere shall be deemed a conviction). 6.3 Termination without Cause by the Company or for Good Reason by Executive (A) By the Company. Notwithstanding any other provision of this Agreement, the Company shall have the right to terminate Executive's employment with the Company and Milgray without Cause at any time, and upon such termination Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. (B) By Executive. If the Company materially breaches any of its obligations, or any material violation by the Company of Executive's rights, under this Agreement followed by (i) written notice from Executive specifying such material breach or violation, plus (ii) the Company not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, the Company not having taken reasonable steps toward curing such material breach or failure within thirty days of actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable (the foregoing being referred to as "Good Reason"), Executive will have the right at Executive's election to terminate his employment hereunder by sending notice to the Company of his election to so terminate. Termination pursuant to this subsection will be effective from and after the effective date of Executive's notice to the Company terminating Executive's employment as aforesaid. Upon any such termination, Executive shall have the rights to receive the amounts -5- 155 described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. 6.4 Death/Disability The death or Total Disability of Executive. For the purposes of this Agreement, "Total Disability" shall mean the inability of Executive due to illness or other incapacity to perform his duties hereunder in a normal manner for a period of six months (whether or not consecutive) during any consecutive eighteen-month period. If there shall be a Total Disability involving Executive, his employment may be terminated by written notice by the Company to Executive. In the event of Executive's death during the term of this Agreement, the persons designated by Executive (or if Executive does not make such a designation, then Executive's estate) shall be entitled to receive his Base Salary plus guaranteed bonus provided for Executive in this Agreement for a period of twelve months following Executive's death (regardless of the time of such death). 6.5 Voluntary Termination Executive may terminate his employment under this Agreement at any time upon thirty days written notice. 7. CONSEQUENCES OF TERMINATION OF EMPLOYMENT 7.1 Termination by the Company other than for Cause or Termination by Executive for Good Reason. If the Company terminates Executive's employment other than for Cause or if Executive, for Good Reason terminates his employment, Executive shall be entitled to receive from the Company (at Executive's election which must be exercised within 30 days of termination), either (i) within twenty days of such election, a lump sum payment in an amount equal to the sum of his Base Salary (plus guaranteed bonus) payments to which Executive would be entitled under this Agreement as a full-time employee of the Company for the balance of Executive's term of employment under this Agreement (from the date of termination); such lump sum payment discounted to present value using the interest rate offered at the date of termination by The Chase Manhattan Bank, N.A., on a certificate of deposit for a period of time equal to the remaining term of this Agreement at the date of termination and subject to the noncompetition covenant for the then balance of the Term as set forth in Section 8.1; or (ii) receive all Base Salary plus guaranteed bonus payments for the remaining term of this Agreement; provided, however, that should Executive elect to become employed by a competitor of the Company after termination (whether as an officer, director, employee, consultant or otherwise), the Company may offset against the amounts it owes Executive all compensation derived from such competitive employment. Executive agrees to notify the Company within five (5) business days of being employed by a competitor of the Company and to provide the Company with such documentation as the Company may reasonably request (including, but not limited to, copies of his Forms W-2) in order to enable the Company to verify the amount of Executive's compensation from any competitor. -6- 156 7.2 Termination by the Company because of Executive's Total Disability. If the Company terminates Executive's employment hereunder because of Executive's Total Disability, Executive shall be entitled to receive from the Company for the full balance of the Term of this Agreement regular bi-weekly payments equal to 75% of Executive's regular bi-weekly Base Salary payment plus guaranteed bonus. This amount shall be reduced by all benefits provided to Executive under any Company disability plan or plans. Executive agrees to participate in such plan(s) to as full an extent and amount as permitted under such plans. 7.3 Voluntary Termination by Executive or Termination by the Company for Cause. If Executive voluntarily terminates his employment hereunder (other than for Good Reason or Total Disability) or if the Company terminates Executive's employment for Cause, Executive shall not be entitled to any further compensation following such termination. The Company shall not be entitled to recover any damages or other amount from Executive by reason of any such termination. 8. RESTRICTIVE COVENANTS 8.1 Covenant Not to Compete. During Executive's employment with the Company, Executive shall not, directly or indirectly, be engaged in the distribution or sale of any products that are directly competitive with products presently distributed or sold by the Company or any of its subsidiaries within the geographical area in which the Company or any of its subsidiaries conducts its business (except for passive investments by Executive of up to 5% of the outstanding stock of a publicly-held company engaged in any such activities). Following termination of Executive's employment with the Company, both in the case of voluntary termination by Executive (whether or not for Good Reason) or in the case of termination by the Company (whether or not for Cause), there shall be no restrictions on Executive's employment by another entity (whether or not competitive with the Company) unless Executive shall have elected the compensation option set forth in Section 7.1(i), in which case the restrictions set forth in the first sentence of this Section 8.1 (except as provided in the last sentence of this Section 8.1) shall continue to apply for the balance of the term of this Agreement as of the date of termination; provided, however, that if Executive elects the option set forth in Section 7.1(i) and then determines at a subsequent date that he wishes to take actions that would otherwise violate such restrictions, Executive will be relieved from such restrictions if he repays to the Company, in advance of taking such actions, a pro rata portion of the payments he received pursuant to that election (based on the length of the time remaining on the non-competition covenant at that time in comparison to the total remaining term of the non-competition covenant at the time of termination). For example, if Executive were terminated without Cause after one year, and elected to receive his remaining two years of pay under this Agreement in a lump sum, and one year later wanted to work for a competitor, the Executive could do so if he repaid the Company one-half of the amount he received as -7- 157 severance (2 years severance pay lump-sum, 1 year of which was "earned" by not competing, with the portion relating to the remaining 1 year to be repaid to the Company in exchange for a release from the non-compete). The Company may, at any time and from time to time, attach an annex to this Agreement specifying specific jurisdictions in which the covenant not-to-compete set forth in this Section 8.1 is applicable. Notwithstanding anything to the contrary contained in the second sentence of this Section 8.1, Executive shall not be restricted from employment by a manufacturer or manufacturer's sales representative which manufactures and/or sells any products referred to in the first sentence of this Section 8.1 or from the sale of any of such products in connection with such employment. 8.2 Nondisclosure and Nonsolicitation. Both during and after Executive's employment with the Company, Executive shall keep secret all material confidential matters of the Company not in the public domain and will not disclose them to anyone outside of the Company. Further, after termination Executive will not seek to hire Company employees. 9. MISCELLANEOUS 9.1 Arbitration All disputes, controversies or claims arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall be submitted to binding arbitration taking place in the State of New York before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Expenses of the arbitration shall be apportioned between the parties by the arbitrator on the basis of relative fault. 9.2 Legal Fees The Company shall pay all legal fees incurred by Executive arising out of the Company's failing to make any payment or withholding any employee benefits under this Agreement or contesting the validity, enforceability or interpretation of this Agreement in the event it is determined that (i) such action was not justified under this Agreement or (ii) if it is determined that both the Company and the Executive acted in violation of this Agreement, the Company's actions constituted a more serious violation than did the Executive's actions. Determination as to Executive's entitlement to legal fees pursuant to this Agreement may be made by the arbitrator if arbitration is sought or by independent legal counsel acceptable to both parties. 9.3 No Third-Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. -8- 158 9.4 Entire Agreement This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. 9.5 Succession and Assignment This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the other. 9.6 Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 9.7 Headings The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.8 Notices All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO THE COMPANY: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049-5022 Attn: President IF TO EXECUTIVE: James Darren O'Donnell 19 Jesse Way Mt. Sinai, New York 11766 -9- 159 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. 9.9 Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. 9.10 Amendments and Waivers No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Company and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 9.11 Severability Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 9.12 Guarantee Guarantor unconditionally guarantees all of the Company's obligations hereunder. Guarantor agrees that Executive may proceed directly against Guarantor in the event of the Company's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Company. -10- 160 IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. MILGRAY ELECTRONICS, INC. By: ------------------------------------- Name: Title: BELL INDUSTRIES, INC. By: ------------------------------------- Name: Title: ---------------------------------------- James Darren O'Donnell -11- 161 EXHIBIT 3.4 FORM OF STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION AGREEMENT This Incentive Stock Option Agreement ("Agreement") is made as of this _________ day of _______________, 199_, between Bell Industries, Inc., a California corporation (the "Company"), and James Darren O'Donnell (the "Participant"). R E C I T A L S 1. The Board of Directors of the Company and its shareholders have adopted the 1990 Stock Option Plan as of October 29, 1990 and the 1994 Stock Option Plan as of November 1, 1994 (the "Plans"). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Plans. 2. The Plans provide for the selling or granting to selected executive and other key employees, and other persons furnishing services to the Company or any subsidiary of the Company, as the Compensation Committee (the "Committee") may from time to time determine, of Restricted Stock or options to purchase shares of Common Stock of the Company. 3. Pursuant to the Plans, the Committee has determined that it is to the advantage and best interest of the Company and its stockholders to grant an Incentive Stock Option to the Participant covering 10,000 shares of the Company's Common Stock as an inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Incentive Stock Option Agreement between the Company and the Participant. 4. The Option granted hereby is intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. The Company grants to the Participant the right and option (the "Option") to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate 10,000 shares of Common Stock at the purchase price of $___________ per share, exercisable in installment periods in accordance with the provisions of this Agreement during a period expiring on the 5th anniversary of the date of this Agreement (the "Expiration Date") or earlier in accordance with Section 5 hereof; provided, however, if the Participant does not in any given installment period purchase all of the shares that the Participant is entitled to purchase in such installment period, then 162 the Participant's right to purchase any shares not purchased in such installment period shall continue until the Expiration Date or sooner termination of the Participant's option. 2. Vesting. This Option shall vest and become exercisable in the percentages and on the dates set forth below: Percentage Cumulative Initially Percentage Date Exercisable Exercisable ---- ----------- ----------- 25% 25% 25% 50% 50% 100% Subject to earlier termination under Section 5 hereof, at any time after the 3rd anniversary date of this Agreement, but no later than the Expiration Date, the Participant may purchase all or any part of the shares subject to this Option which the Participant theretofore failed to purchase. In each case, the number of shares which may be purchased shall be calculated to the nearest full share. Notwithstanding the foregoing vesting schedule, but subject to Section 5 hereof, this Option shall become immediately exercisable in full, if (i) the Company terminates Participant's employment agreement (the "Employment Agreement") dated as of ____________, 1996 other than for Cause (as defined in the Employment Agreement) or (ii) Participant terminates the Employment Agreement for Good Reason (as defined in the Employment Agreement). 3. Manner of Exercise. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company, specifying the number of shares to be purchased and accompanied by payment to the Company of the full purchase price of the shares to be purchased either (i) in cash or by certified or cashier's check payable to the order of the Company, or (ii) by delivery of shares of Common Stock already owned by, and in the possession of, the Participant. Shares of Common Stock used to satisfy any portion of the exercise price of this Option shall be valued at their fair market value determined (in accordance with Section 4 below) as of the close of the business day immediately preceding the date of exercise. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (i) one hundred (100) shares or (ii) the total number of shares then eligible for exercise if less than one hundred (100) shares. This Option may be exercised (i) during the lifetime of the Participant, only by the Participant or, in the event a conservator, guardian or legal representative is appointed during the Participant's lifetime to handle the affairs of the Participant, by such conservator, guardian or legal representative; and (ii) after the Participant's death, by his or her transferee by will or the laws of descent or distribution, and not otherwise, regardless of any community property interest therein of the spouse of the Participant or -2- 163 such spouse's successors in interest. If the spouse of the Participant shall have acquired a community property interest in this Option, the Participant, or the Participant's permitted successors in interest, may exercise the Option on behalf of the spouse of the Participant or such spouse's successors in interest. Except in the event of the Participant's death or permanent disability, the Option may not be exercised prior to the date six months from the date hereof. 4. Fair Market Value of Common Stock. The fair market value of a share of Company Common Stock shall be determined for purposes of this Agreement by reference to the closing price on the New York Stock Exchange (or other principal stock exchange on which such shares are then listed) or, if such shares are not then listed on such exchange (or other principal stock exchange), by reference to the closing price (if a National Market Issue) or the mean between the bid and asked price (if other over-the-counter issue) of a share as supplied by the National Association of Securities Dealers through NASDAQ (or its successor in function), in each case as reported by The Wall Street Journal, for the date on which the option is granted or exercised, or if such date is not a business day, for the business day immediately preceding such date (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof). 5. Cessation of Services, Death or Permanent Disability. If a Participant ceases to be employed by the Company or one of its subsidiaries for any reason other than the Participant's death or permanent disability (within the meaning of Section 22(e)(3) of the Code), the Participant's Option shall be exercisable for a period of three (3) months after the date the Participant ceases to be an employee of the Company or such subsidiary (unless by its terms it sooner expires) to the extent exercisable on the date of such cessation of employment and shall thereafter expire and be void and of no further force or effect. A leave of absence approved in writing by the Committee shall not be deemed a termination of employment for the purposes of this paragraph 5, but no Option may be exercised during any such leave of absence, except during the first three (3) months thereof. If the Participant dies or becomes permanently disabled while employed by the Company or one of its subsidiaries, the Participant's Option shall expire one (1) year after the date of such death or permanent disability unless by its terms it sooner expires. During such period after death, such Option may, to the extent that it remained unexercised (but exercisable by the Participant according to such Option's terms) on the date of such death, be exercised by the person or persons to whom the Participant's rights under the Option shall pass by the Participant's will or by the laws of descent and distribution. 6. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules. No shares issuable upon the exercise of this Option shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended, and all applicable state securities or "Blue Sky" -3- 164 laws (whether by registration or qualification or satisfaction of exemption conditions), all applicable listing requirements of any principal securities exchange on which shares of the same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made. 7. Withholding of Taxes. If the Participant or the Participant's permitted successors in interest disposes of shares of Common Stock acquired pursuant to the exercise of this Option within two years after the date of this Agreement or within one year after exercise of this Option, the Company may deduct and withhold from the wages, salary, bonus and other compensation paid by the Company to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of this Option or the sale of Common Stock issued to the Participant upon exercises hereof, all taxes as may be required from time to time under federal or state tax laws and regulations. This withholding of tax shall be made from the Company's concurrent or next payment of wages, salary, bonus or other compensation to the Participant or by payment to the Company by the Participant of required withholding tax, as the Committee may determine. 8. Adjustments for Reorganizations, Stock Splits, etc. If the outstanding shares of the Common Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares or securities receivable upon the exercise of this Option, without change in the aggregate purchase price applicable to the unexercised portion of this Option but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon the sale of substantially all the property of the Company, the Committee shall provide in writing for appropriate satisfaction of this Option by one or more of the following alternatives to be made in connection with such transaction: (i) the immediate exercisability of this Option (provided that this Option was granted more than six months before such transaction) notwithstanding the provisions of Section 3 hereof, except that this Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (a) one hundred (100) shares or (b) the total number of shares then eligible for exercise if less than one hundred (100) shares; (ii) the assumption of this Option or the substitution therefore of a new option covering the stock of a successor corporation, with appropriate adjustments as to number and kind of shares and prices; (iii) the continuance of the Plan by such successor corporation in which event this Option shall remain in full effect under the terms so provided; or (iv) the payment of an amount in cash or stock, or any combination thereof, in lieu of and in complete satisfaction of this Option. -4- 165 Adjustments under this paragraph 8 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment. 9. Participation by Participant in Other Company Plans. Nothing herein contained shall affect the right of the Participant to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, profit sharing or other employee welfare plan or program of the Company or of any subsidiary of the Company. 10. No Rights as a Shareholder Until Issuance of Stock Certificate. Neither the Participant nor any other person legally entitled to exercise this Option shall be entitled to any of the rights or privileges of a shareholder of the Company in respect of any shares issuable upon any exercise of this Option unless and until a certificate or certificates representing such shares shall have been actually issued and delivered to the Participant. 11. Not an Employment or Service Contract. Nothing contained herein shall be construed as agreement by the Company, express or implied, to employ Participant or contract for Participant's services, to restrict the Company's right to discharge Participant or cease contracting for Participant's services or to modify, extend or otherwise affect in any manner whatsoever the terms of any employment agreement or contract for services which may exist between the Participant and the Company. 12. Agreement Subject to Plan. The Option hereby granted is subject to, and the Company and the Participant agree to be bound by, all of the terms and conditions of the Plan, as the same shall be amended from time to time in accordance with the terms thereof, but no such amendment shall adversely affect the Participant's rights under this Option without the prior written consent of the Participant. 13. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 14. Notices. Any notice or other paper or payment required to be given or sent pursuant to the terms of this Agreement shall be sufficiently given or served hereunder to any party when transmitted by registered or certified mail, postage prepaid, addressed to the party to be served as follows: -5- 166 (a) if to the Company: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, CA 90049-5022 Attention: President (b) if to Participant: James Darren O'Donnell 19 Jesse Way Mt. Sinai, New York 11766 Any party, by written notice, may designate another address for notices to be sent from time to time. -6- 167 15. Execution. This Option has been granted, executed and delivered the day and year first above written at Los Angeles, California, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. COMPANY BELL INDUSTRIES, INC. BY: ------------------------------------- PARTICIPANT ---------------------------------------- NAME: James Darren O'Donnell By his or her signature below, the spouse of the Participant agrees to be bound by all of the terms and conditions of the foregoing Agreement. ---------------------------------------- NAME: -7- 168 EXHIBIT 5 FORM OF INDEMNIFICATION AGREEMENT INDEMNITY AGREEMENT This Agreement is made as of the _____ day of __________, 1996, by and between Milgray Electronics, Inc., a New York corporation (the "Corporation"), Bell Industries, Inc., a California corporation (the "Guarantor"), and James Darren O'Donnell (the "Indemnitee"), a Director and/or Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability of Directors' and Officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, the Corporation does not regard the protection available to Indemnitee as adequate in the present circumstances, and realizes that Indemnitee may not be willing to serve as a Director or Officer without adequate protection, and the Corporation desires Indemnitee to serve in such capacity; NOW, THEREFORE, in consideration of Indemnitee's service as a Director or Officer after the date hereof the parties agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature. (b) The term "Expenses" shall include, but is not limited to, expenses of investigations, judicial or administrative proceedings or appeals, damages, judgments, fines, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under this Agreement. 169 (c) The terms "Director" and "Officer" shall include Indemnitee's service at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise as well as a Director and/or Officer of the Corporation. 2. Indemnity of Director or Officer. Subject only to the limitations set forth in Section 3, Corporation will pay on behalf of the Indemnitee all Expenses actually and reasonably incurred by Indemnitee because of any claim or claims made against him in a Proceeding by reason of the fact that he is or was a Director and/or Officer. 3. Limitations on Indemnity. Corporation shall not be obligated under this Agreement to make any payment of Expenses to the Indemnitee (a) which payment it is prohibited by applicable law from paying as indemnity; (b) for which payment is actually made to the Indemnitee under an insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) for which payment the Indemnitee is indemnified by Corporation otherwise than pursuant to this Agreement and payment is actually made to the Indemnitee except in respect of any excess beyond the amount of the payment under such indemnification; (d) resulting from a claim decided in a Proceeding adversely to the Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he was not legally entitled; (e) resulting from a claim decided in a Proceeding adversely to the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of Corporation within the meaning of Section 16(b) or 16(c) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; or (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be indemnified under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless it shall be decided in a Proceeding that he committed (i) acts of active and deliberate dishonesty (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated. For purposes of Sections 3 and 4, the phrase "decided in a Proceeding" shall mean a decision by a court, arbitrator(s), hearing officer or other judicial agent having the -2- 170 requisite legal authority to make such a decision, which decision has become final and from which no appeal or other review proceeding is permissible. 4. Advance Payment of Costs. Expenses incurred by Indemnitee in defending a claim against him in a Proceeding shall be paid by the Corporation as incurred and in advance of the final disposition of such Proceeding; provided, however, that Expenses of defense need not be paid as incurred and in advance where the judicial agent of first impression has decided the Indemnitee is not entitled to be indemnified pursuant to this Agreement or otherwise. Indemnitee hereby agrees and undertakes to repay such amounts advanced if it shall be decided in a Proceeding that he is not entitled to be indemnified by the Corporation pursuant to this Agreement or otherwise. 5. Enforcement. If a claim under this Agreement is not paid by Corporation, or on its behalf, within thirty days after a written claim has been received by Corporation, the Indemnitee may at any time thereafter bring suit against Corporation to recover the unpaid amount of the claim and if successful in whole or in part, the Indemnitee shall be entitled to be paid also the Expenses of prosecuting such claim. 6. Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Corporation effectively to bring suit to enforce such rights. Notwithstanding the foregoing, if any of the provisions hereof would impair or jeopardize Indemnitee's coverage under the Corporation's Directors' and Officers' Liability Policy, such provisions shall be ineffective and shall be deemed deleted from this Agreement. 7. Notice. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to Corporation shall be given at its principal office and shall be directed to the President (or such other address as Corporation shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, the Indemnitee shall give Corporation such information and cooperation as it may reasonably require. 8. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 9. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Articles of Incorporation or Bylaws of the Corporation or under California law. -3- 171 10. Applicable Law. This Agreement shall be governed by and construed in accordance with California law. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 12. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns. 13. Continuation of Indemnification. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 14. Coverage of Indemnification. The indemnification under this Agreement shall cover Indemnitee's service as a Director and/or Officer prior to or after the date of the Agreement. 15. Guaranty. Guarantor unconditionally guarantees all of the Corporation's obligations hereunder. Guarantor agrees that Indemnitee may proceed directly against Guarantor in the event of the Corporation's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Corporation. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. INDEMNITEE CORPORATION By:_______________________________ By:_____________________________________ GUARANTOR By:_____________________________________ -4- 172 EXHIBIT 6.8(b)-(vii) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of November 26, 1996, by and between Steven Sokoloff (the "Executive"), Milgray Electronics, Inc., a New York corporation (the "Company"), and Bell Industries, Inc., a California corporation (the "Guarantor"), to be effective as of the effective date of the Merger (as defined below) with reference to the following facts: A. Executive is currently employed as Vice President--Marketing of the Company; B. Pursuant to an agreement dated as of November 26, 1996, ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of the Company ("Acquisition Sub") will make a tender offer to acquire all of the outstanding capital stock of Milgray (the "Tender Offer"). After completion of the Tender Offer, it is intended that Acquisition Sub will be merged with and into Milgray, and Milgray will become a wholly-owned subsidiary of the Guarantor (the "Merger"); C. The Company wishes to ensure the continued services of Executive after the Merger; and D. Executive is willing to continue his employment with the Company on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT 1.1 Duties and Responsibilities The Company does hereby employ Executive and Executive hereby accepts such employment as Vice President--Marketing. Executive shall report to the President of the Company, and subject to the directions of the President, shall be responsible for marketing, product and asset management and related matters and performing other functions similar to the functions presently performed by Executive at the Company with respect to semiconductors, computer products and displays; provided, however, that Executive shall not be required to undertake duties not commensurate with his position as Vice President--Marketing of the Company. Notwithstanding anything contained in the preceding sentence, Executive acknowledges that, following the Merger, the Guarantor plans to investigate combining its existing distribution business, or segments thereof, with those of the Company, and where feasible or practicable, to combine such business, or segments thereof, and that as a result of such combination, the Company may change the exact nature of Executive's responsibilities (but not Executive's job title), but in no event will Executive be required to accept job responsibilities in an area 173 outside of his current expertise or to act in less than an executive capacity; moreover, Executive's status and position in the Company (or its successor) organization chart (i.e., the status and position of the person to whom Executive reports and the class of employees who report to Executive) shall be similar to other Vice Presidents of the Company and/or the Guarantor with responsibilities similar to those of Executive. Any such change in responsibility will not constitute a breach of this Agreement by the Company or the Guarantor. During the term of this Agreement, Executive shall devote his full business time and attention to the business of the Company and shall not be engaged in any other duties which interfere with the performance of his duties hereunder. Executive shall be entitled to an office, secretarial help and other accommodations and amenities comparable to those Executive presently has at the Company. 1.2 Place of Performance Executive's duties under this Agreement are to be performed on Long Island in New York State and Executive shall not be required to travel or be assigned away from this location more than seventy five days in any twelve-month period or more than five consecutive days in any thirty-day period. 2. TERM This Agreement shall be in full force and effect for a period (the "Term") which shall commence as of the effective date of the Merger (the "Effective Date") and shall continue for a period of three (3) years, unless sooner terminated as hereafter provided. 3. COMPENSATION 3.1 Base Salary As compensation for the services to be performed by Executive during the continuance of this Agreement, the Company shall pay Executive a base salary of $250,000 per year for each year of his employment hereunder (the "Base Salary"). Base Salary shall be payable in substantially equal bi-weekly installments and reduced on a pro rata basis for any fraction of a year or month during which Executive is not so employed. 3.2 Bonus Executive shall be entitled to earn an incentive bonus based upon achievement of financial and other goals established from time to time by the Company, provided that the minimum bonus for each fiscal year shall be $94,000 (the "Minimum Bonus"). For the initial year of this Agreement, such bonus shall be prorated from the Effective Date and the bonus for any partial year shall be similarly prorated. The incentive bonus shall be paid as follows: (i) the Minimum Bonus shall be paid in four equal quarterly installments within 30 days following the end of each calendar quarter, and (ii) if the -2- 174 annual incentive bonus earned by Executive for any year shall exceed the Minimum Bonus paid for such year, such excess shall be paid to Executive at the same time that annual incentive bonuses for the Company's other senior executive officers are paid in accordance with the Company's policies as in effect from time to time (but in no event later than 60 days following the date of payment of the last quarterly installment of Minimum Bonus). 3.3 Additional Benefits Executive shall be entitled to participate in all of Guarantor's employee benefit plans as listed in the Guarantor's employee handbook, as the same may change from time to time, and, in addition, to participate on the same terms as senior Guarantor executives in any benefit plans available to members of the Guarantor's management (whether or not listed in the employee handbook). Among other things, Executive shall be entitled to participate in the Guarantor's Health Care Benefits Program, 401(k) Plan, Stock Purchase Plan, Stock Option Plan, Short-term and Long-term Disability Programs and the Guarantor's Executive Medical Plan, which provides coverage for all medical expenses not otherwise covered by the basic policy, up to $25,000. If any health, medical or disability plan or program existing at the time of commencement of Executive's employment pursuant to this Agreement is terminated or the benefits thereunder reduced, the Company or Guarantor shall provide Executive with benefits similar to those in existence at the time of commencement of Executive's employment hereunder. 3.4 Stock Options (A) As an additional element of compensation to Executive in consideration of the services to be rendered hereunder, Guarantor shall grant to Executive options to acquire 10,000 shares of Guarantor's common stock at an exercise price equal to the closing price on the Effective Date. The options shall vest in 25%, 25% and 50% increments, respectively, on the first, second and third anniversaries of this Agreement. In addition, all of the options will vest if the Company terminates this Agreement other than for Cause (as defined in Section 6.2) or if the Executive quits for Good Reason (as defined in Section 6.3(B)). The options shall remain exercisable for a period of five (5) years from the date of grant. The specific terms of the above-referenced option shall be as set forth in a separate option agreement in the form annexed hereto as Exhibit 3.4. (B) Executive shall be entitled to participate in the Guarantor's stock option programs, although Executive understands that any grants under such programs are completely discretionary with the Compensation Committee of the Guarantor's Board of Directors. -3- 175 3.5 Reimbursements Executive shall be entitled to reimbursement for all amounts reasonably expended on behalf of the Company, subject to verification similar to that required of and provided by the Company's other senior executives. 3.6 Deductions The Company shall deduct from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. 3.7 Disability Except in the case of Executive's Total Disability (as defined in Section 6.4), Executive's full compensation and benefits under this Agreement shall be continued during any period when he is absent or unable to perform his duties due to illness, disability or other incapacity; and Executive's inability to perform his duties by reason of the foregoing shall not constitute a failure to perform his obligations under this Agreement and shall not be deemed a default by Executive hereunder. The consequences of Executive's Total Disability is covered in Section 7.2 of this Agreement. 4. VACATION Executive shall be entitled to four weeks of vacation in each twelve-month period; provided, however, that no more than six weeks may be taken during any eighteen-month period. Such vacation will accrue on a pro rata basis from the date employment commences under this Agreement. At the end of his employment hereunder, Executive shall be paid for any accrued but unused vacation time. Executive agrees that he will coordinate his vacation plans and schedules in order to prevent any undue disruption of the Company's business. 5. INDEMNIFICATION Executive shall be indemnified by Guarantor and the Company to the full extent permitted by law in respect of his actions as an officer or director of the Company and shall be provided with such liability insurance coverage in this connection as is provided to other Company executives. In addition, the Company and Guarantor shall enter into an Indemnification Agreement with Executive in the form attached as Exhibit 5. -4- 176 6. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: 6.1 Mutual Agreement Whenever the Company and Executive mutually agree in writing to termination; 6.2 Termination for Cause At any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) material breach by Executive of this Agreement or material failure by Executive to perform his duties under this Agreement (other than by reason of Executive's Total Disability) followed by (a) written notice from the Company to Executive specifying such material failure or such material breach, plus (b) Executive not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, Executive not having taken reasonable steps toward curing such material failure or material breach within thirty days of his actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable, or (ii) conviction of Executive by, or a plea of guilty in, a court of competent jurisdiction of a felony or other major crime (a plea of nolo contendere shall be deemed a conviction). 6.3 Termination without Cause by the Company or for Good Reason by Executive (A) By the Company. Notwithstanding any other provision of this Agreement, the Company shall have the right to terminate Executive's employment with the Company and Milgray without Cause at any time, and upon such termination Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. (B) By Executive. If the Company materially breaches any of its obligations, or any material violation by the Company of Executive's rights, under this Agreement followed by (i) written notice from Executive specifying such material breach or violation, plus (ii) the Company not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, the Company not having taken reasonable steps toward curing such material breach or failure within thirty days of actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable (the foregoing being referred to as "Good Reason"), Executive will have the right at Executive's election to terminate his employment hereunder by sending notice to the Company of his election to so terminate. Termination pursuant to this subsection will be effective from and after the effective date of Executive's notice to the Company terminating Executive's employment as aforesaid. -5- 177 Upon any such termination, Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. 6.4 Death/Disability The death or Total Disability of Executive. For the purposes of this Agreement, "Total Disability" shall mean the inability of Executive due to illness or other incapacity to perform his duties hereunder in a normal manner for a period of six months (whether or not consecutive) during any consecutive eighteen-month period. If there shall be a Total Disability involving Executive, his employment may be terminated by written notice by the Company to Executive. In the event of Executive's death during the term of this Agreement, the persons designated by Executive (or if Executive does not make such a designation, then Executive's estate) shall be entitled to receive his Base Salary plus guaranteed bonus provided for Executive in this Agreement for a period of twelve months following Executive's death (regardless of the time of such death). 6.5 Voluntary Termination Executive may terminate his employment under this Agreement at any time upon thirty days written notice. 7. CONSEQUENCES OF TERMINATION OF EMPLOYMENT 7.1 Termination by the Company other than for Cause or Termination by Executive for Good Reason. If the Company terminates Executive's employment other than for Cause or if Executive, for Good Reason terminates his employment, Executive shall be entitled to receive from the Company (at Executive's election which must be exercised within 30 days of termination), either (i) within twenty days of such election, a lump sum payment in an amount equal to the sum of his Base Salary (plus guaranteed bonus) payments to which Executive would be entitled under this Agreement as a full-time employee of the Company for the balance of Executive's term of employment under this Agreement (from the date of termination); such lump sum payment discounted to present value using the interest rate offered at the date of termination by The Chase Manhattan Bank, N.A., on a certificate of deposit for a period of time equal to the remaining term of this Agreement at the date of termination and subject to the noncompetition covenant for the then balance of the Term as set forth in Section 8.1; or (ii) receive all Base Salary plus guaranteed bonus payments for the remaining term of this Agreement; provided, however, that should Executive elect to become employed by a competitor of the Company after termination (whether as an officer, director, employee, consultant or otherwise), the Company may offset against the amounts it owes Executive all compensation derived from such competitive employment. Executive agrees to notify the Company within five (5) business days of being employed by a competitor of the Company and to provide the Company with such documentation as the Company may reasonably request (including, but not limited to, copies of his Forms W- -6- 178 2) in order to enable the Company to verify the amount of Executive's compensation from any competitor. 7.2 Termination by the Company because of Executive's Total Disability. If the Company terminates Executive's employment hereunder because of Executive's Total Disability, Executive shall be entitled to receive from the Company for the full balance of the Term of this Agreement regular bi-weekly payments equal to 75% of Executive's regular bi-weekly Base Salary payment plus guaranteed bonus. This amount shall be reduced by all benefits provided to Executive under any Company disability plan or plans. Executive agrees to participate in such plan(s) to as full an extent and amount as permitted under such plans. 7.3 Voluntary Termination by Executive or Termination by the Company for Cause. If Executive voluntarily terminates his employment hereunder (other than for Good Reason or Total Disability) or if the Company terminates Executive's employment for Cause, Executive shall not be entitled to any further compensation following such termination. The Company shall not be entitled to recover any damages or other amount from Executive by reason of any such termination. 8. RESTRICTIVE COVENANTS 8.1 Covenant Not to Compete. During Executive's employment with the Company, Executive shall not, directly or indirectly, be engaged in the distribution or sale of any products that are directly competitive with products presently distributed or sold by the Company or any of its subsidiaries within the geographical area in which the Company or any of its subsidiaries conducts its business (except for passive investments by Executive of up to 5% of the outstanding stock of a publicly-held company engaged in any such activities). Following termination of Executive's employment with the Company, both in the case of voluntary termination by Executive (whether or not for Good Reason) or in the case of termination by the Company (whether or not for Cause), there shall be no restrictions on Executive's employment by another entity (whether or not competitive with the Company) unless Executive shall have elected the compensation option set forth in Section 7.1(i), in which case the restrictions set forth in the first sentence of this Section 8.1 (except as provided in the last sentence of this Section 8.1) shall continue to apply for the balance of the term of this Agreement as of the date of termination; provided, however, that if Executive elects the option set forth in Section 7.1(i) and then determines at a subsequent date that he wishes to take actions that would otherwise violate such restrictions, Executive will be relieved from such restrictions if he repays to the Company, in advance of taking such actions, a pro rata portion of the payments he received pursuant to that election (based on the length of the time remaining on the non-competition covenant at that time in comparison to the total remaining term of the non-competition covenant at the time of termination). For example, if Executive were terminated without -7- 179 Cause after one year, and elected to receive his remaining two years of pay under this Agreement in a lump sum, and one year later wanted to work for a competitor, the Executive could do so if he repaid the Company one-half of the amount he received as severance (2 years severance pay lump-sum, 1 year of which was "earned" by not competing, with the portion relating to the remaining 1 year to be repaid to the Company in exchange for a release from the non-compete). The Company may, at any time and from time to time, attach an annex to this Agreement specifying specific jurisdictions in which the covenant not-to-compete set forth in this Section 8.1 is applicable. Notwithstanding anything to the contrary contained in the second sentence of this Section 8.1, Executive shall not be restricted from employment by a manufacturer or manufacturer's sales representative which manufactures and/or sells any products referred to in the first sentence of this Section 8.1 or from the sale of any of such products in connection with such employment. 8.2 Nondisclosure and Nonsolicitation. Both during and after Executive's employment with the Company, Executive shall keep secret all material confidential matters of the Company not in the public domain and will not disclose them to anyone outside of the Company. Further, after termination Executive will not seek to hire Company employees. -8- 180 9. MISCELLANEOUS 9.1 Arbitration All disputes, controversies or claims arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall be submitted to binding arbitration taking place in the State of New York before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Expenses of the arbitration shall be apportioned between the parties by the arbitrator on the basis of relative fault. 9.2 Legal Fees The Company shall pay all legal fees incurred by Executive arising out of the Company's failing to make any payment or withholding any employee benefits under this Agreement or contesting the validity, enforceability or interpretation of this Agreement in the event it is determined that (i) such action was not justified under this Agreement or (ii) if it is determined that both the Company and the Executive acted in violation of this Agreement, the Company's actions constituted a more serious violation than did the Executive's actions. Determination as to Executive's entitlement to legal fees pursuant to this Agreement may be made by the arbitrator if arbitration is sought or by independent legal counsel acceptable to both parties. 9.3 No Third-Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. 9.4 Entire Agreement This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. 9.5 Succession and Assignment This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the other. -9- 181 9.6 Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 9.7 Headings The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.8 Notices All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO THE COMPANY: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049-5022 Attn: President IF TO EXECUTIVE: Steven Sokoloff 5 Gaines Drive Farmingdale, New York 11738 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. 9.9 Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) -10- 182 that would cause the application of the laws of any jurisdiction other than the State of New York. 9.10 Amendments and Waivers No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Company and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 9.11 Severability Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 9.12 Guarantee Guarantor unconditionally guarantees all of the Company's obligations hereunder. Guarantor agrees that Executive may proceed directly against Guarantor in the event of the Company's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Company. -11- 183 IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. MILGRAY ELECTRONICS, INC. By: ---------------------------- Name: Title: BELL INDUSTRIES, INC. By: ---------------------------- Name: Title: ------------------------------- Steven Sokoloff -12- 184 EXHIBIT 3.4 FORM OF STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION AGREEMENT This Incentive Stock Option Agreement ("Agreement") is made as of this _________ day of _______________, 199_, between Bell Industries, Inc., a California corporation (the "Company"), and Steven Sokoloff (the "Participant"). R E C I T A L S 1. The Board of Directors of the Company and its shareholders have adopted the 1990 Stock Option Plan as of October 29, 1990 and the 1994 Stock Option Plan as of November 1, 1994 (the "Plans"). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Plans. 2. The Plans provide for the selling or granting to selected executive and other key employees, and other persons furnishing services to the Company or any subsidiary of the Company, as the Compensation Committee (the "Committee") may from time to time determine, of Restricted Stock or options to purchase shares of Common Stock of the Company. 3. Pursuant to the Plans, the Committee has determined that it is to the advantage and best interest of the Company and its stockholders to grant an Incentive Stock Option to the Participant covering 10,000 shares of the Company's Common Stock as an inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Incentive Stock Option Agreement between the Company and the Participant. 4. The Option granted hereby is intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. The Company grants to the Participant the right and option (the "Option") to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate 10,000 shares of Common Stock at the purchase price of $___________ per share, exercisable in installment periods in accordance with the provisions of this Agreement during a period expiring on the 5th anniversary of the date of this Agreement (the "Expiration Date") or earlier in accordance with Section 5 hereof; provided, however, if the Participant does not in any given installment period purchase all of the shares that the Participant is entitled to purchase in such installment period, then 185 the Participant's right to purchase any shares not purchased in such installment period shall continue until the Expiration Date or sooner termination of the Participant's option. 2. Vesting. This Option shall vest and become exercisable in the percentages and on the dates set forth below:
Percentage Cumulative Initially Percentage Date Exercisable Exercisable ---- ----------- ----------- 25% 25% 25% 50% 50% 100%
Subject to earlier termination under Section 5 hereof, at any time after the 3rd anniversary date of this Agreement, but no later than the Expiration Date, the Participant may purchase all or any part of the shares subject to this Option which the Participant theretofore failed to purchase. In each case, the number of shares which may be purchased shall be calculated to the nearest full share. Notwithstanding the foregoing vesting schedule, but subject to Section 5 hereof, this Option shall become immediately exercisable in full, if (i) the Company terminates Participant's employment agreement (the "Employment Agreement") dated as of ____________, 1996 other than for Cause (as defined in the Employment Agreement) or (ii) Participant terminates the Employment Agreement for Good Reason (as defined in the Employment Agreement). 3. Manner of Exercise. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company, specifying the number of shares to be purchased and accompanied by payment to the Company of the full purchase price of the shares to be purchased either (i) in cash or by certified or cashier's check payable to the order of the Company, or (ii) by delivery of shares of Common Stock already owned by, and in the possession of, the Participant. Shares of Common Stock used to satisfy any portion of the exercise price of this Option shall be valued at their fair market value determined (in accordance with Section 4 below) as of the close of the business day immediately preceding the date of exercise. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (i) one hundred (100) shares or (ii) the total number of shares then eligible for exercise if less than one hundred (100) shares. This Option may be exercised (i) during the lifetime of the Participant, only by the Participant or, in the event a conservator, guardian or legal representative is appointed during the Participant's lifetime to handle the affairs of the Participant, by such conservator, guardian or legal representative; and (ii) after the Participant's death, by his or her transferee by will or the laws of descent or distribution, and not otherwise, regardless of any community property interest therein of the spouse of the Participant or -2- 186 such spouse's successors in interest. If the spouse of the Participant shall have acquired a community property interest in this Option, the Participant, or the Participant's permitted successors in interest, may exercise the Option on behalf of the spouse of the Participant or such spouse's successors in interest. Except in the event of the Participant's death or permanent disability, the Option may not be exercised prior to the date six months from the date hereof. 4. Fair Market Value of Common Stock. The fair market value of a share of Company Common Stock shall be determined for purposes of this Agreement by reference to the closing price on the New York Stock Exchange (or other principal stock exchange on which such shares are then listed) or, if such shares are not then listed on such exchange (or other principal stock exchange), by reference to the closing price (if a National Market Issue) or the mean between the bid and asked price (if other over-the-counter issue) of a share as supplied by the National Association of Securities Dealers through NASDAQ (or its successor in function), in each case as reported by The Wall Street Journal, for the date on which the option is granted or exercised, or if such date is not a business day, for the business day immediately preceding such date (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof). 5. Cessation of Services, Death or Permanent Disability. If a Participant ceases to be employed by the Company or one of its subsidiaries for any reason other than the Participant's death or permanent disability (within the meaning of Section 22(e)(3) of the Code), the Participant's Option shall be exercisable for a period of three (3) months after the date the Participant ceases to be an employee of the Company or such subsidiary (unless by its terms it sooner expires) to the extent exercisable on the date of such cessation of employment and shall thereafter expire and be void and of no further force or effect. A leave of absence approved in writing by the Committee shall not be deemed a termination of employment for the purposes of this paragraph 5, but no Option may be exercised during any such leave of absence, except during the first three (3) months thereof. If the Participant dies or becomes permanently disabled while employed by the Company or one of its subsidiaries, the Participant's Option shall expire one (1) year after the date of such death or permanent disability unless by its terms it sooner expires. During such period after death, such Option may, to the extent that it remained unexercised (but exercisable by the Participant according to such Option's terms) on the date of such death, be exercised by the person or persons to whom the Participant's rights under the Option shall pass by the Participant's will or by the laws of descent and distribution. 6. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules. No shares issuable upon the exercise of this Option shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended, and all applicable state securities or "Blue Sky" -3- 187 laws (whether by registration or qualification or satisfaction of exemption conditions), all applicable listing requirements of any principal securities exchange on which shares of the same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made. 7. Withholding of Taxes. If the Participant or the Participant's permitted successors in interest disposes of shares of Common Stock acquired pursuant to the exercise of this Option within two years after the date of this Agreement or within one year after exercise of this Option, the Company may deduct and withhold from the wages, salary, bonus and other compensation paid by the Company to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of this Option or the sale of Common Stock issued to the Participant upon exercises hereof, all taxes as may be required from time to time under federal or state tax laws and regulations. This withholding of tax shall be made from the Company's concurrent or next payment of wages, salary, bonus or other compensation to the Participant or by payment to the Company by the Participant of required withholding tax, as the Committee may determine. 8. Adjustments for Reorganizations, Stock Splits, etc. If the outstanding shares of the Common Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares or securities receivable upon the exercise of this Option, without change in the aggregate purchase price applicable to the unexercised portion of this Option but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon the sale of substantially all the property of the Company, the Committee shall provide in writing for appropriate satisfaction of this Option by one or more of the following alternatives to be made in connection with such transaction: (i) the immediate exercisability of this Option (provided that this Option was granted more than six months before such transaction) notwithstanding the provisions of Section 3 hereof, except that this Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (a) one hundred (100) shares or (b) the total number of shares then eligible for exercise if less than one hundred (100) shares; (ii) the assumption of this Option or the substitution therefore of a new option covering the stock of a successor corporation, with appropriate adjustments as to number and kind of shares and prices; (iii) the continuance of the Plan by such successor corporation in which event this Option shall remain in full effect under the terms so provided; or (iv) the payment of an amount in cash or stock, or any combination thereof, in lieu of and in complete satisfaction of this Option. -4- 188 Adjustments under this paragraph 8 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment. 9. Participation by Participant in Other Company Plans. Nothing herein contained shall affect the right of the Participant to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, profit sharing or other employee welfare plan or program of the Company or of any subsidiary of the Company. 10. No Rights as a Shareholder Until Issuance of Stock Certificate. Neither the Participant nor any other person legally entitled to exercise this Option shall be entitled to any of the rights or privileges of a shareholder of the Company in respect of any shares issuable upon any exercise of this Option unless and until a certificate or certificates representing such shares shall have been actually issued and delivered to the Participant. 11. Not an Employment or Service Contract. Nothing contained herein shall be construed as agreement by the Company, express or implied, to employ Participant or contract for Participant's services, to restrict the Company's right to discharge Participant or cease contracting for Participant's services or to modify, extend or otherwise affect in any manner whatsoever the terms of any employment agreement or contract for services which may exist between the Participant and the Company. 12. Agreement Subject to Plan. The Option hereby granted is subject to, and the Company and the Participant agree to be bound by, all of the terms and conditions of the Plan, as the same shall be amended from time to time in accordance with the terms thereof, but no such amendment shall adversely affect the Participant's rights under this Option without the prior written consent of the Participant. 13. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 14. Notices. Any notice or other paper or payment required to be given or sent pursuant to the terms of this Agreement shall be sufficiently given or served hereunder to any party when transmitted by registered or certified mail, postage prepaid, addressed to the party to be served as follows: (a) if to the Company: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, CA 90049-5022 Attention: President (b) if to Participant: Steven Sokoloff 5 Gaines Drive -5- 189 Farmingdale, New York 11738 Any party, by written notice, may designate another address for notices to be sent from time to time. -6- 190 15. Execution. This Option has been granted, executed and delivered the day and year first above written at Los Angeles, California, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. COMPANY BELL INDUSTRIES, INC. BY: ----------------------------- PARTICIPANT -------------------------------- NAME: Steven Sokoloff By his or her signature below, the spouse of the Participant agrees to be bound by all of the terms and conditions of the foregoing Agreement. NAME: --------------------------- -7- 191 EXHIBIT 5 FORM OF INDEMNIFICATION AGREEMENT INDEMNITY AGREEMENT This Agreement is made as of the _____ day of __________, 1996, by and between Milgray Electronics, Inc., a New York corporation (the "Corporation"), Bell Industries, Inc., a California corporation (the "Guarantor"), and Steven Sokoloff (the "Indemnitee"), a Director and/or Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability of Directors' and Officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, the Corporation does not regard the protection available to Indemnitee as adequate in the present circumstances, and realizes that Indemnitee may not be willing to serve as a Director or Officer without adequate protection, and the Corporation desires Indemnitee to serve in such capacity; NOW, THEREFORE, in consideration of Indemnitee's service as a Director or Officer after the date hereof the parties agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature. (b) The term "Expenses" shall include, but is not limited to, expenses of investigations, judicial or administrative proceedings or appeals, damages, judgments, fines, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under this Agreement. 192 (c) The terms "Director" and "Officer" shall include Indemnitee's service at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise as well as a Director and/or Officer of the Corporation. 2. Indemnity of Director or Officer. Subject only to the limitations set forth in Section 3, Corporation will pay on behalf of the Indemnitee all Expenses actually and reasonably incurred by Indemnitee because of any claim or claims made against him in a Proceeding by reason of the fact that he is or was a Director and/or Officer. 3. Limitations on Indemnity. Corporation shall not be obligated under this Agreement to make any payment of Expenses to the Indemnitee (a) which payment it is prohibited by applicable law from paying as indemnity; (b) for which payment is actually made to the Indemnitee under an insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) for which payment the Indemnitee is indemnified by Corporation otherwise than pursuant to this Agreement and payment is actually made to the Indemnitee except in respect of any excess beyond the amount of the payment under such indemnification; (d) resulting from a claim decided in a Proceeding adversely to the Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he was not legally entitled; (e) resulting from a claim decided in a Proceeding adversely to the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of Corporation within the meaning of Section 16(b) or 16(c) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; or (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be indemnified under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless it shall be decided in a Proceeding that he committed (i) acts of active and deliberate dishonesty (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated. For purposes of Sections 3 and 4, the phrase "decided in a Proceeding" shall mean a decision by a court, arbitrator(s), hearing officer or other judicial agent having the -2- 193 requisite legal authority to make such a decision, which decision has become final and from which no appeal or other review proceeding is permissible. 4. Advance Payment of Costs. Expenses incurred by Indemnitee in defending a claim against him in a Proceeding shall be paid by the Corporation as incurred and in advance of the final disposition of such Proceeding; provided, however, that Expenses of defense need not be paid as incurred and in advance where the judicial agent of first impression has decided the Indemnitee is not entitled to be indemnified pursuant to this Agreement or otherwise. Indemnitee hereby agrees and undertakes to repay such amounts advanced if it shall be decided in a Proceeding that he is not entitled to be indemnified by the Corporation pursuant to this Agreement or otherwise. 5. Enforcement. If a claim under this Agreement is not paid by Corporation, or on its behalf, within thirty days after a written claim has been received by Corporation, the Indemnitee may at any time thereafter bring suit against Corporation to recover the unpaid amount of the claim and if successful in whole or in part, the Indemnitee shall be entitled to be paid also the Expenses of prosecuting such claim. 6. Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Corporation effectively to bring suit to enforce such rights. Notwithstanding the foregoing, if any of the provisions hereof would impair or jeopardize Indemnitee's coverage under the Corporation's Directors' and Officers' Liability Policy, such provisions shall be ineffective and shall be deemed deleted from this Agreement. 7. Notice. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to Corporation shall be given at its principal office and shall be directed to the President (or such other address as Corporation shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, the Indemnitee shall give Corporation such information and cooperation as it may reasonably require. 8. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 9. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Articles of Incorporation or Bylaws of the Corporation or under California law. -3- 194 10. Applicable Law. This Agreement shall be governed by and construed in accordance with California law. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 12. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns. 13. Continuation of Indemnification. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 14. Coverage of Indemnification. The indemnification under this Agreement shall cover Indemnitee's service as a Director and/or Officer prior to or after the date of the Agreement. 15. Guaranty. Guarantor unconditionally guarantees all of the Corporation's obligations hereunder. Guarantor agrees that Indemnitee may proceed directly against Guarantor in the event of the Corporation's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Corporation. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. INDEMNITEE CORPORATION By:_______________________ By:___________________ GUARANTOR By:___________________ -4- 195 EXHIBIT 6.8(b)-(viii) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of November 26, 1996, by and between Elliott Schnabel (also known as Elliott Stevens) (the "Executive"), Milgray Electronics, Inc., a New York corporation (the "Company"), and Bell Industries, Inc., a California corporation (the "Guarantor"), to be effective as of the effective date of the Merger (as defined below) with reference to the following facts: A. Executive is currently employed as Regional Vice President--Sales of the Company; B. Pursuant to an agreement dated as of November 26, 1996, ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of the Company ("Acquisition Sub") will make a tender offer to acquire all of the outstanding capital stock of Milgray (the "Tender Offer"). After completion of the Tender Offer, it is intended that Acquisition Sub will be merged with and into Milgray, and Milgray will become a wholly-owned subsidiary of the Guarantor (the "Merger"); C. The Company wishes to ensure the continued services of Executive after the Merger; and D. Executive is willing to continue his employment with the Company on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT 1.1 Duties and Responsibilities The Company does hereby employ Executive and Executive hereby accepts such employment as Regional Vice President--Sales. Executive shall report to the President of the Company, and subject to the directions of the President, shall be responsible for supervising sales activities of branches assigned to Executive and related matters, including profit and loss for assigned branches and region, customer relations and agreements with significant customers and performing other functions similar to the functions presently performed by Executive at the Company connected with the foregoing; provided, however, that Executive shall not be required to undertake duties not commensurate with his position as Regional Vice President--Sales of the Company. Notwithstanding anything contained in the preceding sentence, Executive acknowledges that, following the Merger, the Guarantor plans to investigate combining its existing distribution business, or segments thereof, with those of the Company, and where feasible or practicable, to combine such business, or segments thereof, and that as a 196 result of such combination, the Company may change the exact nature of Executive's responsibilities (but not Executive's job title), but in no event will Executive be required to accept job responsibilities in an area outside of his current expertise or to act in less than an executive capacity; moreover, Executive's status and position in the Company (or its successor) organization chart (i.e., the status and position of the person to whom Executive reports and the class of employees who report to Executive) shall be similar to other Vice Presidents of the Company and/or the Guarantor with responsibilities similar to those of Executive. Any such change in responsibility will not constitute a breach of this Agreement by the Company or the Guarantor. During the term of this Agreement, Executive shall devote his full business time and attention to the business of the Company and shall not be engaged in any other duties which interfere with the performance of his duties hereunder. Executive shall be entitled to an office, secretarial help and other accommodations and amenities comparable to those Executive presently has at the Company. 1.2 Place of Performance Executive's duties under this Agreement are to be performed on Long Island in New York State and Executive shall not be required to travel or be assigned away from this location more than one hundred days in any twelve-month period or more than five consecutive days in any thirty-day period. 2. TERM This Agreement shall be in full force and effect for a period (the "Term") which shall commence as of the effective date of the Merger (the "Effective Date") and shall continue for a period of three (3) years, unless sooner terminated as hereafter provided. 3. COMPENSATION 3.1 Base Salary As compensation for the services to be performed by Executive during the continuance of this Agreement, the Company shall pay Executive a base salary of $200,000 per year for each year of his employment hereunder (the "Base Salary"). Base Salary shall be payable in substantially equal bi-weekly installments and reduced on a pro rata basis for any fraction of a year or month during which Executive is not so employed. 3.2 Bonus Executive shall be entitled to earn an incentive bonus based upon achievement of financial and other goals established from time to time by the Company, provided that the minimum bonus for each fiscal year shall be $80,000 (the "Minimum Bonus"). For the initial year of this Agreement, such bonus shall be prorated from the Effective Date and the bonus for any partial year shall be similarly prorated. The incentive bonus shall -2- 197 be paid as follows: (i) the Minimum Bonus shall be paid in four equal quarterly installments within 30 days following the end of each calendar quarter, and (ii) if the annual incentive bonus earned by Executive for any year shall exceed the Minimum Bonus paid for such year, such excess shall be paid to Executive at the same time that annual incentive bonuses for the Company's other senior executive officers are paid in accordance with the Company's policies as in effect from time to time (but in no event later than 60 days following the date of payment of the last quarterly installment of Minimum Bonus). 3.3 Additional Benefits Executive shall be entitled to participate in all of Guarantor's employee benefit plans as listed in the Guarantor's employee handbook, as the same may change from time to time, and, in addition, to participate on the same terms as senior Guarantor executives in any benefit plans available to members of the Guarantor's management (whether or not listed in the employee handbook). Among other things, Executive shall be entitled to participate in the Guarantor's Health Care Benefits Program, 401(k) Plan, Stock Purchase Plan, Stock Option Plan, Short-term and Long-term Disability Programs and the Guarantor's Executive Medical Plan, which provides coverage for all medical expenses not otherwise covered by the basic policy, up to $25,000. If any health, medical or disability plan or program existing at the time of commencement of Executive's employment pursuant to this Agreement is terminated or the benefits thereunder reduced, the Company or Guarantor shall provide Executive with benefits similar to those in existence at the time of commencement of Executive's employment hereunder. 3.4 Stock Options (A) As an additional element of compensation to Executive in consideration of the services to be rendered hereunder, Guarantor shall grant to Executive options to acquire 10,000 shares of Guarantor's common stock at an exercise price equal to the closing price on the Effective Date. The options shall vest in 25%, 25% and 50% increments, respectively, on the first, second and third anniversaries of this Agreement. In addition, all of the options will vest if the Company terminates this Agreement other than for Cause (as defined in Section 6.2) or if the Executive quits for Good Reason (as defined in Section 6.3(B)). The options shall remain exercisable for a period of five (5) years from the date of grant. The specific terms of the above-referenced option shall be as set forth in a separate option agreement in the form annexed hereto as Exhibit 3.4. (B) Executive shall be entitled to participate in the Guarantor's stock option programs, although Executive understands that any grants under such programs are completely discretionary with the Compensation Committee of the Guarantor's Board of Directors. -3- 198 3.5 Reimbursements Executive shall be entitled to reimbursement for all amounts reasonably expended on behalf of the Company, subject to verification similar to that required of and provided by the Company's other senior executives. 3.6 Deductions The Company shall deduct from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. 3.7 Disability Except in the case of Executive's Total Disability (as defined in Section 6.4), Executive's full compensation and benefits under this Agreement shall be continued during any period when he is absent or unable to perform his duties due to illness, disability or other incapacity; and Executive's inability to perform his duties by reason of the foregoing shall not constitute a failure to perform his obligations under this Agreement and shall not be deemed a default by Executive hereunder. The consequences of Executive's Total Disability is covered in Section 7.2 of this Agreement. 4. VACATION Executive shall be entitled to four weeks of vacation in each twelve-month period; provided, however, that no more than six weeks may be taken during any eighteen-month period. Such vacation will accrue on a pro rata basis from the date employment commences under this Agreement. At the end of his employment hereunder, Executive shall be paid for any accrued but unused vacation time. Executive agrees that he will coordinate his vacation plans and schedules in order to prevent any undue disruption of the Company's business. 5. INDEMNIFICATION Executive shall be indemnified by Guarantor and the Company to the full extent permitted by law in respect of his actions as an officer or director of the Company and shall be provided with such liability insurance coverage in this connection as is provided to other Company executives. In addition, the Company and Guarantor shall enter into an Indemnification Agreement with Executive in the form attached as Exhibit 5. -4- 199 6. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: 6.1 Mutual Agreement Whenever the Company and Executive mutually agree in writing to termination; 6.2 Termination for Cause At any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) material breach by Executive of this Agreement or material failure by Executive to perform his duties under this Agreement (other than by reason of Executive's Total Disability) followed by (a) written notice from the Company to Executive specifying such material failure or such material breach, plus (b) Executive not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, Executive not having taken reasonable steps toward curing such material failure or material breach within thirty days of his actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable, or (ii) conviction of Executive by, or a plea of guilty in, a court of competent jurisdiction of a felony or other major crime (a plea of nolo contendere shall be deemed a conviction). 6.3 Termination without Cause by the Company or for Good Reason by Executive (A) By the Company. Notwithstanding any other provision of this Agreement, the Company shall have the right to terminate Executive's employment with the Company and Milgray without Cause at any time, and upon such termination Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. (B) By Executive. If the Company materially breaches any of its obligations, or any material violation by the Company of Executive's rights, under this Agreement followed by (i) written notice from Executive specifying such material breach or violation, plus (ii) the Company not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, the Company not having taken reasonable steps toward curing such material breach or failure within thirty days of actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable (the foregoing being referred to as "Good Reason"), Executive will have the right at Executive's election to terminate his employment hereunder by sending notice to the Company of his election to so terminate. Termination pursuant to this subsection will be effective from and after the effective date of Executive's notice to the Company terminating Executive's employment as aforesaid. -5- 200 Upon any such termination, Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. 6.4 Death/Disability The death or Total Disability of Executive. For the purposes of this Agreement, "Total Disability" shall mean the inability of Executive due to illness or other incapacity to perform his duties hereunder in a normal manner for a period of six months (whether or not consecutive) during any consecutive eighteen-month period. If there shall be a Total Disability involving Executive, his employment may be terminated by written notice by the Company to Executive. In the event of Executive's death during the term of this Agreement, the persons designated by Executive (or if Executive does not make such a designation, then Executive's estate) shall be entitled to receive his Base Salary plus guaranteed bonus provided for Executive in this Agreement for a period of twelve months following Executive's death (regardless of the time of such death). 6.5 Voluntary Termination Executive may terminate his employment under this Agreement at any time upon thirty days written notice. 7. CONSEQUENCES OF TERMINATION OF EMPLOYMENT 7.1 Termination by the Company other than for Cause or Termination by Executive for Good Reason. If the Company terminates Executive's employment other than for Cause or if Executive, for Good Reason terminates his employment, Executive shall be entitled to receive from the Company (at Executive's election which must be exercised within 30 days of termination), either (i) within twenty days of such election, a lump sum payment in an amount equal to the sum of his Base Salary (plus guaranteed bonus) payments to which Executive would be entitled under this Agreement as a full-time employee of the Company for the balance of Executive's term of employment under this Agreement (from the date of termination); such lump sum payment discounted to present value using the interest rate offered at the date of termination by The Chase Manhattan Bank, N.A., on a certificate of deposit for a period of time equal to the remaining term of this Agreement at the date of termination and subject to the noncompetition covenant for the then balance of the Term as set forth in Section 8.1; or (ii) receive all Base Salary plus guaranteed bonus payments for the remaining term of this Agreement; provided, however, that should Executive elect to become employed by a competitor of the Company after termination (whether as an officer, director, employee, consultant or otherwise), the Company may offset against the amounts it owes Executive all compensation derived from such competitive employment. Executive agrees to notify the Company within five (5) business days of being employed by a competitor of the Company and to provide the Company with such documentation as the Company may reasonably request (including, but not limited to, copies of his Forms W- -6- 201 2) in order to enable the Company to verify the amount of Executive's compensation from any competitor. 7.2 Termination by the Company because of Executive's Total Disability. If the Company terminates Executive's employment hereunder because of Executive's Total Disability, Executive shall be entitled to receive from the Company for the full balance of the Term of this Agreement regular bi-weekly payments equal to 75% of Executive's regular bi-weekly Base Salary payment plus guaranteed bonus. This amount shall be reduced by all benefits provided to Executive under any Company disability plan or plans. Executive agrees to participate in such plan(s) to as full an extent and amount as permitted under such plans. 7.3 Voluntary Termination by Executive or Termination by the Company for Cause. If Executive voluntarily terminates his employment hereunder (other than for Good Reason or Total Disability) or if the Company terminates Executive's employment for Cause, Executive shall not be entitled to any further compensation following such termination. The Company shall not be entitled to recover any damages or other amount from Executive by reason of any such termination. 8. RESTRICTIVE COVENANTS 8.1 Covenant Not to Compete. During Executive's employment with the Company, Executive shall not, directly or indirectly, be engaged in the distribution or sale of any products that are directly competitive with products presently distributed or sold by the Company or any of its subsidiaries within the geographical area in which the Company or any of its subsidiaries conducts its business (except for passive investments by Executive of up to 5% of the outstanding stock of a publicly-held company engaged in any such activities). Following termination of Executive's employment with the Company, both in the case of voluntary termination by Executive (whether or not for Good Reason) or in the case of termination by the Company (whether or not for Cause), there shall be no restrictions on Executive's employment by another entity (whether or not competitive with the Company) unless Executive shall have elected the compensation option set forth in Section 7.1(i), in which case the restrictions set forth in the first sentence of this Section 8.1 (except as provided in the last sentence of this Section 8.1) shall continue to apply for the balance of the term of this Agreement as of the date of termination; provided, however, that if Executive elects the option set forth in Section 7.1(i) and then determines at a subsequent date that he wishes to take actions that would otherwise violate such restrictions, Executive will be relieved from such restrictions if he repays to the Company, in advance of taking such actions, a pro rata portion of the payments he received pursuant to that election (based on the length of the time remaining on the non-competition covenant at that time in comparison to the total remaining term of the non-competition covenant at the time of termination). For example, if Executive were terminated without -7- 202 Cause after one year, and elected to receive his remaining two years of pay under this Agreement in a lump sum, and one year later wanted to work for a competitor, the Executive could do so if he repaid the Company one-half of the amount he received as severance (2 years severance pay lump-sum, 1 year of which was "earned" by not competing, with the portion relating to the remaining 1 year to be repaid to the Company in exchange for a release from the non-compete). The Company may, at any time and from time to time, attach an annex to this Agreement specifying specific jurisdictions in which the covenant not-to-compete set forth in this Section 8.1 is applicable. Notwithstanding anything to the contrary contained in the second sentence of this Section 8.1, Executive shall not be restricted from employment by a manufacturer or manufacturer's sales representative which manufactures and/or sells any products referred to in the first sentence of this Section 8.1 or from the sale of any of such products in connection with such employment. 8.2 Nondisclosure and Nonsolicitation. Both during and after Executive's employment with the Company, Executive shall keep secret all material confidential matters of the Company not in the public domain and will not disclose them to anyone outside of the Company. Further, after termination Executive will not seek to hire Company employees. -8- 203 9. MISCELLANEOUS 9.1 Arbitration All disputes, controversies or claims arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall be submitted to binding arbitration taking place in the State of New York before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Expenses of the arbitration shall be apportioned between the parties by the arbitrator on the basis of relative fault. 9.2 Legal Fees The Company shall pay all legal fees incurred by Executive arising out of the Company's failing to make any payment or withholding any employee benefits under this Agreement or contesting the validity, enforceability or interpretation of this Agreement in the event it is determined that (i) such action was not justified under this Agreement or (ii) if it is determined that both the Company and the Executive acted in violation of this Agreement, the Company's actions constituted a more serious violation than did the Executive's actions. Determination as to Executive's entitlement to legal fees pursuant to this Agreement may be made by the arbitrator if arbitration is sought or by independent legal counsel acceptable to both parties. 9.3 No Third-Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. 9.4 Entire Agreement This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. 9.5 Succession and Assignment This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the other. -9- 204 9.6 Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 9.7 Headings The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.8 Notices All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO THE COMPANY: Milgray Electronics, Inc. 77 Schmitt Boulevard Farmingdale, New York 11735 Attn: President IF TO THE GUARANTOR: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049-5022 Attn: President IF TO EXECUTIVE: Elliott Schnabel 605 Benton Road East Meadow, New York 11554 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, -10- 205 requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. 9.9 Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. 9.10 Amendments and Waivers No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Company and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 9.11 Severability Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 9.12 Guarantee Guarantor unconditionally guarantees all of the Company's obligations hereunder. Guarantor agrees that Executive may proceed directly against Guarantor in the event of the Company's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Company. -11- 206 IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. MILGRAY ELECTRONICS, INC. By:____________________________ Name: Title: BELL INDUSTRIES, INC. By:____________________________ Name: Title: ________________________________ Elliott Schnabel -12- 207 EXHIBIT 3.4 FORM OF STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION AGREEMENT This Incentive Stock Option Agreement ("Agreement") is made as of this _________ day of _______________, 199_, between Bell Industries, Inc., a California corporation (the "Company"), and Elliott Schnabel (also known as Elliott Stevens) (the "Participant"). R E C I T A L S 1. The Board of Directors of the Company and its shareholders have adopted the 1990 Stock Option Plan as of October 29, 1990 and the 1994 Stock Option Plan as of November 1, 1994 (the "Plans"). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Plans. 2. The Plans provide for the selling or granting to selected executive and other key employees, and other persons furnishing services to the Company or any subsidiary of the Company, as the Compensation Committee (the "Committee") may from time to time determine, of Restricted Stock or options to purchase shares of Common Stock of the Company. 3. Pursuant to the Plans, the Committee has determined that it is to the advantage and best interest of the Company and its stockholders to grant an Incentive Stock Option to the Participant covering 10,000 shares of the Company's Common Stock as an inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Incentive Stock Option Agreement between the Company and the Participant. 4. The Option granted hereby is intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. The Company grants to the Participant the right and option (the "Option") to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate 10,000 shares of Common Stock at the purchase price of $___________ per share, exercisable in installment periods in accordance with the provisions of this Agreement during a period expiring on the 5th anniversary of the date of this Agreement (the "Expiration Date") or earlier in accordance with Section 5 hereof; provided, however, if the Participant does not in any given installment period purchase al of the shares that the Participant is entitled to purchase in such installment period, then 208 the Participant's right to purchase any shares not purchased in such installment period shall continue until the Expiration Date or sooner termination of the Participant's option. 2. Vesting. This Option shall vest and become exercisable in the percentages and on the dates set forth below:
Percentage Cumulative Initially Percentage Date Exercisable Exercisable ---- ----------- ----------- 25% 25% 25% 50% 50% 100%
Subject to earlier termination under Section 5 hereof, at any time after the 3rd anniversary date of this Agreement, but no later than the Expiration Date, the Participant may purchase all or any part of the shares subject to this Option which the Participant theretofore failed to purchase. In each case, the number of shares which may be purchased shall be calculated to the nearest full share. Notwithstanding the foregoing vesting schedule, but subject to Section 5 hereof, this Option shall become immediately exercisable in full, if (i) the Company terminates Participant's employment agreement (the "Employment Agreement") dated as of ____________, 1996 other than for Cause (as defined in the Employment Agreement) or (ii) Participant terminates the Employment Agreement for Good Reason (as defined in the Employment Agreement). 3. Manner of Exercise. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company, specifying the number of shares to be purchased and accompanied by payment to the Company of the full purchase price of the shares to be purchased either (i) in cash or by certified or cashier's check payable to the order of the Company, or (ii) by delivery of shares of Common Stock already owned by, and in the possession of, the Participant. Shares of Common Stock used to satisfy any portion of the exercise price of this Option shall be valued at their fair market value determined (in accordance with Section 4 below) as of the close of the business day immediately preceding the date of exercise. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (i) one hundred (100) shares or (ii) the total number of shares then eligible for exercise if less than one hundred (100) shares. This Option may be exercised (i) during the lifetime of the Participant, only by the Participant or, in the event a conservator, guardian or legal representative is appointed during the Participant's lifetime to handle the affairs of the Participant, by such conservator, guardian or legal representative; and (ii) after the Participant's death, by his or her transferee by will or the laws of descent or distribution, and not otherwise, regardless of any community property interest therein of the spouse of the Participant or -2- 209 such spouse's successors in interest. If the spouse of the Participant shall have acquired a community property interest in this Option, the Participant, or the Participant's permitted successors in interest, may exercise the Option on behalf of the spouse of the Participant or such spouse's successors in interest. Except in the event of the Participant's death or permanent disability, the Option may not be exercised prior to the date six months from the date hereof. 4. Fair Market Value of Common Stock. The fair market value of a share of Company Common Stock shall be determined for purposes of this Agreement by reference to the closing price on the New York Stock Exchange (or other principal stock exchange on which such shares are then listed) or, if such shares are not then listed on such exchange (or other principal stock exchange), by reference to the closing price (if a National Market Issue) or the mean between the bid and asked price (if other over-the-counter issue) of a share as supplied by the National Association of Securities Dealers through NASDAQ (or its successor in function), in each case as reported by The Wall Street Journal, for the date on which the option is granted or exercised, or if such date is not a business day, for the business day immediately preceding such date (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof). 5. Cessation of Services, Death or Permanent Disability. If a Participant ceases to be employed by the Company or one of its subsidiaries for any reason other than the Participant's death or permanent disability (within the meaning of Section 22(e)(3) of the Code), the Participant's Option shall be exercisable for a period of three (3) months after the date the Participant ceases to be an employee of the Company or such subsidiary (unless by its terms it sooner expires) to the extent exercisable on the date of such cessation of employment and shall thereafter expire and be void and of no further force or effect. A leave of absence approved in writing by the Committee shall not be deemed a termination of employment for the purposes of this paragraph 5, but no Option may be exercised during any such leave of absence, except during the first three (3) months thereof. If the Participant dies or becomes permanently disabled while employed by the Company or one of its subsidiaries, the Participant's Option shall expire one (1) year after the date of such death or permanent disability unless by its terms it sooner expires. During such period after death, such Option may, to the extent that it remained unexercised (but exercisable by the Participant according to such Option's terms) on the date of such death, be exercised by the person or persons to whom the Participant's rights under the Option shall pass by the Participant's will or by the laws of descent and distribution. 6. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules. No shares issuable upon the exercise of this Option shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended, and all applicable state securities or "Blue Sky" -3- 210 laws (whether by registration or qualification or satisfaction of exemption conditions), all applicable listing requirements of any principal securities exchange on which shares of the same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made. 7. Withholding of Taxes. If the Participant or the Participant's permitted successors in interest disposes of shares of Common Stock acquired pursuant to the exercise of this Option within two years after the date of this Agreement or within one year after exercise of this Option, the Company may deduct and withhold from the wages, salary, bonus and other compensation paid by the Company to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of this Option or the sale of Common Stock issued to the Participant upon exercises hereof, all taxes as may be required from time to time under federal or state tax laws and regulations. This withholding of tax shall be made from the Company's concurrent or next payment of wages, salary, bonus or other compensation to the Participant or by payment to the Company by the Participant of required withholding tax, as the Committee may determine. 8. Adjustments for Reorganizations, Stock Splits, etc. If the outstanding shares of the Common Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares or securities receivable upon the exercise of this Option, without change in the aggregate purchase price applicable to the unexercised portion of this Option but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon the sale of substantially all the property of the Company, the Committee shall provide in writing for appropriate satisfaction of this Option by one or more of the following alternatives to be made in connection with such transaction: (i) the immediate exercisability of this Option (provided that this Option was granted more than six months before such transaction) notwithstanding the provisions of Section 3 hereof, except that this Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (a) one hundred (100) shares or (b) the total number of shares then eligible for exercise if less than one hundred (100) shares; (ii) the assumption of this Option or the substitution therefore of a new option covering the stock of a successor corporation, with appropriate adjustments as to number and kind of shares and prices; (iii) the continuance of the Plan by such successor corporation in which event this Option shall remain in full effect under the terms so provided; or (iv) the payment of an amount in cash or stock, or any combination thereof, in lieu of and in complete satisfaction of this Option. -4- 211 Adjustments under this paragraph 8 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment. 9. Participation by Participant in Other Company Plans. Nothing herein contained shall affect the right of the Participant to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, profit sharing or other employee welfare plan or program of the Company or of any subsidiary of the Company. 10. No Rights as a Shareholder Until Issuance of Stock Certificate. Neither the Participant nor any other person legally entitled to exercise this Option shall be entitled to any of the rights or privileges of a shareholder of the Company in respect of any shares issuable upon any exercise of this Option unless and until a certificate or certificates representing such shares shall have been actually issued and delivered to the Participant. 11. Not an Employment or Service Contract. Nothing contained herein shall be construed as agreement by the Company, express or implied, to employ Participant or contract for Participant's services, to restrict the Company's right to discharge Participant or cease contracting for Participant's services or to modify, extend or otherwise affect in any manner whatsoever the terms of any employment agreement or contract for services which may exist between the Participant and the Company. 12. Agreement Subject to Plan. The Option hereby granted is subject to, and the Company and the Participant agree to be bound by, all of the terms and conditions of the Plan, as the same shall be amended from time to time in accordance with the terms thereof, but no such amendment shall adversely affect the Participant's rights under this Option without the prior written consent of the Participant. 13. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 14. Notices. Any notice or other paper or payment required to be given or sent pursuant to the terms of this Agreement shall be sufficiently given or served hereunder to any party when transmitted by registered or certified mail, postage prepaid, addressed to the party to be served as follows: -5- 212 (a) if to the Company: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, CA 90049-5022 Attention: President (b) if to Participant: Elliott Schnabel 605 Benton Road East Meadow, New York 11554 Any party, by written notice, may designate another address for notices to be sent from time to time. -6- 213 15. Execution. This Option has been granted, executed and delivered the day and year first above written at Los Angeles, California, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. COMPANY BELL INDUSTRIES, INC. BY:____________________________ PARTICIPANT _______________________________ NAME By his or her signature below, the spouse of the Participant agrees to be bound by all of the terms and conditions of the foregoing Agreement. _______________________________ NAME -7- 214 EXHIBIT 5 FORM OF INDEMNIFICATION AGREEMENT INDEMNITY AGREEMENT This Agreement is made as of the _____ day of __________, 1996, by and between Milgray Electronics, Inc., a New York corporation (the "Corporation"), Bell Industries, Inc., a California corporation (the "Guarantor"), and Elliott Schnabel (also known as Elliott Stevens) (the "Indemnitee"), a Director and/or Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability of Directors' and Officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, the Corporation does not regard the protection available to Indemnitee as adequate in the present circumstances, and realizes that Indemnitee may not be willing to serve as a Director or Officer without adequate protection, and the Corporation desires Indemnitee to serve in such capacity; NOW, THEREFORE, in consideration of Indemnitee's service as a Director or Officer after the date hereof the parties agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature. (b) The term "Expenses" shall include, but is not limited to, expenses of investigations, judicial or administrative proceedings or appeals, damages, judgments, fines, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under this Agreement. 215 (c) The terms "Director" and "Officer" shall include Indemnitee's service at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise as well as a Director and/or Officer of the Corporation. 2. Indemnity of Director or Officer. Subject only to the limitations set forth in Section 3, Corporation will pay on behalf of the Indemnitee all Expenses actually and reasonably incurred by Indemnitee because of any claim or claims made against him in a Proceeding by reason of the fact that he is or was a Director and/or Officer. 3. Limitations on Indemnity. Corporation shall not be obligated under this Agreement to make any payment of Expenses to the Indemnitee (a) which payment it is prohibited by applicable law from paying as indemnity; (b) for which payment is actually made to the Indemnitee under an insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) for which payment the Indemnitee is indemnified by Corporation otherwise than pursuant to this Agreement and payment is actually made to the Indemnitee except in respect of any excess beyond the amount of the payment under such indemnification; (d) resulting from a claim decided in a Proceeding adversely to the Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he was not legally entitled; (e) resulting from a claim decided in a Proceeding adversely to the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of Corporation within the meaning of Section 16(b) or 16(c) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; or (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be indemnified under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless it shall be decided in a Proceeding that he committed (i) acts of active and deliberate dishonesty (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated. For purposes of Sections 3 and 4, the phrase "decided in a Proceeding" shall mean a decision by a court, arbitrator(s), hearing officer or other judicial agent having the -2- 216 requisite legal authority to make such a decision, which decision has become final and from which no appeal or other review proceeding is permissible. 4. Advance Payment of Costs. Expenses incurred by Indemnitee in defending a claim against him in a Proceeding shall be paid by the Corporation as incurred and in advance of the final disposition of such Proceeding; provided, however, that Expenses of defense need not be paid as incurred and in advance where the judicial agent of first impression has decided the Indemnitee is not entitled to be indemnified pursuant to this Agreement or otherwise. Indemnitee hereby agrees and undertakes to repay such amounts advanced if it shall be decided in a Proceeding that he is not entitled to be indemnified by the Corporation pursuant to this Agreement or otherwise. 5. Enforcement. If a claim under this Agreement is not paid by Corporation, or on its behalf, within thirty days after a written claim has been received by Corporation, the Indemnitee may at any time thereafter bring suit against Corporation to recover the unpaid amount of the claim and if successful in whole or in part, the Indemnitee shall be entitled to be paid also the Expenses of prosecuting such claim. 6. Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Corporation effectively to bring suit to enforce such rights. Notwithstanding the foregoing, if any of the provisions hereof would impair or jeopardize Indemnitee's coverage under the Corporation's Directors' and Officers' Liability Policy, such provisions shall be ineffective and shall be deemed deleted from this Agreement. 7. Notice. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to Corporation shall be given at its principal office and shall be directed to the President (or such other address as Corporation shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, the Indemnitee shall give Corporation such information and cooperation as it may reasonably require. 8. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 9. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Articles of Incorporation or Bylaws of the Corporation or under California law. -3- 217 10. Applicable Law. This Agreement shall be governed by and construed in accordance with California law. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 12. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns. 13. Continuation of Indemnification. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 14. Coverage of Indemnification. The indemnification under this Agreement shall cover Indemnitee's service as a Director and/or Officer prior to or after the date of the Agreement. 15. Guaranty. Guarantor unconditionally guarantees all of the Corporation's obligations hereunder. Guarantor agrees that Indemnitee may proceed directly against Guarantor in the event of the Corporation's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Corporation. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. INDEMNITEE CORPORATION By:_______________________ By:___________________ GUARANTOR By:___________________ -4- 218 EXHIBIT 6.8(b)-(ix) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of November 26, 1996, by and between Thomas Woolf (the "Executive"), Milgray Electronics, Inc., a New York corporation (the "Company"), and Bell Industries, Inc., a California corporation (the "Guarantor"), to be effective as of the effective date of the Merger (as defined below) with reference to the following facts: A. Executive is currently employed as Regional Vice President--Sales of the Company; B. Pursuant to an agreement dated as of November 26, 1996, ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of the Company ("Acquisition Sub") will make a tender offer to acquire all of the outstanding capital stock of Milgray (the "Tender Offer"). After completion of the Tender Offer, it is intended that Acquisition Sub will be merged with and into Milgray, and Milgray will become a wholly-owned subsidiary of the Guarantor (the "Merger"); C. The Company wishes to ensure the continued services of Executive after the Merger; and D. Executive is willing to continue his employment with the Company on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT 1.1 Duties and Responsibilities The Company does hereby employ Executive and Executive hereby accepts such employment as Regional Vice President--Sales. Executive shall report to the President of the Company, and subject to the directions of the President, shall be responsible for supervising sales activities of branches assigned to Executive and related matters, including profit and loss for assigned branches and region, customer relations and agreements with significant customers and performing other functions similar to the functions presently performed by Executive at the Company connected with the foregoing; provided, however, that Executive shall not be required to undertake duties not commensurate with his position as Regional Vice President--Sales of the Company. Notwithstanding anything contained in the preceding sentence, Executive acknowledges that, following the Merger, the Guarantor plans to investigate combining its existing distribution business, or segments thereof, with those of the Company, and where feasible or practicable, to combine such business, or segments thereof, and that as a result of such combination, the Company may change the exact nature of Executive's 219 responsibilities (but not Executive's job title), but in no event will Executive be required to accept job responsibilities in an area outside of his current expertise or to act in less than an executive capacity; moreover, Executive's status and position in the Company (or its successor) organization chart (i.e., the status and position of the person to whom Executive reports and the class of employees who report to Executive) shall be similar to other Vice Presidents of the Company and/or the Guarantor with responsibilities similar to those of Executive. Any such change in responsibility will not constitute a breach of this Agreement by the Company or the Guarantor. During the term of this Agreement, Executive shall devote his full business time and attention to the business of the Company and shall not be engaged in any other duties which interfere with the performance of his duties hereunder. Executive shall be entitled to an office, secretarial help and other accommodations and amenities comparable to those Executive presently has at the Company. 1.2 Place of Performance Executive's duties under this Agreement are to be performed in Connecticut and Executive shall not be required to travel or be assigned away from this location more than one hundred days in any twelve-month period or more than five consecutive days in any thirty-day period. 2. TERM This Agreement shall be in full force and effect for a period (the "Term") which shall commence as of the effective date of the Merger (the "Effective Date") and shall continue for a period of three (3) years, unless sooner terminated as hereafter provided. 3. COMPENSATION 3.1 Base Salary As compensation for the services to be performed by Executive during the continuance of this Agreement, the Company shall pay Executive a base salary of $175,000 per year for each year of his employment hereunder (the "Base Salary"). Base Salary shall be payable in substantially equal bi-weekly installments and reduced on a pro rata basis for any fraction of a year or month during which Executive is not so employed. 3.2 Bonus Executive shall be entitled to earn an incentive bonus based upon achievement of financial and other goals established from time to time by the Company, provided that the minimum bonus for each fiscal year shall be $56,000 (the "Minimum Bonus"). For the initial year of this Agreement, such bonus shall be prorated from the Effective Date and the bonus for any partial year shall be similarly prorated. The incentive bonus shall be paid as follows: (i) the Minimum Bonus shall be paid in four equal quarterly -2- 220 installments within 30 days following the end of each calendar quarter, and (ii) if the annual incentive bonus earned by Executive for any year shall exceed the Minimum Bonus paid for such year, such excess shall be paid to Executive at the same time that annual incentive bonuses for the Company's other senior executive officers are paid in accordance with the Company's policies as in effect from time to time (but in no event later than 60 days following the date of payment of the last quarterly installment of Minimum Bonus). 3.3 Additional Benefits Executive shall be entitled to participate in all of Guarantor's employee benefit plans as listed in the Guarantor's employee handbook, as the same may change from time to time, and, in addition, to participate on the same terms as senior Guarantor executives in any benefit plans available to members of the Guarantor's management (whether or not listed in the employee handbook). Among other things, Executive shall be entitled to participate in the Guarantor's Health Care Benefits Program, 401(k) Plan, Stock Purchase Plan, Stock Option Plan, Short-term and Long-term Disability Programs and the Guarantor's Executive Medical Plan, which provides coverage for all medical expenses not otherwise covered by the basic policy, up to $25,000. If any health, medical or disability plan or program existing at the time of commencement of Executive's employment pursuant to this Agreement is terminated or the benefits thereunder reduced, the Company or Guarantor shall provide Executive with benefits similar to those in existence at the time of commencement of Executive's employment hereunder. 3.4 Stock Options (A) As an additional element of compensation to Executive in consideration of the services to be rendered hereunder, Guarantor shall grant to Executive options to acquire 10,000 shares of Guarantor's common stock at an exercise price equal to the closing price on the Effective Date. The options shall vest in 25%, 25% and 50% increments, respectively, on the first, second and third anniversaries of this Agreement. In addition, all of the options will vest if the Company terminates this Agreement other than for Cause (as defined in Section 6.2) or if the Executive quits for Good Reason (as defined in Section 6.3(B)). The options shall remain exercisable for a period of five (5) years from the date of grant. The specific terms of the above-referenced option shall be as set forth in a separate option agreement in the form annexed hereto as Exhibit 3.4. (B) Executive shall be entitled to participate in the Guarantor's stock option programs, although Executive understands that any grants under such programs are completely discretionary with the Compensation Committee of the Guarantor's Board of Directors. -3- 221 3.5 Reimbursements Executive shall be entitled to reimbursement for all amounts reasonably expended on behalf of the Company, subject to verification similar to that required of and provided by the Company's other senior executives. 3.6 Deductions The Company shall deduct from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. 3.7 Disability Except in the case of Executive's Total Disability (as defined in Section 6.4), Executive's full compensation and benefits under this Agreement shall be continued during any period when he is absent or unable to perform his duties due to illness, disability or other incapacity; and Executive's inability to perform his duties by reason of the foregoing shall not constitute a failure to perform his obligations under this Agreement and shall not be deemed a default by Executive hereunder. The consequences of Executive's Total Disability is covered in Section 7.2 of this Agreement. 4. VACATION Executive shall be entitled to four weeks of vacation in each twelve-month period; provided, however, that no more than six weeks may be taken during any eighteen-month period. Such vacation will accrue on a pro rata basis from the date employment commences under this Agreement. At the end of his employment hereunder, Executive shall be paid for any accrued but unused vacation time. Executive agrees that he will coordinate his vacation plans and schedules in order to prevent any undue disruption of the Company's business. 5. INDEMNIFICATION Executive shall be indemnified by Guarantor and the Company to the full extent permitted by law in respect of his actions as an officer or director of the Company and shall be provided with such liability insurance coverage in this connection as is provided to other Company executives. In addition, the Company and Guarantor shall enter into an Indemnification Agreement with Executive in the form attached as Exhibit 5. -4- 222 6. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: 6.1 Mutual Agreement Whenever the Company and Executive mutually agree in writing to termination; 6.2 Termination for Cause At any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) material breach by Executive of this Agreement or material failure by Executive to perform his duties under this Agreement (other than by reason of Executive's Total Disability) followed by (a) written notice from the Company to Executive specifying such material failure or such material breach, plus (b) Executive not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, Executive not having taken reasonable steps toward curing such material failure or material breach within thirty days of his actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable, or (ii) conviction of Executive by, or a plea of guilty in, a court of competent jurisdiction of a felony or other major crime (a plea of nolo contendere shall be deemed a conviction). 6.3 Termination without Cause by the Company or for Good Reason by Executive (A) By the Company. Notwithstanding any other provision of this Agreement, the Company shall have the right to terminate Executive's employment with the Company and Milgray without Cause at any time, and upon such termination Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. (B) By Executive. If the Company materially breaches any of its obligations, or any material violation by the Company of Executive's rights, under this Agreement followed by (i) written notice from Executive specifying such material breach or violation, plus (ii) the Company not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, the Company not having taken reasonable steps toward curing such material breach or failure within thirty days of actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable (the foregoing being referred to as "Good Reason"), Executive will have the right at Executive's election to terminate his employment hereunder by sending notice to the Company of his election to so terminate. Termination pursuant to this subsection will be effective from and after the effective date of Executive's notice to the Company terminating Executive's employment as aforesaid. Upon any such termination, Executive shall have the rights to receive the amounts -5- 223 described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. 6.4 Death/Disability The death or Total Disability of Executive. For the purposes of this Agreement, "Total Disability" shall mean the inability of Executive due to illness or other incapacity to perform his duties hereunder in a normal manner for a period of six months (whether or not consecutive) during any consecutive eighteen-month period. If there shall be a Total Disability involving Executive, his employment may be terminated by written notice by the Company to Executive. In the event of Executive's death during the term of this Agreement, the persons designated by Executive (or if Executive does not make such a designation, then Executive's estate) shall be entitled to receive his Base Salary plus guaranteed bonus provided for Executive in this Agreement for a period of twelve months following Executive's death (regardless of the time of such death). 6.5 Voluntary Termination Executive may terminate his employment under this Agreement at any time upon thirty days written notice. 7. CONSEQUENCES OF TERMINATION OF EMPLOYMENT 7.1 Termination by the Company other than for Cause or Termination by Executive for Good Reason. If the Company terminates Executive's employment other than for Cause or if Executive, for Good Reason terminates his employment, Executive shall be entitled to receive from the Company (at Executive's election which must be exercised within 30 days of termination), either (i) within twenty days of such election, a lump sum payment in an amount equal to the sum of his Base Salary (plus guaranteed bonus) payments to which Executive would be entitled under this Agreement as a full-time employee of the Company for the balance of Executive's term of employment under this Agreement (from the date of termination); such lump sum payment discounted to present value using the interest rate offered at the date of termination by The Chase Manhattan Bank, N.A., on a certificate of deposit for a period of time equal to the remaining term of this Agreement at the date of termination and subject to the noncompetition covenant for the then balance of the Term as set forth in Section 8.1; or (ii) receive all Base Salary plus guaranteed bonus payments for the remaining term of this Agreement; provided, however, that should Executive elect to become employed by a competitor of the Company after termination (whether as an officer, director, employee, consultant or otherwise), the Company may offset against the amounts it owes Executive all compensation derived from such competitive employment. Executive agrees to notify the Company within five (5) business days of being employed by a competitor of the Company and to provide the Company with such documentation as the Company may reasonably request (including, but not limited to, copies of his Forms W-2) in order to enable the Company to verify the amount of Executive's compensation from any competitor. -6- 224 7.2 Termination by the Company because of Executive's Total Disability. If the Company terminates Executive's employment hereunder because of Executive's Total Disability, Executive shall be entitled to receive from the Company for the full balance of the Term of this Agreement regular bi-weekly payments equal to 75% of Executive's regular bi-weekly Base Salary payment plus guaranteed bonus. This amount shall be reduced by all benefits provided to Executive under any Company disability plan or plans. Executive agrees to participate in such plan(s) to as full an extent and amount as permitted under such plans. 7.3 Voluntary Termination by Executive or Termination by the Company for Cause. If Executive voluntarily terminates his employment hereunder (other than for Good Reason or Total Disability) or if the Company terminates Executive's employment for Cause, Executive shall not be entitled to any further compensation following such termination. The Company shall not be entitled to recover any damages or other amount from Executive by reason of any such termination. 8. RESTRICTIVE COVENANTS 8.1 Covenant Not to Compete. During Executive's employment with the Company, Executive shall not, directly or indirectly, be engaged in the distribution or sale of any products that are directly competitive with products presently distributed or sold by the Company or any of its subsidiaries within the geographical area in which the Company or any of its subsidiaries conducts its business (except for passive investments by Executive of up to 5% of the outstanding stock of a publicly-held company engaged in any such activities). Following termination of Executive's employment with the Company, both in the case of voluntary termination by Executive (whether or not for Good Reason) or in the case of termination by the Company (whether or not for Cause), there shall be no restrictions on Executive's employment by another entity (whether or not competitive with the Company) unless Executive shall have elected the compensation option set forth in Section 7.1(i), in which case the restrictions set forth in the first sentence of this Section 8.1 (except as provided in the last sentence of this Section 8.1) shall continue to apply for the balance of the term of this Agreement as of the date of termination; provided, however, that if Executive elects the option set forth in Section 7.1(i) and then determines at a subsequent date that he wishes to take actions that would otherwise violate such restrictions, Executive will be relieved from such restrictions if he repays to the Company, in advance of taking such actions, a pro rata portion of the payments he received pursuant to that election (based on the length of the time remaining on the non-competition covenant at that time in comparison to the total remaining term of the non-competition covenant at the time of termination). For example, if Executive were terminated without Cause after one year, and elected to receive his remaining two years of pay under this Agreement in a lump sum, and one year later wanted to work for a competitor, the Executive could do so if he repaid the Company one-half of the amount he received as -7- 225 severance (2 years severance pay lump-sum, 1 year of which was "earned" by not competing, with the portion relating to the remaining 1 year to be repaid to the Company in exchange for a release from the non-compete). The Company may, at any time and from time to time, attach an annex to this Agreement specifying specific jurisdictions in which the covenant not-to-compete set forth in this Section 8.1 is applicable. Notwithstanding anything to the contrary contained in the second sentence of this Section 8.1, Executive shall not be restricted from employment by a manufacturer or manufacturer's sales representative which manufactures and/or sells any products referred to in the first sentence of this Section 8.1 or from the sale of any of such products in connection with such employment. 8.2 Nondisclosure and Nonsolicitation. Both during and after Executive's employment with the Company, Executive shall keep secret all material confidential matters of the Company not in the public domain and will not disclose them to anyone outside of the Company. Further, after termination Executive will not seek to hire Company employees. 9. MISCELLANEOUS 9.1 Arbitration All disputes, controversies or claims arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall be submitted to binding arbitration taking place in the State of New York before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Expenses of the arbitration shall be apportioned between the parties by the arbitrator on the basis of relative fault. 9.2 Legal Fees The Company shall pay all legal fees incurred by Executive arising out of the Company's failing to make any payment or withholding any employee benefits under this Agreement or contesting the validity, enforceability or interpretation of this Agreement in the event it is determined that (i) such action was not justified under this Agreement or (ii) if it is determined that both the Company and the Executive acted in violation of this Agreement, the Company's actions constituted a more serious violation than did the Executive's actions. Determination as to Executive's entitlement to legal fees pursuant to this Agreement may be made by the arbitrator if arbitration is sought or by independent legal counsel acceptable to both parties. 9.3 No Third-Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. -8- 226 9.4 Entire Agreement This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. 9.5 Succession and Assignment This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the other. 9.6 Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 9.7 Headings The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.8 Notices All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: -9- 227 IF TO THE COMPANY: Milgray Electronics, Inc. 77 Schmitt Boulevard Farmingdale, New York 11735 Attn: President IF TO THE GUARANTOR: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049-5022 Attn: President IF TO EXECUTIVE: Thomas Woolf Saw Mill Road Newtown, Connecticut 06470 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. 9.9 Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. 9.10 Amendments and Waivers No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Company and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. -10- 228 9.11 Severability Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 9.12 Guarantee Guarantor unconditionally guarantees all of the Company's obligations hereunder. Guarantor agrees that Executive may proceed directly against Guarantor in the event of the Company's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Company. IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. MILGRAY ELECTRONICS, INC. By:____________________________ Name: Title: BELL INDUSTRIES, INC. By:____________________________ Name: Title: _______________________________ Thomas Woolf -11- 229 EXHIBIT 3.4 FORM OF STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION AGREEMENT This Incentive Stock Option Agreement ("Agreement") is made as of this _________ day of _______________, 199_, between Bell Industries, Inc., a California corporation(the "Company"), and Thomas Woolf (the "Participant"). R E C I T A L S 1. The Board of Directors of the Company and its shareholders have adopted the 1990 Stock Option Plan as of October 29, 1990 and the 1994 Stock Option Plan as of November 1, 1994 (the "Plans"). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Plans. 2. The Plans provide for the selling or granting to selected executive and other key employees, and other persons furnishing services to the Company or any subsidiary of the Company, as the Compensation Committee (the "Committee") may from time to time determine, of Restricted Stock or options to purchase shares of Common Stock of the Company. 3. Pursuant to the Plans, the Committee has determined that it is to the advantage and best interest of the Company and its stockholders to grant an Incentive Stock Option to the Participant covering 10,000 shares of the Company's Common Stock as an inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Incentive Stock Option Agreement between the Company and the Participant. 4. The Option granted hereby is intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. The Company grants to the Participant the right and option (the "Option") to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate 10,000 shares of Common Stock at the purchase price of $___________ per share, exercisable in installment periods in accordance with the provisions of this Agreement during a period expiring on the 5th anniversary of the date of this Agreement (the "Expiration Date") or earlier in accordance with Section 5 hereof; provided, however, if the Participant does not in any given installment period purchase all of the shares that the Participant is entitled to purchase in such installment period, then the Participant's right to purchase any shares not purchased in such installment period shall continue until the Expiration Date or sooner termination of the Participant's option. 230 2. Vesting. This Option shall vest and become exercisable in the percentages and on the dates set forth below:
Percentage Cumulative Initially Percentage Date Exercisable Exercisable ---- ----------- ----------- 25% 25% 25% 50% 50% 100%
Subject to earlier termination under Section 5 hereof, at any time after the 3rd anniversary date of this Agreement, but no later than the Expiration Date, the Participant may purchase all or any part of the shares subject to this Option which the Participant theretofore failed to purchase. In each case, the number of shares which may be purchased shall be calculated to the nearest full share. Notwithstanding the foregoing vesting schedule, but subject to Section 5 hereof, this Option shall become immediately exercisable in full, if (i) the Company terminates Participant's employment agreement (the "Employment Agreement") dated as of ____________, 1996 other than for Cause (as defined in the Employment Agreement) or (ii) Participant terminates the Employment Agreement for Good Reason (as defined in the Employment Agreement). 3. Manner of Exercise. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company, specifying the number of shares to be purchased and accompanied by payment to the Company of the full purchase price of the shares to be purchased either (i) in cash or by certified or cashier's check payable to the order of the Company, or (ii) by delivery of shares of Common Stock already owned by, and in the possession of, the Participant. Shares of Common Stock used to satisfy any portion of the exercise price of this Option shall be valued at their fair market value determined (in accordance with Section 4 below) as of the close of the business day immediately preceding the date of exercise. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (i) one hundred (100) shares or (ii) the total number of shares then eligible for exercise if less than one hundred (100) shares. This Option may be exercised (i) during the lifetime of the Participant, only by the Participant or, in the event a conservator, guardian or legal representative is appointed during the Participant's lifetime to handle the affairs of the Participant, by such conservator, guardian or legal representative; and (ii) after the Participant's death, by his or her transferee by will or the laws of descent or distribution, and not otherwise, regardless of any community property interest therein of the spouse of the Participant or such spouse's successors in interest. If the spouse of the Participant shall have acquired a community property interest in this Option, the Participant, or the Participant's -2- 231 permitted successors in interest, may exercise the Option on behalf of the spouse of the Participant or such spouse's successors in interest. Except in the event of the Participant's death or permanent disability, the Option may not be exercised prior to the date six months from the date hereof. 4. Fair Market Value of Common Stock. The fair market value of a share of Company Common Stock shall be determined for purposes of this Agreement by reference to the closing price on the New York Stock Exchange (or other principal stock exchange on which such shares are then listed) or, if such shares are not then listed on such exchange (or other principal stock exchange), by reference to the closing price (if a National Market Issue) or the mean between the bid and asked price (if other over-the-counter issue) of a share as supplied by the National Association of Securities Dealers through NASDAQ (or its successor in function), in each case as reported by The Wall Street Journal, for the date on which the option is granted or exercised, or if such date is not a business day, for the business day immediately preceding such date (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof). 5. Cessation of Services, Death or Permanent Disability. If a Participant ceases to be employed by the Company or one of its subsidiaries for any reason other than the Participant's death or permanent disability (within the meaning of Section 22(e)(3) of the Code), the Participant's Option shall be exercisable for a period of three (3) months after the date the Participant ceases to be an employee of the Company or such subsidiary (unless by its terms it sooner expires) to the extent exercisable on the date of such cessation of employment and shall thereafter expire and be void and of no further force or effect. A leave of absence approved in writing by the Committee shall not be deemed a termination of employment for the purposes of this paragraph 5, but no Option may be exercised during any such leave of absence, except during the first three (3) months thereof. If the Participant dies or becomes permanently disabled while employed by the Company or one of its subsidiaries, the Participant's Option shall expire one (1) year after the date of such death or permanent disability unless by its terms it sooner expires. During such period after death, such Option may, to the extent that it remained unexercised (but exercisable by the Participant according to such Option's terms) on the date of such death, be exercised by the person or persons to whom the Participant's rights under the Option shall pass by the Participant's will or by the laws of descent and distribution. 6. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules. No shares issuable upon the exercise of this Option shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended, and all applicable state securities or "Blue Sky" laws (whether by registration or qualification or satisfaction of exemption conditions), all applicable listing requirements of any principal securities exchange on which shares of the -3- 232 same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made. 7. Withholding of Taxes. If the Participant or the Participant's permitted successors in interest disposes of shares of Common Stock acquired pursuant to the exercise of this Option within two years after the date of this Agreement or within one year after exercise of this Option, the Company may deduct and withhold from the wages, salary, bonus and other compensation paid by the Company to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of this Option or the sale of Common Stock issued to the Participant upon exercises hereof, all taxes as may be required from time to time under federal or state tax laws and regulations. This withholding of tax shall be made from the Company's concurrent or next payment of wages, salary, bonus or other compensation to the Participant or by payment to the Company by the Participant of required withholding tax, as the Committee may determine. 8. Adjustments for Reorganizations, Stock Splits, etc. If the outstanding shares of the Common Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares or securities receivable upon the exercise of this Option, without change in the aggregate purchase price applicable to the unexercised portion of this Option but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon the sale of substantially all the property of the Company, the Committee shall provide in writing for appropriate satisfaction of this Option by one or more of the following alternatives to be made in connection with such transaction: (i) the immediate exercisability of this Option (provided that this Option was granted more than six months before such transaction) notwithstanding the provisions of Section 3 hereof, except that this Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (a) one hundred (100) shares or (b) the total number of shares then eligible for exercise if less than one hundred (100) shares; (ii) the assumption of this Option or the substitution therefore of a new option covering the stock of a successor corporation, with appropriate adjustments as to number and kind of shares and prices; (iii) the continuance of the Plan by such successor corporation in which event this Option shall remain in full effect under the terms so provided; or (iv) the payment of an amount in cash or stock, or any combination thereof, in lieu of and in complete satisfaction of this Option. -4- 233 Adjustments under this paragraph 8 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment. 9. Participation by Participant in Other Company Plans. Nothing herein contained shall affect the right of the Participant to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, profit sharing or other employee welfare plan or program of the Company or of any subsidiary of the Company. 10. No Rights as a Shareholder Until Issuance of Stock Certificate. Neither the Participant nor any other person legally entitled to exercise this Option shall be entitled to any of the rights or privileges of a shareholder of the Company in respect of any shares issuable upon any exercise of this Option unless and until a certificate or certificates representing such shares shall have been actually issued and delivered to the Participant. 11. Not an Employment or Service Contract. Nothing contained herein shall be construed as agreement by the Company, express or implied, to employ Participant or contract for Participant's services, to restrict the Company's right to discharge Participant or cease contracting for Participant's services or to modify, extend or otherwise affect in any manner whatsoever the terms of any employment agreement or contract for services which may exist between the Participant and the Company. 12. Agreement Subject to Plan. The Option hereby granted is subject to, and the Company and the Participant agree to be bound by, all of the terms and conditions of the Plan, as the same shall be amended from time to time in accordance with the terms thereof, but no such amendment shall adversely affect the Participant's rights under this Option without the prior written consent of the Participant. 13. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 14. Notices. Any notice or other paper or payment required to be given or sent pursuant to the terms of this Agreement shall be sufficiently given or served hereunder to any party when transmitted by registered or certified mail, postage prepaid, addressed to the party to be served as follows: (a) if to the Company: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, CA 90049-5022 Attention: President (b) if to Participant: Thomas Woolf Saw Mill Road -5- 234 Newtown, Connecticut 06470 Any party, by written notice, may designate another address for notices to be sent from time to time. -6- 235 15. Execution. This Option has been granted, executed and delivered the day and year first above written at Los Angeles, California, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. COMPANY BELL INDUSTRIES, INC. BY:____________________________ PARTICIPANT _______________________________ Thomas Woolf By his or her signature below, the spouse of the Participant agrees to be bound by all of the terms and conditions of the foregoing Agreement. _______________________________ NAME: -7- 236 EXHIBIT 5 FORM OF INDEMNIFICATION AGREEMENT INDEMNITY AGREEMENT This Agreement is made as of the _____ day of __________, 1996, by and between Milgray Electronics, Inc., a New York corporation (the "Corporation"), Bell Industries, Inc., a California corporation (the "Guarantor"), and Thomas Woolf (the "Indemnitee"), a Director and/or Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability of Directors' and officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, the Corporation does not regard the protection available to Indemnitee as adequate in the present circumstances, and realizes that Indemnitee may not be willing to serve as a Director or Officer without adequate protection, and the Corporation desires Indemnitee to serve in such capacity; NOW, THEREFORE, in consideration of Indemnitee's service as a Director or Officer after the date hereof the parties agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature. (b) The term "Expenses" shall include, but is not limited to, expenses of investigations, judicial or administrative proceedings or appeals, damages, judgments, fines, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under this Agreement. 237 (c) The terms "Director" and "Officer" shall include Indemnitee's service at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise as well as a Director and/or Officer of the Corporation. 2. Indemnity of Director or Officer. Subject only to the limitations set forth in Section 3, Corporation will pay on behalf of the Indemnitee all Expenses actually and reasonably incurred by Indemnitee because of any claim or claims made against him in a Proceeding by reason of the fact that he is or was a Director and/or Officer. 3. Limitations on Indemnity. Corporation shall not be obligated under this Agreement to make any payment of Expenses to the Indemnitee (a) which payment it is prohibited by applicable law from paying as indemnity; (b) for which payment is actually made to the Indemnitee under an insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) for which payment the Indemnitee is indemnified by Corporation otherwise than pursuant to this Agreement and payment is actually made to the Indemnitee except in respect of any excess beyond the amount of the payment under such indemnification; (d) resulting from a claim decided in a Proceeding adversely to the Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he was not legally entitled; (e) resulting from a claim decided in a Proceeding adversely to the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of Corporation within the meaning of Section 16(b) or 16(c) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; or (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be indemnified under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless it shall be decided in a Proceeding that he committed (i) acts of active and deliberate dishonesty (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated. For purposes of Sections 3 and 4, the phrase "decided in a Proceeding" shall mean a decision by a court, arbitrator(s), hearing officer or other judicial agent having the -2- 238 requisite legal authority to make such a decision, which decision has become final and from which no appeal or other review proceeding is permissible. 4. Advance Payment of Costs. Expenses incurred by Indemnitee in defending a claim against him in a Proceeding shall be paid by the Corporation as incurred and in advance of the final disposition of such Proceeding; provided, however, that Expenses of defense need not be paid as incurred and in advance where the judicial agent of first impression has decided the Indemnitee is not entitled to be indemnified pursuant to this Agreement or otherwise. Indemnitee hereby agrees and undertakes to repay such amounts advanced if it shall be decided in a Proceeding that he is not entitled to be indemnified by the Corporation pursuant to this Agreement or otherwise. 5. Enforcement. If a claim under this Agreement is not paid by Corporation, or on its behalf, within thirty days after a written claim has been received by Corporation, the Indemnitee may at any time thereafter bring suit against Corporation to recover the unpaid amount of the claim and if successful in whole or in part, the Indemnitee shall be entitled to be paid also the Expenses of prosecuting such claim. 6. Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Corporation effectively to bring suit to enforce such rights. Notwithstanding the foregoing, if any of the provisions hereof would impair or jeopardize Indemnitee's coverage under the Corporation's Directors' and Officers' Liability Policy, such provisions shall be ineffective and shall be deemed deleted from this Agreement. 7. Notice. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to Corporation shall be given at its principal office and shall be directed to the President (or such other address as Corporation shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, the Indemnitee shall give Corporation such information and cooperation as it may reasonably require. 8. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 9. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Articles of Incorporation or Bylaws of the Corporation or under California law. -3- 239 10. Applicable Law. This Agreement shall be governed by and construed in accordance with California law. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 12. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns. 13. Continuation of Indemnification. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 14. Coverage of Indemnification. The indemnification under this Agreement shall cover Indemnitee's service as a Director and/or Officer prior to or after the date of the Agreement. 15. Guaranty. Guarantor unconditionally guarantees all of the Corporation's obligations hereunder. Guarantor agrees that Indemnitee may proceed directly against Guarantor in the event of the Corporation's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Corporation. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. INDEMNITEE CORPORATION By:_______________________ By:___________________ GUARANTOR By:___________________ -4- 240 EXHIBIT 6.12 FORM OF LEGAL OPINION [LETTERHEAD] November __, 1996 Bell Industries, Inc. ME Acquisition, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049 Re: Milgray Electronics, Inc. Dear Sirs: I have acted as counsel to Milgray Electronics, Inc., a New York corporation (the "Company"), in connection with the acquisition of the Company by Bell Industries, Inc., a California corporation ("Parent") by means of a tender offer (the "Offer") by ME Acquisition, Inc., a New York corporation ("Purchaser") for all outstanding shares of common stock, par value $.25 per share, of the Company (the "Company Common Stock"), at $14.77 per share, net to the seller in cash, followed by a merger (the "Merger") of Purchaser into the Company, pursuant to an Agreement and Plan of Merger entered into as of November 26, 1996 (the "Agreement"). I am delivering this opinion to you pursuant to section 6.12 of the Agreement. Capitalized terms used and not otherwise defined herein shall have the meanings assigned thereto in the Agreement. I have examined such corporate records, certificates and documents and examined such questions of law as I have deemed necessary or desirable as a basis for rendering this opinion. Based on the foregoing, and subject to the qualifications set forth below, it is my opinion that: 1. The Company is a corporation duly organized and validly existing in good standing under the laws of the State of New York. 2. The Company is qualified as a foreign corporation and is in good standing in each of the jurisdictions listed on Schedule 3.1(a) of the Agreement (the "Jurisdictions"). To my knowledge, except for the Jurisdictions, there are no jurisdictions in which the character of the Company's properties or the nature of its business makes qualification as a foreign corporation necessary. 241 Bell Industries, Inc. ME Acquisition, Inc. November __, 1996 Page 2 3. The Company has the requisite corporate power and authority to own, use or lease its properties and to carry on its business as now being conducted and as it is now proposed to be conducted. 4. To my knowledge, the Company's authorized capital stock consists solely of 60,000,000 shares of the Company Common Stock, of which 6,773,176 shares are issued and outstanding and 43,726 shares are issued and held in the Treasury of the Company. Also to my knowledge: (a) All of the issued and outstanding shares of the Company Common Stock are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights. (b) No agreement or other document grants or imposes on any shares of the Company Common Stock any right, preference, privilege or restriction with respect to the transactions contemplated by the Agreement (including without limitation any rights of first refusal), other than the right to dissent from the Merger. (c) There are no bonds, debentures, notes or other indebtedness having general voting rights (or convertible into securities having such rights) ("Voting Debt") of the Company issued and outstanding. (d) Except as set forth in the introduction to this paragraph 4 and in subparagraphs (a) - (c) of this paragraph 4, (i) there are no shares of capital stock of the Company authorized, issued or outstanding and (ii) except as otherwise set forth on Schedule 3.2(a) of the Agreement, there are no existing options, warrants, calls, preemptive rights, subscriptions or other rights, agreements, arrangements or commitments of any character (including without limitation "earn-out" arrangements) relating to the issued or unissued capital stock of the Company, obligating the Company to issue, transfer or sell or cause to be issued, transferred or sold any shares of capital stock or Voting Debt of, or other equity interest in, the Company or securities convertible into or exchangeable for such shares or equity interests or obligations of the Company to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement, arrangement or commitment. (e) There are no outstanding contractual obligations of the Company to repurchase, redeem or otherwise acquire any of the Company Common Stock or 242 Bell Industries, Inc. ME Acquisition, Inc. November __, 1996 Page 3 the capital stock of the Company or to provide funds to make any investment (in the form of a loan, capital contribution or otherwise) in any subsidiary of the Company (each, a "Subsidiary") or any other entity. (f) There are no voting trusts or other agreements or understandings to which the Company is a party with respect to the voting of the capital stock of the Company or any of its Subsidiaries. (g) The Company is not required to redeem, repurchase or otherwise acquire shares of capital stock of the Company as a result of the transactions contemplated by this Agreement. (h) All of the issued and outstanding shares of capital stock of each of the Subsidiaries are owned beneficially and of record by the Company, free and clear of all liens, charges, pledges, encumbrances, equities, voting restrictions, claims and options of any nature. The Company has not made, directly or indirectly, any material investment in, advance to or purchase or guaranty of any obligations of, any entity other than the Subsidiaries. 5. The Company has the requisite corporate power and authority to execute and deliver the Agreement, to carry out its obligations thereunder and to consummate the transactions contemplated thereby. Except as described in paragraph 10 of this opinion, all corporate action has been taken on the part of the Company necessary for the authorization, execution and delivery of the Agreement by the Company, the performance of all obligations of the Company under the Agreement and the consummation of the transactions contemplated by the Agreement (including without limitation the Company's approval of the acquisition by Parent of beneficial ownership of shares of the Company Common Stock), and no other corporate proceedings on the part of the Company are necessary, as a matter of law or otherwise, including any vote of the Company's shareholders, in order to satisfy the requirements for business combinations contained in Section 912(c)(1) of the NYBCL. 6. Upon execution and delivery of the Agreement and assuming that the Agreement constitutes a valid and binding agreement of Parent and Purchaser, the Agreement is a legal, valid and binding agreement of the Company, enforceable against the Company in accordance with the terms thereof. 243 Bell Industries, Inc. ME Acquisition, Inc. November __, 1996 Page 4 7. The execution and delivery of the Agreement by the Company, the performance by the Company of its obligations thereunder and the consummation of the transactions contemplated thereby, do not and will not: (a) subject to the obtaining of any requisite approvals of the Company's shareholders, violate any provision of the certificate of incorporation or bylaws of the Company; (b) require any consent, approval, order, authorization or permit of, or registration, filing or notification to, any Governmental Entity, except as provided in section 3.4(b) of the Agreement; (c) to my knowledge, except as disclosed on Schedule 3.4(c) of the Agreement, result in any violation of or the breach of or constitute a default (with notice or lapse of time or both) under, or give rise to any right of termination, cancellation or acceleration or guaranteed payments under or to a loss of a material benefit under, any of the terms, conditions or provisions of any material note, lease, mortgage, license or agreement which would have a Material Adverse Effect; (d) to my knowledge, violate the provisions of any order, writ, injunction, judgment, decree, statute, rule or regulation applicable to the Company, in such a manner as to materially impair the ability of the Company to perform its obligations under the Agreement or prevent the consummation of any of the transactions contemplated by the Agreement; or (e) to my knowledge, result in the creation of any lien, charge or encumbrance upon any shares of capital stock, properties or assets of the Company under any agreement or instrument to which the Company is a party or by which the Company is bound (other than any liens, charges or encumbrances that may be created as a result of the financing by Parent of the transactions contemplated by the Agreement). 8. To my knowledge, except as disclosed on Schedule 3.10 of the Agreement, there is no suit, claim, action, proceeding or investigation pending or threatened against or affecting the Company or any of the directors or officers of the Company in their capacity as such that, individually or in the aggregate, allege damages of $100,000 or more. Also to my knowledge, neither the Company nor any officer, director or employee of the Company, has been permanently or temporarily enjoined by 244 Bell Industries, Inc. ME Acquisition, Inc. November __, 1996 Page 5 any order, judgment or decree of any court or any other governmental or regulatory authority from engaging in or continuing any conduct or practice in connection with the business, assets or properties of the Company nor is the Company or any officer, director or employee of the Company under investigation by any Governmental Entity related to the conduct of the Company's business. Finally, to my knowledge, there is not in existence any order, judgment or decree of any court or other tribunal or other agency enjoining or requiring the Company to take any action of any kind with respect to its business, assets or properties. 9. To my knowledge, the Company holds all material licenses, permits and authorizations necessary for the lawful conduct of its business as now conducted, and to my knowledge, such business is not being, and the Company has not received any notice from any authority or person that such business has been or is being, conducted in violation of any law, ordinance or regulation, including without limitation any law, ordinance or regulation relating to (a) the protection of the environment or (b) occupational health and safety, except for possible violations which are not material either singly or in the aggregate. 10. If Parent, Purchaser or any permitted assignee thereof acquires and holds shares of Company Common Stock constituting at least 90% of all of the issued and outstanding shares of Company Common Stock, no vote of the holders of the Company Common Stock is required to approve the Agreement or the transactions contemplated thereby, including the Merger. Otherwise, the Merger must be approved by the affirmative vote of at least 662/3% of the outstanding shares entitled to vote on a proposal to approve the Merger at a duly convened special or regular meeting of the shareholders of the Company. The opinions expressed in paragraphs 1 and 2 with respect to good standing are based solely upon the certificates of status and good standing issued by the appropriate governmental agency of the State of New York and the appropriate governmental agency of each of the Jurisdictions (copies of which are attached hereto as Exhibit A), and no opinion is expressed herein with respect to such matters beyond the dates as of which such certificates were issued. The opinions set forth above are also subject to and limited by the following: (a) with respect to the enforceability of the Agreement, the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws (including without limitation, New York and federal laws relating to fraudulent transfers or 245 Bell Industries, Inc. ME Acquisition, Inc. November __, 1996 Page 6 conveyances), and court decisions and other legal or equitable principles of general application, relating to, limiting or affecting the enforcement of creditors' rights generally; (b) the discretion of any court of competent jurisdiction in awarding equitable remedies, including but not limited to specific performance or injunctive relief; and (c) the effect of federal, state or local antitrust or similar laws governing business acquisitions (other than the NYBCL, the effect of which expressly is covered by the opinions set forth herein). The opinions herein are limited to the applicability of New York law and the laws of the United States, and I express no opinion whatsoever as to the laws of any other jurisdiction. Whenever my opinion herein with respect to the existence or nonexistence of facts is qualified by the phrase "to my knowledge," such phrase means that I do not have actual knowledge that the facts as stated herein are untrue. This opinion is rendered solely for your benefit in connection with the Agreement and may not be relied upon in any manner for any purpose, or furnished to, used, circulated, quoted or referred to by any person without my prior written consent. Very truly yours, Herschel M. Weinberg EX-99.(C)(2) 13 EXHIBIT (C)(2) 1 TENDER AGREEMENT This TENDER AGREEMENT (the "Agreement") is entered into as of November 26, 1996 by and among Bell Industries, Inc., a California corporation ("Parent"), ME Acquisition, Inc., a New York corporation and a wholly owned subsidiary of Parent ("Purchaser"), and Herbert S. Davidson (the "Shareholder"). RECITALS WHEREAS, concurrently herewith, Parent and Purchaser are entering into an Agreement and Plan of Merger (the "Merger Agreement") with Milgray Electronics, Inc., a New York corporation (the "Company"), pursuant to which Parent will acquire the Company, on the terms and subject to the conditions set forth in the Merger Agreement, by means of a tender offer by Purchaser (the "Offer") for all outstanding shares of common stock, par value $.25 per share, of the Company (the "Company Common Stock"), at $14.77 per share, net to the seller in cash, followed by a merger (the "Merger") of Purchaser into the Company (capitalized terms used herein and not otherwise defined are used as defined in the Merger Agreement); and WHEREAS, as of the date hereof the Shareholder beneficially owns directly or indirectly 3,742,064 shares of Company Common Stock (the "Existing Shares" and, with any After-Acquired Shares (as defined below), the "Shares"), which Shares constitute approximately 55.2% of the issued and outstanding shares of Company Common Stock; and WHEREAS, as an inducement to Parent to acquire the Company, and as a condition to Parent's willingness to enter into the Merger Agreement and consummate the transactions contemplated thereby, Parent and Purchaser have required that the Shareholder agree, and the Shareholder has agreed (i) to tender and sell the Shares in the Offer and vote the Shares in favor of the Merger, and (ii) not to compete with Parent, Purchaser, the Company or the Surviving Corporation to the extent set forth herein, in each case upon the terms and subject to the conditions set forth herein; and WHEREAS, the Board of Directors of the Company has approved the Merger Agreement, the Offer, the Merger and the transactions contemplated thereby. NOW THEREFORE, in consideration of the premises and the representations, warranties and agreements contained herein, and such other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Agreement to Tender. 1.1 Tender of Shares. The Shareholder hereby agrees (a) to validly tender (or cause the record owner of any Shares to tender) all Shares pursuant to the Offer, not later than December 10, 1996 or, with respect to After-Acquired Shares, within one 2 business day following the acquisition thereof, and (b) not to withdraw any Shares so tendered without the prior written consent of Parent. The Shareholder hereby acknowledges and agrees that Purchaser's obligation to accept for payment and pay for the Shares in the Offer is subject to the terms and conditions of the Offer. 1.2 No Liens. The Shareholder agrees that, in connection with the transfer of Shares to Purchaser in the Offer, he shall transfer to and unconditionally vest in the Purchaser or Parent, as the case may be, good and valid title to such Shares, free and clear of all claims, liens, restrictions, security interests, pledges, limitations and encumbrances whatsoever, except those arising hereunder. 1.3 No Purchase. Purchaser may allow the Offer to expire without accepting for payment or paying for any Shares, as set forth in the Offer to Purchase. If any Shares are not accepted for payment in accordance with the terms of the Offer, they shall be returned to the Shareholder. 2. Voting. The Shareholder hereby agrees that (for as long as the Merger Agreement is in effect), at any meeting of the holders of Company Common Stock, however called, or in connection with any written consent of the holders of Company Common Stock, he shall vote (or cause to be voted) the Shares (a) in favor of the Merger, the execution and delivery by the Company of the Merger Agreement and the approval of the terms thereof and each of the other actions contemplated by the Merger Agreement and this Agreement and any actions required in furtherance thereof and hereof; (b) against any action or agreement that would result in a breach in any respect of any covenant, representation or warranty or any other obligation or agreement of the Company under the Merger Agreement or this Agreement; and (c) except as otherwise agreed to in writing in advance by Parent, against any of the following actions or agreements (other than the Merger Agreement or the transactions contemplated thereby): (i) any action or agreement that is intended, or could reasonably be expected, to impede, interfere with, delay, postpone or attempt to discourage or adversely affect the Merger, the Offer and the transactions contemplated by this Agreement and the Merger Agreement; (ii) any extraordinary corporate transaction, such as a merger, consolidation or other business combination involving the Company and its Subsidiaries; (iii) a sale, lease or transfer of a material amount of assets of the Company and its Subsidiaries or a reorganization, recapitalization, dissolution or liquidation of the Company or its Subsidiaries; (iv) any change in the management or Board of Directors of the Company, except as provided in Section 1.3 of the Merger Agreement; and (v) any change in the present capitalization or dividend policy of the Company; (vi) any amendment of the Company's articles of incorporation or bylaws; or (vii) any other material change in the Company's corporate structure or business. Any such vote or consent shall be given in accordance with such procedures relating thereto as shall ensure that it is duly counted for purposes of determining that a quorum is present and for purposes of recording the results of such vote or consent. Notwithstanding anything to the contrary contained in this Agreement, Shareholder shall be free to act in his capacity as Chairman of the Board of Directors of the Company, President and Chief Executive Officer and to discharge his fiduciary duties as such. -2- 3 3. Representations and Warranties. The Shareholder represents and warrants to Parent and Purchaser as follows: 3.1 Ownership of Shares. On the date hereof, Shareholder is the record owner of 3,010,232 of the Existing Shares, H.S. Davidson Associates, Inc., a New York corporation wholly owned by the Shareholder, is the record owner of 731,632 of the Existing Shares, and Herbert S. Davidson, as Trustee under that certain Trust Agreement dated May 16, 1996, owns 200 of the Existing Shares, and, on the date hereof, such Existing Shares constitute all of the shares of Company Common Stock owned of record and beneficially by Shareholder. Shareholder has sole voting power, sole power of disposition and sole power to agree to all of the matters set forth in this Agreement with respect to all of the Existing Shares, with no limitations, qualifications or restrictions on such rights, and the Existing Shares are the only shares of Company Common Stock over which Shareholder has such powers or otherwise are owned of record or beneficially by Shareholder as of the date hereof. 3.2 Power; Binding Agreement. Shareholder has the legal capacity, power and authority to enter into and perform all of its obligations under this Agreement. The execution, delivery and performance of this Agreement by the Shareholder will not violate any other agreement to which the Shareholder is a party, including without limitation any voting agreement, shareholders agreement or voting trust. This Agreement has been duly and validly executed and delivered by the Shareholder and constitutes a valid and binding agreement of the Shareholder, enforceable against the Shareholder in accordance with its terms, except that such enforceability may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights. 3.3 No Conflict. Except for filings under the HSR Act, the Exchange Act and under Article 16 of the NYBCL, (a) no filing with, and no permit, authorization, consent or approval of, any Federal, state or foreign public body or authority is necessary for the execution of this Agreement by the Shareholder and the consummation by the Shareholder of the transactions contemplated hereby and (b) neither the execution and delivery of this Agreement by the Shareholder nor the consummation by the Shareholder of the transactions contemplated hereby nor compliance by the Shareholder with any of the provisions hereof shall (i) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, commitment, arrangement, understanding, agreement or other instrument or obligation to which Shareholder is a party or by which Shareholder or any of its properties or assets may be bound or (ii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Shareholder or any of its properties or assets. 3.4 Encumbrances. The Shares and the certificates representing such Shares are now, and at all times during the term hereof will be, held by Shareholder, or by a nominee or custodian for the benefit of Shareholder, free and clear of all liens, claims, security interests, proxies, voting trusts or agreements, understandings or arrangements -3- 4 or any other encumbrances whatsoever, except for any such encumbrances or proxies arising hereunder. 3.5 Finder's Fees. No investment banker, broker, financial advisor, finder or other person is entitled to a commission or fee from Parent, Purchaser or the Company in respect of this Agreement or the transactions contemplated hereby based upon any arrangement or agreement made by or on behalf of Shareholder, except as otherwise specifically provided in the Merger Agreement or arrangements or agreements made by or on behalf of Parent or Purchaser by its authorized representatives. 3.6 Reliance by Parent. Shareholder understands and acknowledges that Parent is entering into, and causing Purchaser to enter into, the Merger Agreement in reliance upon the Shareholder's execution and delivery of this Agreement and the representations, warranties and covenants of the Shareholder set forth herein. 4. Other Covenants of the Shareholder. The Shareholder hereby covenants and agrees as follows: 4.1 No Solicitation. The Shareholder shall not (in the capacity of a shareholder of the Company or otherwise, including without limitation as an officer and/or director of the Company), and he shall direct and use his best efforts to cause his agents and representatives not to, directly or indirectly solicit (including by way of furnishing information) or respond to any inquiries or the making of any proposal by any person or entity (other than Parent or any affiliate of Parent) concerning any Acquisition Proposal, except as permitted by Section 6.1 of the Merger Agreement. If Shareholder receives any such inquiry or proposal with respect to the sale of Shares, then the Shareholder shall promptly inform Parent in the same manner as set forth in Section 6.1 of the Merger Agreement. The Shareholder shall immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. 4.2 Non-Competition; Nondisclosure. (a) In addition to being the controlling shareholder of the Company, the Shareholder was a founder of the Company in 1951 and is currently the Chief Executive Officer, Chairman of the Board and President of the Company. Accordingly, the Shareholder recognizes and expressly acknowledges that (i) he has developed a highly valuable expertise in the electronics distribution business which expertise is of a special, unique and extraordinary character (as such business is presently conducted by the Company and its Subsidiaries, the "Company Business"); (ii) Parent and Purchaser and, after the consummation of the transactions contemplated hereby and by the Merger Agreement, the Company and the Surviving Corporation, would be irreparably damaged, and the substantial investment by Parent and Purchaser in the business of the Company and the Surviving Corporation would be materially and irreparably harmed and impaired, if the Shareholder were to (x) engage in any activity competing with the Company Business in violation of the terms of this Agreement as set forth in Section 4.2(b) or -4- 5 (y) disclose in violation of this Agreement or make unauthorized use of any confidential information concerning the Company Business; (iii) he is voluntarily entering into this Agreement, including without limitation this Section 4.2, with the intent that the covenants in this Section 4.2 shall be valid and enforceable; and (iv) the terms and conditions of this Agreement and this Section 4.2 are fair and reasonable to the Shareholder in all respects and will not create any hardship for Shareholder. (b) In light of the foregoing, and for and in consideration of benefits derived directly and indirectly from this Agreement, the Shareholder covenants and agrees as follows: (i) for a period of three years from the date of the sale of the Shares or, if longer, while Shareholder is an officer, director or employee of the Parent or Purchaser (the "Noncompete Term"), Shareholder will not, alone or as a member, employee or agent of any partnership or as an officer, agent, employee, consultant, director, shareholder (except for passive investments of not more than five percent (5%) of the outstanding shares of, or any other equity interest in, any corporation or other entity), directly or indirectly manage, operate, join, control or participate in the management, operation or control of, or work for (as an employee, consultant, independent contractor or otherwise) or permit the use of his name by, or be connected in any manner with any business or activity which is in competition with the Company Business in any town, county, parish or other municipality in any state of the United States in which the Company Business is presently conducted and in any town, county, parish or municipality adjacent thereto; (ii) during the Noncompete Term, the Shareholder shall not, directly or indirectly, solicit, induce, or attempt to solicit or induce (x) any employee of the Company or its Subsidiaries, affiliates, successors or assigns to terminate his or her employment relationship with the Company or its Subsidiaries, affiliates, successors or assigns for the purpose of associating with any competitor of the Company or its Subsidiaries, affiliates, successors or assigns; or (y) any customer, client, vendor, supplier or consultant then under contract to the Company or its Subsidiaries, affiliates, successors or assigns, to terminate his, her or its relationship with the Company or its Subsidiaries, affiliates, successors or assigns, for the purpose of associating with any competitor of the Company or its Subsidiaries, affiliates, successors or assigns; and (iii) unless otherwise required by any applicable law or rules and regulations of any national exchange, not to disclose to any person any trade secrets or confidential information with respect to any of the Company's trademarks, products, designs, processes, customers, suppliers or methods of distribution; PROVIDED, HOWEVER, that such trade secrets or confidential information shall not include any information known generally to the public (other than as a result of unauthorized disclosure by Shareholder). (iv) Notwithstanding the foregoing, at any time after the initial three year portion of the Noncompete Term, the Shareholder may engage in any -5- 6 activities that would otherwise violate the restrictions contained in this Section 4.2(b) with the express written consent of Parent, which will not be unreasonably withheld. (c) The Shareholder recognizes and acknowledges that his expertise is of special, unique and extraordinary character and that (i) in the event of Shareholder's failure to comply with any of the restrictions contained in this Section 4.2, it may be impossible to measure in money the damage to Parent, Purchaser, the Company and the Surviving Corporation and (ii) in the event of any such failure, such persons may not have an adequate remedy at law. It is therefore agreed that Parent, Purchaser, the Company and the Surviving Corporation, in addition to any other rights or remedies which they may have, shall be entitled to immediate injunctive relief to enforce such restrictions, and specific enforcement of the provisions of this Section 4.2 in the event of any breach or threatened breach hereof. (d) The Shareholder further acknowledges and agrees that these covenants are reasonable and valid in geographic and temporal scope and in all other respects and that if any court determines that any of these covenants, or any part thereof, is invalid or unenforceable, the remainder of these covenants shall not thereby be effected and shall be given full effect without regard to the invalid portions. If any court determines that any of these covenants, or any part thereof, is unenforceable because of the duration or scope of such provision, such court shall have the power to reduce the duration or scope of such provision, as the case may be, and, in its reduced form, such provision shall then be enforceable. 4.3 Restriction on Transfer, Proxies and Non-Transference. Shareholder hereby agrees, while the Merger Agreement is in effect, and except as specifically contemplated hereby, not to (i) offer for sale, sell, transfer, tender, pledge, encumber, assign or otherwise dispose of, or enter into any contract, option or other arrangement or otherwise dispose of, or enter into any contract, option or other arrangement or understanding with respect to the offer for sale, sale, transfer, tender, pledge, encumbrance, assignment or other disposition of, any of the Shares or any interest therein, (ii) grant any proxies or powers of attorney, deposit any Shares into a voting trust or enter into a voting agreement with respect to any Shares or (iii) take any action that would make any representation or warranty of Shareholder contained herein untrue or incorrect or have the effect of preventing or disabling Shareholder from performing its obligations under this Agreement. 4.4 Notice of Additional Shares. Shareholder hereby agrees to promptly notify Parent in writing of the number of After-Acquired Shares that may be acquired by Shareholder, if any, after the date hereof. 4.5 Public Disclosure. The Shareholder hereby agrees that Parent and Purchaser may publish and disclose in the Offer Documents and, if approval of the Company's shareholders is required under applicable law, the Company Proxy Statement (including all documents and schedules filed with the SEC) his identity and ownership of -6- 7 Company Common Stock and the nature of his commitments, arrangements and understandings under this Agreement. 4.6 No Inconsistent Agreements. Shareholder shall not enter into any agreement or understanding with any person or entity the effect of which would be inconsistent or violative of the provisions of this Agreement. 4.7 Further Assurances. From time to time, at the other party's request and without further consideration, each party hereto shall execute and deliver such additional documents and take all such further action as may be necessary or desirable to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement. 5. Miscellaneous. 5.1 Fees and Expenses. All costs and expenses incurred in connection with this Agreement and the consummation of the transactions contemplated hereby shall be paid by the party incurring such expenses. 5.2 Survival of Representations and Warranties. All representations and warranties contained in this Agreement shall survive the delivery of and payment for the Shares. 5.3 Amendment and Modification. This Agreement may be amended, modified and supplemented in any and all respects by written agreement of the parties hereto. 5.4 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties, except that Purchaser may assign, in its sole discretion, any or all of its rights, interests and obligations hereunder to Parent. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by, the parties and their respective successors and assigns. 5.5 Specific Performance. Each of the parties hereto recognizes and acknowledges that a breach by it of any covenants or agreements contained in this Agreement will cause the other party to sustain damages for which it would not have an adequate remedy at law for money damages, and therefore each of the parties hereto agrees that in the event of any such breach the aggrieved party shall be entitled to the remedy of specific performance of such covenants and agreements and injunctive and other equitable relief in addition to any other remedy to which it may be entitled, at law or in equity. 5.6 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given upon personal delivery, facsimile transmission (which -7- 8 is confirmed), telex or delivery by an overnight express courier service (delivery, postage or freight charges prepaid), or on the fourth day following deposit in the United States mail (if sent by registered or certified mail, return receipt requested, delivery, postage or freight charges prepaid), addressed to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): If to Shareholder: c/o Milgray Electronics, Inc. 77 Schmitt Boulevard Farmingdale, New York 11735 Telecopy No. (516)___-____ Attention: Herbert S. Davidson with a copy to: Herschel M. Weinberg, Esq. 110 East 59th Street, 23rd Floor New York, New York 10022 Telecopy No. (212) 223-4911 If to Parent or Purchaser, to: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049 Telecopy No. (310) 447-3265 Attention: Tracy A. Edwards with a copy to: Irell & Manella LLP 1800 Avenue of the Stars, Suite 900 Los Angeles, California 90067 Telecopy No. (310) 203-7199 Attention: Andrew W. Gross, Esq. 5.7 Definitions; Interpretation. (a) As used in this Agreement, (i) the term "After-Acquired Shares" shall mean any shares of Company Common Stock acquired directly or indirectly, or otherwise beneficially owned, by the Shareholder in any capacity after the date hereof and prior to the termination hereof, whether upon the exercise of options, warrants or rights, the conversion or exchange of convertible or exchangeable securities, or by means of a purchase, dividend, distribution, gift, bequest, inheritance or as a successor -8- 9 in interest in any capacity (including a fiduciary capacity) or upon a stock dividend, stock split, merger (other than as contemplated by the Merger Agreement), recapitalization, reclassification, combination, exchange of shares or the like of the Company Common Stock, or otherwise; (ii) the term "affiliate(s)" shall have the meaning set forth in Rule 12b-2 of the Exchange Act and (ii) the phrases "beneficially own" or "beneficial ownership" with respect to any securities shall mean having "beneficial ownership" of such securities (as determined pursuant to Rule 13d-3 under the Exchange Act), including pursuant to any agreement, arrangement or understanding, whether or not in writing (without duplicative counting of the same securities by the same holder, securities beneficially owned by a person shall include securities beneficially owned by all other persons with whom such Person would constitute a "group" within the meaning of Rule 13d-5 of the Exchange Act). (b) When a reference is made in this Agreement to Section , such reference shall be to a Section in this Agreement unless otherwise indicated. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." The descriptive headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 5.8 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart. 5.9 Entire Agreement; No Third Party Beneficiaries. This Agreement (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and (b) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. 5.10 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void, unenforceable or against its regulatory policy, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 5.11 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York without giving effect to the principles of conflicts of law thereof. -9- 10 IN WITNESS WHEREOF, Parent, Purchaser and the Shareholder have caused this Agreement to be duly executed as of the day and year first above written. BELL INDUSTRIES, INC. By: /s/ Theodore Williams ---------------------------------- Name: Theodore Williams Title: Chairman and Chief Executive Officer ME ACQUISITION, INC. By: /s/ Theodore Williams ----------------------------------- Name: Theodore Williams Title: President /s/ Herbert S. Davidson - ----------------------------- Herbert S. Davidson Address: 3295 N.W. 53rd Circle Boca Raton, Florida 33496 -10- EX-99.(C)(3) 14 EXHIBIT (C)(3) 1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of November 26, 1996, by and between Herbert S. Davidson (the "Executive") and Bell Industries, Inc., a California corporation (the "Company"), to be effective as of the effective date of the Merger (as defined below) with reference to the following facts: A. Executive is currently a director, Chief Executive Officer and President of Milgray Electronics, Inc., a New York corporation ("Milgray"); B. Pursuant to an agreement dated as of November 26, 1996, ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of the Company ("Acquisition Sub") will make a tender offer to acquire all of the outstanding capital stock of Milgray (the "Tender Offer"). After completion of the Tender Offer, it is intended that Acquisition Sub will be merged with and into Milgray, and Milgray will become a wholly-owned subsidiary of the Company (the "Merger"); C. The Company wishes to ensure the continued services of Executive after the Merger by having him serve as Vice Chairman of the Board and an Assistant Secretary of the Company; and D. Executive is willing to accept employment by the Company on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT The Company does hereby employ Executive and Executive hereby accepts such employment as Vice Chairman of the Board and an Assistant Secretary of the Company, such employment to commence on the effective date of the Merger. Executive shall be entitled to an office and access to secretarial services at Milgray's executive offices during the Term of this Agreement comparable to those Executive presently has at Milgray. Executive's duties under this Agreement are to be performed on Long Island in New York State. Executive shall devote such time to performance of his services as Vice Chairman of the Board and an Assistant Secretary of the Company as Executive and the Company shall mutually agree from time to time. 2. TERM This Agreement shall be in full force and effect for a period (the "Term") which shall commence as of the effective date of the Merger (the "Effective Date") and shall continue for a period of one (1) year, unless sooner terminated as hereafter provided. 2 Thereafter, this Agreement will automatically renew for annual one year periods, unless both parties mutually agree to the contrary. 3. COMPENSATION As compensation for the services to be performed by Executive during the continuance of this Agreement, the Company shall pay Executive a salary of $100,000 per year during the first year of his employment hereunder (the "Base Salary"). Executive's Base Salary in any subsequent year of employment under this Agreement shall be a nominal amount to be set by the Company, it being understood that such amount shall be sufficient to enable Executive to participate in the Company's medical insurance plan. Executive's Base Salary shall be payable in substantially equal bi-weekly installments and reduced on a pro rata basis for any fraction of a year or month during which Executive is not so employed. Executive shall be entitled to reimbursement for all amounts reasonably expended on behalf of the Company, subject to verification similar to that required of and provided by the Company's other senior executives. The Company shall deduct from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. At all such times as Executive may be a member of the Company's Board of Directors, Executive will be deemed to be an "employee director". 4. INDEMNIFICATION Executive shall be indemnified by the Company to the full extent permitted by law in respect of his actions as an officer or director of the Company and shall be provided with such liability insurance coverage in this connection as is provided to other Company executives. In addition, the Company shall enter into an Indemnification Agreement with Executive in the form attached as Exhibit 4. 5. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: 5.1 Mutual Agreement Whenever the Company and Executive mutually agree in writing to termination; 5.2 Termination for Cause At any time for Cause. For purposes of this Agreement, "Cause" shall mean conviction of Executive by, or a plea of guilty in, a court of competent jurisdiction of a felony or other major crime (a plea of nolo contendere shall be deemed a conviction). -2- 3 5.3 Voluntary Termination Executive may terminate his employment under this Agreement at any time upon thirty days written notice. 6. NONDISCLOSURE Both during and after Executive's employment with the Company, Executive shall keep secret all confidential matters of the Company not in the public domain and will not disclose them to anyone outside of the Company. 7. MISCELLANEOUS 7.1 Arbitration All disputes, controversies or claims arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall be submitted to binding arbitration taking place in the State of New York before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Expenses of the arbitration shall be apportioned between the parties by the arbitrator on the basis of relative fault. 7.2 No Third-Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. 7.3 Entire Agreement This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. 7.4 Succession and Assignment This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the other. -3- 4 7.5 Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 7.6 Headings The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 7.7 Notices All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO THE COMPANY: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049-5022 Attn: President IF TO EXECUTIVE: Herbert S. Davidson c/o Milgray Electronics, Inc. 77 Schmitt Boulevard Farmingdale, New York 11735 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. -4- 5 7.8 Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. 7.9 Amendments and Waivers No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Company and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 7.10 Severability Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. -5- 6 IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. BELL INDUSTRIES, INC. By: /s/ Tracy A. Edwards ----------------------------- Name: Tracy A. Edwards Title: Vice President HERBERT S. DAVIDSON /s/ Herbert S. Davidson --------------------------------- -6- 7 EXHIBIT 5 FORM OF INDEMNIFICATION AGREEMENT INDEMNITY AGREEMENT This Agreement is made as of the _____ day of __________, 1996, by and between Bell Industries, Inc., a California corporation (the "Corporation"), and Herbert S. Davidson (the "Indemnitee"), a Director and/or Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability of Directors' and Officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, the Corporation does not regard the protection available to Indemnitee as adequate in the present circumstances, and realizes that Indemnitee may not be willing to serve as a Director or Officer without adequate protection, and the Corporation desires Indemnitee to serve in such capacity; NOW, THEREFORE, in consideration of Indemnitee's service as a Director or Officer after the date hereof the parties agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature. (b) The term "Expenses" shall include, but is not limited to, expenses of investigations, judicial or administrative proceedings or appeals, damages, judgments, fines, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under this Agreement. 8 (c) The terms "Director" and "Officer" shall include Indemnitee's service at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise as well as a Director and/or Officer of the Corporation. 2. Indemnity of Director or Officer. Subject only to the limitations set forth in Section 3, Corporation will pay on behalf of the Indemnitee all Expenses actually and reasonably incurred by Indemnitee because of any claim or claims made against him in a Proceeding by reason of the fact that he is or was a Director and/or Officer. 3. Limitations on Indemnity. Corporation shall not be obligated under this Agreement to make any payment of Expenses to the Indemnitee (a) which payment it is prohibited by applicable law from paying as indemnity; (b) for which payment is actually made to the Indemnitee under an insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) for which payment the Indemnitee is indemnified by Corporation otherwise than pursuant to this Agreement and payment is actually made to the Indemnitee except in respect of any excess beyond the amount of the payment under such indemnification; (d) resulting from a claim decided in a Proceeding adversely to the Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he was not legally entitled; and, if the Indemnitee is a Director, based upon any of the exceptions set forth in clauses (i) through (iv) of Article Tenth of this Corporation's Articles of Incorporation; (e) resulting from a claim decided in a Proceeding adversely to the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of Corporation within the meaning of Section 16(b) or 16(c) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; or (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be indemnified under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless it shall be decided in a Proceeding that he committed (i) acts of active and deliberate dishonesty (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated. -2- 9 For purposes of Sections 3 and 4, the phrase "decided in a Proceeding" shall mean a decision by a court, arbitrator(s), hearing officer or other judicial agent having the requisite legal authority to make such a decision, which decision has become final and from which no appeal or other review proceeding is permissible. 4. Advance Payment of Costs. Expenses incurred by Indemnitee in defending a claim against him in a Proceeding shall be paid by the Corporation as incurred and in advance of the final disposition of such Proceeding; provided, however, that Expenses of defense need not be paid as incurred and in advance where the judicial agent of first impression has decided the Indemnitee is not entitled to be indemnified pursuant to this Agreement or otherwise. Indemnitee hereby agrees and undertakes to repay such amounts advanced if it shall be decided in a Proceeding that he is not entitled to be indemnified by the Corporation pursuant to this Agreement or otherwise. 5. Enforcement. If a claim under this Agreement is not paid by Corporation, or on its behalf, within thirty days after a written claim has been received by Corporation, the Indemnitee may at any time thereafter bring suit against Corporation to recover the unpaid amount of the claim and if successful in whole or in part, the Indemnitee shall be entitled to be paid also the Expenses of prosecuting such claim. 6. Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Corporation effectively to bring suit to enforce such rights. Notwithstanding the foregoing, if any of the provisions hereof would impair or jeopardize Indemnitee's coverage under the Corporation's Directors' and Officers' Liability Policy, such provisions shall be ineffective and shall be deemed deleted from this Agreement. 7. Notice. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to Corporation shall be given at its principal office and shall be directed to the President (or such other address as Corporation shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, the Indemnitee shall give Corporation such information and cooperation as it may reasonably require. 8. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. -3- 10 9. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Articles of Incorporation or Bylaws of the Corporation or under California law. 10. Applicable Law. This Agreement shall be governed by and construed in accordance with California law. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 12. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns. 13. Continuation of Indemnification. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 14. Coverage of Indemnification. The indemnification under this Agreement shall cover Indemnitee's service as a Director and/or Officer prior to or after the date of the Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. INDEMNITEE CORPORATION By:_______________________ By:___________________ -4- EX-99.(C)(4) 15 EXHIBIT (C)(4) 1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of November 26, 1996, by and between Richard Hyman (the "Executive") and Bell Industries, Inc., a California corporation (the "Company"), to be effective as of the effective date of the Merger (as defined below) with reference to the following facts: A. Executive is currently employed as Executive Vice President, Vice President--Sales/Marketing and Chief Operating Officer of Milgray Electronics, Inc., a New York corporation ("Milgray"); B. Pursuant to an agreement dated as of November 26, 1996, ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of the Company ("Acquisition Sub") will make a tender offer to acquire all of the outstanding capital stock of Milgray (the "Tender Offer"). After completion of the Tender Offer, it is intended that Acquisition Sub will be merged with and into Milgray, and Milgray will become a wholly-owned subsidiary of the Company (the "Merger"); C. The Company wishes to ensure the continued services of Executive after the Merger by having him serve as Executive Vice President--Electronics Distribution Group of the Company and President of Milgray; and D. Executive is willing to accept employment by the Company and Milgray on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT 1.1 Duties and Responsibilities The Company does hereby employ Executive and Executive hereby accepts such employment as President of Milgray and Executive Vice President--Electronics Distribution Group of Bell performing the functions of principal executive officer in charge of a significant segment of the Company's business - i.e., the business presently being conducted by Milgray, such employment to commence on the effective date of the Merger. Executive shall report to the President of the Company, and subject to the directions of the Board of Directors of Milgray and/or the President of the Company, shall have general supervision, direction and control of the business, officers and employees of Milgray and its subsidiaries; provided, however, that Executive shall not be required to undertake duties not commensurate with his position as President of Milgray and Executive Vice President--Electronics Distribution Group of Bell. Notwithstanding anything contained in the preceding sentence, Executive acknowledges that, following the Merger, the Company plans to investigate combining its existing 2 distribution business, or segments thereof, with those of Milgray, and where feasible or practicable, to combine such business, or segments thereof, and that as a result of such combination, the Company may change the exact nature of Executive's responsibilities (but not Executive's job title), but in no event will Executive be required to accept job responsibilities in an area outside of his current expertise or to act in less than an executive capacity; moreover, Executive's status and position in the Company (or its successor) organization chart (i.e., the status and position of the person to whom Executive reports and the class of employees who report to Executive) shall be similar to other Vice Presidents of the Company with responsibilities similar to those of Executive. Any such change in responsibility will not constitute a breach of this Agreement by the Company. During the term of this Agreement, Executive shall devote his full business time and attention to the business of the Company and Milgray and shall not be engaged in any other duties which interfere with the performance of his duties hereunder. Executive shall be entitled to an office, secretarial help and other accommodations and amenities comparable to those Executive presently has at Milgray. 1.2 Place of Performance Executive's duties under this Agreement are to be performed on Long Island in New York State and Executive shall not be required to travel or be assigned away from this location more than sixty days in any twelve-month period or more than five consecutive days in any thirty-day period. 2. TERM This Agreement shall be in full force and effect for a period (the "Term") which shall commence as of the effective date of the Merger (the "Effective Date") and shall continue for a period of five (5) years, unless sooner terminated as hereafter provided. 3. COMPENSATION 3.1 Base Salary As compensation for the services to be performed by Executive during the continuance of this Agreement, the Company shall pay Executive a base salary of $400,000 per year for each year of his employment hereunder (the "Base Salary"). Base Salary shall be payable in substantially equal bi-weekly installments and reduced on a pro rata basis for any fraction of a year or month during which Executive is not so employed. 3.2 Bonus Executive shall be entitled to earn an incentive bonus based upon achievement of financial and other goals established from time to time by the Company, provided that the minimum bonus for each fiscal year of the Company shall be $135,000. For the initial year of this Agreement, such bonus shall be prorated from the Effective Date and -2- 3 the bonus for any other partial year shall be similarly prorated. Any such bonus earned by Executive shall be paid at the same time that annual incentive bonuses for the Company's other senior executive officers are paid in accordance with the Company's policies as in effect from time to time (but in no event will the guaranteed minimum bonus be paid later than 30 days after the end of the Company's fiscal year, with the remainder, if any, to be paid within 90 days after the end of the Company's fiscal year). 3.3 Additional Benefits Executive shall be entitled to participate in all of the Company's employee benefit plans as listed in the Company's employee handbook, as the same may change from time to time, and, in addition, to participate on the same terms as senior Company executives in any benefit plans available to members of the Company's management (whether or not listed in the employee handbook). Among other things, Executive shall be entitled to participate in the Company's Health Care Benefits Program, 401(k) Plan, Stock Purchase Plan, Stock Option Plan, Short-term and Long-term Disability Programs and the Company's Executive Medical Plan, which provides coverage for all medical expenses not otherwise covered by the basic policy, up to $25,000. If any health, medical or disability plan or program existing at the time of commencement of Executive's employment pursuant to this Agreement is terminated or the benefits thereunder reduced, the Company shall provide Executive with benefits similar to those in existence at the time of commencement of Executive's employment hereunder. 3.4 Stock Options (A) As an additional element of compensation to Executive in consideration of the services to be rendered hereunder, the Company shall grant to Executive options to acquire 25,000 shares of Company's common stock at an exercise price equal to the closing price on the Effective Date. The options shall vest in 10%, 20%, 30% and 40% increments, respectively, on the first, second, third and fourth anniversaries of this Agreement. In addition, all of the options will vest if (i) the Company terminates this agreement other than for Cause (as defined in Section 6.2) or (ii) the Executive terminates this Agreement for Good Reason (as defined in Section 6.3(B)). The options shall remain exercisable for a period of five (5) years from the date of grant. The specific terms of the above-referenced option shall be as set forth in a separate option agreement in the form annexed hereto as Exhibit 3.4. (B) Executive shall be entitled to participate in the Company's stock option programs, although Executive understands that any grants under such programs are completely discretionary with the Compensation Committee of the Company's Board of Directors. -3- 4 3.5 Reimbursements Executive shall be entitled to reimbursement for all amounts reasonably expended on behalf of the Company and Milgray, subject to verification similar to that required of and provided by the Company's other senior executives. 3.6 Deductions The Company shall deduct from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. 3.7 Disability Except in the case of Executive's Total Disability (as defined in Section 6.4), Executive's full compensation and benefits under this Agreement shall be continued during any period when he is absent or unable to perform his duties due to illness, disability or other incapacity; and Executive's inability to perform his duties by reason of the foregoing shall not constitute a failure to perform his obligations under this Agreement and shall not be deemed a default by Executive hereunder. The consequences of Executive's Total Disability is covered in Section 7.2 of this Agreement. 4. VACATION Executive shall be entitled to four weeks of vacation in each twelve-month period; provided, however, that no more than six weeks may be taken during any eighteen-month period. Such vacation will accrue on a pro rata basis from the date employment commences under this Agreement. At the end of his employment hereunder, Executive shall be paid for any accrued but unused vacation time. Executive agrees that he will coordinate his vacation plans and schedules in order to prevent any undue disruption of the Company's and Milgray's business. 5. INDEMNIFICATION Executive shall be indemnified by the Company to the full extent permitted by law in respect of his actions as an officer or director of the Company and shall be provided with such liability insurance coverage in this connection as is provided to other Company executives. In addition, the Company shall enter into an Indemnification Agreement with Executive in the form attached as Exhibit 5. -4- 5 6. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: 6.1 Mutual Agreement Whenever the Company and Executive mutually agree in writing to termination; 6.2 Termination for Cause At any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) material breach by Executive of this Agreement or material failure by Executive to perform his duties under this Agreement (other than by reason of Executive's Total Disability) followed by (a) written notice from the Company to Executive specifying such material failure or such material breach, plus (b) Executive not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, Executive not having taken reasonable steps toward curing such material failure or material breach within thirty days of his actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable, or (ii) conviction of Executive by, or a plea of guilty in, a court of competent jurisdiction of a felony or other major crime (a plea of nolo contendere shall be deemed a conviction). 6.3 Termination without Cause by the Company or for Good Reason by Executive (A) By the Company. Notwithstanding any other provision of this Agreement, the Company shall have the right to terminate Executive's employment with the Company and Milgray without Cause at any time, and upon such termination Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. (B) By Executive. If the Company materially breaches any of its obligations, or any material violation by the Company of Executive's rights, under this Agreement followed by (i) written notice from Executive specifying such material breach or violation, plus (ii) the Company not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, the Company not having taken reasonable steps toward curing such material breach or failure within thirty days of actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable (the foregoing being referred to as "Good Reason"), Executive will have the right at Executive's election to terminate his employment hereunder by sending notice to the Company of his election to so terminate. Termination pursuant to this subsection will be effective from and after the effective date of Executive's notice to the Company terminating Executive's employment as aforesaid. Upon any such termination, Executive shall have the rights to receive the amounts -5- 6 described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. 6.4 Death/Disability The death or Total Disability of Executive. For the purposes of this Agreement, "Total Disability" shall mean the inability of Executive due to illness or other incapacity to perform his duties hereunder in a normal manner for a period of six months (whether or not consecutive) during any consecutive eighteen-month period. If there shall be a Total Disability involving Executive, his employment may be terminated by written notice by the Company to Executive. In the event of Executive's death during the term of this Agreement, the persons designated by Executive (or if Executive does not make such a designation, then Executive's estate) shall be entitled to receive his Base Salary plus guaranteed bonus provided for Executive in this Agreement for a period of twelve months following Executive's death (regardless of the time of such death). 6.5 Voluntary Termination Executive may terminate his employment under this Agreement at any time upon thirty days written notice. 7. CONSEQUENCES OF TERMINATION OF EMPLOYMENT 7.1 Termination by the Company other than for Cause or Termination by Executive for Good Reason. If the Company terminates Executive's employment other than for Cause or if Executive, for Good Reason terminates his employment, Executive shall be entitled to receive from the Company (at Executive's election which must be exercised within 30 days of termination), either (i) within twenty days of such election, a lump sum payment in an amount equal to the sum of his Base Salary (plus guaranteed bonus) payments to which Executive would be entitled under this Agreement as a full-time employee of the Company for the balance of Executive's term of employment under this Agreement (from the date of termination); such lump sum payment discounted to present value using the interest rate offered at the date of termination by The Chase Manhattan Bank, N.A., on a certificate of deposit for a period of time equal to the remaining term of this Agreement at the date of termination and subject to the noncompetition covenant for the then balance of the Term as set forth in Section 8.1; or (ii) receive all Base Salary plus guaranteed bonus payments payable for the remaining term of this Agreement; provided, however, that should Executive elect to become employed by a competitor of the Company after termination (whether as an officer, director, employee, consultant or otherwise), the Company may offset against the amounts it owes Executive all compensation derived from such competitive employment. Executive agrees to notify the Company within five (5) business days of being employed by a competitor of the Company and to provide the Company with such documentation as the Company may reasonably request (including, but not limited to, copies of his Forms W-2) in order to enable the Company to verify the amount of Executive's compensation from any competitor. -6- 7 7.2 Termination by the Company because of Executive's Total Disability. If the Company terminates Executive's employment hereunder because of Executive's Total Disability, Executive shall be entitled to receive from the Company for the full balance of the Term of this Agreement regular bi-weekly payments equal to 75% of Executive's regular bi-weekly Base Salary payment plus guaranteed bonus. This amount shall be reduced by all benefits provided to Executive under any Company disability plan or plans. Executive agrees to participate in such plan(s) to as full an extent and amount as permitted under such plans. 7.3 Voluntary Termination by Executive or Termination by the Company for Cause. If Executive voluntarily terminates his employment hereunder (other than for Good Reason or Total Disability) or if the Company terminates Executive's employment for Cause, Executive shall not be entitled to any further compensation following such termination. The Company shall not be entitled to recover any damages or other amount from Executive by reason of any such termination. 8. RESTRICTIVE COVENANTS 8.1 Covenant Not to Compete. During Executive's employment with the Company, Executive shall not, directly or indirectly, be engaged in the distribution or sale of any products that are directly competitive with products presently distributed or sold by the Company or any of its subsidiaries within the geographical area in which the Company or any of its subsidiaries conducts its business (except for passive investments by Executive of up to 5% of the outstanding stock of a publicly-held company engaged in any such activities). Following termination of Executive's employment with the Company, both in the case of voluntary termination by Executive (whether or not for Good Reason) or in the case of termination by the Company (whether or not for Cause), there shall be no restrictions on Executive's employment by another entity (whether or not competitive with the Company) unless Executive shall have elected the compensation option set forth in Section 7.1(i), in which case the restrictions set forth in the first sentence of this Section 8.1 (except as provided in the last sentence of this Section 8.1) shall continue to apply for the balance of the term of this Agreement as of the date of termination; provided, however, that if Executive elects the option set forth in Section 7.1(i) and then determines at a subsequent date that he wishes to take actions that would otherwise violate such restrictions, Executive will be relieved from such restrictions if he repays to the Company, in advance of taking such actions, a pro rata portion of the payments he received pursuant to that election (based on the length of the time remaining on the non-competition covenant at that time in comparison to the total remaining term of the non-competition covenant at the time of termination). For example, if Executive were terminated without Cause after two years, and elected to receive his remaining three years of pay under this Agreement in a lump sum, and one year later wanted to work for a competitor, the Executive could do so if he repaid the Company two-thirds of the amount he received as -7- 8 severance (3 years severance pay lump-sum, 1 year of which was "earned" by not competing, with the portion relating to the remaining 2 years to be repaid to the Company in exchange for a release from the non-compete). The Company may, at any time and from time to time, attach an annex to this Agreement specifying specific jurisdictions in which the covenant not-to-compete set forth in this Section 8.1 is applicable. Notwithstanding anything to the contrary contained in the second sentence of this Section 8.1, Executive shall not be restricted from employment by a manufacturer or manufacturer's sales representative which manufactures and/or sells any products referred to in the first sentence of this Section 8.1 or from the sale of any of such products in connection with such employment. 8.2 Nondisclosure and Nonsolicitation. Both during and after Executive's employment with the Company, Executive shall keep secret all material confidential matters of the Company not in the public domain and will not disclose them to anyone outside of the Company. Further, after termination Executive will not seek to hire Company employees. 9. MISCELLANEOUS 9.1 Arbitration All disputes, controversies or claims arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall be submitted to binding arbitration taking place in the State of New York before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Expenses of the arbitration shall be apportioned between the parties by the arbitrator on the basis of relative fault. 9.2 Legal Fees The Company shall pay all legal fees incurred by Executive arising out of the Company's failing to make any payment or withholding any employee benefits under this Agreement or contesting the validity, enforceability or interpretation of this Agreement in the event it is determined that (i) such action was not justified under this Agreement or (ii) if it is determined that both the Company and the Executive acted in violation of this Agreement, the Company's actions constituted a more serious violation than did the Executive's actions. Determination as to Executive's entitlement to legal fees pursuant to this Agreement may be made by the arbitrator if arbitration is sought or by independent legal counsel acceptable to both parties. 9.3 No Third-Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. -8- 9 9.4 Entire Agreement This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. 9.5 Succession and Assignment This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the other. 9.6 Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 9.7 Headings The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.8 Notices All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO THE COMPANY: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049-5022 Attn: President IF TO EXECUTIVE: Richard Hyman 22 Bondsburry Lane Melville, New York 11747 -9- 10 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. 9.9 Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. 9.10 Amendments and Waivers No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Company and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 9.11 Severability Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. -10- 11 IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. BELL INDUSTRIES, INC. By: /s/ Tracy A. Edwards ---------------------------- Name: Tracy A. Edwards Title: Vice President RICHARD HYMAN /s/ Richard Hyman -------------------------------- -11- 12 EXHIBIT 3.4 FORM OF STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION AGREEMENT This Incentive Stock Option Agreement ("Agreement") is made as of this _________ day of _______________, 199_, between Bell Industries, Inc., a California corporation (the "Company"), and Richard Hyman (the "Participant"). R E C I T A L S 1. The Board of Directors of the Company and its shareholders have adopted the 1990 Stock Option Plan as of October 29, 1990 and the 1994 Stock Option Plan as of November 1, 1994 (the "Plans"). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Plans. 2. The Plans provide for the selling or granting to selected executive and other key employees, and other persons furnishing services to the Company or any subsidiary of the Company, as the Compensation Committee (the "Committee") may from time to time determine, of Restricted Stock or options to purchase shares of Common Stock of the Company. 3. Pursuant to the Plans, the Committee has determined that it is to the advantage and best interest of the Company and its stockholders to grant an Incentive Stock Option to the Participant covering 25,000 shares of the Company's Common Stock as an inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Incentive Stock Option Agreement between the Company and the Participant. 4. The Option granted hereby is intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. The Company grants to the Participant the right and option (the "Option") to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate 25,000 shares of Common Stock at the purchase price of $___________ per share, exercisable in installment periods in accordance with the provisions of this Agreement during a period expiring on the 5th anniversary of the date of this Agreement (the "Expiration Date") or earlier in accordance with Section 5 hereof; provided, however, if the Participant does not in any given installment period purchase all of the shares that the Participant is entitled to purchase in such installment period, then 13 the Participant's right to purchase any shares not purchased in such installment period shall continue until the Expiration Date or sooner termination of the Participant's option. 2. Vesting. This Option shall vest and become exercisable in the percentages and on the dates set forth below: Percentage Cumulative Initially Percentage Date Exercisable Exercisable ---- ----------- ----------- 10% 10% 20% 30% 30% 60% 40% 100% Subject to earlier termination under Section 5 hereof, at any time after the 4th anniversary date of this Agreement, but no later than the Expiration Date, the Participant may purchase all or any part of the shares subject to this Option which the Participant theretofore failed to purchase. In each case, the number of shares which may be purchased shall be calculated to the nearest full share. Notwithstanding the foregoing vesting schedule, but subject to Section 5 hereof, this Option shall become immediately exercisable in full, if (i) the Company terminates Participant's employment agreement (the "Employment Agreement") dated as of ____________, 1996 other than for Cause (as defined in the Employment Agreement) or (ii) Participant terminates the Employment Agreement for Good Reason (as defined in the Employment Agreement). 3. Manner of Exercise. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company, specifying the number of shares to be purchased and accompanied by payment to the Company of the full purchase price of the shares to be purchased either (i) in cash or by certified or cashier's check payable to the order of the Company, or (ii) by delivery of shares of Common Stock already owned by, and in the possession of, the Participant. Shares of Common Stock used to satisfy any portion of the exercise price of this Option shall be valued at their fair market value determined (in accordance with Section 4 below) as of the close of the business day immediately preceding the date of exercise. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (i) one hundred (100) shares or (ii) the total number of shares then eligible for exercise if less than one hundred (100) shares. This Option may be exercised (i) during the lifetime of the Participant, only by the Participant or, in the event a conservator, guardian or legal representative is appointed during the Participant's lifetime to handle the affairs of the Participant, by such conservator, guardian or legal representative; and (ii) after the Participant's death, -2- 14 by his or her transferee by will or the laws of descent or distribution, and not otherwise, regardless of any community property interest therein of the spouse of the Participant or such spouse's successors in interest. If the spouse of the Participant shall have acquired a community property interest in this Option, the Participant, or the Participant's permitted successors in interest, may exercise the Option on behalf of the spouse of the Participant or such spouse's successors in interest. Except in the event of the Participant's death or permanent disability, the Option may not be exercised prior to the date six months from the date hereof. 4. Fair Market Value of Common Stock. The fair market value of a share of Company Common Stock shall be determined for purposes of this Agreement by reference to the closing price on the New York Stock Exchange (or other principal stock exchange on which such shares are then listed) or, if such shares are not then listed on such exchange (or other principal stock exchange), by reference to the closing price (if a National Market Issue) or the mean between the bid and asked price (if other over-the-counter issue) of a share as supplied by the National Association of Securities Dealers through NASDAQ (or its successor in function), in each case as reported by The Wall Street Journal, for the date on which the option is granted or exercised, or if such date is not a business day, for the business day immediately preceding such date (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof). 5. Cessation of Services, Death or Permanent Disability. If a Participant ceases to be employed by the Company or one of its subsidiaries for any reason other than the Participant's death or permanent disability (within the meaning of Section 22(e) (3) of the Code), the Participant's Option shall be exercisable for a period of three (3) months after the date the Participant ceases to be an employee of the Company or such subsidiary (unless by its terms it sooner expires) to the extent exercisable on the date of such cessation of employment and shall thereafter expire and be void and of no further force or effect. A leave of absence approved in writing by the Committee shall not be deemed a termination of employment for the purposes of this paragraph 5, but no Option may be exercised during any such leave of absence, except during the first three (3) months thereof. If the Participant dies or becomes permanently disabled while employed by the Company or one of its subsidiaries, the Participant's Option shall expire one (1) year after the date of such death or permanent disability unless by its terms it sooner expires. During such period after death, such Option may, to the extent that it remained unexercised (but exercisable by the Participant according to such Option's terms) on the date of such death, be exercised by the person or persons to whom the Participant's rights under the Option shall pass by the Participant's will or by the laws of descent and distribution. -3- 15 6. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules. No shares issuable upon the exercise of this Option shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended, and all applicable state securities or "Blue Sky" laws (whether by registration or qualification or satisfaction of exemption conditions), all applicable listing requirements of any principal securities exchange on which shares of the same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made. 7. Withholding of Taxes. If the Participant or the Participant's permitted successors in interest disposes of shares of Common Stock acquired pursuant to the exercise of this Option within two years after the date of this Agreement or within one year after exercise of this Option, the Company may deduct and withhold from the wages, salary, bonus and other compensation paid by the Company to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of this Option or the sale of Common Stock issued to the Participant upon exercises hereof, all taxes as may be required from time to time under federal or state tax laws and regulations. This withholding of tax shall be made from the Company's concurrent or next payment of wages, salary, bonus or other compensation to the Participant or by payment to the Company by the Participant of required withholding tax, as the Committee may determine. 8. Adjustments for Reorganizations, Stock Splits, etc. If the outstanding shares of the Common Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares or securities receivable upon the exercise of this Option, without change in the aggregate purchase price applicable to the unexercised portion of this Option but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon the sale of substantially all the property of the Company, the Committee shall provide in writing for appropriate satisfaction of this Option by one or more of the following alternatives to be made in connection with such transaction: (i) the immediate exercisability of this Option (provided that this Option was granted more than six months before such transaction) notwithstanding the provisions of Section 3 hereof, except that this Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (a) one hundred (100) shares or (b) the total number of shares then eligible for exercise if less than one hundred (100) shares; (ii) the assumption of this Option or the substitution therefore of a new option covering the stock of a successor corporation, with -4- 16 appropriate adjustments as to number and kind of shares and prices; (iii) the continuance of the Plan by such successor corporation in which event this Option shall remain in full effect under the terms so provided; or (iv) the payment of an amount in cash or stock, or any combination thereof, in lieu of and in complete satisfaction of this Option. Adjustments under this paragraph 8 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment. 9. Participation by Participant in Other Company Plans. Nothing herein contained shall affect the right of the Participant to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, profit sharing or other employee welfare plan or program of the Company or of any subsidiary of the Company. 10. No Rights as a Shareholder Until Issuance of Stock Certificate. Neither the Participant nor any other person legally entitled to exercise this Option shall be entitled to any of the rights or privileges of a shareholder of the Company in respect of any shares issuable upon any exercise of this Option unless and until a certificate or certificates representing such shares shall have been actually issued and delivered to the Participant. 11. Not an Employment or Service Contract. Nothing contained herein shall be construed as agreement by the Company, express or implied, to employ Participant or contract for Participant's services, to restrict the Company's right to discharge Participant or cease contracting for Participant's services or to modify, extend or otherwise affect in any manner whatsoever the terms of any employment agreement or contract for services which may exist between the Participant and the Company. 12. Agreement Subject to Plan. The Option hereby granted is subject to, and the Company and the Participant agree to be bound by, all of the terms and conditions of the Plan, as the same shall be amended from time to time in accordance with the terms thereof, but no such amendment shall adversely affect the Participant's rights under this Option without the prior written consent of the Participant. 13. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 14. Notices. Any notice or other paper or payment required to be given or sent pursuant to the terms of this Agreement shall be sufficiently given or served hereunder to any party when transmitted by registered or certified mail, postage prepaid, addressed to the party to be served as follows: (a) if to the Company: Bell Industries, Inc. 11812 San Vicente Boulevard -5- 17 Los Angeles, CA 90049-5022 Attention: President (b) if to Participant: Richard Hyman 22 Bondsburry Lane Melville, New York 11747 Any party, by written notice, may designate another address for notices to be sent from time to time. -6- 18 15. Execution. This Option has been granted, executed and delivered the day and year first above written at Los Angeles, California, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. COMPANY ------- BELL INDUSTRIES, INC. BY: --------------------------- PARTICIPANT ----------- ------------------------------ Richard Hyman By his or her signature below, the spouse of the Participant agrees to be bound by all of the terms and conditions of the foregoing Agreement. ------------------------------ NAME: -7- 19 EXHIBIT 5 FORM OF INDEMNIFICATION AGREEMENT INDEMNITY AGREEMENT This Agreement is made as of the _____ day of __________, 1996, by and between Bell Industries, Inc., a California corporation (the "Corporation"), and Richard Hyman (the "Indemnitee"), a Director and/or Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability of Directors' and Officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, the Corporation does not regard the protection available to Indemnitee as adequate in the present circumstances, and realizes that Indemnitee may not be willing to serve as a Director or Officer without adequate protection, and the Corporation desires Indemnitee to serve in such capacity; NOW, THEREFORE, in consideration of Indemnitee's service as a Director or Officer after the date hereof the parties agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature. (b) The term "Expenses" shall include, but is not limited to, expenses of investigations, judicial or administrative proceedings or appeals, damages, judgments, fines, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under this Agreement. 20 (c) The terms "Director" and "Officer" shall include Indemnitee's service at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise as well as a Director and/or Officer of the Corporation. 2. Indemnity of Director or Officer. Subject only to the limitations set forth in Section 3, Corporation will pay on behalf of the Indemnitee all Expenses actually and reasonably incurred by Indemnitee because of any claim or claims made against him in a Proceeding by reason of the fact that he is or was a Director and/or Officer. 3. Limitations on Indemnity. Corporation shall not be obligated under this Agreement to make any payment of Expenses to the Indemnitee (a) which payment it is prohibited by applicable law from paying as indemnity; (b) for which payment is actually made to the Indemnitee under an insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) for which payment the Indemnitee is indemnified by Corporation otherwise than pursuant to this Agreement and payment is actually made to the Indemnitee except in respect of any excess beyond the amount of the payment under such indemnification; (d) resulting from a claim decided in a Proceeding adversely to the Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he was not legally entitled; (e) resulting from a claim decided in a Proceeding adversely to the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of Corporation within the meaning of Section 16(b) or 16(c) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; or (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be indemnified under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless it shall be decided in a Proceeding that he committed (i) acts of active and deliberate dishonesty (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated. For purposes of Sections 3 and 4, the phrase "decided in a Proceeding" shall mean a decision by a court, arbitrator(s), hearing officer or other judicial agent having the -2- 21 requisite legal authority to make such a decision, which decision has become final and from which no appeal or other review proceeding is permissible. 4. Advance Payment of Costs. Expenses incurred by Indemnitee in defending a claim against him in a Proceeding shall be paid by the Corporation as incurred and in advance of the final disposition of such Proceeding; provided, however, that Expenses of defense need not be paid as incurred and in advance where the judicial agent of first impression has decided the Indemnitee is not entitled to be indemnified pursuant to this Agreement or otherwise. Indemnitee hereby agrees and undertakes to repay such amounts advanced if it shall be decided in a Proceeding that he is not entitled to be indemnified by the Corporation pursuant to this Agreement or otherwise. 5. Enforcement. If a claim under this Agreement is not paid by Corporation, or on its behalf, within thirty days after a written claim has been received by Corporation, the Indemnitee may at any time thereafter bring suit against Corporation to recover the unpaid amount of the claim and if successful in whole or in part, the Indemnitee shall be entitled to be paid also the Expenses of prosecuting such claim. 6. Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Corporation effectively to bring suit to enforce such rights. Notwithstanding the foregoing, if any of the provisions hereof would impair or jeopardize Indemnitee's coverage under the Corporation's Directors' and Officers' Liability Policy, such provisions shall be ineffective and shall be deemed deleted from this Agreement. 7. Notice. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to Corporation shall be given at its principal office and shall be directed to the President (or such other address as Corporation shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, the Indemnitee shall give Corporation such information and cooperation as it may reasonably require. 8. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 9. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Articles of Incorporation or Bylaws of the Corporation or under California law. -3- 22 10. Applicable Law. This Agreement shall be governed by and construed in accordance with California law. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 12. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns. 13. Continuation of Indemnification. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 14. Coverage of Indemnification. The indemnification under this Agreement shall cover Indemnitee's service as a Director and/or Officer prior to or after the date of the Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. INDEMNITEE CORPORATION By: By: ----------------------- ------------------- -4- EX-99.(C)(5) 16 EXHIBIT (C)(5) 1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of November 26, 1996, by and between John Tortorici (the "Executive"), Milgray Electronics, Inc., a New York corporation (the "Company"), and Bell Industries, Inc., a California corporation (the "Guarantor"), to be effective as of the effective date of the Merger (as defined below) with reference to the following facts: A. Executive is currently employed as Vice President-Finance and Treasurer of the Company with executive responsibilities in the financial and administrative areas; B. Pursuant to an agreement dated as of November 26, 1996, ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of the Company ("Acquisition Sub") will make a tender offer to acquire all of the outstanding capital stock of Milgray (the "Tender Offer"). After completion of the Tender Offer, it is intended that Acquisition Sub will be merged with and into Milgray, and Milgray will become a wholly-owned subsidiary of the Guarantor (the "Merger"); C. The Company wishes to ensure the continued services of Executive after the Merger; and D. Executive is willing to continue his employment with the Company on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT 1.1 Duties and Responsibilities The Company does hereby employ Executive and Executive hereby accepts such employment as Vice President--Finance and Treasurer. Executive shall report to the President of the Company, and subject to the directions of the President, shall be responsible for performing various executive functions in the financial and administrative areas similar or relating to the functions presently performed by Executive at the Company; provided, however, that Executive shall not be required to undertake duties not commensurate with his position as Vice President--Finance and Treasurer of the Company. Notwithstanding anything contained in the preceding sentence, Executive acknowledges that, following the Merger, the Guarantor plans to investigate combining its existing distribution business, or segments thereof, with those of the Company, and where feasible or practicable, to combine such business, or segments thereof, and that as a result of such combination, the Company may change the exact nature of Executive's responsibilities (but not Executive's job title), but in no event will Executive be required to accept job responsibilities in an area outside of his current expertise or to act in less 2 than an executive capacity; moreover, Executive's status and position in the Company (or its successor) organization chart (i.e., the status and position of the person to whom Executive reports and the class of employees who report to Executive) shall be similar to other Vice Presidents of the Company and/or the Guarantor with responsibilities similar to those of Executive. Any such change in responsibility will not constitute a breach of this Agreement by the Company or the Guarantor. During the term of this Agreement, Executive shall devote his full business time and attention to the business of the Company and shall not be engaged in any other duties which interfere with the performance of his duties hereunder. Executive shall be entitled to an office, secretarial help and other accommodations and amenities comparable to those Executive presently has at the Company. 1.2 Place of Performance Executive's duties under this Agreement are to be performed on Long Island in New York State and Executive shall not be required to travel or be assigned away from this location more than forty days in any twelve-month period or more than five consecutive days in any thirty-day period. 2. TERM This Agreement shall be in full force and effect for a period (the "Term") which shall commence as of the effective date of the Merger (the "Effective Date") and shall continue for a period of three (3) years, unless sooner terminated as hereafter provided. 3. COMPENSATION 3.1 Base Salary As compensation for the services to be performed by Executive during the continuance of this Agreement, the Company shall pay Executive a base salary of $175,000 per year for each year of his employment hereunder (the "Base Salary"). Base Salary shall be payable in substantially equal bi-weekly installments and reduced on a pro rata basis for any fraction of a year or month during which Executive is not so employed. 3.2 Bonus Executive shall be entitled to earn an incentive bonus based upon achievement of financial and other goals established from time to time by the Company, provided that the minimum bonus for each fiscal year shall be $70,000. For the initial year of this Agreement, such bonus shall be prorated from the Effective Date and the bonus for any partial year shall be similarly prorated. Any such bonus earned by Executive shall be paid at the same time that annual incentive bonuses for the Company's other senior executive officers are paid in accordance with the Company's policies as in effect from time to time (but in no event will the guaranteed minimum bonus be paid later than 30 -2- 3 days after the end of the Company's fiscal year, with the remainder, if any, to be paid within 90 days after the end of the Company's fiscal year). 3.3 Additional Benefits Executive shall be entitled to participate in all of Guarantor's employee benefit plans as listed in the Guarantor's employee handbook, as the same may change from time to time, and, in addition, to participate on the same terms as senior Guarantor executives in any benefit plans available to members of the Guarantor's management (whether or not listed in the employee handbook). Among other things, Executive shall be entitled to participate in the Guarantor's Health Care Benefits Program, 401(k) Plan, Stock Purchase Plan, Stock Option Plan, Short-term and Long-term Disability Programs and the Guarantor's Executive Medical Plan, which provides coverage for all medical expenses not otherwise covered by the basic policy, up to $25,000. If any health, medical or disability plan or program existing at the time of commencement of Executive's employment pursuant to this Agreement is terminated or the benefits thereunder reduced, the Company or Guarantor shall provide Executive with benefits similar to those in existence at the time of commencement of Executive's employment hereunder. 3.4 Stock Options (A) As an additional element of compensation to Executive in consideration of the services to be rendered hereunder, Guarantor shall grant to Executive options to acquire 10,000 shares of Guarantor's common stock at an exercise price equal to the closing price on the Effective Date. The options shall vest in 25%, 25% and 50% increments, respectively, on the first, second and third anniversaries of this Agreement. In addition, all of the options will vest if the Company terminates this agreement other than for Cause (as defined in Section 6.2) or if the Executive quits for Good Reason (as defined in Section 6.3(B)). The options shall remain exercisable for a period of five (5) years from the date of grant. The specific terms of the above-referenced option shall be as set forth in a separate option agreement in the form annexed hereto as Exhibit 3.4. (B) Executive shall be entitled to participate in the Guarantor's stock option programs, although Executive understands that any grants under such programs are completely discretionary with the Compensation Committee of the Guarantor's Board of Directors. 3.5 Reimbursements Executive shall be entitled to reimbursement for all amounts reasonably expended on behalf of the Company, subject to verification similar to that required of and provided by the Company's other senior executives. -3- 4 3.6 Deductions The Company shall deduct from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. 3.7 Disability Except in the case of Executive's Total Disability (as defined in Section 6.4), Executive's full compensation and benefits under this Agreement shall be continued during any period when he is absent or unable to perform his duties due to illness, disability or other incapacity; and Executive's inability to perform his duties by reason of the foregoing shall not constitute a failure to perform his obligations under this Agreement and shall not be deemed a default by Executive hereunder. The consequences of Executive's Total Disability is covered in Section 7.2 of this Agreement. 4. VACATION Executive shall be entitled to four weeks of vacation in each twelve-month period; provided, however, that no more than six weeks may be taken during any eighteen-month period. Such vacation will accrue on a pro rata basis from the date employment commences under this Agreement. At the end of his employment hereunder, Executive shall be paid for any accrued but unused vacation time. Executive agrees that he will coordinate his vacation plans and schedules in order to prevent any undue disruption of the Company's business. 5. INDEMNIFICATION Executive shall be indemnified by Guarantor and the Company to the full extent permitted by law in respect of his actions as an officer or director of the Company and shall be provided with such liability insurance coverage in this connection as is provided to other Company executives. In addition, the Company and Guarantor shall enter into an Indemnification Agreement with Executive in the form attached as Exhibit 5. 6. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: 6.1 Mutual Agreement Whenever the Company and Executive mutually agree in writing to termination; -4- 5 6.2 Termination for Cause At any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) material breach by Executive of this Agreement or material failure by Executive to perform his duties under this Agreement (other than by reason of Executive's Total Disability) followed by (a) written notice from the Company to Executive specifying such material failure or such material breach, plus (b) Executive not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, Executive not having taken reasonable steps toward curing such material failure or material breach within thirty days of his actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable, or (ii) conviction of Executive by, or a plea of guilty in, a court of competent jurisdiction of a felony or other major crime (a plea of nolo contendere shall be deemed a conviction). 6.3 Termination without Cause by the Company or for Good Reason by Executive (A) By the Company. Notwithstanding any other provision of this Agreement, the Company shall have the right to terminate Executive's employment with the Company without Cause at any time, and upon such termination Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. (B) By Executive. If the Company materially breaches any of its obligations, or any material violation by the Company of Executive's rights, under this Agreement followed by (i) written notice from Executive specifying such material breach or violation, plus (ii) the Company not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, the Company not having taken reasonable steps toward curing such material breach or failure within thirty days of actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable (the foregoing being referred to as "Good Reason"), Executive will have the right at Executive's election to terminate his employment hereunder by sending notice to the Company of his election to so terminate. Termination pursuant to this subsection will be effective from and after the effective date of Executive's notice to the Company terminating Executive's employment as aforesaid. Upon any such termination, Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. 6.4 Death/Disability The death or Total Disability of Executive. For the purposes of this Agreement, "Total Disability" shall mean the inability of Executive due to illness or other incapacity to perform his duties hereunder in a normal manner for a period of six months (whether or not consecutive) during any consecutive eighteen-month period. If there shall be a -5- 6 Total Disability involving Executive, his employment may be terminated by written notice by the Company to Executive. In the event of Executive's death during the term of this Agreement, the persons designated by Executive (or if Executive does not make such a designation, then Executive's estate) shall be entitled to receive his Base Salary plus guaranteed bonus provided for Executive in this Agreement for a period of twelve months following Executive's death (regardless of the time of such death). 6.5 Voluntary Termination Executive may terminate his employment under this Agreement at any time upon thirty days written notice. 7. CONSEQUENCES OF TERMINATION OF EMPLOYMENT 7.1 Termination by the Company other than for Cause or Termination by Executive for Good Reason. If the Company terminates Executive's employment other than for Cause or if Executive, for Good Reason terminates his employment, Executive shall be entitled to receive from the Company (at Executive's election which must be exercised within 30 days of termination), either (i) within twenty days of such election, a lump sum payment in an amount equal to the sum of his Base Salary (plus guaranteed bonus) payments to which Executive would be entitled under this Agreement as a full-time employee of the Company for the balance of Executive's term of employment under this Agreement (from the date of termination); such lump sum payment discounted to present value using the interest rate offered at the date of termination by The Chase Manhattan Bank, N.A., on a certificate of deposit for a period of time equal to the remaining term of this Agreement at the date of termination and subject to the noncompetition covenant for the then balance of the Term as set forth in Section 8.1; or (ii) receive all Base Salary plus guaranteed bonus payments for the remaining term of this Agreement; provided, however, that should Executive elect to become employed by a competitor of the Company after termination (whether as an officer, director, employee, consultant or otherwise), the Company may offset against the amounts it owes Executive all compensation derived from such competitive employment. Executive agrees to notify the Company within five (5) business days of being employed by a competitor of the Company and to provide the Company with such documentation as the Company may reasonably request (including, but not limited to, copies of his Forms W-2) in order to enable the Company to verify the amount of Executive's compensation from any competitor. 7.2 Termination by the Company because of Executive's Total Disability. If the Company terminates Executive's employment hereunder because of Executive's Total Disability, Executive shall be entitled to receive from the Company for the full balance of the Term of this Agreement regular bi-weekly payments equal to 75% of Executive's regular bi-weekly Base Salary payment plus guaranteed bonus. This amount shall be reduced by all benefits provided to Executive under any Company disability plan or plans. Executive agrees to participate in such plan(s) to as full an extent and amount as permitted under such plans. -6- 7 7.3 Voluntary Termination by Executive or Termination by the Company for Cause. If Executive voluntarily terminates his employment hereunder (other than for Good Reason or Total Disability) or if the Company terminates Executive's employment for Cause, Executive shall not be entitled to any further compensation following such termination. The Company shall not be entitled to recover any damages or other amount from Executive by reason of any such termination. 8. RESTRICTIVE COVENANTS 8.1 Covenant Not to Compete During Executive's employment with the Company, Executive shall not, directly or indirectly, be engaged in the distribution or sale of any products that are directly competitive with products presently distributed or sold by the Company or any of its subsidiaries within the geographical area in which the Company or any of its subsidiaries conducts its business (except for passive investments by Executive of up to 5% of the outstanding stock of a publicly-held company engaged in any such activities). Following termination of Executive's employment with the Company, both in the case of voluntary termination by Executive (whether or not for Good Reason) or in the case of termination by the Company (whether or not for Cause), there shall be no restrictions on Executive's employment by another entity (whether or not competitive with the Company) unless Executive shall have elected the compensation option set forth in Section 7.1(i), in which case the restrictions set forth in the first sentence of this Section 8.1 (except as provided in the last sentence of this Section 8.1) shall continue to apply for the balance of the term of this Agreement as of the date of termination; provided, however, that if Executive elects the option set forth in Section 7.1(i) and then determines at a subsequent date that he wishes to take actions that would otherwise violate such restrictions, Executive will be relieved from such restrictions if he repays to the Company, in advance of taking such actions, a pro rata portion of the payments he received pursuant to that election (based on the length of the time remaining on the non-competition covenant at that time in comparison to the total remaining term of the non-competition covenant at the time of termination). For example, if Executive were terminated without Cause after one year, and elected to receive his remaining two years of pay under this Agreement in a lump sum, and one year later wanted to work for a competitor, the Executive could do so if he repaid the Company one-half of the amount he received as severance (2 years severance pay lump-sum, 1 year of which was "earned" by not competing, with the portion relating to the remaining 1 year to be repaid to the Company in exchange for a release from the non-compete). The Company may, at any time and from time to time, attach an annex to this Agreement specifying specific jurisdictions in which the covenant not-to-compete set forth in this Section 8.1 is applicable. Notwithstanding anything to the contrary contained in the second sentence of this Section 8.1, Executive shall not be restricted from employment by a manufacturer or manufacturer's sales representative which manufactures and/or sells any products -7- 8 referred to in the first sentence of this Section 8.1 or from the sale of any of such products in connection with such employment. 8.2 Nondisclosure and Nonsolicitation. Both during and after Executive's employment with the Company, Executive shall keep secret all material confidential matters of the Company not in the public domain and will not disclose them to anyone outside of the Company. Further, after termination Executive will not seek to hire Company employees. 9. MISCELLANEOUS 9.1 Arbitration All disputes, controversies or claims arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall be submitted to binding arbitration taking place in the State of New York before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Expenses of the arbitration shall be apportioned between the parties by the arbitrator on the basis of relative fault. 9.2 Legal Fees The Company shall pay all legal fees incurred by Executive arising out of the Company's failing to make any payment or withholding any employee benefits under this Agreement or contesting the validity, enforceability or interpretation of this Agreement in the event it is determined that (i) such action was not justified under this Agreement or (ii) if it is determined that both the Company and the Executive acted in violation of this Agreement, the Company's actions constituted a more serious violation than did the Executive's actions. Determination as to Executive's entitlement to legal fees pursuant to this Agreement may be made by the arbitrator if arbitration is sought or by independent legal counsel acceptable to both parties. 9.3 No Third-Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. 9.4 Entire Agreement This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. -8- 9 9.5 Succession and Assignment This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the other. 9.6 Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 9.7 Headings The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.8 Notices All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO THE COMPANY: Milgray Electronics, Inc. 77 Schmitt Boulevard Farmingdale, New York 11735 Attn: President IF TO THE GUARANTOR: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049-5022 Attn: President IF TO EXECUTIVE: Mr. John Tortorici 12 Lorenz Drive Valhalla, New York 10595 -9- 10 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. 9.9 Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. 9.10 Amendments and Waivers No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Company and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 9.11 Severability Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 9.12 Guarantee Guarantor unconditionally guarantees all of the Company's obligations hereunder. Guarantor agrees that Executive may proceed directly against Guarantor in the event of the Company's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Company. -10- 11 IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. MILGRAY ELECTRONICS, INC. By: /s/ Richard Hyman ------------------------------- Name: Richard Hyman Title: Executive Vice President BELL INDUSTRIES, INC. By: /s/ Tracy A. Edwards ------------------------------- Name: Tracy A. Edwards Title: Vice President /s/ John Tortorici ------------------------------- John Tortorici -11- 12 EXHIBIT 3.4 FORM OF STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION AGREEMENT This Incentive Stock Option Agreement ("Agreement") is made as of this _________ day of _______________, 199_, between Bell Industries, Inc., a California corporation (the "Company"), and John Tortorici (the "Participant"). RECITALS 1. The Board of Directors of the Company and its shareholders have adopted the 1990 Stock Option Plan as of October 29, 1990 and the 1994 Stock Option Plan as of November 1, 1994 (the "Plans"). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Plans. 2. The Plans provide for the selling or granting to selected executive and other key employees, and other persons furnishing services to the Company or any subsidiary of the Company, as the Compensation Committee (the "Committee") may from time to time determine, of Restricted Stock or options to purchase shares of Common Stock of the Company. 3. Pursuant to the Plans, the Committee has determined that it is to the advantage and best interest of the Company and its stockholders to grant an Incentive Stock Option to the Participant covering 10,000 shares of the Company's Common Stock as an inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Incentive Stock Option Agreement between the Company and the Participant. 4. The Option granted hereby is intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. The Company grants to the Participant the right and option (the "Option") to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate 10,000 shares of Common Stock at the purchase price of $___________ per share, exercisable in installment periods in accordance with the provisions of this Agreement during a period expiring on the 5th anniversary of the date of this Agreement (the "Expiration Date") or earlier in accordance with Section 5 hereof; provided, however, if the Participant does not in any given installment period purchase all of the shares that the Participant is entitled to purchase in such installment period, then 13 the Participant's right to purchase any shares not purchased in such installment period shall continue until the Expiration Date or sooner termination of the Participant's option. 2. Vesting. This Option shall vest and become exercisable in the percentages and on the dates set forth below: Percentage Cumulative Initially Percentage Date Exercisable Exercisable ---- ----------- ----------- 25% 25% 25% 50% 50% 100% Subject to earlier termination under Section 5 hereof, at any time after the 3rd anniversary date of this Agreement, but no later than the Expiration Date, the Participant may purchase all or any part of the shares subject to this Option which the Participant theretofore failed to purchase. In each case, the number of shares which may be purchased shall be calculated to the nearest full share. Notwithstanding the foregoing vesting schedule, but subject to Section 5 hereof, this Option shall become immediately exercisable in full, if (i) the Company terminates Participant's employment agreement (the "Employment Agreement") dated as of ____________, 1996 other than for Cause (as defined in the Employment Agreement) or (ii) Participant terminates the Employment Agreement for Good Reason (as defined in the Employment Agreement). 3. Manner of Exercise. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company, specifying the number of shares to be purchased and accompanied by payment to the Company of the full purchase price of the shares to be purchased either (i) in cash or by certified or cashier's check payable to the order of the Company, or (ii) by delivery of shares of Common Stock already owned by, and in the possession of, the Participant. Shares of Common Stock used to satisfy any portion of the exercise price of this Option shall be valued at their fair market value determined (in accordance with Section 4 below) as of the close of the business day immediately preceding the date of exercise. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (i) one hundred (100) shares or (ii) the total number of shares then eligible for exercise if less than one hundred (100) shares. This Option may be exercised (i) during the lifetime of the Participant, only by the Participant or, in the event a conservator, guardian or legal representative is appointed during the Participant's lifetime to handle the affairs of the Participant, by such conservator, guardian or legal representative; and (ii) after the Participant's death, by his or her transferee by will or the laws of descent or distribution, and not otherwise, regardless of any community property interest therein of the spouse of the Participant or -2- 14 such spouse's successors in interest. If the spouse of the Participant shall have acquired a community property interest in this Option, the Participant, or the Participant's permitted successors in interest, may exercise the Option on behalf of the spouse of the Participant or such spouse's successors in interest. Except in the event of the Participant's death or permanent disability, the Option may not be exercised prior to the date six months from the date hereof. 4. Fair Market Value of Common Stock. The fair market value of a share of Company Common Stock shall be determined for purposes of this Agreement by reference to the closing price on the New York Stock Exchange (or other principal stock exchange on which such shares are then listed) or, if such shares are not then listed on such exchange (or other principal stock exchange), by reference to the closing price (if a National Market Issue) or the mean between the bid and asked price (if other over-the-counter issue) of a share as supplied by the National Association of Securities Dealers through NASDAQ (or its successor in function), in each case as reported by The Wall Street Journal, for the date on which the option is granted or exercised, or if such date is not a business day, for the business day immediately preceding such date (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof). 5. Cessation of Services, Death or Permanent Disability. If a Participant ceases to be employed by the Company or one of its subsidiaries for any reason other than the Participant's death or permanent disability (within the meaning of Section 22(e)(3) of the Code), the Participant's Option shall be exercisable for a period of three (3) months after the date the Participant ceases to be an employee of the Company or such subsidiary (unless by its terms it sooner expires) to the extent exercisable on the date of such cessation of employment and shall thereafter expire and be void and of no further force or effect. A leave of absence approved in writing by the Committee shall not be deemed a termination of employment for the purposes of this paragraph 5, but no Option may be exercised during any such leave of absence, except during the first three (3) months thereof. If the Participant dies or becomes permanently disabled while employed by the Company or one of its subsidiaries, the Participant's Option shall expire one (1) year after the date of such death or permanent disability unless by its terms it sooner expires. During such period after death, such Option may, to the extent that it remained unexercised (but exercisable by the Participant according to such Option's terms) on the date of such death, be exercised by the person or persons to whom the Participant's rights under the Option shall pass by the Participant's will or by the laws of descent and distribution. 6. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules. No shares issuable upon the exercise of this Option shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended, and all applicable state securities -3- 15 or "Blue Sky" laws (whether by registration or qualification or satisfaction of exemption conditions), all applicable listing requirements of any principal securities exchange on which shares of the same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made. 7. Withholding of Taxes. If the Participant or the Participant's permitted successors in interest disposes of shares of Common Stock acquired pursuant to the exercise of this Option within two years after the date of this Agreement or within one year after exercise of this Option, the Company may deduct and withhold from the wages, salary, bonus and other compensation paid by the Company to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of this Option or the sale of Common Stock issued to the Participant upon exercises hereof, all taxes as may be required from time to time under federal or state tax laws and regulations. This withholding of tax shall be made from the Company's concurrent or next payment of wages, salary, bonus or other compensation to the Participant or by payment to the Company by the Participant of required withholding tax, as the Committee may determine. 8. Adjustments for Reorganizations, Stock Splits, etc. If the outstanding shares of the Common Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares or securities receivable upon the exercise of this Option, without change in the aggregate purchase price applicable to the unexercised portion of this Option but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon the sale of substantially all the property of the Company, the Committee shall provide in writing for appropriate satisfaction of this Option by one or more of the following alternatives to be made in connection with such transaction: (i) the immediate exercisability of this Option (provided that this Option was granted more than six months before such transaction) notwithstanding the provisions of Section 3 hereof, except that this Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (a) one hundred (100) shares or (b) the total number of shares then eligible for exercise if less than one hundred (100) shares; (ii) the assumption of this Option or the substitution therefore of a new option covering the stock of a successor corporation, with appropriate adjustments as to number and kind of shares and prices; (iii) the continuance of the Plan by such successor corporation in which event this Option shall remain in full -4- 16 effect under the terms so provided; or (iv) the payment of an amount in cash or stock, or any combination thereof, in lieu of and in complete satisfaction of this Option. Adjustments under this paragraph 8 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment. 9. Participation by Participant in Other Company Plans. Nothing herein contained shall affect the right of the Participant to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, profit sharing or other employee welfare plan or program of the Company or of any subsidiary of the Company. 10. No Rights as a Shareholder Until Issuance of Stock Certificate. Neither the Participant nor any other person legally entitled to exercise this Option shall be entitled to any of the rights or privileges of a shareholder of the Company in respect of any shares issuable upon any exercise of this Option unless and until a certificate or certificates representing such shares shall have been actually issued and delivered to the Participant. 11. Not an Employment or Service Contract. Nothing contained herein shall be construed as agreement by the Company, express or implied, to employ Participant or contract for Participant's services, to restrict the Company's right to discharge Participant or cease contracting for Participant's services or to modify, extend or otherwise affect in any manner whatsoever the terms of any employment agreement or contract for services which may exist between the Participant and the Company. 12. Agreement Subject to Plan. The Option hereby granted is subject to, and the Company and the Participant agree to be bound by, all of the terms and conditions of the Plan, as the same shall be amended from time to time in accordance with the terms thereof, but no such amendment shall adversely affect the Participant's rights under this Option without the prior written consent of the Participant. 13. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 14. Notices. Any notice or other paper or payment required to be given or sent pursuant to the terms of this Agreement shall be sufficiently given or served hereunder to any party when transmitted by registered or certified mail, postage prepaid, addressed to the party to be served as follows: -5- 17 (a) if to the Company: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, CA 90049-5022 Attention: President (b) if to Participant: Mr. John Tortorici 12 Lorenz Drive Valhalla, New York 10595 Any party, by written notice, may designate another address for notices to be sent from time to time. -6- 18 15. Execution. This Option has been granted, executed and delivered the day and year first above written at Los Angeles, California, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. COMPANY BELL INDUSTRIES, INC. BY:______________________ PARTICIPANT _________________________ John Tortorici By his or her signature below, the spouse of the Participant agrees to be bound by all of the terms and conditions of the foregoing Agreement. _________________________ NAME: -7- 19 EXHIBIT 5 FORM OF INDEMNIFICATION AGREEMENT INDEMNITY AGREEMENT This Agreement is made as of the _____ day of __________, 1996, by and between Milgray Electronics, Inc., a New York corporation (the "Corporation"), Bell Industries, Inc., a California corporation (the "Guarantor"), and John Tortorici (the "Indemnitee"), a Director and/or Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability of Directors' and Officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, the Corporation does not regard the protection available to Indemnitee as adequate in the present circumstances, and realizes that Indemnitee may not be willing to serve as a Director or Officer without adequate protection, and the Corporation desires Indemnitee to serve in such capacity; NOW, THEREFORE, in consideration of Indemnitee's service as a Director or Officer after the date hereof the parties agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature. (b) The term "Expenses" shall include, but is not limited to, expenses of investigations, judicial or administrative proceedings or appeals, damages, judgments, fines, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under this Agreement. 20 (c) The terms "Director" and "Officer" shall include Indemnitee's service at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise as well as a Director and/or Officer of the Corporation. 2. Indemnity of Director or Officer. Subject only to the limitations set forth in Section 3, Corporation will pay on behalf of the Indemnitee all Expenses actually and reasonably incurred by Indemnitee because of any claim or claims made against him in a Proceeding by reason of the fact that he is or was a Director and/or Officer. 3. Limitations on Indemnity. Corporation shall not be obligated under this Agreement to make any payment of Expenses to the Indemnitee (a) which payment it is prohibited by applicable law from paying as indemnity; (b) for which payment is actually made to the Indemnitee under an insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) for which payment the Indemnitee is indemnified by Corporation otherwise than pursuant to this Agreement and payment is actually made to the Indemnitee except in respect of any excess beyond the amount of the payment under such indemnification; (d) resulting from a claim decided in a Proceeding adversely to the Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he was not legally entitled; (e) resulting from a claim decided in a Proceeding adversely to the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of Corporation within the meaning of Section 16(b) or 16(c) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; or (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be indemnified under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless it shall be decided in a Proceeding that he committed (i) acts of active and deliberate dishonesty (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated. For purposes of Sections 3 and 4, the phrase "decided in a Proceeding" shall mean a decision by a court, arbitrator(s), hearing officer or other judicial agent having the -2- 21 requisite legal authority to make such a decision, which decision has become final and from which no appeal or other review proceeding is permissible. 4. Advance Payment of Costs. Expenses incurred by Indemnitee in defending a claim against him in a Proceeding shall be paid by the Corporation as incurred and in advance of the final disposition of such Proceeding; provided, however, that Expenses of defense need not be paid as incurred and in advance where the judicial agent of first impression has decided the Indemnitee is not entitled to be indemnified pursuant to this Agreement or otherwise. Indemnitee hereby agrees and undertakes to repay such amounts advanced if it shall be decided in a Proceeding that he is not entitled to be indemnified by the Corporation pursuant to this Agreement or otherwise. 5. Enforcement. If a claim under this Agreement is not paid by Corporation, or on its behalf, within thirty days after a written claim has been received by Corporation, the Indemnitee may at any time thereafter bring suit against Corporation to recover the unpaid amount of the claim and if successful in whole or in part, the Indemnitee shall be entitled to be paid also the Expenses of prosecuting such claim. 6. Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Corporation effectively to bring suit to enforce such rights. Notwithstanding the foregoing, if any of the provisions hereof would impair or jeopardize Indemnitee's coverage under the Corporation's Directors' and Officers' Liability Policy, such provisions shall be ineffective and shall be deemed deleted from this Agreement. 7. Notice. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to Corporation shall be given at its principal office and shall be directed to the President (or such other address as Corporation shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, the Indemnitee shall give Corporation such information and cooperation as it may reasonably require. 8. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 9. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Articles of Incorporation or Bylaws of the Corporation or under California law. -3- 22 10. Applicable Law. This Agreement shall be governed by and construed in accordance with California law. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 12. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns. 13. Continuation of Indemnification. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 14. Coverage of Indemnification. The indemnification under this Agreement shall cover Indemnitee's service as a Director and/or Officer prior to or after the date of the Agreement. 15. Guaranty. Guarantor unconditionally guarantees all of the Corporation's obligations hereunder. Guarantor agrees that Indemnitee may proceed directly against Guarantor in the event of the Corporation's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Corporation. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. INDEMNITEE CORPORATION By:_______________________ By:_______________________ GUARANTOR By:_______________________ -4- EX-99.(C)(6) 17 EXHIBIT (C)(6) 1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of November 26, 1996, by and between Gary Adams (the "Executive"), Milgray Electronics, Inc., a New York corporation (the "Company"), and Bell Industries, Inc., a California corporation (the "Guarantor"), to be effective as of the effective date of the Merger (as defined below) with reference to the following facts: A. Executive is currently employed as Regional Vice President--Sales of the Company; B. Pursuant to an agreement dated as of November 26, 1996, ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of the Company ("Acquisition Sub") will make a tender offer to acquire all of the outstanding capital stock of Milgray (the "Tender Offer"). After completion of the Tender Offer, it is intended that Acquisition Sub will be merged with and into Milgray, and Milgray will become a wholly-owned subsidiary of the Guarantor (the "Merger"); C. The Company wishes to ensure the continued services of Executive after the Merger; and D. Executive is willing to continue his employment with the Company on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT 1.1 Duties and Responsibilities The Company does hereby employ Executive and Executive hereby accepts such employment as Regional Vice President--Sales. Executive shall report to the President of the Company, and subject to the directions of the President, shall be responsible for supervising sales activities of branches assigned to Executive and related matters, including profit and loss for assigned branches and region, customer relations and agreements with significant customers and performing other functions similar to the functions presently performed by Executive at the Company connected with the foregoing; provided, however, that Executive shall not be required to undertake duties not commensurate with his position as Regional Vice President--Sales of the Company. Notwithstanding anything contained in the preceding sentence, Executive acknowledges that, following the Merger, the Guarantor plans to investigate combining its existing distribution business, or segments thereof, with those of the Company, and where feasible or practicable, to combine such business, or segments thereof, and that as a result of such combination, the Company may change the exact nature of Executive's 2 responsibilities (but not Executive's job title), but in no event will Executive be required to accept job responsibilities in an area outside of his current expertise or to act in less than an executive capacity; moreover, Executive's status and position in the Company (or its successor) organization chart (i.e., the status and position of the person to whom Executive reports and the class of employees who report to Executive) shall be similar to other Vice Presidents of the Company and/or the Guarantor with responsibilities similar to those of Executive. Any such change in responsibility will not constitute a breach of this Agreement by the Company or the Guarantor. During the term of this Agreement, Executive shall devote his full business time and attention to the business of the Company and shall not be engaged in any other duties which interfere with the performance of his duties hereunder. Executive shall be entitled to an office, secretarial help and other accommodations and amenities comparable to those Executive presently has at the Company. 1.2 Place of Performance Executive's duties under this Agreement are to be performed in Orlando, Florida and Executive shall not be required to travel or be assigned away from this location more than one hundred days in any twelve-month period or more than five consecutive days in any thirty-day period. 2. TERM This Agreement shall be in full force and effect for a period (the "Term") which shall commence as of the effective date of the Merger (the "Effective Date") and shall continue for a period of three (3) years, unless sooner terminated as hereafter provided. 3. COMPENSATION 3.1 Base Salary As compensation for the services to be performed by Executive during the continuance of this Agreement, the Company shall pay Executive a base salary of $150,000 per year for each year of his employment hereunder (the "Base Salary"). Base Salary shall be payable in substantially equal bi-weekly installments and reduced on a pro rata basis for any fraction of a year or month during which Executive is not so employed. 3.2 Bonus Executive shall be entitled to earn an incentive bonus based upon achievement of financial and other goals established from time to time by the Company, provided that the minimum bonus for each fiscal year shall be $61,000 (the "Minimum Bonus"). For the initial year of this Agreement, such bonus shall be prorated from the Effective Date and the bonus for any partial year shall be similarly prorated. The incentive bonus shall be paid as follows: (i) the Minimum Bonus shall be paid in four equal quarterly -2- 3 installments within 30 days following the end of each calendar quarter, and (ii) if the annual incentive bonus earned by Executive for any year shall exceed the Minimum Bonus paid for such year, such excess shall be paid to Executive at the same time that annual incentive bonuses for the Company's other senior executive officers are paid in accordance with the Company's policies as in effect from time to time (but in no event later than 60 days following the date of payment of the last quarterly installment of Minimum Bonus). 3.3 Additional Benefits Executive shall be entitled to participate in all of Guarantor's employee benefit plans as listed in the Guarantor's employee handbook, as the same may change from time to time, and, in addition, to participate on the same terms as senior Guarantor executives in any benefit plans available to members of the Guarantor's management (whether or not listed in the employee handbook). Among other things, Executive shall be entitled to participate in the Guarantor's Health Care Benefits Program, 401(k) Plan, Stock Purchase Plan, Stock Option Plan, Short-term and Long-term Disability Programs and the Guarantor's Executive Medical Plan, which provides coverage for all medical expenses not otherwise covered by the basic policy, up to $25,000. If any health, medical or disability plan or program existing at the time of commencement of Executive's employment pursuant to this Agreement is terminated or the benefits thereunder reduced, the Company or Guarantor shall provide Executive with benefits similar to those in existence at the time of commencement of Executive's employment hereunder. 3.4 Stock Options (A) As an additional element of compensation to Executive in consideration of the services to be rendered hereunder, Guarantor shall grant to Executive options to acquire 10,000 shares of Guarantor's common stock at an exercise price equal to the closing price on the Effective Date. The options shall vest in 25%, 25% and 50% increments, respectively, on the first, second and third anniversaries of this Agreement. In addition, all of the options will vest if the Company terminates this agreement other than for Cause (as defined in Section 6.2) or if the Executive quits for Good Reason (as defined in Section 6.3(B)). The options shall remain exercisable for a period of five (5) years from the date of grant. The specific terms of the above-referenced option shall be as set forth in a separate option agreement in the form annexed hereto as Exhibit 3.4. (B) Executive shall be entitled to participate in the Guarantor's stock option programs, although Executive understands that any grants under such programs are completely discretionary with the Compensation Committee of the Guarantor's Board of Directors. -3- 4 3.5 Reimbursements Executive shall be entitled to reimbursement for all amounts reasonably expended on behalf of the Company, subject to verification similar to that required of and provided by the Company's other senior executives. 3.6 Deductions The Company shall deduct from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. 3.7 Disability Except in the case of Executive's Total Disability (as defined in Section 6.4), Executive's full compensation and benefits under this Agreement shall be continued during any period when he is absent or unable to perform his duties due to illness, disability or other incapacity; and Executive's inability to perform his duties by reason of the foregoing shall not constitute a failure to perform his obligations under this Agreement and shall not be deemed a default by Executive hereunder. The consequences of Executive's Total Disability is covered in Section 7.2 of this Agreement. 4. VACATION Executive shall be entitled to four weeks of vacation in each twelve-month period; provided, however, that no more than six weeks may be taken during any eighteen-month period. Such vacation will accrue on a pro rata basis from the date employment commences under this Agreement. At the end of his employment hereunder, Executive shall be paid for any accrued but unused vacation time. Executive agrees that he will coordinate his vacation plans and schedules in order to prevent any undue disruption of the Company's business. 5. INDEMNIFICATION Executive shall be indemnified by Guarantor and the Company to the full extent permitted by law in respect of his actions as an officer or director of the Company and shall be provided with such liability insurance coverage in this connection as is provided to other Company executives. In addition, the Company and Guarantor shall enter into an Indemnification Agreement with Executive in the form attached as Exhibit 5. 6. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: -4- 5 6.1 Mutual Agreement Whenever the Company and Executive mutually agree in writing to termination; 6.2 Termination for Cause At any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) material breach by Executive of this Agreement or material failure by Executive to perform his duties under this Agreement (other than by reason of Executive's Total Disability) followed by (a) written notice from the Company to Executive specifying such material failure or such material breach, plus (b) Executive not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, Executive not having taken reasonable steps toward curing such material failure or material breach within thirty days of his actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable, or (ii) conviction of Executive by, or a plea of guilty in, a court of competent jurisdiction of a felony or other major crime (a plea of nolo contendere shall be deemed a conviction). 6.3 Termination without Cause by the Company or for Good Reason by Executive (A) By the Company. Notwithstanding any other provision of this Agreement, the Company shall have the right to terminate Executive's employment with the Company and Milgray without Cause at any time, and upon such termination Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. (B) By Executive. If the Company materially breaches any of its obligations, or any material violation by the Company of Executive's rights, under this Agreement followed by (i) written notice from Executive specifying such material breach or violation, plus (ii) the Company not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, the Company not having taken reasonable steps toward curing such material breach or failure within thirty days of actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable (the foregoing being referred to as "Good Reason"), Executive will have the right at Executive's election to terminate his employment hereunder by sending notice to the Company of his election to so terminate. Termination pursuant to this subsection will be effective from and after the effective date of Executive's notice to the Company terminating Executive's employment as aforesaid. Upon any such termination, Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. -5- 6 6.4 Death/Disability The death or Total Disability of Executive. For the purposes of this Agreement, "Total Disability" shall mean the inability of Executive due to illness or other incapacity to perform his duties hereunder in a normal manner for a period of six months (whether or not consecutive) during any consecutive eighteen-month period. If there shall be a Total Disability involving Executive, his employment may be terminated by written notice by the Company to Executive. In the event of Executive's death during the term of this Agreement, the persons designated by Executive (or if Executive does not make such a designation, then Executive's estate) shall be entitled to receive his Base Salary plus guaranteed bonus provided for Executive in this Agreement for a period of twelve months following Executive's death (regardless of the time of such death). 6.5 Voluntary Termination Executive may terminate his employment under this Agreement at any time upon thirty days written notice. 7. CONSEQUENCES OF TERMINATION OF EMPLOYMENT 7.1 Termination by the Company other than for Cause or Termination by Executive for Good Reason. If the Company terminates Executive's employment other than for Cause or if Executive, for Good Reason terminates his employment, Executive shall be entitled to receive from the Company (at Executive's election which must be exercised within 30 days of termination), either (i) within twenty days of such election, a lump sum payment in an amount equal to the sum of his Base Salary (plus guaranteed bonus) payments to which Executive would be entitled under this Agreement as a full-time employee of the Company for the balance of Executive's term of employment under this Agreement (from the date of termination); such lump sum payment discounted to present value using the interest rate offered at the date of termination by The Chase Manhattan Bank, N.A., on a certificate of deposit for a period of time equal to the remaining term of this Agreement at the date of termination and subject to the noncompetition covenant for the then balance of the Term as set forth in Section 8.1; or (ii) receive all Base Salary plus guaranteed bonus payments for the remaining term of this Agreement; provided, however, that should Executive elect to become employed by a competitor of the Company after termination (whether as an officer, director, employee, consultant or otherwise), the Company may offset against the amounts it owes Executive all compensation derived from such competitive employment. Executive agrees to notify the Company within five (5) business days of being employed by a competitor of the Company and to provide the Company with such documentation as the Company may reasonably request (including, but not limited to, copies of his Forms W-2) in order to enable the Company to verify the amount of Executive's compensation from any competitor. 7.2 Termination by the Company because of Executive's Total Disability. If the Company terminates Executive's employment hereunder because of -6- 7 Executive's Total Disability, Executive shall be entitled to receive from the Company for the full balance of the Term of this Agreement regular bi-weekly payments equal to 75% of Executive's regular bi-weekly Base Salary payment plus guaranteed bonus. This amount shall be reduced by all benefits provided to Executive under any Company disability plan or plans. Executive agrees to participate in such plan(s) to as full an extent and amount as permitted under such plans. 7.3 Voluntary Termination by Executive or Termination by the Company for Cause. If Executive voluntarily terminates his employment hereunder (other than for Good Reason or Total Disability) or if the Company terminates Executive's employment for Cause, Executive shall not be entitled to any further compensation following such termination. The Company shall not be entitled to recover any damages or other amount from Executive by reason of any such termination. 8. RESTRICTIVE COVENANTS 8.1 Covenant Not to Compete. During Executive's employment with the Company, Executive shall not, directly or indirectly, be engaged in the distribution or sale of any products that are directly competitive with products presently distributed or sold by the Company or any of its subsidiaries within the geographical area in which the Company or any of its subsidiaries conducts its business (except for passive investments by Executive of up to 5% of the outstanding stock of a publicly-held company engaged in any such activities). Following termination of Executive's employment with the Company, both in the case of voluntary termination by Executive (whether or not for Good Reason) or in the case of termination by the Company (whether or not for Cause), there shall be no restrictions on Executive's employment by another entity (whether or not competitive with the Company) unless Executive shall have elected the compensation option set forth in Section 7.1(i), in which case the restrictions set forth in the first sentence of this Section 8.1 (except as provided in the last sentence of this Section 8.1) shall continue to apply for the balance of the term of this Agreement as of the date of termination; provided, however, that if Executive elects the option set forth in Section 7.1(i) and then determines at a subsequent date that he wishes to take actions that would otherwise violate such restrictions, Executive will be relieved from such restrictions if he repays to the Company, in advance of taking such actions, a pro rata portion of the payments he received pursuant to that election (based on the length of the time remaining on the non-competition covenant at that time in comparison to the total remaining term of the non-competition covenant at the time of termination). For example, if Executive were terminated without Cause after one year, and elected to receive his remaining two years of pay under this Agreement in a lump sum, and one year later wanted to work for a competitor, the Executive could do so if he repaid the Company one-half of the amount he received as severance (2 years severance pay lump-sum, 1 year of which was "earned" by not competing, with the portion relating to the remaining 1 year to be repaid to the Company -7- 8 in exchange for a release from the non-compete). The Company may, at any time and from time to time, attach an annex to this Agreement specifying specific jurisdictions in which the covenant not-to-compete set forth in this Section 8.1 is applicable. Notwithstanding anything to the contrary contained in the second sentence of this Section 8.1, Executive shall not be restricted from employment by a manufacturer or manufacturer's sales representative which manufactures and/or sells any products referred to in the first sentence of this Section 8.1 or from the sale of any of such products in connection with such employment. 8.2 Nondisclosure and Nonsolicitation. Both during and after Executive's employment with the Company, Executive shall keep secret all material confidential matters of the Company not in the public domain and will not disclose them to anyone outside of the Company. Further, after termination Executive will not seek to hire Company employees. 9. MISCELLANEOUS 9.1 Arbitration All disputes, controversies or claims arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall be submitted to binding arbitration taking place in the state of New York before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Expenses of the arbitration shall be apportioned between the parties by the arbitrator on the basis of relative fault. 9.2 Legal Fees The Company shall pay all legal fees incurred by Executive arising out of the Company's failing to make any payment or withholding any employee benefits under this Agreement or contesting the validity, enforceability or interpretation of this Agreement in the event it is determined that (i) such action was not justified under this Agreement or (ii) if it is determined that both the Company and the Executive acted in violation of this Agreement, the Company's actions constituted a more serious violation than did the Executive's actions. Determination as to Executive's entitlement to legal fees pursuant to this Agreement may be made by the arbitrator if arbitration is sought or by independent legal counsel acceptable to both parties. 9.3 No Third-Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. -8- 9 9.4 Entire Agreement This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. 9.5 Succession and Assignment This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the other. 9.6 Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 9.7 Headings The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.8 Notices All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO THE COMPANY: Milgray Electronics, Inc. 77 Schmitt Boulevard Farmingdale, New York 11735 Attn: President IF TO THE GUARANTOR: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049-5022 Attn: President -9- 10 IF TO EXECUTIVE: Gary Adams 74 Sweetbriar Branch Longwood, Florida 32750 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. 9.9 Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. 9.10 Amendments and Waivers No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Company and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 9.11 Severability Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 9.12 Guarantee Guarantor unconditionally guarantees all of the Company's obligations hereunder. Guarantor agrees that Executive may proceed directly against Guarantor in the event of the Company's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Company. -10- 11 IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. MILGRAY ELECTRONICS, INC. By: /s/ Richard Hyman ------------------------------- Name: Richard Hyman Title: Executive Vice President BELL INDUSTRIES, INC. By: /s/ Tracy A. Edwards ------------------------------- Name: Tracy A. Edwards Title: Vice President /s/ Gary Adams ------------------------------- Gary Adams -11- 12 EXHIBIT 3.4 FORM OF STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION AGREEMENT This Incentive Stock Option Agreement ("Agreement") is made as of this _________ day of _______________, 199_, between Bell Industries, Inc., a California corporation (the "Company"), and Gary Adams (the "Participant"). R E C I T A L S 1. The Board of Directors of the Company and its shareholders have adopted the 1990 Stock Option Plan as of October 29, 1990 and the 1994 Stock Option Plan as of November 1, 1994 (the "Plans"). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Plans. 2. The Plans provide for the selling or granting to selected executive and other key employees, and other persons furnishing services to the Company or any subsidiary of the Company, as the Compensation Committee (the "Committee") may from time to time determine, of Restricted Stock or options to purchase shares of Common Stock of the Company. 3. Pursuant to the Plans, the Committee has determined that it is to the advantage and best interest of the Company and its stockholders to grant an Incentive Stock Option to the Participant covering 10,000 shares of the Company's Common Stock as an inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Incentive Stock Option Agreement between the Company and the Participant. 4. The Option granted hereby is intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. The Company grants to the Participant the right and option (the "Option") to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate 10,000 shares of Common Stock at the purchase price of $___________ per share, exercisable in installment periods in accordance with the provisions of this Agreement during a period expiring on the 5th anniversary of the date of this Agreement (the "Expiration Date") or earlier in accordance with Section 5 hereof; provided, however, if the Participant does not in any given installment period purchase all of the shares that the Participant is entitled to purchase in such installment period, then 13 the Participant's right to purchase any shares not purchased in such installment period shall continue until the Expiration Date or sooner termination of the Participant's option. 2. Vesting. This Option shall vest and become exercisable in the percentages and on the dates set forth below: Percentage Cumulative Initially Percentage Date Exercisable Exercisable ---- ----------- ----------- 25% 25% 25% 50% 50% 100% Subject to earlier termination under Section 5 hereof, at any time after the 3rd anniversary date of this Agreement, but no later than the Expiration Date, the Participant may purchase all or any part of the shares subject to this Option which the Participant theretofore failed to purchase. In each case, the number of shares which may be purchased shall be calculated to the nearest full share. Notwithstanding the foregoing vesting schedule, but subject to Section 5 hereof, this Option shall become immediately exercisable in full, if (i) the Company terminates Participant's employment agreement (the "Employment Agreement") dated as of ____________, 1996 other than for Cause (as defined in the Employment Agreement) or (ii) Participant terminates the Employment Agreement for Good Reason (as defined in the Employment Agreement). 3. Manner of Exercise. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company, specifying the number of shares to be purchased and accompanied by payment to the Company of the full purchase price of the shares to be purchased either (i) in cash or by certified or cashier's check payable to the order of the Company, or (ii) by delivery of shares of Common Stock already owned by, and in the possession of, the Participant. Shares of Common Stock used to satisfy any portion of the exercise price of this Option shall be valued at their fair market value determined (in accordance with Section 4 below) as of the close of the business day immediately preceding the date of exercise. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (i) one hundred (100) shares or (ii) the total number of shares then eligible for exercise if less than one hundred (100) shares. This Option may be exercised (i) during the lifetime of the Participant, only by the Participant or, in the event a conservator, guardian or legal representative is appointed during the Participant's lifetime to handle the affairs of the Participant, by such conservator, guardian or legal representative; and (ii) after the Participant's death, by his or her transferee by will or the laws of descent or distribution, and not otherwise, regardless of any community property interest therein of the spouse of the Participant or -2- 14 such spouse's successors in interest. If the spouse of the Participant shall have acquired a community property interest in this Option, the Participant, or the Participant's permitted successors in interest, may exercise the Option on behalf of the spouse of the Participant or such spouse's successors in interest. Except in the event of the Participant's death or permanent disability, the Option may not be exercised prior to the date six months from the date hereof. 4. Fair Market Value of Common Stock. The fair market value of a share of Company Common Stock shall be determined for purposes of this Agreement by reference to the closing price on the New York Stock Exchange (or other principal stock exchange on which such shares are then listed) or, if such shares are not then listed on such exchange (or other principal stock exchange), by reference to the closing price (if a National Market Issue) or the mean between the bid and asked price (if other over-the-counter issue) of a share as supplied by the National Association of Securities Dealers through NASDAQ (or its successor in function), in each case as reported by The Wall Street Journal, for the date on which the option is granted or exercised, or if such date is not a business day, for the business day immediately preceding such date (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof). 5. Cessation of Services, Death or Permanent Disability. If a Participant ceases to be employed by the Company or one of its subsidiaries for any reason other than the Participant's death or permanent disability (within the meaning of Section 22(e) (3) of the Code), the Participant's Option shall be exercisable for a period of three (3) months after the date the Participant ceases to be an employee of the Company or such subsidiary (unless by its terms it sooner expires) to the extent exercisable on the date of such cessation of employment and shall thereafter expire and be void and of no further force or effect. A leave of absence approved in writing by the Committee shall not be deemed a termination of employment for the purposes of this paragraph 5, but no Option may be exercised during any such leave of absence, except during the first three (3) months thereof. If the Participant dies or becomes permanently disabled while employed by the Company or one of its subsidiaries, the Participant's Option shall expire one (1) year after the date of such death or permanent disability unless by its terms it sooner expires. During such period after death, such Option may, to the extent that it remained unexercised (but exercisable by the Participant according to such Option's terms) on the date of such death, be exercised by the person or persons to whom the Participant's rights under the Option shall pass by the Participant's will or by the laws of descent and distribution. -3- 15 6. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules. No shares issuable upon the exercise of this Option shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended, and all applicable state securities or "Blue Sky" laws (whether by registration or qualification or satisfaction of exemption conditions), all applicable listing requirements of any principal securities exchange on which shares of the same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made. 7. Withholding of Taxes. If the Participant or the Participant's permitted successors in interest disposes of shares of Common Stock acquired pursuant to the exercise of this Option within two years after the date of this Agreement or within one year after exercise of this Option, the Company may deduct and withhold from the wages, salary, bonus and other compensation paid by the Company to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of this Option or the sale of Common Stock issued to the Participant upon exercises hereof, all taxes as may be required from time to time under federal or state tax laws and regulations. This withholding of tax shall be made from the Company's concurrent or next payment of wages, salary, bonus or other compensation to the Participant or by payment to the Company by the Participant of required withholding tax, as the Committee may determine. 8. Adjustments for Reorganizations, Stock Splits, etc. If the outstanding shares of the Common Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares or securities receivable upon the exercise of this Option, without change in the aggregate purchase price applicable to the unexercised portion of this Option but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon the sale of substantially all the property of the Company, the Committee shall provide in writing for appropriate satisfaction of this Option by one or more of the following alternatives to be made in connection with such transaction: (i) the immediate exercisability of this Option (provided that this Option was granted more than six months before such transaction) notwithstanding the provisions of Section 3 hereof, except that this Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (a) one hundred (100) shares or (b) the total number of shares then eligible for exercise if less than one hundred (100) shares; (ii) the assumption of this Option or the -4- 16 substitution therefore of a new option covering the stock of a successor corporation, with appropriate adjustments as to number and kind of shares and prices; (iii) the continuance of the Plan by such successor corporation in which event this Option shall remain in full effect under the terms so provided; or (iv) the payment of an amount in cash or stock, or any combination thereof, in lieu of and in complete satisfaction of this Option. Adjustments under this paragraph 8 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment. 9. Participation by Participant in Other Company Plans. Nothing herein contained shall affect the right of the Participant to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, profit sharing or other employee welfare plan or program of the Company or of any subsidiary of the Company. 10. No Rights as a Shareholder Until Issuance of Stock Certificate. Neither the Participant nor any other person legally entitled to exercise this Option shall be entitled to any of the rights or privileges of a shareholder of the Company in respect of any shares issuable upon any exercise of this Option unless and until a certificate or certificates representing such shares shall have been actually issued and delivered to the Participant. 11. Not an Employment or Service Contract. Nothing contained herein shall be construed as agreement by the Company, express or implied, to employ Participant or contract for Participant's services, to restrict the Company's right to discharge Participant or cease contracting for Participant's services or to modify, extend or otherwise affect in any manner whatsoever the terms of any employment agreement or contract for services which may exist between the Participant and the Company. 12. Agreement Subject to Plan. The Option hereby granted is subject to, and the Company and the Participant agree to be bound by, all of the terms and conditions of the Plan, as the same shall be amended from time to time in accordance with the terms thereof, but no such amendment shall adversely affect the Participant's rights under this Option without the prior written consent of the Participant. 13. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 14. Notices. Any notice or other paper or payment required to be given or sent pursuant to the terms of this Agreement shall be sufficiently given or served hereunder to any party when transmitted by registered or certified mail, postage prepaid, addressed to the party to be served as follows: (a) if to the Company: Bell Industries, Inc. -5- 17 11812 San Vicente Boulevard Los Angeles, CA 90049-5022 Attention: President (b) if to Participant: Gary Adams 74 Sweetbriar Branch Longwood, Florida 32750 Any party, by written notice, may designate another address for notices to be sent from time to time. -6- 18 15. Execution. This Option has been granted, executed and delivered the day and year first above written at Los Angeles, California, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. COMPANY BELL INDUSTRIES, INC. BY: _________________ PARTICIPANT _____________________ Gary Adams By his or her signature below, the spouse of the Participant agrees to be bound by all of the terms and conditions of the foregoing Agreement. ____________________ NAME: -7- 19 EXHIBIT 5 FORM OF INDEMNIFICATION AGREEMENT INDEMNITY AGREEMENT This Agreement is made as of the _____ day of __________, 1996, by and between Milgray Electronics, Inc., a New York corporation (the "Corporation") Bell Industries, Inc., a California corporation (the "Guarantor"), and Gary Adams (the "Indemnitee"), a Director and/or Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability of Directors' and Officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, the Corporation does not regard the protection available to Indemnitee as adequate in the present circumstances, and realizes that Indemnitee may not be willing to serve as a Director or Officer without adequate protection, and the Corporation desires Indemnitee to serve in such capacity; NOW, THEREFORE, in consideration of Indemnitee's service as a Director or Officer after the date hereof the parties agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature. (b) The term "Expenses" shall include, but is not limited to, expenses of investigations, judicial or administrative proceedings or appeals, damages, judgments, fines, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under this Agreement. 20 (c) The terms "Director" and "Officer" shall include Indemnitee's service at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise as well as a Director and/or Officer of the Corporation. 2. Indemnity of Director or Officer. Subject only to the limitations set forth in Section 3, Corporation will pay on behalf of the Indemnitee all Expenses actually and reasonably incurred by Indemnitee because of any claim or claims made against him in a Proceeding by reason of the fact that he is or was a Director and/or Officer. 3. Limitations on Indemnity. Corporation shall not be obligated under this Agreement to make any payment of Expenses to the Indemnitee (a) which payment it is prohibited by applicable law from paying as indemnity; (b) for which payment is actually made to the Indemnitee under an insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) for which payment the Indemnitee is indemnified by Corporation otherwise than pursuant to this Agreement and payment is actually made to the Indemnitee except in respect of any excess beyond the amount of the payment under such indemnification; (d) resulting from a claim decided in a Proceeding adversely to the Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he was not legally entitled; (e) resulting from a claim decided in a Proceeding adversely to the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of Corporation within the meaning of Section 16(b) or 16(c) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; or (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be indemnified under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless it shall be decided in a Proceeding that he committed (i) acts of active and deliberate dishonesty (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated. For purposes of Sections 3 and 4, the phrase "decided in a Proceeding" shall mean a decision by a court, arbitrator(s), hearing officer or other judicial agent having the -2- 21 requisite legal authority to make such a decision, which decision has become final and from which no appeal or other review proceeding is permissible. 4. Advance Payment of Costs. Expenses incurred by Indemnitee in defending a claim against him in a Proceeding shall be paid by the Corporation as incurred and in advance of the final disposition of such Proceeding; provided, however, that Expenses of defense need not be paid as incurred and in advance where the judicial agent of first impression has decided the Indemnitee is not entitled to be indemnified pursuant to this Agreement or otherwise. Indemnitee hereby agrees and undertakes to repay such amounts advanced if it shall be decided in a Proceeding that he is not entitled to be indemnified by the Corporation pursuant to this Agreement or otherwise. 5. Enforcement. If a claim under this Agreement is not paid by Corporation, or on its behalf, within thirty days after a written claim has been received by Corporation, the Indemnitee may at any time thereafter bring suit against Corporation to recover the unpaid amount of the claim and if successful in whole or in part, the Indemnitee shall be entitled to be paid also the Expenses of prosecuting such claim. 6. Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Corporation effectively to bring suit to enforce such rights. Notwithstanding the foregoing, if any of the provisions hereof would impair or jeopardize Indemnitee's coverage under the Corporation's Directors' and Officers' Liability Policy, such provisions shall be ineffective and shall be deemed deleted from this Agreement. 7. Notice. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to Corporation shall be given at its principal office and shall be directed to the President (or such other address as Corporation shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, the Indemnitee shall give Corporation such information and cooperation as it may reasonably require. 8. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 9. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Articles of Incorporation or Bylaws of the Corporation or under California law. -3- 22 10. Applicable Law. This Agreement shall be governed by and construed in accordance with California law. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 12. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns. 13. Continuation of Indemnification. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 14. Coverage of Indemnification. The indemnification under this Agreement shall cover Indemnitee's service as a Director and/or Officer prior to or after the date of the Agreement. 15. Guaranty. Guarantor unconditionally guarantees all of the Corporation's obligations hereunder. Guarantor agrees that Indemnitee may proceed directly against Guarantor in the event of the Corporation's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Corporation. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. INDEMNITEE CORPORATION By:_______________________ By:_________________________ GUARANTOR By:_________________________ -4- EX-99.(C)(7) 18 EXHIBIT (C)(7) 1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of November 26, 1996, by and between Andrew Epstein (the "Executive"), Milgray Electronics, Inc., a New York corporation (the "Company"), and Bell Industries, Inc., a California corporation (the "Guarantor"), to be effective as of the effective date of the Merger (as defined below) with reference to the following facts: A. Executive is currently employed as Vice President--Operations of the Company; B. Pursuant to an agreement dated as of November 26, 1996, ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of the Company ("Acquisition Sub") will make a tender offer to acquire all of the outstanding capital stock of Milgray (the "Tender Offer"). After completion of the Tender Offer, it is intended that Acquisition Sub will be merged with and into Milgray, and Milgray will become a wholly-owned subsidiary of the Guarantor (the "Merger"); C. The Company wishes to ensure the continued services of Executive after the Merger; and D. Executive is willing to continue his employment with the Company on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT 1.1 Duties and Responsibilities The Company does hereby employ Executive and Executive hereby accepts such employment as Vice President--Operations. Executive shall report to the President of the Company, and subject to the directions of the President, shall be responsible for performing functions similar to the functions presently performed by Executive at the Company, including supervision of physical handling of inventory, management of security, quality and efficiency of the Company's warehouses, purchasing of supplies and equipment (other than computer equipment) and maintenance and repair of facilities; provided, however, that Executive shall not be required to undertake duties not commensurate with his position as Vice President--Operations of the Company. Notwithstanding anything contained in the preceding sentence, Executive acknowledges that, following the Merger, the Guarantor plans to investigate combining its existing distribution business, or segments thereof, with those of the Company, and where feasible or practicable, to combine such business, or segments thereof, and that as a result of such combination, the Company may change the exact nature of Executive's 2 responsibilities (but not Executive's job title), but in no event will Executive be required to accept job responsibilities in an area outside of his current expertise or to act in less than an executive capacity; moreover, Executive's status and position in the Company (or its successor) organization chart (i.e., the status and position of the person to whom Executive reports and the class of employees who report to Executive) shall be similar to other Vice Presidents of the Company and/or the Guarantor with responsibilities similar to those of Executive. Any such change in responsibility will not constitute a breach of this Agreement by the Company or the Guarantor. During the term of this Agreement, Executive shall devote his full business time and attention to the business of the Company and shall not be engaged in any other duties which interfere with the performance of his duties hereunder. Executive shall be entitled to an office, secretarial help and other accommodations and amenities comparable to those Executive presently has at the Company. 1.2 Place of Performance Executive's duties under this Agreement are to be performed on Long Island in New York State and Executive shall not be required to travel or be assigned away from this location more than forty days in any twelve-month period or more than five consecutive days in any thirty-day period. 2. TERM This Agreement shall be in full force and effect for a period (the "Term") which shall commence as of the effective date of the Merger (the "Effective Date") and shall continue for a period of three (3) years, unless sooner terminated as hereafter provided. 3. COMPENSATION 3.1 Base Salary As compensation for the services to be performed by Executive during the continuance of this Agreement, the Company shall pay Executive a base salary of $175,000 per year for each year of his employment hereunder (the "Base Salary"). Base Salary shall be payable in substantially equal bi-weekly installments and reduced on a pro rata basis for any fraction of a year or month during which Executive is not so employed. 3.2 Bonus Executive shall be entitled to earn an incentive bonus based upon achievement of financial and other goals established from time to time by the Company, provided that the minimum bonus for each fiscal year shall be $66,000. For the initial year of this Agreement, such bonus shall be prorated from the Effective Date and the bonus for any partial year shall be similarly prorated. Any such bonus earned by Executive shall be paid at the same time that annual incentive bonuses for the Company's other senior -2- 3 executive officers are paid in accordance with the Company's policies as in effect from time to time (but in no event will the guaranteed minimum bonus be paid later than 30 days after the end of the Company's fiscal year, with the remainder, if any, to be paid within 90 days after the end of the Company's fiscal year). 3.3 Additional Benefits Executive shall be entitled to participate in all of Guarantor's employee benefit plans as listed in the Guarantor's employee handbook, as the same may change from time to time, and, in addition, to participate on the same terms as senior Guarantor executives in any benefit plans available to members of the Guarantor's management (whether or not listed in the employee handbook). Among other things, Executive shall be entitled to participate in the Guarantor's Health Care Benefits Program, 401(k) Plan, Stock Purchase Plan, Stock Option Plan, Short-term and Long-term Disability Programs and the Guarantor's Executive Medical Plan, which provides coverage for all medical expenses not otherwise covered by the basic policy, up to $25,000. If any health, medical or disability plan or program existing at the time of commencement of Executive's employment pursuant to this Agreement is terminated or the benefits thereunder reduced, the Company or Guarantor shall provide Executive with benefits similar to those in existence at the time of commencement of Executive's employment hereunder. 3.4 Stock Options (A) As an additional element of compensation to Executive in consideration of the services to be rendered hereunder, Guarantor shall grant to Executive options to acquire 10,000 shares of Guarantor's common stock at an exercise price equal to the closing price on the Effective Date. The options shall vest in 25%, 25% and 50% increments, respectively, on the first, second and third anniversaries of this Agreement. In addition, all of the options will vest if (i) the Company terminates this Agreement other than for Cause (as defined in Section 6.2) or (ii) the Executive terminates this Agreement for Good Reason (as defined in Section 6.3(B)). The options shall remain exercisable for a period of five (5) years from the date of grant. The specific terms of the above-referenced option shall be as set forth in a separate option agreement in the form annexed hereto as Exhibit 3.4. (B) Executive shall be entitled to participate in the Guarantor's stock option programs, although Executive understands that any grants under such programs are completely discretionary with the Compensation Committee of the Guarantor's Board of Directors. 3.5 Reimbursements Executive shall be entitled to reimbursement for all amounts reasonably expended on behalf of the Company, subject to verification similar to that required of and provided by the Company's other senior executives. -3- 4 3.6 Deductions The Company shall deduct from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. 3.7 Disability Except in the case of Executive's Total Disability (as defined in Section 6.4), Executive's full compensation and benefits under this Agreement shall be continued during any period when he is absent or unable to perform his duties due to illness, disability or other incapacity; and Executive's inability to perform his duties by reason of the foregoing shall not constitute a failure to perform his obligations under this Agreement and shall not be deemed a default by Executive hereunder. The consequences of Executive's Total Disability is covered in Section 7.2 of this Agreement. 4. VACATION Executive shall be entitled to four weeks of vacation in each twelve-month period; provided, however, that no more than six weeks may be taken during any eighteen-month period. Such vacation will accrue on a pro rata basis from the date employment commences under this Agreement. At the end of his employment hereunder, Executive shall be paid for any accrued but unused vacation time. Executive agrees that he will coordinate his vacation plans and schedules in order to prevent any undue disruption of the Company's business. 5. INDEMNIFICATION Executive shall be indemnified by Guarantor and the Company to the full extent permitted by law in respect of his actions as an officer or director of the Company and shall be provided with such liability insurance coverage in this connection as is provided to other Company executives. In addition, the Company and Guarantor shall enter into an Indemnification Agreement with Executive in the form attached as Exhibit 5. 6. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: 6.1 Mutual Agreement Whenever the Company and Executive mutually agree in writing to termination; -4- 5 6.2 Termination for Cause At any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) material breach by Executive of this Agreement or material failure by Executive to perform his duties under this Agreement (other than by reason of Executive's Total Disability) followed by (a) written notice from the Company to Executive specifying such material failure or such material breach, plus (b) Executive not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, Executive not having taken reasonable steps toward curing such material failure or material breach within thirty days of his actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable, or (ii) conviction of Executive by, or a plea of guilty in, a court of competent jurisdiction of a felony or other major crime (a plea of nolo contendere shall be deemed a conviction). 6.3 Termination without Cause by the Company or for Good Reason by Executive (A) By the Company. Notwithstanding any other provision of this Agreement, the Company shall have the right to terminate Executive's employment with the Company and Milgray without Cause at any time, and upon such termination Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. (B) By Executive. If the Company materially breaches any of its obligations, or any material violation by the Company of Executive's rights, under this Agreement followed by (i) written notice from Executive specifying such material breach or violation, plus (ii) the Company not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, the Company not having taken reasonable steps toward curing such material breach or failure within thirty days of actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable (the foregoing being referred to as "Good Reason"), Executive will have the right at Executive's election to terminate his employment hereunder by sending notice to the Company of his election to so terminate. Termination pursuant to this subsection will be effective from and after the effective date of Executive's notice to the Company terminating Executive's employment as aforesaid. Upon any such termination, Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. 6.4 Death/Disability The death or Total Disability of Executive. For the purposes of this Agreement, "Total Disability" shall mean the inability of Executive due to illness or other incapacity to perform his duties hereunder in a normal manner for a period of six months (whether or not consecutive) during any consecutive eighteen-month period. If there shall be a -5- 6 Total Disability involving Executive, his employment may be terminated by written notice by the Company to Executive. In the event of Executive's death during the term of this Agreement, the persons designated by Executive (or if Executive does not make such a designation, then Executive's estate) shall be entitled to receive his Base Salary plus guaranteed bonus provided for Executive in this Agreement for a period of twelve months following Executive's death (regardless of the time of such death). 6.5 Voluntary Termination Executive may terminate his employment under this Agreement at any time upon thirty days written notice. 7. CONSEQUENCES OF TERMINATION OF EMPLOYMENT 7.1 Termination by the Company other than for Cause or Termination by Executive for Good Reason. If the Company terminates Executive's employment other than for Cause or if Executive, for Good Reason terminates his employment, Executive shall be entitled to receive from the Company (at Executive's election which must be exercised within 30 days of termination), either (i) within twenty days of such election, a lump sum payment in an amount equal to the sum of his Base Salary (plus guaranteed bonus) payments to which Executive would be entitled under this Agreement as a full-time employee of the Company for the balance of Executive's term of employment under this Agreement (from the date of termination); such lump sum payment discounted to present value using the interest rate offered at the date of termination by The Chase Manhattan Bank, N.A., on a certificate of deposit for a period of time equal to the remaining term of this Agreement at the date of termination and subject to the noncompetition covenant for the then balance of the Term as set forth in Section 8.1; or (ii) receive all Base Salary plus guaranteed bonus payments for the remaining term of this Agreement; provided, however, that should Executive elect to become employed by a competitor of the Company after termination (whether as an officer, director, employee, consultant or otherwise), the Company may offset against the amounts it owes Executive all compensation derived from such competitive employment. Executive agrees to notify the Company within five (5) business days of being employed by a competitor of the Company and to provide the Company with such documentation as the Company may reasonably request (including, but not limited to, copies of his Forms W-2) in order to enable the Company to verify the amount of Executive's compensation from any competitor. 7.2 Termination by the Company because of Executive's Total Disability. If the Company terminates Executive's employment hereunder because of Executive's Total Disability, Executive shall be entitled to receive from the Company for the full balance of the Term of this Agreement regular bi-weekly payments equal to 75% of Executive's regular bi-weekly Base Salary payment plus guaranteed bonus. This amount shall be reduced by all benefits provided to Executive under any Company disability plan or plans. Executive agrees to participate in such plan(s) to as full an extent and amount as permitted under such plans. -6- 7 7.3 Voluntary Termination by Executive or Termination by the Company for Cause. If Executive voluntarily terminates his employment hereunder (other than for Good Reason or Total Disability) or if the Company terminates Executive's employment for Cause, Executive shall not be entitled to any further compensation following such termination. The Company shall not be entitled to recover any damages or other amount from Executive by reason of any such termination. 8. RESTRICTIVE COVENANTS 8.1 Covenant Not to Compete. During Executive's employment with the Company, Executive shall not, directly or indirectly, be engaged in the distribution or sale of any products that are directly competitive with products presently distributed or sold by the Company or any of its subsidiaries within the geographical area in which the Company or any of its subsidiaries conducts its business (except for passive investments by Executive of up to 5% of the outstanding stock of a publicly-held company engaged in any such activities). Following termination of Executive's employment with the Company, both in the case of voluntary termination by Executive (whether or not for Good Reason) or in the case of termination by the Company (whether or not for Cause), there shall be no restrictions on Executive's employment by another entity (whether or not competitive with the Company) unless Executive shall have elected the compensation option set forth in Section 7.1(i), in which case the restrictions set forth in the first sentence of this Section 8.1 (except as provided in the last sentence of this Section 8.1) shall continue to apply for the balance of the term of this Agreement as of the date of termination; provided, however, that if Executive elects the option set forth in Section 7.1(i) and then determines at a subsequent date that he wishes to take actions that would otherwise violate such restrictions, Executive will be relieved from such restrictions if he repays to the Company, in advance of taking such actions, a pro rata portion of the payments he received pursuant to that election (based on the length of the time remaining on the non-competition covenant at that time in comparison to the total remaining term of the non-competition covenant at the time of termination). For example, if Executive were terminated without Cause after one year, and elected to receive his remaining two years of pay under this Agreement in a lump sum, and one year later wanted to work for a competitor, the Executive could do so if he repaid the Company one-half of the amount he received as severance (2 years severance pay lump-sum, 1 year of which was "earned" by not competing, with the portion relating to the remaining 1 year to be repaid to the Company in exchange for a release from the non-compete). The Company may, at any time and from time to time, attach an annex to this Agreement specifying specific jurisdictions in which the covenant not-to-compete set forth in this Section 8.1 is applicable. Notwithstanding anything to the contrary contained in the second sentence of this Section 8.1, Executive shall not be restricted from employment by a manufacturer or manufacturer's sales representative which manufactures and/or sells any products -7- 8 referred to in the first sentence of this Section 8.1 or from the sale of any of such products in connection with such employment. 8.2 Nondisclosure and Nonsolicitation. Both during and after Executive's employment with the Company, Executive shall keep secret all material confidential matters of the Company not in the public domain and will not disclose them to anyone outside of the Company. Further, after termination Executive will not seek to hire Company employees. 9. MISCELLANEOUS 9.1 Arbitration All disputes, controversies or claims arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall be submitted to binding arbitration taking place in the State of New York before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Expenses of the arbitration shall be apportioned between the parties by the arbitrator on the basis of relative fault. 9.2 Legal Fees The Company shall pay all legal fees incurred by Executive arising out of the Company's failing to make any payment or withholding any employee benefits under this Agreement or contesting the validity, enforceability or interpretation of this Agreement in the event it is determined that (i) such action was not justified under this Agreement or (ii) if it is determined that both the Company and the Executive acted in violation of this Agreement, the Company's actions constituted a more serious violation than did the Executive's actions. Determination as to Executive's entitlement to legal fees pursuant to this Agreement may be made by the arbitrator if arbitration is sought or by independent legal counsel acceptable to both parties. 9.3 No Third-Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. 9.4 Entire Agreement This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. -8- 9 9.5 Succession and Assignment This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the other. 9.6 Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 9.7 Headings The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.8 Notices All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO THE COMPANY: Milgray Electronics, Inc. 77 Schmitt Boulevard Farmingdale, New York 11735 Attn: President IF TO THE GUARANTOR: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049-5022 Attn: President IF TO EXECUTIVE: Andrew Epstein 52 Rustic Gate Lane Dix Hills, New York 11746 -9- 10 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. 9.9 Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. 9.10 Amendments and Waivers No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Company and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 9.11 Severability Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 9.12 Guarantee Guarantor unconditionally guarantees all of the Company's obligations hereunder. Guarantor agrees that Executive may proceed directly against Guarantor in the event of the Company's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Company. -10- 11 IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. MILGRAY ELECTRONICS, INC. By: /s/ Richard Hyman ------------------------------ Name: Richard Hyman Title: Executive Vice President BELL INDUSTRIES, INC. By: /s/ Tracy A. Edwards ----------------------------- Name: Tracy A. Edwards Title: Vice President /s/ Andrew Epstein ----------------------------- Andrew Epstein -11- 12 EXHIBIT 3.4 FORM OF STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION AGREEMENT This Incentive Stock Option Agreement ("Agreement") is made as of this _________ day of _______________, 199_, between Bell Industries, Inc., a California corporation (the "Company"), and Andrew Epstein (the "Participant"). R E C I T A L S 1. The Board of Directors of the Company and its shareholders have adopted the 1990 Stock Option Plan as of October 29, 1990 and the 1994 Stock Option Plan as of November 1, 1994 (the "Plans"). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Plans. 2. The Plans provide for the selling or granting to selected executive and other key employees, and other persons furnishing services to the Company or any subsidiary of the Company, as the Compensation Committee (the "Committee") may from time to time determine, of Restricted Stock or options to purchase shares of Common Stock of the Company. 3. Pursuant to the Plans, the Committee has determined that it is to the advantage and best interest of the Company and its stockholders to grant an Incentive Stock Option to the Participant covering 10,000 shares of the Company's Common Stock as an inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Incentive Stock Option Agreement between the Company and the Participant. 4. The Option granted hereby is intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. The Company grants to the Participant the right and option (the "Option") to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate 10,000 shares of Common Stock at the purchase price of $___________ per share, exercisable in installment periods in accordance with the provisions of this Agreement during a period expiring on the 5th anniversary of the date of this Agreement (the "Expiration Date") or earlier in accordance with Section 5 hereof; provided, however, if the Participant does not in any given installment period purchase all of the shares that the Participant is entitled to purchase in such installment period, then 13 the Participant's right to purchase any shares not purchased in such installment period shall continue until the Expiration Date or sooner termination of the Participant's option. 2. Vesting. This Option shall vest and become exercisable in the percentages and on the dates set forth below: Percentage Cumulative Initially Percentage Date Exercisable Exercisable ---- ----------- ----------- 25% 25% 25% 50% 50% 100% Subject to earlier termination under Section 5 hereof, at any time after the 3rd anniversary date of this Agreement, but no later than the Expiration Date, the Participant may purchase all or any part of the shares subject to this Option which the Participant theretofore failed to purchase. In each case, the number of shares which may be purchased shall be calculated to the nearest full share. Notwithstanding the foregoing vesting schedule, but subject to Section 5 hereof, this Option shall become immediately exercisable in full, if (i) the Company terminates Participant's employment agreement (the "Employment Agreement") dated as of ____________, 1996 other than for Cause (as defined in the Employment Agreement) or (ii) Participant terminates the Employment Agreement for Good Reason (as defined in the Employment Agreement). 3. Manner of Exercise. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company, specifying the number of shares to be purchased and accompanied by payment to the Company of the full purchase price of the shares to be purchased either (i) in cash or by certified or cashier's check payable to the order of the Company, or (ii) by delivery of shares of Common Stock already owned by, and in the possession of, the Participant. Shares of Common Stock used to satisfy any portion of the exercise price of this Option shall be valued at their fair market value determined (in accordance with Section 4 below) as of the close of the business day immediately preceding the date of exercise. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (i) one hundred (100) shares or (ii) the total number of shares then eligible for exercise if less than one hundred (100) shares. This Option may be exercised (i) during the lifetime of the Participant, only by the Participant or, in the event a conservator, guardian or legal representative is appointed during the Participant's lifetime to handle the affairs of the Participant, by such conservator, guardian or legal representative; and (ii) after the Participant's death, by his or her transferee by will or the laws of descent or distribution, and not otherwise, regardless of any community property interest therein of the spouse of the Participant or -2- 14 such spouse's successors in interest. If the spouse of the Participant shall have acquired a community property interest in this Option, the Participant, or the Participant's permitted successors in interest, may exercise the Option on behalf of the spouse of the Participant or such spouse's successors in interest. Except in the event of the Participant's death or permanent disability, the Option may not be exercised prior to the date six months from the date hereof. 4. Fair Market Value of Common Stock. The fair market value of a share of Company Common Stock shall be determined for purposes of this Agreement by reference to the closing price on the New York Stock Exchange (or other principal stock exchange on which such shares are then listed) or, if such shares are not then listed on such exchange (or other principal stock exchange), by reference to the closing price (if a National Market Issue) or the mean between the bid and asked price (if other over-the-counter issue) of a share as supplied by the National Association of Securities Dealers through NASDAQ (or its successor in function), in each case as reported by The Wall Street Journal, for the date on which the option is granted or exercised, or if such date is not a business day, for the business day immediately preceding such date (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof). 5. Cessation of Services, Death or Permanent Disability. If a Participant ceases to be employed by the Company or one of its subsidiaries for any reason other than the Participant's death or permanent disability (within the meaning of Section 22(e)(3) of the Code), the Participant's Option shall be exercisable for a period of three (3) months after the date the Participant ceases to be an employee of the Company or such subsidiary (unless by its terms it sooner expires) to the extent exercisable on the date of such cessation of employment and shall thereafter expire and be void and of no further force or effect. A leave of absence approved in writing by the Committee shall not be deemed a termination of employment for the purposes of this paragraph 5, but no Option may be exercised during any such leave of absence, except during the first three (3) months thereof. If the Participant dies or becomes permanently disabled while employed by the Company or one of its subsidiaries, the Participant's Option shall expire one (1) year after the date of such death or permanent disability unless by its terms it sooner expires. During such period after death, such Option may, to the extent that it remained unexercised (but exercisable by the Participant according to such Option's terms) on the date of such death, be exercised by the person or persons to whom the Participant's rights under the Option shall pass by the Participant's will or by the laws of descent and distribution. 6. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules. No shares issuable upon the exercise of this Option shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended, and all applicable state securities -3- 15 or "Blue Sky" laws (whether by registration or qualification or satisfaction of exemption conditions), all applicable listing requirements of any principal securities exchange on which shares of the same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made. 7. Withholding of Taxes. If the Participant or the Participant's permitted successors in interest disposes of shares of Common Stock acquired pursuant to the exercise of this Option within two years after the date of this Agreement or within one year after exercise of this Option, the Company may deduct and withhold from the wages, salary, bonus and other compensation paid by the Company to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of this Option or the sale of Common Stock issued to the Participant upon exercises hereof, all taxes as may be required from time to time under federal or state tax laws and regulations. This withholding of tax shall be made from the Company's concurrent or next payment of wages, salary, bonus or other compensation to the Participant or by payment to the Company by the Participant of required withholding tax, as the Committee may determine. 8. Adjustments for Reorganizations, Stock Splits, etc. If the outstanding shares of the Common Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares or securities receivable upon the exercise of this Option, without change in the aggregate purchase price applicable to the unexercised portion of this Option but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon the sale of substantially all the property of the Company, the Committee shall provide in writing for appropriate satisfaction of this Option by one or more of the following alternatives to be made in connection with such transaction: (i) the immediate exercisability of this Option (provided that this Option was granted more than six months before such transaction) notwithstanding the provisions of Section 3 hereof, except that this Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (a) one hundred (100) shares or (b) the total number of shares then eligible for exercise if less than one hundred (100) shares; (ii) the assumption of this Option or the substitution therefore of a new option covering the stock of a successor corporation, with appropriate adjustments as to number and kind of shares and prices; (iii) the continuance of the Plan by such successor corporation in which event this Option shall remain in full effect under the terms so provided; or (iv) the payment of an amount in cash or stock, or any combination thereof, in lieu of and in complete satisfaction of this Option. -4- 16 Adjustments under this paragraph 8 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment. 9. Participation by Participant in Other Company Plans. Nothing herein contained shall affect the right of the Participant to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, profit sharing or other employee welfare plan or program of the Company or of any subsidiary of the Company. 10. No Rights as a Shareholder Until Issuance of Stock Certificate. Neither the Participant nor any other person legally entitled to exercise this Option shall be entitled to any of the rights or privileges of a shareholder of the Company in respect of any shares issuable upon any exercise of this Option unless and until a certificate or certificates representing such shares shall have been actually issued and delivered to the Participant. 11. Not an Employment or Service Contract. Nothing contained herein shall be construed as agreement by the Company, express or implied, to employ Participant or contract for Participant's services, to restrict the Company's right to discharge Participant or cease contracting for Participant's services or to modify, extend or otherwise affect in any manner whatsoever the terms of any employment agreement or contract for services which may exist between the Participant and the Company. 12. Agreement Subject to Plan. The Option hereby granted is subject to, and the Company and the Participant agree to be bound by, all of the terms and conditions of the Plan, as the same shall be amended from time to time in accordance with the terms thereof, but no such amendment shall adversely affect the Participant's rights under this Option without the prior written consent of the Participant. 13. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 14. Notices. Any notice or other paper or payment required to be given or sent pursuant to the terms of this Agreement shall be sufficiently given or served hereunder to any party when transmitted by registered or certified mail, postage prepaid, addressed to the party to be served as follows: -5- 17 (a) if to the Company: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, CA 90049-5022 Attention: President (b) if to Participant: Andrew Epstein 52 Rustic Gate Lane Dix Hills, New York 11746 Any party, by written notice, may designate another address for notices to be sent from time to time. 15. Execution. This Option has been granted, executed and delivered the day and year first above written at Los Angeles, California, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. COMPANY BELL INDUSTRIES, INC. BY: _________________ PARTICIPANT _____________________ Andrew Epstein By his or her signature below, the spouse of the Participant agrees to be bound by all of the terms and conditions of the foregoing Agreement. ____________________ NAME: -6- 18 EXHIBIT 5 FORM OF INDEMNIFICATION AGREEMENT INDEMNITY AGREEMENT This Agreement is made as of the _____ day of __________, 1996, by and between Milgray Electronics, Inc., a New York corporation (the "Corporation"), Bell Industries, Inc., a California corporation (the "Guarantor"), and Andrew Epstein (the "Indemnitee"), a Director and/or Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability of Directors' and Officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, the Corporation does not regard the protection available to Indemnitee as adequate in the present circumstances, and realizes that Indemnitee may not be willing to serve as a Director or Officer without adequate protection, and the Corporation desires Indemnitee to serve in such capacity; NOW, THEREFORE, in consideration of Indemnitee's service as a Director or Officer after the date hereof the parties agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature. (b) The term "Expenses" shall include, but is not limited to, expenses of investigations, judicial or administrative proceedings or appeals, damages, judgments, fines, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under this Agreement. 19 (c) The terms "Director" and "Officer" shall include Indemnitee's service at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise as well as a Director and/or Officer of the Corporation. 2. Indemnity of Director or Officer. Subject only to the limitations set forth in Section 3, Corporation will pay on behalf of the Indemnitee all Expenses actually and reasonably incurred by Indemnitee because of any claim or claims made against him in a Proceeding by reason of the fact that he is or was a Director and/or Officer. 3. Limitations on Indemnity. Corporation shall not be obligated under this Agreement to make any payment of Expenses to the Indemnitee (a) which payment it is prohibited by applicable law from paying as indemnity; (b) for which payment is actually made to the Indemnitee under an insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) for which payment the Indemnitee is indemnified by Corporation otherwise than pursuant to this Agreement and payment is actually made to the Indemnitee except in respect of any excess beyond the amount of the payment under such indemnification; (d) resulting from a claim decided in a Proceeding adversely to the Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he was not legally entitled; (e) resulting from a claim decided in a Proceeding adversely to the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of Corporation within the meaning of Section 16(b) or 16(c) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; or (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be indemnified under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless it shall be decided in a Proceeding that he committed (i) acts of active and deliberate dishonesty (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated. For purposes of Sections 3 and 4, the phrase "decided in a Proceeding" shall mean a decision by a court, arbitrator(s), hearing officer or other judicial agent having the -2- 20 requisite legal authority to make such a decision, which decision has become final and from which no appeal or other review proceeding is permissible. 4. Advance Payment of Costs. Expenses incurred by Indemnitee in defending a claim against him in a Proceeding shall be paid by the Corporation as incurred and in advance of the final disposition of such Proceeding; provided, however, that Expenses of defense need not be paid as incurred and in advance where the judicial agent of first impression has decided the Indemnitee is not entitled to be indemnified pursuant to this Agreement or otherwise. Indemnitee hereby agrees and undertakes to repay such amounts advanced if it shall be decided in a Proceeding that he is not entitled to be indemnified by the Corporation pursuant to this Agreement or otherwise. 5. Enforcement. If a claim under this Agreement is not paid by Corporation, or on its behalf, within thirty days after a written claim has been received by Corporation, the Indemnitee may at any time thereafter bring suit against Corporation to recover the unpaid amount of the claim and if successful in whole or in part, the Indemnitee shall be entitled to be paid also the Expenses of prosecuting such claim. 6. Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Corporation effectively to bring suit to enforce such rights. Notwithstanding the foregoing, if any of the provisions hereof would impair or jeopardize Indemnitee's coverage under the Corporation's Directors' and Officers' Liability Policy, such provisions shall be ineffective and shall be deemed deleted from this Agreement. 7. Notice. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to Corporation shall be given at its principal office and shall be directed to the President (or such other address as Corporation shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, the Indemnitee shall give Corporation such information and cooperation as it may reasonably require. 8. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 9. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Articles of Incorporation or Bylaws of the Corporation or under California law. -3- 21 10. Applicable Law. This Agreement shall be governed by and construed in accordance with California law. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 12. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns. 13. Continuation of Indemnification. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 14. Coverage of Indemnification. The indemnification under this Agreement shall cover Indemnitee's service as a Director and/or Officer prior to or after the date of the Agreement. 15. Guaranty. Guarantor unconditionally guarantees all of the Corporation's obligations hereunder. Guarantor agrees that Indemnitee may proceed directly against Guarantor in the event of the Corporation's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Corporation. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. INDEMNITEE CORPORATION By:_______________________ By:________________________ GUARANTOR By:________________________ -4- EX-99.(C)(8) 19 EXHIBIT (C)(8) 1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of November 26, 1996, by and between James Darren O'Donnell (the "Executive"), Milgray Electronics, Inc., a New York corporation (the "Company"), and Bell Industries, Inc., a California corporation (the "Guarantor"), to be effective as of the effective date of the Merger (as defined below) with reference to the following facts: A. Executive is currently employed as Vice President--Marketing of the Company; B. Pursuant to an agreement dated as of November 26, 1996, ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of the Company ("Acquisition Sub") will make a tender offer to acquire all of the outstanding capital stock of Milgray (the "Tender Offer"). After completion of the Tender Offer, it is intended that Acquisition Sub will be merged with and into Milgray, and Milgray will become a wholly-owned subsidiary of the Guarantor (the "Merger"); C. The Company wishes to ensure the continued services of Executive after the Merger; and D. Executive is willing to continue his employment with the Company on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT 1.1 Duties and Responsibilities The Company does hereby employ Executive and Executive hereby accepts such employment as Vice President--Marketing. Executive shall report to the President of the Company, and subject to the directions of the President, shall be responsible for marketing, product and asset management and related matters and performing other functions similar to the functions presently performed by Executive at the Company with respect to passives, electromechanical and power supplies; provided, however, that Executive shall not be required to undertake duties not commensurate with his position as Vice President--Marketing of the Company. Notwithstanding anything contained in the preceding sentence, Executive acknowledges that, following the Merger, the Guarantor plans to investigate combining its existing distribution business, or segments thereof, with those of the Company, and where feasible or practicable, to combine such business, or segments thereof, and that as a result of such combination, the Company may change the exact nature of Executive's responsibilities (but not Executive's job title), but in no event will Executive be required to accept job responsibilities in an area 2 outside of his current expertise or to act in less than an executive capacity; moreover, Executive's status and position in the Company (or its successor) organization chart (i.e., the status and position of the person to whom Executive reports and the class of employees who report to Executive) shall be similar to other Vice Presidents of the Company and/or the Guarantor with responsibilities similar to those of Executive. Any such change in responsibility will not constitute a breach of this Agreement by the Company or the Guarantor. During the term of this Agreement, Executive shall devote his full business time and attention to the business of the Company and shall not be engaged in any other duties which interfere with the performance of his duties hereunder. Executive shall be entitled to an office, secretarial help and other accommodations and amenities comparable to those Executive presently has at the Company. 1.2 Place of Performance Executive's duties under this Agreement are to be performed on Long Island in New York State and Executive shall not be required to travel or be assigned away from this location more than seventy five days in any twelve-month period or more than five consecutive days in any thirty-day period. 2. TERM This Agreement shall be in full force and effect for a period (the "Term") which shall commence as of the effective date of the Merger (the "Effective Date") and shall continue for a period of three (3) years, unless sooner terminated as hereafter provided. 3. COMPENSATION 3.1 Base Salary As compensation for the services to be performed by Executive during the continuance of this Agreement, the Company shall pay Executive a base salary of $225,000 per year for each year of his employment hereunder (the "Base Salary"). Base Salary shall be payable in substantially equal bi-weekly installments and reduced on a pro rata basis for any fraction of a year or month during which Executive is not so employed. 3.2 Bonus Executive shall be entitled to earn an incentive bonus based upon achievement of financial and other goals established from time to time by the Company, provided that the minimum bonus for each fiscal year shall be $75,000 (the "Minimum Bonus"). For the initial year of this Agreement, such bonus shall be prorated from the Effective Date and the bonus for any partial year shall be similarly prorated. The incentive bonus shall be paid as follows: (i) the Minimum Bonus shall be paid in four equal quarterly installments within 30 days following the end of each calendar quarter, and (ii) if the -2- 3 annual incentive bonus earned by Executive for any year shall exceed the Minimum Bonus paid for such year, such excess shall be paid to Executive at the same time that annual incentive bonuses for the Company's other senior executive officers are paid in accordance with the Company's policies as in effect from time to time (but in no event later than 60 days following the date of payment of the last quarterly installment of Minimum Bonus). 3.3 Additional Benefits Executive shall be entitled to participate in all of Guarantor's employee benefit plans as listed in the Guarantor's employee handbook, as the same may change from time to time, and, in addition, to participate on the same terms as senior Guarantor executives in any benefit plans available to members of the Guarantor's management (whether or not listed in the employee handbook). Among other things, Executive shall be entitled to participate in the Guarantor's Health Care Benefits Program, 401(k) Plan, Stock Purchase Plan, Stock Option Plan, Short-term and Long-term Disability Programs and the Guarantor's Executive Medical Plan, which provides coverage for all medical expenses not otherwise covered by the basic policy, up to $25,000. If any health, medical or disability plan or program existing at the time of commencement of Executive's employment pursuant to this Agreement is terminated or the benefits thereunder reduced, the Company or Guarantor shall provide Executive with benefits similar to those in existence at the time of commencement of Executive's employment hereunder. 3.4 Stock Options (A) As an additional element of compensation to Executive in consideration of the services to be rendered hereunder, Guarantor shall grant to Executive options to acquire 10,000 shares of Guarantor's common stock at an exercise price equal to the closing price on the Effective Date. The options shall vest in 25%, 25% and 50% increments, respectively, on the first, second and third anniversaries of this Agreement. In addition, all of the options will vest if the Company terminates this Agreement other than for Cause (as defined in Section 6.2) or if the Executive quits for Good Reason (as defined in Section 6.3(B)). The options shall remain exercisable for a period of five (5) years from the date of grant. The specific terms of the above-referenced option shall be as set forth in a separate option agreement in the form annexed hereto as Exhibit 3.4. (B) Executive shall be entitled to participate in the Guarantor's stock option programs, although Executive understands that any grants under such programs are completely discretionary with the Compensation Committee of the Guarantor's Board of Directors. -3- 4 3.5 Reimbursements Executive shall be entitled to reimbursement for all amounts reasonably expended on behalf of the Company, subject to verification similar to that required of and provided by the Company's other senior executives. 3.6 Deductions The Company shall deduct from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. 3.7 Disability Except in the case of Executive's Total Disability (as defined in Section 6.4), Executive's full compensation and benefits under this Agreement shall be continued during any period when he is absent or unable to perform his duties due to illness, disability or other incapacity; and Executive's inability to perform his duties by reason of the foregoing shall not constitute a failure to perform his obligations under this Agreement and shall not be deemed a default by Executive hereunder. The consequences of Executive's Total Disability is covered in Section 7.2 of this Agreement. 4. VACATION Executive shall be entitled to four weeks of vacation in each twelve-month period; provided, however, that no more than six weeks may be taken during any eighteen-month period. Such vacation will accrue on a pro rata basis from the date employment commences under this Agreement. At the end of his employment hereunder, Executive shall be paid for any accrued but unused vacation time. Executive agrees that he will coordinate his vacation plans and schedules in order to prevent any undue disruption of the Company's business. 5. INDEMNIFICATION Executive shall be indemnified by Guarantor and the Company to the full extent permitted by law in respect of his actions as an officer or director of the Company and shall be provided with such liability insurance coverage in this connection as is provided to other Company executives. In addition, the Company and Guarantor shall enter into an Indemnification Agreement with Executive in the form attached as Exhibit 5. -4- 5 6. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: 6.1 Mutual Agreement Whenever the Company and Executive mutually agree in writing to termination; 6.2 Termination for Cause At any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) material breach by Executive of this Agreement or material failure by Executive to perform his duties under this Agreement (other than by reason of Executive's Total Disability) followed by (a) written notice from the Company to Executive specifying such material failure or such material breach, plus (b) Executive not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, Executive not having taken reasonable steps toward curing such material failure or material breach within thirty days of his actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable, or (ii) conviction of Executive by, or a plea of guilty in, a court of competent jurisdiction of a felony or other major crime (a plea of nolo contendere shall be deemed a conviction). 6.3 Termination without Cause by the Company or for Good Reason by Executive (A) By the Company. Notwithstanding any other provision of this Agreement, the Company shall have the right to terminate Executive's employment with the Company and Milgray without Cause at any time, and upon such termination Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. (B) By Executive. If the Company materially breaches any of its obligations, or any material violation by the Company of Executive's rights, under this Agreement followed by (i) written notice from Executive specifying such material breach or violation, plus (ii) the Company not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, the Company not having taken reasonable steps toward curing such material breach or failure within thirty days of actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable (the foregoing being referred to as "Good Reason"), Executive will have the right at Executive's election to terminate his employment hereunder by sending notice to the Company of his election to so terminate. Termination pursuant to this subsection will be effective from and after the effective date of Executive's notice to the Company terminating Executive's employment as aforesaid. Upon any such termination, Executive shall have the rights to receive the amounts -5- 6 described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. 6.4 Death/Disability The death or Total Disability of Executive. For the purposes of this Agreement, "Total Disability" shall mean the inability of Executive due to illness or other incapacity to perform his duties hereunder in a normal manner for a period of six months (whether or not consecutive) during any consecutive eighteen-month period. If there shall be a Total Disability involving Executive, his employment may be terminated by written notice by the Company to Executive. In the event of Executive's death during the term of this Agreement, the persons designated by Executive (or if Executive does not make such a designation, then Executive's estate) shall be entitled to receive his Base Salary plus guaranteed bonus provided for Executive in this Agreement for a period of twelve months following Executive's death (regardless of the time of such death). 6.5 Voluntary Termination Executive may terminate his employment under this Agreement at any time upon thirty days written notice. 7. CONSEQUENCES OF TERMINATION OF EMPLOYMENT 7.1 Termination by the Company other than for Cause or Termination by Executive for Good Reason. If the Company terminates Executive's employment other than for Cause or if Executive, for Good Reason terminates his employment, Executive shall be entitled to receive from the Company (at Executive's election which must be exercised within 30 days of termination), either (i) within twenty days of such election, a lump sum payment in an amount equal to the sum of his Base Salary (plus guaranteed bonus) payments to which Executive would be entitled under this Agreement as a full-time employee of the Company for the balance of Executive's term of employment under this Agreement (from the date of termination); such lump sum payment discounted to present value using the interest rate offered at the date of termination by The Chase Manhattan Bank, N.A., on a certificate of deposit for a period of time equal to the remaining term of this Agreement at the date of termination and subject to the noncompetition covenant for the then balance of the Term as set forth in Section 8.1; or (ii) receive all Base Salary plus guaranteed bonus payments for the remaining term of this Agreement; provided, however, that should Executive elect to become employed by a competitor of the Company after termination (whether as an officer, director, employee, consultant or otherwise), the Company may offset against the amounts it owes Executive all compensation derived from such competitive employment. Executive agrees to notify the Company within five (5) business days of being employed by a competitor of the Company and to provide the Company with such documentation as the Company may reasonably request (including, but not limited to, copies of his Forms W-2) in order to enable the Company to verify the amount of Executive's compensation from any competitor. -6- 7 7.2 Termination by the Company because of Executive's Total Disability. If the Company terminates Executive's employment hereunder because of Executive's Total Disability, Executive shall be entitled to receive from the Company for the full balance of the Term of this Agreement regular bi-weekly payments equal to 75% of Executive's regular bi-weekly Base Salary payment plus guaranteed bonus. This amount shall be reduced by all benefits provided to Executive under any Company disability plan or plans. Executive agrees to participate in such plan(s) to as full an extent and amount as permitted under such plans. 7.3 Voluntary Termination by Executive or Termination by the Company for Cause. If Executive voluntarily terminates his employment hereunder (other than for Good Reason or Total Disability) or if the Company terminates Executive's employment for Cause, Executive shall not be entitled to any further compensation following such termination. The Company shall not be entitled to recover any damages or other amount from Executive by reason of any such termination. 8. RESTRICTIVE COVENANTS 8.1 Covenant Not to Compete. During Executive's employment with the Company, Executive shall not, directly or indirectly, be engaged in the distribution or sale of any products that are directly competitive with products presently distributed or sold by the Company or any of its subsidiaries within the geographical area in which the Company or any of its subsidiaries conducts its business (except for passive investments by Executive of up to 5% of the outstanding stock of a publicly-held company engaged in any such activities). Following termination of Executive's employment with the Company, both in the case of voluntary termination by Executive (whether or not for Good Reason) or in the case of termination by the Company (whether or not for Cause), there shall be no restrictions on Executive's employment by another entity (whether or not competitive with the Company) unless Executive shall have elected the compensation option set forth in Section 7.1(i), in which case the restrictions set forth in the first sentence of this Section 8.1 (except as provided in the last sentence of this Section 8.1) shall continue to apply for the balance of the term of this Agreement as of the date of termination; provided, however, that if Executive elects the option set forth in Section 7.1(i) and then determines at a subsequent date that he wishes to take actions that would otherwise violate such restrictions, Executive will be relieved from such restrictions if he repays to the Company, in advance of taking such actions, a pro rata portion of the payments he received pursuant to that election (based on the length of the time remaining on the non-competition covenant at that time in comparison to the total remaining term of the non-competition covenant at the time of termination). For example, if Executive were terminated without Cause after one year, and elected to receive his remaining two years of pay under this Agreement in a lump sum, and one year later wanted to work for a competitor, the Executive could do so if he repaid the Company one-half of the amount he received as -7- 8 severance (2 years severance pay lump-sum, 1 year of which was "earned" by not competing, with the portion relating to the remaining 1 year to be repaid to the Company in exchange for a release from the non-compete). The Company may, at any time and from time to time, attach an annex to this Agreement specifying specific jurisdictions in which the covenant not-to-compete set forth in this Section 8.1 is applicable. Notwithstanding anything to the contrary contained in the second sentence of this Section 8.1, Executive shall not be restricted from employment by a manufacturer or manufacturer's sales representative which manufactures and/or sells any products referred to in the first sentence of this Section 8.1 or from the sale of any of such products in connection with such employment. 8.2 Nondisclosure and Nonsolicitation. Both during and after Executive's employment with the Company, Executive shall keep secret all material confidential matters of the Company not in the public domain and will not disclose them to anyone outside of the Company. Further, after termination Executive will not seek to hire Company employees. 9. MISCELLANEOUS 9.1 Arbitration All disputes, controversies or claims arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall be submitted to binding arbitration taking place in the State of New York before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Expenses of the arbitration shall be apportioned between the parties by the arbitrator on the basis of relative fault. 9.2 Legal Fees The Company shall pay all legal fees incurred by Executive arising out of the Company's failing to make any payment or withholding any employee benefits under this Agreement or contesting the validity, enforceability or interpretation of this Agreement in the event it is determined that (i) such action was not justified under this Agreement or (ii) if it is determined that both the Company and the Executive acted in violation of this Agreement, the Company's actions constituted a more serious violation than did the Executive's actions. Determination as to Executive's entitlement to legal fees pursuant to this Agreement may be made by the arbitrator if arbitration is sought or by independent legal counsel acceptable to both parties. 9.3 No Third-Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. -8- 9 9.4 Entire Agreement This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. 9.5 Succession and Assignment This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the other. 9.6 Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 9.7 Headings The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.8 Notices All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO THE COMPANY: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049-5022 Attn: President IF TO EXECUTIVE: James Darren O'Donnell 19 Jesse Way Mt. Sinai, New York 11766 -9- 10 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. 9.9 Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. 9.10 Amendments and Waivers No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Company and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 9.11 Severability Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 9.12 Guarantee Guarantor unconditionally guarantees all of the Company's obligations hereunder. Guarantor agrees that Executive may proceed directly against Guarantor in the event of the Company's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Company. -10- 11 IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. MILGRAY ELECTRONICS, INC. By: /s/ Richard Hyman ------------------------------------- Name: Richard Hyman Title: Executive Vice President BELL INDUSTRIES, INC. By: /s/ Tracy A. Edwards ------------------------------------- Name: Tracy A. Edwards Title: Vice President /s/ James Darren O'Donnell ------------------------------------- James Darren O'Donnell -11- 12 EXHIBIT 3.4 FORM OF STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION AGREEMENT This Incentive Stock Option Agreement ("Agreement") is made as of this _________ day of _______________, 199_, between Bell Industries, Inc., a California corporation (the "Company"), and James Darren O'Donnell (the "Participant"). R E C I T A L S 1. The Board of Directors of the Company and its shareholders have adopted the 1990 Stock Option Plan as of October 29, 1990 and the 1994 Stock Option Plan as of November 1, 1994 (the "Plans"). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Plans. 2. The Plans provide for the selling or granting to selected executive and other key employees, and other persons furnishing services to the Company or any subsidiary of the Company, as the Compensation Committee (the "Committee") may from time to time determine, of Restricted Stock or options to purchase shares of Common Stock of the Company. 3. Pursuant to the Plans, the Committee has determined that it is to the advantage and best interest of the Company and its stockholders to grant an Incentive Stock Option to the Participant covering 10,000 shares of the Company's Common Stock as an inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Incentive Stock Option Agreement between the Company and the Participant. 4. The Option granted hereby is intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. The Company grants to the Participant the right and option (the "Option") to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate 10,000 shares of Common Stock at the purchase price of $___________ per share, exercisable in installment periods in accordance with the provisions of this Agreement during a period expiring on the 5th anniversary of the date of this Agreement (the "Expiration Date") or earlier in accordance with Section 5 hereof; provided, however, if the Participant does not in any given installment period purchase all of the shares that the Participant is entitled to purchase in such installment period, then 13 the Participant's right to purchase any shares not purchased in such installment period shall continue until the Expiration Date or sooner termination of the Participant's option. 2. Vesting. This Option shall vest and become exercisable in the percentages and on the dates set forth below: Percentage Cumulative Initially Percentage Date Exercisable Exercisable ---- ----------- ----------- 25% 25% 25% 50% 50% 100% Subject to earlier termination under Section 5 hereof, at any time after the 3rd anniversary date of this Agreement, but no later than the Expiration Date, the Participant may purchase all or any part of the shares subject to this Option which the Participant theretofore failed to purchase. In each case, the number of shares which may be purchased shall be calculated to the nearest full share. Notwithstanding the foregoing vesting schedule, but subject to Section 5 hereof, this Option shall become immediately exercisable in full, if (i) the Company terminates Participant's employment agreement (the "Employment Agreement") dated as of ____________, 1996 other than for Cause (as defined in the Employment Agreement) or (ii) Participant terminates the Employment Agreement for Good Reason (as defined in the Employment Agreement). 3. Manner of Exercise. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company, specifying the number of shares to be purchased and accompanied by payment to the Company of the full purchase price of the shares to be purchased either (i) in cash or by certified or cashier's check payable to the order of the Company, or (ii) by delivery of shares of Common Stock already owned by, and in the possession of, the Participant. Shares of Common Stock used to satisfy any portion of the exercise price of this Option shall be valued at their fair market value determined (in accordance with Section 4 below) as of the close of the business day immediately preceding the date of exercise. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (i) one hundred (100) shares or (ii) the total number of shares then eligible for exercise if less than one hundred (100) shares. This Option may be exercised (i) during the lifetime of the Participant, only by the Participant or, in the event a conservator, guardian or legal representative is appointed during the Participant's lifetime to handle the affairs of the Participant, by such conservator, guardian or legal representative; and (ii) after the Participant's death, by his or her transferee by will or the laws of descent or distribution, and not otherwise, regardless of any community property interest therein of the spouse of the Participant or -2- 14 such spouse's successors in interest. If the spouse of the Participant shall have acquired a community property interest in this Option, the Participant, or the Participant's permitted successors in interest, may exercise the Option on behalf of the spouse of the Participant or such spouse's successors in interest. Except in the event of the Participant's death or permanent disability, the Option may not be exercised prior to the date six months from the date hereof. 4. Fair Market Value of Common Stock. The fair market value of a share of Company Common Stock shall be determined for purposes of this Agreement by reference to the closing price on the New York Stock Exchange (or other principal stock exchange on which such shares are then listed) or, if such shares are not then listed on such exchange (or other principal stock exchange), by reference to the closing price (if a National Market Issue) or the mean between the bid and asked price (if other over-the-counter issue) of a share as supplied by the National Association of Securities Dealers through NASDAQ (or its successor in function), in each case as reported by The Wall Street Journal, for the date on which the option is granted or exercised, or if such date is not a business day, for the business day immediately preceding such date (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof). 5. Cessation of Services, Death or Permanent Disability. If a Participant ceases to be employed by the Company or one of its subsidiaries for any reason other than the Participant's death or permanent disability (within the meaning of Section 22(e)(3) of the Code), the Participant's Option shall be exercisable for a period of three (3) months after the date the Participant ceases to be an employee of the Company or such subsidiary (unless by its terms it sooner expires) to the extent exercisable on the date of such cessation of employment and shall thereafter expire and be void and of no further force or effect. A leave of absence approved in writing by the Committee shall not be deemed a termination of employment for the purposes of this paragraph 5, but no Option may be exercised during any such leave of absence, except during the first three (3) months thereof. If the Participant dies or becomes permanently disabled while employed by the Company or one of its subsidiaries, the Participant's Option shall expire one (1) year after the date of such death or permanent disability unless by its terms it sooner expires. During such period after death, such Option may, to the extent that it remained unexercised (but exercisable by the Participant according to such Option's terms) on the date of such death, be exercised by the person or persons to whom the Participant's rights under the Option shall pass by the Participant's will or by the laws of descent and distribution. 6. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules. No shares issuable upon the exercise of this Option shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended, and all applicable state securities or "Blue Sky" -3- 15 laws (whether by registration or qualification or satisfaction of exemption conditions), all applicable listing requirements of any principal securities exchange on which shares of the same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made. 7. Withholding of Taxes. If the Participant or the Participant's permitted successors in interest disposes of shares of Common Stock acquired pursuant to the exercise of this Option within two years after the date of this Agreement or within one year after exercise of this Option, the Company may deduct and withhold from the wages, salary, bonus and other compensation paid by the Company to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of this Option or the sale of Common Stock issued to the Participant upon exercises hereof, all taxes as may be required from time to time under federal or state tax laws and regulations. This withholding of tax shall be made from the Company's concurrent or next payment of wages, salary, bonus or other compensation to the Participant or by payment to the Company by the Participant of required withholding tax, as the Committee may determine. 8. Adjustments for Reorganizations, Stock Splits, etc. If the outstanding shares of the Common Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares or securities receivable upon the exercise of this Option, without change in the aggregate purchase price applicable to the unexercised portion of this Option but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon the sale of substantially all the property of the Company, the Committee shall provide in writing for appropriate satisfaction of this Option by one or more of the following alternatives to be made in connection with such transaction: (i) the immediate exercisability of this Option (provided that this Option was granted more than six months before such transaction) notwithstanding the provisions of Section 3 hereof, except that this Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (a) one hundred (100) shares or (b) the total number of shares then eligible for exercise if less than one hundred (100) shares; (ii) the assumption of this Option or the substitution therefore of a new option covering the stock of a successor corporation, with appropriate adjustments as to number and kind of shares and prices; (iii) the continuance of the Plan by such successor corporation in which event this Option shall remain in full effect under the terms so provided; or (iv) the payment of an amount in cash or stock, or any combination thereof, in lieu of and in complete satisfaction of this Option. -4- 16 Adjustments under this paragraph 8 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment. 9. Participation by Participant in Other Company Plans. Nothing herein contained shall affect the right of the Participant to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, profit sharing or other employee welfare plan or program of the Company or of any subsidiary of the Company. 10. No Rights as a Shareholder Until Issuance of Stock Certificate. Neither the Participant nor any other person legally entitled to exercise this Option shall be entitled to any of the rights or privileges of a shareholder of the Company in respect of any shares issuable upon any exercise of this Option unless and until a certificate or certificates representing such shares shall have been actually issued and delivered to the Participant. 11. Not an Employment or Service Contract. Nothing contained herein shall be construed as agreement by the Company, express or implied, to employ Participant or contract for Participant's services, to restrict the Company's right to discharge Participant or cease contracting for Participant's services or to modify, extend or otherwise affect in any manner whatsoever the terms of any employment agreement or contract for services which may exist between the Participant and the Company. 12. Agreement Subject to Plan. The Option hereby granted is subject to, and the Company and the Participant agree to be bound by, all of the terms and conditions of the Plan, as the same shall be amended from time to time in accordance with the terms thereof, but no such amendment shall adversely affect the Participant's rights under this Option without the prior written consent of the Participant. 13. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 14. Notices. Any notice or other paper or payment required to be given or sent pursuant to the terms of this Agreement shall be sufficiently given or served hereunder to any party when transmitted by registered or certified mail, postage prepaid, addressed to the party to be served as follows: -5- 17 (a) if to the Company: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, CA 90049-5022 Attention: President (b) if to Participant: James Darren O'Donnell 19 Jesse Way Mt. Sinai, New York 11766 Any party, by written notice, may designate another address for notices to be sent from time to time. -6- 18 15. Execution. This Option has been granted, executed and delivered the day and year first above written at Los Angeles, California, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. COMPANY BELL INDUSTRIES, INC. BY: ------------------------------------- PARTICIPANT ---------------------------------------- NAME: James Darren O'Donnell By his or her signature below, the spouse of the Participant agrees to be bound by all of the terms and conditions of the foregoing Agreement. ---------------------------------------- NAME: -7- 19 EXHIBIT 5 FORM OF INDEMNIFICATION AGREEMENT INDEMNITY AGREEMENT This Agreement is made as of the _____ day of __________, 1996, by and between Milgray Electronics, Inc., a New York corporation (the "Corporation"), Bell Industries, Inc., a California corporation (the "Guarantor"), and James Darren O'Donnell (the "Indemnitee"), a Director and/or Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability of Directors' and Officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, the Corporation does not regard the protection available to Indemnitee as adequate in the present circumstances, and realizes that Indemnitee may not be willing to serve as a Director or Officer without adequate protection, and the Corporation desires Indemnitee to serve in such capacity; NOW, THEREFORE, in consideration of Indemnitee's service as a Director or Officer after the date hereof the parties agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature. (b) The term "Expenses" shall include, but is not limited to, expenses of investigations, judicial or administrative proceedings or appeals, damages, judgments, fines, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under this Agreement. 20 (c) The terms "Director" and "Officer" shall include Indemnitee's service at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise as well as a Director and/or Officer of the Corporation. 2. Indemnity of Director or Officer. Subject only to the limitations set forth in Section 3, Corporation will pay on behalf of the Indemnitee all Expenses actually and reasonably incurred by Indemnitee because of any claim or claims made against him in a Proceeding by reason of the fact that he is or was a Director and/or Officer. 3. Limitations on Indemnity. Corporation shall not be obligated under this Agreement to make any payment of Expenses to the Indemnitee (a) which payment it is prohibited by applicable law from paying as indemnity; (b) for which payment is actually made to the Indemnitee under an insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) for which payment the Indemnitee is indemnified by Corporation otherwise than pursuant to this Agreement and payment is actually made to the Indemnitee except in respect of any excess beyond the amount of the payment under such indemnification; (d) resulting from a claim decided in a Proceeding adversely to the Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he was not legally entitled; (e) resulting from a claim decided in a Proceeding adversely to the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of Corporation within the meaning of Section 16(b) or 16(c) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; or (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be indemnified under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless it shall be decided in a Proceeding that he committed (i) acts of active and deliberate dishonesty (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated. For purposes of Sections 3 and 4, the phrase "decided in a Proceeding" shall mean a decision by a court, arbitrator(s), hearing officer or other judicial agent having the -2- 21 requisite legal authority to make such a decision, which decision has become final and from which no appeal or other review proceeding is permissible. 4. Advance Payment of Costs. Expenses incurred by Indemnitee in defending a claim against him in a Proceeding shall be paid by the Corporation as incurred and in advance of the final disposition of such Proceeding; provided, however, that Expenses of defense need not be paid as incurred and in advance where the judicial agent of first impression has decided the Indemnitee is not entitled to be indemnified pursuant to this Agreement or otherwise. Indemnitee hereby agrees and undertakes to repay such amounts advanced if it shall be decided in a Proceeding that he is not entitled to be indemnified by the Corporation pursuant to this Agreement or otherwise. 5. Enforcement. If a claim under this Agreement is not paid by Corporation, or on its behalf, within thirty days after a written claim has been received by Corporation, the Indemnitee may at any time thereafter bring suit against Corporation to recover the unpaid amount of the claim and if successful in whole or in part, the Indemnitee shall be entitled to be paid also the Expenses of prosecuting such claim. 6. Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Corporation effectively to bring suit to enforce such rights. Notwithstanding the foregoing, if any of the provisions hereof would impair or jeopardize Indemnitee's coverage under the Corporation's Directors' and Officers' Liability Policy, such provisions shall be ineffective and shall be deemed deleted from this Agreement. 7. Notice. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to Corporation shall be given at its principal office and shall be directed to the President (or such other address as Corporation shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, the Indemnitee shall give Corporation such information and cooperation as it may reasonably require. 8. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 9. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Articles of Incorporation or Bylaws of the Corporation or under California law. -3- 22 10. Applicable Law. This Agreement shall be governed by and construed in accordance with California law. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 12. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns. 13. Continuation of Indemnification. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 14. Coverage of Indemnification. The indemnification under this Agreement shall cover Indemnitee's service as a Director and/or Officer prior to or after the date of the Agreement. 15. Guaranty. Guarantor unconditionally guarantees all of the Corporation's obligations hereunder. Guarantor agrees that Indemnitee may proceed directly against Guarantor in the event of the Corporation's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Corporation. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. INDEMNITEE CORPORATION By:_______________________________ By:_____________________________________ GUARANTOR By:_____________________________________ -4- EX-99.(C)(9) 20 EXHIBIT (C)(9) 1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of November 26, 1996, by and between Steven Sokoloff (the "Executive"), Milgray Electronics, Inc., a New York corporation (the "Company"), and Bell Industries, Inc., a California corporation (the "Guarantor"), to be effective as of the effective date of the Merger (as defined below) with reference to the following facts: A. Executive is currently employed as Vice President--Marketing of the Company; B. Pursuant to an agreement dated as of November 26, 1996, ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of the Company ("Acquisition Sub") will make a tender offer to acquire all of the outstanding capital stock of Milgray (the "Tender Offer"). After completion of the Tender Offer, it is intended that Acquisition Sub will be merged with and into Milgray, and Milgray will become a wholly-owned subsidiary of the Guarantor (the "Merger"); C. The Company wishes to ensure the continued services of Executive after the Merger; and D. Executive is willing to continue his employment with the Company on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT 1.1 Duties and Responsibilities The Company does hereby employ Executive and Executive hereby accepts such employment as Vice President--Marketing. Executive shall report to the President of the Company, and subject to the directions of the President, shall be responsible for marketing, product and asset management and related matters and performing other functions similar to the functions presently performed by Executive at the Company with respect to semiconductors, computer products and displays; provided, however, that Executive shall not be required to undertake duties not commensurate with his position as Vice President--Marketing of the Company. Notwithstanding anything contained in the preceding sentence, Executive acknowledges that, following the Merger, the Guarantor plans to investigate combining its existing distribution business, or segments thereof, with those of the Company, and where feasible or practicable, to combine such business, or segments thereof, and that as a result of such combination, the Company may change the exact nature of Executive's responsibilities (but not Executive's job title), but in no event will Executive be required to accept job responsibilities in an area 2 outside of his current expertise or to act in less than an executive capacity; moreover, Executive's status and position in the Company (or its successor) organization chart (i.e., the status and position of the person to whom Executive reports and the class of employees who report to Executive) shall be similar to other Vice Presidents of the Company and/or the Guarantor with responsibilities similar to those of Executive. Any such change in responsibility will not constitute a breach of this Agreement by the Company or the Guarantor. During the term of this Agreement, Executive shall devote his full business time and attention to the business of the Company and shall not be engaged in any other duties which interfere with the performance of his duties hereunder. Executive shall be entitled to an office, secretarial help and other accommodations and amenities comparable to those Executive presently has at the Company. 1.2 Place of Performance Executive's duties under this Agreement are to be performed on Long Island in New York State and Executive shall not be required to travel or be assigned away from this location more than seventy five days in any twelve-month period or more than five consecutive days in any thirty-day period. 2. TERM This Agreement shall be in full force and effect for a period (the "Term") which shall commence as of the effective date of the Merger (the "Effective Date") and shall continue for a period of three (3) years, unless sooner terminated as hereafter provided. 3. COMPENSATION 3.1 Base Salary As compensation for the services to be performed by Executive during the continuance of this Agreement, the Company shall pay Executive a base salary of $250,000 per year for each year of his employment hereunder (the "Base Salary"). Base Salary shall be payable in substantially equal bi-weekly installments and reduced on a pro rata basis for any fraction of a year or month during which Executive is not so employed. 3.2 Bonus Executive shall be entitled to earn an incentive bonus based upon achievement of financial and other goals established from time to time by the Company, provided that the minimum bonus for each fiscal year shall be $94,000 (the "Minimum Bonus"). For the initial year of this Agreement, such bonus shall be prorated from the Effective Date and the bonus for any partial year shall be similarly prorated. The incentive bonus shall be paid as follows: (i) the Minimum Bonus shall be paid in four equal quarterly installments within 30 days following the end of each calendar quarter, and (ii) if the -2- 3 annual incentive bonus earned by Executive for any year shall exceed the Minimum Bonus paid for such year, such excess shall be paid to Executive at the same time that annual incentive bonuses for the Company's other senior executive officers are paid in accordance with the Company's policies as in effect from time to time (but in no event later than 60 days following the date of payment of the last quarterly installment of Minimum Bonus). 3.3 Additional Benefits Executive shall be entitled to participate in all of Guarantor's employee benefit plans as listed in the Guarantor's employee handbook, as the same may change from time to time, and, in addition, to participate on the same terms as senior Guarantor executives in any benefit plans available to members of the Guarantor's management (whether or not listed in the employee handbook). Among other things, Executive shall be entitled to participate in the Guarantor's Health Care Benefits Program, 401(k) Plan, Stock Purchase Plan, Stock Option Plan, Short-term and Long-term Disability Programs and the Guarantor's Executive Medical Plan, which provides coverage for all medical expenses not otherwise covered by the basic policy, up to $25,000. If any health, medical or disability plan or program existing at the time of commencement of Executive's employment pursuant to this Agreement is terminated or the benefits thereunder reduced, the Company or Guarantor shall provide Executive with benefits similar to those in existence at the time of commencement of Executive's employment hereunder. 3.4 Stock Options (A) As an additional element of compensation to Executive in consideration of the services to be rendered hereunder, Guarantor shall grant to Executive options to acquire 10,000 shares of Guarantor's common stock at an exercise price equal to the closing price on the Effective Date. The options shall vest in 25%, 25% and 50% increments, respectively, on the first, second and third anniversaries of this Agreement. In addition, all of the options will vest if the Company terminates this Agreement other than for Cause (as defined in Section 6.2) or if the Executive quits for Good Reason (as defined in Section 6.3(B)). The options shall remain exercisable for a period of five (5) years from the date of grant. The specific terms of the above-referenced option shall be as set forth in a separate option agreement in the form annexed hereto as Exhibit 3.4. (B) Executive shall be entitled to participate in the Guarantor's stock option programs, although Executive understands that any grants under such programs are completely discretionary with the Compensation Committee of the Guarantor's Board of Directors. -3- 4 3.5 Reimbursements Executive shall be entitled to reimbursement for all amounts reasonably expended on behalf of the Company, subject to verification similar to that required of and provided by the Company's other senior executives. 3.6 Deductions The Company shall deduct from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. 3.7 Disability Except in the case of Executive's Total Disability (as defined in Section 6.4), Executive's full compensation and benefits under this Agreement shall be continued during any period when he is absent or unable to perform his duties due to illness, disability or other incapacity; and Executive's inability to perform his duties by reason of the foregoing shall not constitute a failure to perform his obligations under this Agreement and shall not be deemed a default by Executive hereunder. The consequences of Executive's Total Disability is covered in Section 7.2 of this Agreement. 4. VACATION Executive shall be entitled to four weeks of vacation in each twelve-month period; provided, however, that no more than six weeks may be taken during any eighteen-month period. Such vacation will accrue on a pro rata basis from the date employment commences under this Agreement. At the end of his employment hereunder, Executive shall be paid for any accrued but unused vacation time. Executive agrees that he will coordinate his vacation plans and schedules in order to prevent any undue disruption of the Company's business. 5. INDEMNIFICATION Executive shall be indemnified by Guarantor and the Company to the full extent permitted by law in respect of his actions as an officer or director of the Company and shall be provided with such liability insurance coverage in this connection as is provided to other Company executives. In addition, the Company and Guarantor shall enter into an Indemnification Agreement with Executive in the form attached as Exhibit 5. -4- 5 6. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: 6.1 Mutual Agreement Whenever the Company and Executive mutually agree in writing to termination; 6.2 Termination for Cause At any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) material breach by Executive of this Agreement or material failure by Executive to perform his duties under this Agreement (other than by reason of Executive's Total Disability) followed by (a) written notice from the Company to Executive specifying such material failure or such material breach, plus (b) Executive not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, Executive not having taken reasonable steps toward curing such material failure or material breach within thirty days of his actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable, or (ii) conviction of Executive by, or a plea of guilty in, a court of competent jurisdiction of a felony or other major crime (a plea of nolo contendere shall be deemed a conviction). 6.3 Termination without Cause by the Company or for Good Reason by Executive (A) By the Company. Notwithstanding any other provision of this Agreement, the Company shall have the right to terminate Executive's employment with the Company and Milgray without Cause at any time, and upon such termination Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. (B) By Executive. If the Company materially breaches any of its obligations, or any material violation by the Company of Executive's rights, under this Agreement followed by (i) written notice from Executive specifying such material breach or violation, plus (ii) the Company not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, the Company not having taken reasonable steps toward curing such material breach or failure within thirty days of actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable (the foregoing being referred to as "Good Reason"), Executive will have the right at Executive's election to terminate his employment hereunder by sending notice to the Company of his election to so terminate. Termination pursuant to this subsection will be effective from and after the effective date of Executive's notice to the Company terminating Executive's employment as aforesaid. -5- 6 Upon any such termination, Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. 6.4 Death/Disability The death or Total Disability of Executive. For the purposes of this Agreement, "Total Disability" shall mean the inability of Executive due to illness or other incapacity to perform his duties hereunder in a normal manner for a period of six months (whether or not consecutive) during any consecutive eighteen-month period. If there shall be a Total Disability involving Executive, his employment may be terminated by written notice by the Company to Executive. In the event of Executive's death during the term of this Agreement, the persons designated by Executive (or if Executive does not make such a designation, then Executive's estate) shall be entitled to receive his Base Salary plus guaranteed bonus provided for Executive in this Agreement for a period of twelve months following Executive's death (regardless of the time of such death). 6.5 Voluntary Termination Executive may terminate his employment under this Agreement at any time upon thirty days written notice. 7. CONSEQUENCES OF TERMINATION OF EMPLOYMENT 7.1 Termination by the Company other than for Cause or Termination by Executive for Good Reason. If the Company terminates Executive's employment other than for Cause or if Executive, for Good Reason terminates his employment, Executive shall be entitled to receive from the Company (at Executive's election which must be exercised within 30 days of termination), either (i) within twenty days of such election, a lump sum payment in an amount equal to the sum of his Base Salary (plus guaranteed bonus) payments to which Executive would be entitled under this Agreement as a full-time employee of the Company for the balance of Executive's term of employment under this Agreement (from the date of termination); such lump sum payment discounted to present value using the interest rate offered at the date of termination by The Chase Manhattan Bank, N.A., on a certificate of deposit for a period of time equal to the remaining term of this Agreement at the date of termination and subject to the noncompetition covenant for the then balance of the Term as set forth in Section 8.1; or (ii) receive all Base Salary plus guaranteed bonus payments for the remaining term of this Agreement; provided, however, that should Executive elect to become employed by a competitor of the Company after termination (whether as an officer, director, employee, consultant or otherwise), the Company may offset against the amounts it owes Executive all compensation derived from such competitive employment. Executive agrees to notify the Company within five (5) business days of being employed by a competitor of the Company and to provide the Company with such documentation as the Company may reasonably request (including, but not limited to, copies of his Forms W- -6- 7 2) in order to enable the Company to verify the amount of Executive's compensation from any competitor. 7.2 Termination by the Company because of Executive's Total Disability. If the Company terminates Executive's employment hereunder because of Executive's Total Disability, Executive shall be entitled to receive from the Company for the full balance of the Term of this Agreement regular bi-weekly payments equal to 75% of Executive's regular bi-weekly Base Salary payment plus guaranteed bonus. This amount shall be reduced by all benefits provided to Executive under any Company disability plan or plans. Executive agrees to participate in such plan(s) to as full an extent and amount as permitted under such plans. 7.3 Voluntary Termination by Executive or Termination by the Company for Cause. If Executive voluntarily terminates his employment hereunder (other than for Good Reason or Total Disability) or if the Company terminates Executive's employment for Cause, Executive shall not be entitled to any further compensation following such termination. The Company shall not be entitled to recover any damages or other amount from Executive by reason of any such termination. 8. RESTRICTIVE COVENANTS 8.1 Covenant Not to Compete. During Executive's employment with the Company, Executive shall not, directly or indirectly, be engaged in the distribution or sale of any products that are directly competitive with products presently distributed or sold by the Company or any of its subsidiaries within the geographical area in which the Company or any of its subsidiaries conducts its business (except for passive investments by Executive of up to 5% of the outstanding stock of a publicly-held company engaged in any such activities). Following termination of Executive's employment with the Company, both in the case of voluntary termination by Executive (whether or not for Good Reason) or in the case of termination by the Company (whether or not for Cause), there shall be no restrictions on Executive's employment by another entity (whether or not competitive with the Company) unless Executive shall have elected the compensation option set forth in Section 7.1(i), in which case the restrictions set forth in the first sentence of this Section 8.1 (except as provided in the last sentence of this Section 8.1) shall continue to apply for the balance of the term of this Agreement as of the date of termination; provided, however, that if Executive elects the option set forth in Section 7.1(i) and then determines at a subsequent date that he wishes to take actions that would otherwise violate such restrictions, Executive will be relieved from such restrictions if he repays to the Company, in advance of taking such actions, a pro rata portion of the payments he received pursuant to that election (based on the length of the time remaining on the non-competition covenant at that time in comparison to the total remaining term of the non-competition covenant at the time of termination). For example, if Executive were terminated without -7- 8 Cause after one year, and elected to receive his remaining two years of pay under this Agreement in a lump sum, and one year later wanted to work for a competitor, the Executive could do so if he repaid the Company one-half of the amount he received as severance (2 years severance pay lump-sum, 1 year of which was "earned" by not competing, with the portion relating to the remaining 1 year to be repaid to the Company in exchange for a release from the non-compete). The Company may, at any time and from time to time, attach an annex to this Agreement specifying specific jurisdictions in which the covenant not-to-compete set forth in this Section 8.1 is applicable. Notwithstanding anything to the contrary contained in the second sentence of this Section 8.1, Executive shall not be restricted from employment by a manufacturer or manufacturer's sales representative which manufactures and/or sells any products referred to in the first sentence of this Section 8.1 or from the sale of any of such products in connection with such employment. 8.2 Nondisclosure and Nonsolicitation. Both during and after Executive's employment with the Company, Executive shall keep secret all material confidential matters of the Company not in the public domain and will not disclose them to anyone outside of the Company. Further, after termination Executive will not seek to hire Company employees. -8- 9 9. MISCELLANEOUS 9.1 Arbitration All disputes, controversies or claims arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall be submitted to binding arbitration taking place in the State of New York before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Expenses of the arbitration shall be apportioned between the parties by the arbitrator on the basis of relative fault. 9.2 Legal Fees The Company shall pay all legal fees incurred by Executive arising out of the Company's failing to make any payment or withholding any employee benefits under this Agreement or contesting the validity, enforceability or interpretation of this Agreement in the event it is determined that (i) such action was not justified under this Agreement or (ii) if it is determined that both the Company and the Executive acted in violation of this Agreement, the Company's actions constituted a more serious violation than did the Executive's actions. Determination as to Executive's entitlement to legal fees pursuant to this Agreement may be made by the arbitrator if arbitration is sought or by independent legal counsel acceptable to both parties. 9.3 No Third-Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. 9.4 Entire Agreement This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. 9.5 Succession and Assignment This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the other. -9- 10 9.6 Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 9.7 Headings The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.8 Notices All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO THE COMPANY: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049-5022 Attn: President IF TO EXECUTIVE: Steven Sokoloff 5 Gaines Drive Farmingdale, New York 11738 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. 9.9 Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) -10- 11 that would cause the application of the laws of any jurisdiction other than the State of New York. 9.10 Amendments and Waivers No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Company and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 9.11 Severability Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 9.12 Guarantee Guarantor unconditionally guarantees all of the Company's obligations hereunder. Guarantor agrees that Executive may proceed directly against Guarantor in the event of the Company's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Company. -11- 12 IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. MILGRAY ELECTRONICS, INC. By: /s/ Richard Hyman ---------------------------- Name: Richard Hyman Title: Executive Vice President BELL INDUSTRIES, INC. By: /s/ Tracy A. Edwards ---------------------------- Name: Tracy A. Edwards Title: Vice President /s/ Steven Sokoloff ------------------------------- Steven Sokoloff -12- 13 EXHIBIT 3.4 FORM OF STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION AGREEMENT This Incentive Stock Option Agreement ("Agreement") is made as of this _________ day of _______________, 199_, between Bell Industries, Inc., a California corporation (the "Company"), and Steven Sokoloff (the "Participant"). R E C I T A L S 1. The Board of Directors of the Company and its shareholders have adopted the 1990 Stock Option Plan as of October 29, 1990 and the 1994 Stock Option Plan as of November 1, 1994 (the "Plans"). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Plans. 2. The Plans provide for the selling or granting to selected executive and other key employees, and other persons furnishing services to the Company or any subsidiary of the Company, as the Compensation Committee (the "Committee") may from time to time determine, of Restricted Stock or options to purchase shares of Common Stock of the Company. 3. Pursuant to the Plans, the Committee has determined that it is to the advantage and best interest of the Company and its stockholders to grant an Incentive Stock Option to the Participant covering 10,000 shares of the Company's Common Stock as an inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Incentive Stock Option Agreement between the Company and the Participant. 4. The Option granted hereby is intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. The Company grants to the Participant the right and option (the "Option") to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate 10,000 shares of Common Stock at the purchase price of $___________ per share, exercisable in installment periods in accordance with the provisions of this Agreement during a period expiring on the 5th anniversary of the date of this Agreement (the "Expiration Date") or earlier in accordance with Section 5 hereof; provided, however, if the Participant does not in any given installment period purchase all of the shares that the Participant is entitled to purchase in such installment period, then 14 the Participant's right to purchase any shares not purchased in such installment period shall continue until the Expiration Date or sooner termination of the Participant's option. 2. Vesting. This Option shall vest and become exercisable in the percentages and on the dates set forth below:
Percentage Cumulative Initially Percentage Date Exercisable Exercisable ---- ----------- ----------- 25% 25% 25% 50% 50% 100%
Subject to earlier termination under Section 5 hereof, at any time after the 3rd anniversary date of this Agreement, but no later than the Expiration Date, the Participant may purchase all or any part of the shares subject to this Option which the Participant theretofore failed to purchase. In each case, the number of shares which may be purchased shall be calculated to the nearest full share. Notwithstanding the foregoing vesting schedule, but subject to Section 5 hereof, this Option shall become immediately exercisable in full, if (i) the Company terminates Participant's employment agreement (the "Employment Agreement") dated as of ____________, 1996 other than for Cause (as defined in the Employment Agreement) or (ii) Participant terminates the Employment Agreement for Good Reason (as defined in the Employment Agreement). 3. Manner of Exercise. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company, specifying the number of shares to be purchased and accompanied by payment to the Company of the full purchase price of the shares to be purchased either (i) in cash or by certified or cashier's check payable to the order of the Company, or (ii) by delivery of shares of Common Stock already owned by, and in the possession of, the Participant. Shares of Common Stock used to satisfy any portion of the exercise price of this Option shall be valued at their fair market value determined (in accordance with Section 4 below) as of the close of the business day immediately preceding the date of exercise. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (i) one hundred (100) shares or (ii) the total number of shares then eligible for exercise if less than one hundred (100) shares. This Option may be exercised (i) during the lifetime of the Participant, only by the Participant or, in the event a conservator, guardian or legal representative is appointed during the Participant's lifetime to handle the affairs of the Participant, by such conservator, guardian or legal representative; and (ii) after the Participant's death, by his or her transferee by will or the laws of descent or distribution, and not otherwise, regardless of any community property interest therein of the spouse of the Participant or -2- 15 such spouse's successors in interest. If the spouse of the Participant shall have acquired a community property interest in this Option, the Participant, or the Participant's permitted successors in interest, may exercise the Option on behalf of the spouse of the Participant or such spouse's successors in interest. Except in the event of the Participant's death or permanent disability, the Option may not be exercised prior to the date six months from the date hereof. 4. Fair Market Value of Common Stock. The fair market value of a share of Company Common Stock shall be determined for purposes of this Agreement by reference to the closing price on the New York Stock Exchange (or other principal stock exchange on which such shares are then listed) or, if such shares are not then listed on such exchange (or other principal stock exchange), by reference to the closing price (if a National Market Issue) or the mean between the bid and asked price (if other over-the-counter issue) of a share as supplied by the National Association of Securities Dealers through NASDAQ (or its successor in function), in each case as reported by The Wall Street Journal, for the date on which the option is granted or exercised, or if such date is not a business day, for the business day immediately preceding such date (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof). 5. Cessation of Services, Death or Permanent Disability. If a Participant ceases to be employed by the Company or one of its subsidiaries for any reason other than the Participant's death or permanent disability (within the meaning of Section 22(e)(3) of the Code), the Participant's Option shall be exercisable for a period of three (3) months after the date the Participant ceases to be an employee of the Company or such subsidiary (unless by its terms it sooner expires) to the extent exercisable on the date of such cessation of employment and shall thereafter expire and be void and of no further force or effect. A leave of absence approved in writing by the Committee shall not be deemed a termination of employment for the purposes of this paragraph 5, but no Option may be exercised during any such leave of absence, except during the first three (3) months thereof. If the Participant dies or becomes permanently disabled while employed by the Company or one of its subsidiaries, the Participant's Option shall expire one (1) year after the date of such death or permanent disability unless by its terms it sooner expires. During such period after death, such Option may, to the extent that it remained unexercised (but exercisable by the Participant according to such Option's terms) on the date of such death, be exercised by the person or persons to whom the Participant's rights under the Option shall pass by the Participant's will or by the laws of descent and distribution. 6. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules. No shares issuable upon the exercise of this Option shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended, and all applicable state securities or "Blue Sky" -3- 16 laws (whether by registration or qualification or satisfaction of exemption conditions), all applicable listing requirements of any principal securities exchange on which shares of the same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made. 7. Withholding of Taxes. If the Participant or the Participant's permitted successors in interest disposes of shares of Common Stock acquired pursuant to the exercise of this Option within two years after the date of this Agreement or within one year after exercise of this Option, the Company may deduct and withhold from the wages, salary, bonus and other compensation paid by the Company to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of this Option or the sale of Common Stock issued to the Participant upon exercises hereof, all taxes as may be required from time to time under federal or state tax laws and regulations. This withholding of tax shall be made from the Company's concurrent or next payment of wages, salary, bonus or other compensation to the Participant or by payment to the Company by the Participant of required withholding tax, as the Committee may determine. 8. Adjustments for Reorganizations, Stock Splits, etc. If the outstanding shares of the Common Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares or securities receivable upon the exercise of this Option, without change in the aggregate purchase price applicable to the unexercised portion of this Option but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon the sale of substantially all the property of the Company, the Committee shall provide in writing for appropriate satisfaction of this Option by one or more of the following alternatives to be made in connection with such transaction: (i) the immediate exercisability of this Option (provided that this Option was granted more than six months before such transaction) notwithstanding the provisions of Section 3 hereof, except that this Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (a) one hundred (100) shares or (b) the total number of shares then eligible for exercise if less than one hundred (100) shares; (ii) the assumption of this Option or the substitution therefore of a new option covering the stock of a successor corporation, with appropriate adjustments as to number and kind of shares and prices; (iii) the continuance of the Plan by such successor corporation in which event this Option shall remain in full effect under the terms so provided; or (iv) the payment of an amount in cash or stock, or any combination thereof, in lieu of and in complete satisfaction of this Option. -4- 17 Adjustments under this paragraph 8 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment. 9. Participation by Participant in Other Company Plans. Nothing herein contained shall affect the right of the Participant to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, profit sharing or other employee welfare plan or program of the Company or of any subsidiary of the Company. 10. No Rights as a Shareholder Until Issuance of Stock Certificate. Neither the Participant nor any other person legally entitled to exercise this Option shall be entitled to any of the rights or privileges of a shareholder of the Company in respect of any shares issuable upon any exercise of this Option unless and until a certificate or certificates representing such shares shall have been actually issued and delivered to the Participant. 11. Not an Employment or Service Contract. Nothing contained herein shall be construed as agreement by the Company, express or implied, to employ Participant or contract for Participant's services, to restrict the Company's right to discharge Participant or cease contracting for Participant's services or to modify, extend or otherwise affect in any manner whatsoever the terms of any employment agreement or contract for services which may exist between the Participant and the Company. 12. Agreement Subject to Plan. The Option hereby granted is subject to, and the Company and the Participant agree to be bound by, all of the terms and conditions of the Plan, as the same shall be amended from time to time in accordance with the terms thereof, but no such amendment shall adversely affect the Participant's rights under this Option without the prior written consent of the Participant. 13. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 14. Notices. Any notice or other paper or payment required to be given or sent pursuant to the terms of this Agreement shall be sufficiently given or served hereunder to any party when transmitted by registered or certified mail, postage prepaid, addressed to the party to be served as follows: (a) if to the Company: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, CA 90049-5022 Attention: President (b) if to Participant: Steven Sokoloff 5 Gaines Drive -5- 18 Farmingdale, New York 11738 Any party, by written notice, may designate another address for notices to be sent from time to time. -6- 19 15. Execution. This Option has been granted, executed and delivered the day and year first above written at Los Angeles, California, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. COMPANY BELL INDUSTRIES, INC. BY: ---------------------------- PARTICIPANT ------------------------------- NAME: Steven Sokoloff By his or her signature below, the spouse of the Participant agrees to be bound by all of the terms and conditions of the foregoing Agreement. NAME: -------------------------- -7- 20 EXHIBIT 5 FORM OF INDEMNIFICATION AGREEMENT INDEMNITY AGREEMENT This Agreement is made as of the _____ day of __________, 1996, by and between Milgray Electronics, Inc., a New York corporation (the "Corporation"), Bell Industries, Inc., a California corporation (the "Guarantor"), and Steven Sokoloff (the "Indemnitee"), a Director and/or Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability of Directors' and Officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, the Corporation does not regard the protection available to Indemnitee as adequate in the present circumstances, and realizes that Indemnitee may not be willing to serve as a Director or Officer without adequate protection, and the Corporation desires Indemnitee to serve in such capacity; NOW, THEREFORE, in consideration of Indemnitee's service as a Director or Officer after the date hereof the parties agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature. (b) The term "Expenses" shall include, but is not limited to, expenses of investigations, judicial or administrative proceedings or appeals, damages, judgments, fines, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under this Agreement. 21 (c) The terms "Director" and "Officer" shall include Indemnitee's service at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise as well as a Director and/or Officer of the Corporation. 2. Indemnity of Director or Officer. Subject only to the limitations set forth in Section 3, Corporation will pay on behalf of the Indemnitee all Expenses actually and reasonably incurred by Indemnitee because of any claim or claims made against him in a Proceeding by reason of the fact that he is or was a Director and/or Officer. 3. Limitations on Indemnity. Corporation shall not be obligated under this Agreement to make any payment of Expenses to the Indemnitee (a) which payment it is prohibited by applicable law from paying as indemnity; (b) for which payment is actually made to the Indemnitee under an insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) for which payment the Indemnitee is indemnified by Corporation otherwise than pursuant to this Agreement and payment is actually made to the Indemnitee except in respect of any excess beyond the amount of the payment under such indemnification; (d) resulting from a claim decided in a Proceeding adversely to the Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he was not legally entitled; (e) resulting from a claim decided in a Proceeding adversely to the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of Corporation within the meaning of Section 16(b) or 16(c) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; or (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be indemnified under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless it shall be decided in a Proceeding that he committed (i) acts of active and deliberate dishonesty (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated. For purposes of Sections 3 and 4, the phrase "decided in a Proceeding" shall mean a decision by a court, arbitrator(s), hearing officer or other judicial agent having the -2- 22 requisite legal authority to make such a decision, which decision has become final and from which no appeal or other review proceeding is permissible. 4. Advance Payment of Costs. Expenses incurred by Indemnitee in defending a claim against him in a Proceeding shall be paid by the Corporation as incurred and in advance of the final disposition of such Proceeding; provided, however, that Expenses of defense need not be paid as incurred and in advance where the judicial agent of first impression has decided the Indemnitee is not entitled to be indemnified pursuant to this Agreement or otherwise. Indemnitee hereby agrees and undertakes to repay such amounts advanced if it shall be decided in a Proceeding that he is not entitled to be indemnified by the Corporation pursuant to this Agreement or otherwise. 5. Enforcement. If a claim under this Agreement is not paid by Corporation, or on its behalf, within thirty days after a written claim has been received by Corporation, the Indemnitee may at any time thereafter bring suit against Corporation to recover the unpaid amount of the claim and if successful in whole or in part, the Indemnitee shall be entitled to be paid also the Expenses of prosecuting such claim. 6. Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Corporation effectively to bring suit to enforce such rights. Notwithstanding the foregoing, if any of the provisions hereof would impair or jeopardize Indemnitee's coverage under the Corporation's Directors' and Officers' Liability Policy, such provisions shall be ineffective and shall be deemed deleted from this Agreement. 7. Notice. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to Corporation shall be given at its principal office and shall be directed to the President (or such other address as Corporation shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, the Indemnitee shall give Corporation such information and cooperation as it may reasonably require. 8. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 9. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Articles of Incorporation or Bylaws of the Corporation or under California law. -3- 23 10. Applicable Law. This Agreement shall be governed by and construed in accordance with California law. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 12. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns. 13. Continuation of Indemnification. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 14. Coverage of Indemnification. The indemnification under this Agreement shall cover Indemnitee's service as a Director and/or Officer prior to or after the date of the Agreement. 15. Guaranty. Guarantor unconditionally guarantees all of the Corporation's obligations hereunder. Guarantor agrees that Indemnitee may proceed directly against Guarantor in the event of the Corporation's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Corporation. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. INDEMNITEE CORPORATION By:_______________________ By:___________________ GUARANTOR By:___________________ -4- EX-99.(C)(10) 21 EXHIBIT (C)(10) 1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of November 26, 1996, by and between Elliott Schnabel (also known as Elliott Stevens) (the "Executive"), Milgray Electronics, Inc., a New York corporation (the "Company"), and Bell Industries, Inc., a California corporation (the "Guarantor"), to be effective as of the effective date of the Merger (as defined below) with reference to the following facts: A. Executive is currently employed as Regional Vice President--Sales of the Company; B. Pursuant to an agreement dated as of November 26, 1996, ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of the Company ("Acquisition Sub") will make a tender offer to acquire all of the outstanding capital stock of Milgray (the "Tender Offer"). After completion of the Tender Offer, it is intended that Acquisition Sub will be merged with and into Milgray, and Milgray will become a wholly-owned subsidiary of the Guarantor (the "Merger"); C. The Company wishes to ensure the continued services of Executive after the Merger; and D. Executive is willing to continue his employment with the Company on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT 1.1 Duties and Responsibilities The Company does hereby employ Executive and Executive hereby accepts such employment as Regional Vice President--Sales. Executive shall report to the President of the Company, and subject to the directions of the President, shall be responsible for supervising sales activities of branches assigned to Executive and related matters, including profit and loss for assigned branches and region, customer relations and agreements with significant customers and performing other functions similar to the functions presently performed by Executive at the Company connected with the foregoing; provided, however, that Executive shall not be required to undertake duties not commensurate with his position as Regional Vice President--Sales of the Company. Notwithstanding anything contained in the preceding sentence, Executive acknowledges that, following the Merger, the Guarantor plans to investigate combining its existing distribution business, or segments thereof, with those of the Company, and where feasible or practicable, to combine such business, or segments thereof, and that as a 2 result of such combination, the Company may change the exact nature of Executive's responsibilities (but not Executive's job title), but in no event will Executive be required to accept job responsibilities in an area outside of his current expertise or to act in less than an executive capacity; moreover, Executive's status and position in the Company (or its successor) organization chart (i.e., the status and position of the person to whom Executive reports and the class of employees who report to Executive) shall be similar to other Vice Presidents of the Company and/or the Guarantor with responsibilities similar to those of Executive. Any such change in responsibility will not constitute a breach of this Agreement by the Company or the Guarantor. During the term of this Agreement, Executive shall devote his full business time and attention to the business of the Company and shall not be engaged in any other duties which interfere with the performance of his duties hereunder. Executive shall be entitled to an office, secretarial help and other accommodations and amenities comparable to those Executive presently has at the Company. 1.2 Place of Performance Executive's duties under this Agreement are to be performed on Long Island in New York State and Executive shall not be required to travel or be assigned away from this location more than one hundred days in any twelve-month period or more than five consecutive days in any thirty-day period. 2. TERM This Agreement shall be in full force and effect for a period (the "Term") which shall commence as of the effective date of the Merger (the "Effective Date") and shall continue for a period of three (3) years, unless sooner terminated as hereafter provided. 3. COMPENSATION 3.1 Base Salary As compensation for the services to be performed by Executive during the continuance of this Agreement, the Company shall pay Executive a base salary of $200,000 per year for each year of his employment hereunder (the "Base Salary"). Base Salary shall be payable in substantially equal bi-weekly installments and reduced on a pro rata basis for any fraction of a year or month during which Executive is not so employed. 3.2 Bonus Executive shall be entitled to earn an incentive bonus based upon achievement of financial and other goals established from time to time by the Company, provided that the minimum bonus for each fiscal year shall be $80,000 (the "Minimum Bonus"). For the initial year of this Agreement, such bonus shall be prorated from the Effective Date and the bonus for any partial year shall be similarly prorated. The incentive bonus shall -2- 3 be paid as follows: (i) the Minimum Bonus shall be paid in four equal quarterly installments within 30 days following the end of each calendar quarter, and (ii) if the annual incentive bonus earned by Executive for any year shall exceed the Minimum Bonus paid for such year, such excess shall be paid to Executive at the same time that annual incentive bonuses for the Company's other senior executive officers are paid in accordance with the Company's policies as in effect from time to time (but in no event later than 60 days following the date of payment of the last quarterly installment of Minimum Bonus). 3.3 Additional Benefits Executive shall be entitled to participate in all of Guarantor's employee benefit plans as listed in the Guarantor's employee handbook, as the same may change from time to time, and, in addition, to participate on the same terms as senior Guarantor executives in any benefit plans available to members of the Guarantor's management (whether or not listed in the employee handbook). Among other things, Executive shall be entitled to participate in the Guarantor's Health Care Benefits Program, 401(k) Plan, Stock Purchase Plan, Stock Option Plan, Short-term and Long-term Disability Programs and the Guarantor's Executive Medical Plan, which provides coverage for all medical expenses not otherwise covered by the basic policy, up to $25,000. If any health, medical or disability plan or program existing at the time of commencement of Executive's employment pursuant to this Agreement is terminated or the benefits thereunder reduced, the Company or Guarantor shall provide Executive with benefits similar to those in existence at the time of commencement of Executive's employment hereunder. 3.4 Stock Options (A) As an additional element of compensation to Executive in consideration of the services to be rendered hereunder, Guarantor shall grant to Executive options to acquire 10,000 shares of Guarantor's common stock at an exercise price equal to the closing price on the Effective Date. The options shall vest in 25%, 25% and 50% increments, respectively, on the first, second and third anniversaries of this Agreement. In addition, all of the options will vest if the Company terminates this Agreement other than for Cause (as defined in Section 6.2) or if the Executive quits for Good Reason (as defined in Section 6.3(B)). The options shall remain exercisable for a period of five (5) years from the date of grant. The specific terms of the above-referenced option shall be as set forth in a separate option agreement in the form annexed hereto as Exhibit 3.4. (B) Executive shall be entitled to participate in the Guarantor's stock option programs, although Executive understands that any grants under such programs are completely discretionary with the Compensation Committee of the Guarantor's Board of Directors. -3- 4 3.5 Reimbursements Executive shall be entitled to reimbursement for all amounts reasonably expended on behalf of the Company, subject to verification similar to that required of and provided by the Company's other senior executives. 3.6 Deductions The Company shall deduct from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. 3.7 Disability Except in the case of Executive's Total Disability (as defined in Section 6.4), Executive's full compensation and benefits under this Agreement shall be continued during any period when he is absent or unable to perform his duties due to illness, disability or other incapacity; and Executive's inability to perform his duties by reason of the foregoing shall not constitute a failure to perform his obligations under this Agreement and shall not be deemed a default by Executive hereunder. The consequences of Executive's Total Disability is covered in Section 7.2 of this Agreement. 4. VACATION Executive shall be entitled to four weeks of vacation in each twelve-month period; provided, however, that no more than six weeks may be taken during any eighteen-month period. Such vacation will accrue on a pro rata basis from the date employment commences under this Agreement. At the end of his employment hereunder, Executive shall be paid for any accrued but unused vacation time. Executive agrees that he will coordinate his vacation plans and schedules in order to prevent any undue disruption of the Company's business. 5. INDEMNIFICATION Executive shall be indemnified by Guarantor and the Company to the full extent permitted by law in respect of his actions as an officer or director of the Company and shall be provided with such liability insurance coverage in this connection as is provided to other Company executives. In addition, the Company and Guarantor shall enter into an Indemnification Agreement with Executive in the form attached as Exhibit 5. -4- 5 6. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: 6.1 Mutual Agreement Whenever the Company and Executive mutually agree in writing to termination; 6.2 Termination for Cause At any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) material breach by Executive of this Agreement or material failure by Executive to perform his duties under this Agreement (other than by reason of Executive's Total Disability) followed by (a) written notice from the Company to Executive specifying such material failure or such material breach, plus (b) Executive not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, Executive not having taken reasonable steps toward curing such material failure or material breach within thirty days of his actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable, or (ii) conviction of Executive by, or a plea of guilty in, a court of competent jurisdiction of a felony or other major crime (a plea of nolo contendere shall be deemed a conviction). 6.3 Termination without Cause by the Company or for Good Reason by Executive (A) By the Company. Notwithstanding any other provision of this Agreement, the Company shall have the right to terminate Executive's employment with the Company and Milgray without Cause at any time, and upon such termination Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. (B) By Executive. If the Company materially breaches any of its obligations, or any material violation by the Company of Executive's rights, under this Agreement followed by (i) written notice from Executive specifying such material breach or violation, plus (ii) the Company not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, the Company not having taken reasonable steps toward curing such material breach or failure within thirty days of actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable (the foregoing being referred to as "Good Reason"), Executive will have the right at Executive's election to terminate his employment hereunder by sending notice to the Company of his election to so terminate. Termination pursuant to this subsection will be effective from and after the effective date of Executive's notice to the Company terminating Executive's employment as aforesaid. -5- 6 Upon any such termination, Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. 6.4 Death/Disability The death or Total Disability of Executive. For the purposes of this Agreement, "Total Disability" shall mean the inability of Executive due to illness or other incapacity to perform his duties hereunder in a normal manner for a period of six months (whether or not consecutive) during any consecutive eighteen-month period. If there shall be a Total Disability involving Executive, his employment may be terminated by written notice by the Company to Executive. In the event of Executive's death during the term of this Agreement, the persons designated by Executive (or if Executive does not make such a designation, then Executive's estate) shall be entitled to receive his Base Salary plus guaranteed bonus provided for Executive in this Agreement for a period of twelve months following Executive's death (regardless of the time of such death). 6.5 Voluntary Termination Executive may terminate his employment under this Agreement at any time upon thirty days written notice. 7. CONSEQUENCES OF TERMINATION OF EMPLOYMENT 7.1 Termination by the Company other than for Cause or Termination by Executive for Good Reason. If the Company terminates Executive's employment other than for Cause or if Executive, for Good Reason terminates his employment, Executive shall be entitled to receive from the Company (at Executive's election which must be exercised within 30 days of termination), either (i) within twenty days of such election, a lump sum payment in an amount equal to the sum of his Base Salary (plus guaranteed bonus) payments to which Executive would be entitled under this Agreement as a full-time employee of the Company for the balance of Executive's term of employment under this Agreement (from the date of termination); such lump sum payment discounted to present value using the interest rate offered at the date of termination by The Chase Manhattan Bank, N.A., on a certificate of deposit for a period of time equal to the remaining term of this Agreement at the date of termination and subject to the noncompetition covenant for the then balance of the Term as set forth in Section 8.1; or (ii) receive all Base Salary plus guaranteed bonus payments for the remaining term of this Agreement; provided, however, that should Executive elect to become employed by a competitor of the Company after termination (whether as an officer, director, employee, consultant or otherwise), the Company may offset against the amounts it owes Executive all compensation derived from such competitive employment. Executive agrees to notify the Company within five (5) business days of being employed by a competitor of the Company and to provide the Company with such documentation as the Company may reasonably request (including, but not limited to, copies of his Forms W- -6- 7 2) in order to enable the Company to verify the amount of Executive's compensation from any competitor. 7.2 Termination by the Company because of Executive's Total Disability. If the Company terminates Executive's employment hereunder because of Executive's Total Disability, Executive shall be entitled to receive from the Company for the full balance of the Term of this Agreement regular bi-weekly payments equal to 75% of Executive's regular bi-weekly Base Salary payment plus guaranteed bonus. This amount shall be reduced by all benefits provided to Executive under any Company disability plan or plans. Executive agrees to participate in such plan(s) to as full an extent and amount as permitted under such plans. 7.3 Voluntary Termination by Executive or Termination by the Company for Cause. If Executive voluntarily terminates his employment hereunder (other than for Good Reason or Total Disability) or if the Company terminates Executive's employment for Cause, Executive shall not be entitled to any further compensation following such termination. The Company shall not be entitled to recover any damages or other amount from Executive by reason of any such termination. 8. RESTRICTIVE COVENANTS 8.1 Covenant Not to Compete. During Executive's employment with the Company, Executive shall not, directly or indirectly, be engaged in the distribution or sale of any products that are directly competitive with products presently distributed or sold by the Company or any of its subsidiaries within the geographical area in which the Company or any of its subsidiaries conducts its business (except for passive investments by Executive of up to 5% of the outstanding stock of a publicly held company engaged in any such activities). Following termination of Executive's employment with the Company, both in the case of voluntary termination by Executive (whether or not for Good Reason) or in the case of termination by the Company (whether or not for Cause), there shall be no restrictions on Executive's employment by another entity (whether or not competitive with the Company) unless Executive shall have elected the compensation option set forth in Section 7.1(i), in which case the restrictions set forth in the first sentence of this Section 8.1 (except as provided in the last sentence of this Section 8.1) shall continue to apply for the balance of the term of this Agreement as of the date of termination; provided, however, that if Executive elects the option set forth in Section 7.1(i) and then determines at a subsequent date that he wishes to take actions that would otherwise violate such restrictions, Executive will be relieved from such restrictions if he repays to the Company, in advance of taking such actions, a pro rata portion of the payments he received pursuant to that election (based on the length of the time remaining on the non-competition covenant at that time in comparison to the total remaining term of the non-competition covenant at the time of termination). For example, if Executive were terminated without -7- 8 Cause after one year, and elected to receive his remaining two years of pay under this Agreement in a lump sum, and one year later wanted to work for a competitor, the Executive could do so if he repaid the Company one-half of the amount he received as severance (2 years severance pay lump-sum, 1 year of which was "earned" by not competing, with the portion relating to the remaining 1 year to be repaid to the Company in exchange for a release from the non-compete). The Company may, at any time and from time to time, attach an annex to this Agreement specifying specific jurisdictions in which the covenant not-to-compete set forth in this Section 8.1 is applicable. Notwithstanding anything to the contrary contained in the second sentence of this Section 8.1, Executive shall not be restricted from employment by a manufacturer or manufacturer's sales representative which manufactures and/or sells any products referred to in the first sentence of this Section 8.1 or from the sale of any of such products in connection with such employment. 8.2 Nondisclosure and Nonsolicitation. Both during and after Executive's employment with the Company, Executive shall keep secret all material confidential matters of the Company not in the public domain and will not disclose them to anyone outside of the Company. Further, after termination Executive will not seek to hire Company employees. -8- 9 9. MISCELLANEOUS 9.1 Arbitration All disputes, controversies or claims arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall be submitted to binding arbitration taking place in the State of New York before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Expenses of the arbitration shall be apportioned between the parties by the arbitrator on the basis of relative fault. 9.2 Legal Fees The Company shall pay all legal fees incurred by Executive arising out of the Company's failing to make any payment or withholding any employee benefits under this Agreement or contesting the validity, enforceability or interpretation of this Agreement in the event it is determined that (i) such action was not justified under this Agreement or (ii) if it is determined that both the Company and the Executive acted in violation of this Agreement, the Company's actions constituted a more serious violation than did the Executive's actions. Determination as to Executive's entitlement to legal fees pursuant to this Agreement may be made by the arbitrator if arbitration is sought or by independent legal counsel acceptable to both parties. 9.3 No Third-Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. 9.4 Entire Agreement This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. 9.5 Succession and Assignment This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the other. -9- 10 9.6 Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 9.7 Headings The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.8 Notices All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO THE COMPANY: Milgray Electronics, Inc. 77 Schmitt Boulevard Farmingdale, New York 11735 Attn: President IF TO THE GUARANTOR: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049-5022 Attn: President IF TO EXECUTIVE: Elliott Schnabel 605 Benton Road East Meadow, New York 11554 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, -10- 11 requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. 9.9 Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. 9.10 Amendments and Waivers No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Company and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 9.11 Severability Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 9.12 Guarantee Guarantor unconditionally guarantees all of the Company's obligations hereunder. Guarantor agrees that Executive may proceed directly against Guarantor in the event of the Company's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Company. -11- 12 IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. MILGRAY ELECTRONICS, INC. By: /s/ Richard Hyman ------------------------------------ Name: Richard Hyman Title: Executive Vice President BELL INDUSTRIES, INC. By: /s/ Tracy A. Edwards ------------------------------------ Name: Tracy A. Edwards Title: Vice President /s/ Elliott Schnabel ------------------------------------- Elliott Schnabel -12- 13 EXHIBIT 3.4 FORM OF STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION AGREEMENT This Incentive Stock Option Agreement ("Agreement") is made as of this _________ day of _______________, 199_, between Bell Industries, Inc., a California corporation (the "Company"), and Elliott Schnabel (also known as Elliott Stevens) (the "Participant"). R E C I T A L S 1. The Board of Directors of the Company and its shareholders have adopted the 1990 Stock Option Plan as of October 29, 1990 and the 1994 Stock Option Plan as of November 1, 1994 (the "Plans"). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Plans. 2. The Plans provide for the selling or granting to selected executive and other key employees, and other persons furnishing services to the Company or any subsidiary of the Company, as the Compensation Committee (the "Committee") may from time to time determine, of Restricted Stock or options to purchase shares of Common Stock of the Company. 3. Pursuant to the Plans, the Committee has determined that it is to the advantage and best interest of the Company and its stockholders to grant an Incentive Stock Option to the Participant covering 10,000 shares of the Company's Common Stock as an inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Incentive Stock Option Agreement between the Company and the Participant. 4. The Option granted hereby is intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. The Company grants to the Participant the right and option (the "Option") to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate 10,000 shares of Common Stock at the purchase price of $___________ per share, exercisable in installment periods in accordance with the provisions of this Agreement during a period expiring on the 5th anniversary of the date of this Agreement (the "Expiration Date") or earlier in accordance with Section 5 hereof; provided, however, if the Participant does not in any given installment period purchase al of the shares that the Participant is entitled to purchase in such installment period, then 14 the Participant's right to purchase any shares not purchased in such installment period shall continue until the Expiration Date or sooner termination of the Participant's option. 2. Vesting. This Option shall vest and become exercisable in the percentages and on the dates set forth below:
Percentage Cumulative Initially Percentage Date Exercisable Exercisable ---- ----------- ----------- 25% 25% 25% 50% 50% 100%
Subject to earlier termination under Section 5 hereof, at any time after the 3rd anniversary date of this Agreement, but no later than the Expiration Date, the Participant may purchase all or any part of the shares subject to this Option which the Participant theretofore failed to purchase. In each case, the number of shares which may be purchased shall be calculated to the nearest full share. Notwithstanding the foregoing vesting schedule, but subject to Section 5 hereof, this Option shall become immediately exercisable in full, if (i) the Company terminates Participant's employment agreement (the "Employment Agreement") dated as of ____________, 1996 other than for Cause (as defined in the Employment Agreement) or (ii) Participant terminates the Employment Agreement for Good Reason (as defined in the Employment Agreement). 3. Manner of Exercise. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company, specifying the number of shares to be purchased and accompanied by payment to the Company of the full purchase price of the shares to be purchased either (i) in cash or by certified or cashier's check payable to the order of the Company, or (ii) by delivery of shares of Common Stock already owned by, and in the possession of, the Participant. Shares of Common Stock used to satisfy any portion of the exercise price of this Option shall be valued at their fair market value determined (in accordance with Section 4 below) as of the close of the business day immediately preceding the date of exercise. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (i) one hundred (100) shares or (ii) the total number of shares then eligible for exercise if less than one hundred (100) shares. This Option may be exercised (i) during the lifetime of the Participant, only by the Participant or, in the event a conservator, guardian or legal representative is appointed during the Participant's lifetime to handle the affairs of the Participant, by such conservator, guardian or legal representative; and (ii) after the Participant's death, by his or her transferee by will or the laws of descent or distribution, and not otherwise, regardless of any community property interest therein of the spouse of the Participant or -2- 15 such spouse's successors in interest. If the spouse of the Participant shall have acquired a community property interest in this Option, the Participant, or the Participant's permitted successors in interest, may exercise the Option on behalf of the spouse of the Participant or such spouse's successors in interest. Except in the event of the Participant's death or permanent disability, the Option may not be exercised prior to the date six months from the date hereof. 4. Fair Market Value of Common Stock. The fair market value of a share of Company Common Stock shall be determined for purposes of this Agreement by reference to the closing price on the New York Stock Exchange (or other principal stock exchange on which such shares are then listed) or, if such shares are not then listed on such exchange (or other principal stock exchange), by reference to the closing price (if a National Market Issue) or the mean between the bid and asked price (if other over-the-counter issue) of a share as supplied by the National Association of Securities Dealers through NASDAQ (or its successor in function), in each case as reported by The Wall Street Journal, for the date on which the option is granted or exercised, or if such date is not a business day, for the business day immediately preceding such date (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof). 5. Cessation of Services, Death or Permanent Disability. If a Participant ceases to be employed by the Company or one of its subsidiaries for any reason other than the Participant's death or permanent disability (within the meaning of Section 22(e)(3) of the Code), the Participant's Option shall be exercisable for a period of three (3) months after the date the Participant ceases to be an employee of the Company or such subsidiary (unless by its terms it sooner expires) to the extent exercisable on the date of such cessation of employment and shall thereafter expire and be void and of no further force or effect. A leave of absence approved in writing by the Committee shall not be deemed a termination of employment for the purposes of this paragraph 5, but no Option may be exercised during any such leave of absence, except during the first three (3) months thereof. If the Participant dies or becomes permanently disabled while employed by the Company or one of its subsidiaries, the Participant's Option shall expire one (1) year after the date of such death or permanent disability unless by its terms it sooner expires. During such period after death, such Option may, to the extent that it remained unexercised (but exercisable by the Participant according to such Option's terms) on the date of such death, be exercised by the person or persons to whom the Participant's rights under the Option shall pass by the Participant's will or by the laws of descent and distribution. 6. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules. No shares issuable upon the exercise of this Option shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended, and all applicable state securities or "Blue Sky" -3- 16 laws (whether by registration or qualification or satisfaction of exemption conditions), all applicable listing requirements of any principal securities exchange on which shares of the same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made. 7. Withholding of Taxes. If the Participant or the Participant's permitted successors in interest disposes of shares of Common Stock acquired pursuant to the exercise of this Option within two years after the date of this Agreement or within one year after exercise of this Option, the Company may deduct and withhold from the wages, salary, bonus and other compensation paid by the Company to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of this Option or the sale of Common Stock issued to the Participant upon exercises hereof, all taxes as may be required from time to time under federal or state tax laws and regulations. This withholding of tax shall be made from the Company's concurrent or next payment of wages, salary, bonus or other compensation to the Participant or by payment to the Company by the Participant of required withholding tax, as the Committee may determine. 8. Adjustments for Reorganizations, Stock Splits, etc. If the outstanding shares of the Common Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares or securities receivable upon the exercise of this Option, without change in the aggregate purchase price applicable to the unexercised portion of this Option but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon the sale of substantially all the property of the Company, the Committee shall provide in writing for appropriate satisfaction of this Option by one or more of the following alternatives to be made in connection with such transaction: (i) the immediate exercisability of this Option (provided that this Option was granted more than six months before such transaction) notwithstanding the provisions of Section 3 hereof, except that this Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (a) one hundred (100) shares or (b) the total number of shares then eligible for exercise if less than one hundred (100) shares; (ii) the assumption of this Option or the substitution therefore of a new option covering the stock of a successor corporation, with appropriate adjustments as to number and kind of shares and prices; (iii) the continuance of the Plan by such successor corporation in which event this Option shall remain in full effect under the terms so provided; or (iv) the payment of an amount in cash or stock, or any combination thereof, in lieu of and in complete satisfaction of this Option. -4- 17 Adjustments under this paragraph 8 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment. 9. Participation by Participant in Other Company Plans. Nothing herein contained shall affect the right of the Participant to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, profit sharing or other employee welfare plan or program of the Company or of any subsidiary of the Company. 10. No Rights as a Shareholder Until Issuance of Stock Certificate. Neither the Participant nor any other person legally entitled to exercise this Option shall be entitled to any of the rights or privileges of a shareholder of the Company in respect of any shares issuable upon any exercise of this Option unless and until a certificate or certificates representing such shares shall have been actually issued and delivered to the Participant. 11. Not an Employment or Service Contract. Nothing contained herein shall be construed as agreement by the Company, express or implied, to employ Participant or contract for Participant's services, to restrict the Company's right to discharge Participant or cease contracting for Participant's services or to modify, extend or otherwise affect in any manner whatsoever the terms of any employment agreement or contract for services which may exist between the Participant and the Company. 12. Agreement Subject to Plan. The Option hereby granted is subject to, and the Company and the Participant agree to be bound by, all of the terms and conditions of the Plan, as the same shall be amended from time to time in accordance with the terms thereof, but no such amendment shall adversely affect the Participant's rights under this Option without the prior written consent of the Participant. 13. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 14. Notices. Any notice or other paper or payment required to be given or sent pursuant to the terms of this Agreement shall be sufficiently given or served hereunder to any party when transmitted by registered or certified mail, postage prepaid, addressed to the party to be served as follows: -5- 18 (a) if to the Company: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, CA 90049-5022 Attention: President (b) if to Participant: Elliott Schnabel 605 Benton Road East Meadow, New York 11554 Any party, by written notice, may designate another address for notices to be sent from time to time. -6- 19 15. Execution. This Option has been granted, executed and delivered the day and year first above written at Los Angeles, California, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. COMPANY BELL INDUSTRIES, INC. BY:____________________________ PARTICIPANT _______________________________ NAME By his or her signature below, the spouse of the Participant agrees to be bound by all of the terms and conditions of the foregoing Agreement. _______________________________ NAME -7- 20 EXHIBIT 5 FORM OF INDEMNIFICATION AGREEMENT INDEMNITY AGREEMENT This Agreement is made as of the _____ day of __________, 1996, by and between Milgray Electronics, Inc., a New York corporation (the "Corporation"), Bell Industries, Inc., a California corporation (the "Guarantor"), and Elliott Schnabel (also known as Elliott Stevens) (the "Indemnitee"), a Director and/or Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability of Directors' and Officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, the Corporation does not regard the protection available to Indemnitee as adequate in the present circumstances, and realizes that Indemnitee may not be willing to serve as a Director or Officer without adequate protection, and the Corporation desires Indemnitee to serve in such capacity; NOW, THEREFORE, in consideration of Indemnitee's service as a Director or Officer after the date hereof the parties agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature. (b) The term "Expenses" shall include, but is not limited to, expenses of investigations, judicial or administrative proceedings or appeals, damages, judgments, fines, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under this Agreement. 21 (c) The terms "Director" and "Officer" shall include Indemnitee's service at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise as well as a Director and/or Officer of the Corporation. 2. Indemnity of Director or Officer. Subject only to the limitations set forth in Section 3, Corporation will pay on behalf of the Indemnitee all Expenses actually and reasonably incurred by Indemnitee because of any claim or claims made against him in a Proceeding by reason of the fact that he is or was a Director and/or Officer. 3. Limitations on Indemnity. Corporation shall not be obligated under this Agreement to make any payment of Expenses to the Indemnitee (a) which payment it is prohibited by applicable law from paying as indemnity; (b) for which payment is actually made to the Indemnitee under an insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) for which payment the Indemnitee is indemnified by Corporation otherwise than pursuant to this Agreement and payment is actually made to the Indemnitee except in respect of any excess beyond the amount of the payment under such indemnification; (d) resulting from a claim decided in a Proceeding adversely to the Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he was not legally entitled; (e) resulting from a claim decided in a Proceeding adversely to the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of Corporation within the meaning of Section 16(b) or 16(c) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; or (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be indemnified under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless it shall be decided in a Proceeding that he committed (i) acts of active and deliberate dishonesty (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated. For purposes of Sections 3 and 4, the phrase "decided in a Proceeding" shall mean a decision by a court, arbitrator(s), hearing officer or other judicial agent having the -2- 22 requisite legal authority to make such a decision, which decision has become final and from which no appeal or other review proceeding is permissible. 4. Advance Payment of Costs. Expenses incurred by Indemnitee in defending a claim against him in a Proceeding shall be paid by the Corporation as incurred and in advance of the final disposition of such Proceeding; provided, however, that Expenses of defense need not be paid as incurred and in advance where the judicial agent of first impression has decided the Indemnitee is not entitled to be indemnified pursuant to this Agreement or otherwise. Indemnitee hereby agrees and undertakes to repay such amounts advanced if it shall be decided in a Proceeding that he is not entitled to be indemnified by the Corporation pursuant to this Agreement or otherwise. 5. Enforcement. If a claim under this Agreement is not paid by Corporation, or on its behalf, within thirty days after a written claim has been received by Corporation, the Indemnitee may at any time thereafter bring suit against Corporation to recover the unpaid amount of the claim and if successful in whole or in part, the Indemnitee shall be entitled to be paid also the Expenses of prosecuting such claim. 6. Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Corporation effectively to bring suit to enforce such rights. Notwithstanding the foregoing, if any of the provisions hereof would impair or jeopardize Indemnitee's coverage under the Corporation's Directors' and Officers' Liability Policy, such provisions shall be ineffective and shall be deemed deleted from this Agreement. 7. Notice. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to Corporation shall be given at its principal office and shall be directed to the President (or such other address as Corporation shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, the Indemnitee shall give Corporation such information and cooperation as it may reasonably require. 8. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 9. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Articles of Incorporation or Bylaws of the Corporation or under California law. -3- 23 10. Applicable Law. This Agreement shall be governed by and construed in accordance with California law. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 12. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns. 13. Continuation of Indemnification. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 14. Coverage of Indemnification. The indemnification under this Agreement shall cover Indemnitee's service as a Director and/or Officer prior to or after the date of the Agreement. 15. Guaranty. Guarantor unconditionally guarantees all of the Corporation's obligations hereunder. Guarantor agrees that Indemnitee may proceed directly against Guarantor in the event of the Corporation's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Corporation. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. INDEMNITEE CORPORATION By:_______________________ By:___________________ GUARANTOR By:___________________ -4- EX-99.(C)(11) 22 EXHIBIT (C)(11) 1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of November 26, 1996, by and between Thomas Woolf (the "Executive"), Milgray Electronics, Inc., a New York corporation (the "Company"), and Bell Industries, Inc., a California corporation (the "Guarantor"), to be effective as of the effective date of the Merger (as defined below) with reference to the following facts: A. Executive is currently employed as Regional Vice President--Sales of the Company; B. Pursuant to an agreement dated as of November 26, 1996, ME Acquisition, Inc., a New York corporation and wholly owned subsidiary of the Company ("Acquisition Sub") will make a tender offer to acquire all of the outstanding capital stock of Milgray (the "Tender Offer"). After completion of the Tender Offer, it is intended that Acquisition Sub will be merged with and into Milgray, and Milgray will become a wholly-owned subsidiary of the Guarantor (the "Merger"); C. The Company wishes to ensure the continued services of Executive after the Merger; and D. Executive is willing to continue his employment with the Company on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT 1.1 Duties and Responsibilities The Company does hereby employ Executive and Executive hereby accepts such employment as Regional Vice President--Sales. Executive shall report to the President of the Company, and subject to the directions of the President, shall be responsible for supervising sales activities of branches assigned to Executive and related matters, including profit and loss for assigned branches and region, customer relations and agreements with significant customers and performing other functions similar to the functions presently performed by Executive at the Company connected with the foregoing; provided, however, that Executive shall not be required to undertake duties not commensurate with his position as Regional Vice President--Sales of the Company. Notwithstanding anything contained in the preceding sentence, Executive acknowledges that, following the Merger, the Guarantor plans to investigate combining its existing distribution business, or segments thereof, with those of the Company, and where feasible or practicable, to combine such business, or segments thereof, and that as a result of such combination, the Company may change the exact nature of Executive's 2 responsibilities (but not Executive's job title), but in no event will Executive be required to accept job responsibilities in an area outside of his current expertise or to act in less than an executive capacity; moreover, Executive's status and position in the Company (or its successor) organization chart (i.e., the status and position of the person to whom Executive reports and the class of employees who report to Executive) shall be similar to other Vice Presidents of the Company and/or the Guarantor with responsibilities similar to those of Executive. Any such change in responsibility will not constitute a breach of this Agreement by the Company or the Guarantor. During the term of this Agreement, Executive shall devote his full business time and attention to the business of the Company and shall not be engaged in any other duties which interfere with the performance of his duties hereunder. Executive shall be entitled to an office, secretarial help and other accommodations and amenities comparable to those Executive presently has at the Company. 1.2 Place of Performance Executive's duties under this Agreement are to be performed in Connecticut and Executive shall not be required to travel or be assigned away from this location more than one hundred days in any twelve-month period or more than five consecutive days in any thirty-day period. 2. TERM This Agreement shall be in full force and effect for a period (the "Term") which shall commence as of the effective date of the Merger (the "Effective Date") and shall continue for a period of three (3) years, unless sooner terminated as hereafter provided. 3. COMPENSATION 3.1 Base Salary As compensation for the services to be performed by Executive during the continuance of this Agreement, the Company shall pay Executive a base salary of $175,000 per year for each year of his employment hereunder (the "Base Salary"). Base Salary shall be payable in substantially equal bi-weekly installments and reduced on a pro rata basis for any fraction of a year or month during which Executive is not so employed. 3.2 Bonus Executive shall be entitled to earn an incentive bonus based upon achievement of financial and other goals established from time to time by the Company, provided that the minimum bonus for each fiscal year shall be $56,000 (the "Minimum Bonus"). For the initial year of this Agreement, such bonus shall be prorated from the Effective Date and the bonus for any partial year shall be similarly prorated. The incentive bonus shall be paid as follows: (i) the Minimum Bonus shall be paid in four equal quarterly -2- 3 installments within 30 days following the end of each calendar quarter, and (ii) if the annual incentive bonus earned by Executive for any year shall exceed the Minimum Bonus paid for such year, such excess shall be paid to Executive at the same time that annual incentive bonuses for the Company's other senior executive officers are paid in accordance with the Company's policies as in effect from time to time (but in no event later than 60 days following the date of payment of the last quarterly installment of Minimum Bonus). 3.3 Additional Benefits Executive shall be entitled to participate in all of Guarantor's employee benefit plans as listed in the Guarantor's employee handbook, as the same may change from time to time, and, in addition, to participate on the same terms as senior Guarantor executives in any benefit plans available to members of the Guarantor's management (whether or not listed in the employee handbook). Among other things, Executive shall be entitled to participate in the Guarantor's Health Care Benefits Program, 401(k) Plan, Stock Purchase Plan, Stock Option Plan, Short-term and Long-term Disability Programs and the Guarantor's Executive Medical Plan, which provides coverage for all medical expenses not otherwise covered by the basic policy, up to $25,000. If any health, medical or disability plan or program existing at the time of commencement of Executive's employment pursuant to this Agreement is terminated or the benefits thereunder reduced, the Company or Guarantor shall provide Executive with benefits similar to those in existence at the time of commencement of Executive's employment hereunder. 3.4 Stock Options (A) As an additional element of compensation to Executive in consideration of the services to be rendered hereunder, Guarantor shall grant to Executive options to acquire 10,000 shares of Guarantor's common stock at an exercise price equal to the closing price on the Effective Date. The options shall vest in 25%, 25% and 50% increments, respectively, on the first, second and third anniversaries of this Agreement. In addition, all of the options will vest if the Company terminates this Agreement other than for Cause (as defined in Section 6.2) or if the Executive quits for Good Reason (as defined in Section 6.3(B)). The options shall remain exercisable for a period of five (5) years from the date of grant. The specific terms of the above-referenced option shall be as set forth in a separate option agreement in the form annexed hereto as Exhibit 3.4. (B) Executive shall be entitled to participate in the Guarantor's stock option programs, although Executive understands that any grants under such programs are completely discretionary with the Compensation Committee of the Guarantor's Board of Directors. -3- 4 3.5 Reimbursements Executive shall be entitled to reimbursement for all amounts reasonably expended on behalf of the Company, subject to verification similar to that required of and provided by the Company's other senior executives. 3.6 Deductions The Company shall deduct from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. 3.7 Disability Except in the case of Executive's Total Disability (as defined in Section 6.4), Executive's full compensation and benefits under this Agreement shall be continued during any period when he is absent or unable to perform his duties due to illness, disability or other incapacity; and Executive's inability to perform his duties by reason of the foregoing shall not constitute a failure to perform his obligations under this Agreement and shall not be deemed a default by Executive hereunder. The consequences of Executive's Total Disability is covered in Section 7.2 of this Agreement. 4. VACATION Executive shall be entitled to four weeks of vacation in each twelve-month period; provided, however, that no more than six weeks may be taken during any eighteen-month period. Such vacation will accrue on a pro rata basis from the date employment commences under this Agreement. At the end of his employment hereunder, Executive shall be paid for any accrued but unused vacation time. Executive agrees that he will coordinate his vacation plans and schedules in order to prevent any undue disruption of the Company's business. 5. INDEMNIFICATION Executive shall be indemnified by Guarantor and the Company to the full extent permitted by law in respect of his actions as an officer or director of the Company and shall be provided with such liability insurance coverage in this connection as is provided to other Company executives. In addition, the Company and Guarantor shall enter into an Indemnification Agreement with Executive in the form attached as Exhibit 5. -4- 5 6. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: 6.1 Mutual Agreement Whenever the Company and Executive mutually agree in writing to termination; 6.2 Termination for Cause At any time for Cause. For purposes of this Agreement, "Cause" shall mean (i) material breach by Executive of this Agreement or material failure by Executive to perform his duties under this Agreement (other than by reason of Executive's Total Disability) followed by (a) written notice from the Company to Executive specifying such material failure or such material breach, plus (b) Executive not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, Executive not having taken reasonable steps toward curing such material failure or material breach within thirty days of his actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable, or (ii) conviction of Executive by, or a plea of guilty in, a court of competent jurisdiction of a felony or other major crime (a plea of nolo contendere shall be deemed a conviction). 6.3 Termination without Cause by the Company or for Good Reason by Executive (A) By the Company. Notwithstanding any other provision of this Agreement, the Company shall have the right to terminate Executive's employment with the Company and Milgray without Cause at any time, and upon such termination Executive shall have the rights to receive the amounts described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. (B) By Executive. If the Company materially breaches any of its obligations, or any material violation by the Company of Executive's rights, under this Agreement followed by (i) written notice from Executive specifying such material breach or violation, plus (ii) the Company not having cured the breach within thirty days of actual receipt of notice or, if the breach is not capable of cure within thirty days, the Company not having taken reasonable steps toward curing such material breach or failure within thirty days of actual receipt of such notice and diligently continuing to cure such material breach as expeditiously as practicable (the foregoing being referred to as "Good Reason"), Executive will have the right at Executive's election to terminate his employment hereunder by sending notice to the Company of his election to so terminate. Termination pursuant to this subsection will be effective from and after the effective date of Executive's notice to the Company terminating Executive's employment as aforesaid. Upon any such termination, Executive shall have the rights to receive the amounts -5- 6 described in Section 7.1 and Executive shall be fully vested in all options granted to him under this Agreement. 6.4 Death/Disability The death or Total Disability of Executive. For the purposes of this Agreement, "Total Disability" shall mean the inability of Executive due to illness or other incapacity to perform his duties hereunder in a normal manner for a period of six months (whether or not consecutive) during any consecutive eighteen-month period. If there shall be a Total Disability involving Executive, his employment may be terminated by written notice by the Company to Executive. In the event of Executive's death during the term of this Agreement, the persons designated by Executive (or if Executive does not make such a designation, then Executive's estate) shall be entitled to receive his Base Salary plus guaranteed bonus provided for Executive in this Agreement for a period of twelve months following Executive's death (regardless of the time of such death). 6.5 Voluntary Termination Executive may terminate his employment under this Agreement at any time upon thirty days written notice. 7. CONSEQUENCES OF TERMINATION OF EMPLOYMENT 7.1 Termination by the Company other than for Cause or Termination by Executive for Good Reason. If the Company terminates Executive's employment other than for Cause or if Executive, for Good Reason terminates his employment, Executive shall be entitled to receive from the Company (at Executive's election which must be exercised within 30 days of termination), either (i) within twenty days of such election, a lump sum payment in an amount equal to the sum of his Base Salary (plus guaranteed bonus) payments to which Executive would be entitled under this Agreement as a full-time employee of the Company for the balance of Executive's term of employment under this Agreement (from the date of termination); such lump sum payment discounted to present value using the interest rate offered at the date of termination by The Chase Manhattan Bank, N.A., on a certificate of deposit for a period of time equal to the remaining term of this Agreement at the date of termination and subject to the noncompetition covenant for the then balance of the Term as set forth in Section 8.1; or (ii) receive all Base Salary plus guaranteed bonus payments for the remaining term of this Agreement; provided, however, that should Executive elect to become employed by a competitor of the Company after termination (whether as an officer, director, employee, consultant or otherwise), the Company may offset against the amounts it owes Executive all compensation derived from such competitive employment. Executive agrees to notify the Company within five (5) business days of being employed by a competitor of the Company and to provide the Company with such documentation as the Company may reasonably request (including, but not limited to, copies of his Forms W-2) in order to enable the Company to verify the amount of Executive's compensation from any competitor. -6- 7 7.2 Termination by the Company because of Executive's Total Disability. If the Company terminates Executive's employment hereunder because of Executive's Total Disability, Executive shall be entitled to receive from the Company for the full balance of the Term of this Agreement regular bi-weekly payments equal to 75% of Executive's regular bi-weekly Base Salary payment plus guaranteed bonus. This amount shall be reduced by all benefits provided to Executive under any Company disability plan or plans. Executive agrees to participate in such plan(s) to as full an extent and amount as permitted under such plans. 7.3 Voluntary Termination by Executive or Termination by the Company for Cause. If Executive voluntarily terminates his employment hereunder (other than for Good Reason or Total Disability) or if the Company terminates Executive's employment for Cause, Executive shall not be entitled to any further compensation following such termination. The Company shall not be entitled to recover any damages or other amount from Executive by reason of any such termination. 8. RESTRICTIVE COVENANTS 8.1 Covenant Not to Compete. During Executive's employment with the Company, Executive shall not, directly or indirectly, be engaged in the distribution or sale of any products that are directly competitive with products presently distributed or sold by the Company or any of its subsidiaries within the geographical area in which the Company or any of its subsidiaries conducts its business (except for passive investments by Executive of up to 5% of the outstanding stock of a publicly-held company engaged in any such activities). Following termination of Executive's employment with the Company, both in the case of voluntary termination by Executive (whether or not for Good Reason) or in the case of termination by the Company (whether or not for Cause), there shall be no restrictions on Executive's employment by another entity (whether or not competitive with the Company) unless Executive shall have elected the compensation option set forth in Section 7.1(i), in which case the restrictions set forth in the first sentence of this Section 8.1 (except as provided in the last sentence of this Section 8.1) shall continue to apply for the balance of the term of this Agreement as of the date of termination; provided, however, that if Executive elects the option set forth in Section 7.1(i) and then determines at a subsequent date that he wishes to take actions that would otherwise violate such restrictions, Executive will be relieved from such restrictions if he repays to the Company, in advance of taking such actions, a pro rata portion of the payments he received pursuant to that election (based on the length of the time remaining on the non-competition covenant at that time in comparison to the total remaining term of the non-competition covenant at the time of termination). For example, if Executive were terminated without Cause after one year, and elected to receive his remaining two years of pay under this Agreement in a lump sum, and one year later wanted to work for a competitor, the Executive could do so if he repaid the Company one-half of the amount he received as -7- 8 severance (2 years severance pay lump-sum, 1 year of which was "earned" by not competing, with the portion relating to the remaining 1 year to be repaid to the Company in exchange for a release from the non-compete). The Company may, at any time and from time to time, attach an annex to this Agreement specifying specific jurisdictions in which the covenant not-to-compete set forth in this Section 8.1 is applicable. Notwithstanding anything to the contrary contained in the second sentence of this Section 8.1, Executive shall not be restricted from employment by a manufacturer or manufacturer's sales representative which manufactures and/or sells any products referred to in the first sentence of this Section 8.1 or from the sale of any of such products in connection with such employment. 8.2 Nondisclosure and Nonsolicitation. Both during and after Executive's employment with the Company, Executive shall keep secret all material confidential matters of the Company not in the public domain and will not disclose them to anyone outside of the Company. Further, after termination Executive will not seek to hire Company employees. 9. MISCELLANEOUS 9.1 Arbitration All disputes, controversies or claims arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall be submitted to binding arbitration taking place in the State of New York before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Expenses of the arbitration shall be apportioned between the parties by the arbitrator on the basis of relative fault. 9.2 Legal Fees The Company shall pay all legal fees incurred by Executive arising out of the Company's failing to make any payment or withholding any employee benefits under this Agreement or contesting the validity, enforceability or interpretation of this Agreement in the event it is determined that (i) such action was not justified under this Agreement or (ii) if it is determined that both the Company and the Executive acted in violation of this Agreement, the Company's actions constituted a more serious violation than did the Executive's actions. Determination as to Executive's entitlement to legal fees pursuant to this Agreement may be made by the arbitrator if arbitration is sought or by independent legal counsel acceptable to both parties. 9.3 No Third-Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. -8- 9 9.4 Entire Agreement This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. 9.5 Succession and Assignment This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the other. 9.6 Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 9.7 Headings The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.8 Notices All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: -9- 10 IF TO THE COMPANY: Milgray Electronics, Inc. 77 Schmitt Boulevard Farmingdale, New York 11735 Attn: President IF TO THE GUARANTOR: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, California 90049-5022 Attn: President IF TO EXECUTIVE: Thomas Woolf Saw Mill Road Newtown, Connecticut 06470 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. 9.9 Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. 9.10 Amendments and Waivers No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Company and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. -10- 11 9.11 Severability Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 9.12 Guarantee Guarantor unconditionally guarantees all of the Company's obligations hereunder. Guarantor agrees that Executive may proceed directly against Guarantor in the event of the Company's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Company. IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. MILGRAY ELECTRONICS, INC. By: /s/ Richard Hyman ------------------------------- Name: Richard Hyman Title: Executive Vice President BELL INDUSTRIES, INC. By: /s/ Tracy A. Edwards ------------------------------- Name: Tracy A. Edwards Title: Vice President /s/ Thomas Woolf -------------------------------- Thomas Woolf -11- 12 EXHIBIT 3.4 FORM OF STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION AGREEMENT This Incentive Stock Option Agreement ("Agreement") is made as of this _________ day of _______________, 199_, between Bell Industries, Inc., a California corporation(the "Company"), and Thomas Woolf (the "Participant"). R E C I T A L S 1. The Board of Directors of the Company and its shareholders have adopted the 1990 Stock Option Plan as of October 29, 1990 and the 1994 Stock Option Plan as of November 1, 1994 (the "Plans"). Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Plans. 2. The Plans provide for the selling or granting to selected executive and other key employees, and other persons furnishing services to the Company or any subsidiary of the Company, as the Compensation Committee (the "Committee") may from time to time determine, of Restricted Stock or options to purchase shares of Common Stock of the Company. 3. Pursuant to the Plans, the Committee has determined that it is to the advantage and best interest of the Company and its stockholders to grant an Incentive Stock Option to the Participant covering 10,000 shares of the Company's Common Stock as an inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Incentive Stock Option Agreement between the Company and the Participant. 4. The Option granted hereby is intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, the parties hereto agree as follows: 1. Grant of Option. The Company grants to the Participant the right and option (the "Option") to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate 10,000 shares of Common Stock at the purchase price of $___________ per share, exercisable in installment periods in accordance with the provisions of this Agreement during a period expiring on the 5th anniversary of the date of this Agreement (the "Expiration Date") or earlier in accordance with Section 5 hereof; provided, however, if the Participant does not in any given installment period purchase all of the shares that the Participant is entitled to purchase in such installment period, then the Participant's right to purchase any shares not purchased in such installment period shall continue until the Expiration Date or sooner termination of the Participant's option. 13 2. Vesting. This Option shall vest and become exercisable in the percentages and on the dates set forth below:
Percentage Cumulative Initially Percentage Date Exercisable Exercisable ---- ----------- ----------- 25% 25% 25% 50% 50% 100%
Subject to earlier termination under Section 5 hereof, at any time after the 3rd anniversary date of this Agreement, but no later than the Expiration Date, the Participant may purchase all or any part of the shares subject to this Option which the Participant theretofore failed to purchase. In each case, the number of shares which may be purchased shall be calculated to the nearest full share. Notwithstanding the foregoing vesting schedule, but subject to Section 5 hereof, this Option shall become immediately exercisable in full, if (i) the Company terminates Participant's employment agreement (the "Employment Agreement") dated as of ____________, 1996 other than for Cause (as defined in the Employment Agreement) or (ii) Participant terminates the Employment Agreement for Good Reason (as defined in the Employment Agreement). 3. Manner of Exercise. Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company, specifying the number of shares to be purchased and accompanied by payment to the Company of the full purchase price of the shares to be purchased either (i) in cash or by certified or cashier's check payable to the order of the Company, or (ii) by delivery of shares of Common Stock already owned by, and in the possession of, the Participant. Shares of Common Stock used to satisfy any portion of the exercise price of this Option shall be valued at their fair market value determined (in accordance with Section 4 below) as of the close of the business day immediately preceding the date of exercise. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (i) one hundred (100) shares or (ii) the total number of shares then eligible for exercise if less than one hundred (100) shares. This Option may be exercised (i) during the lifetime of the Participant, only by the Participant or, in the event a conservator, guardian or legal representative is appointed during the Participant's lifetime to handle the affairs of the Participant, by such conservator, guardian or legal representative; and (ii) after the Participant's death, by his or her transferee by will or the laws of descent or distribution, and not otherwise, regardless of any community property interest therein of the spouse of the Participant or such spouse's successors in interest. If the spouse of the Participant shall have acquired a community property interest in this Option, the Participant, or the Participant's -2- 14 permitted successors in interest, may exercise the Option on behalf of the spouse of the Participant or such spouse's successors in interest. Except in the event of the Participant's death or permanent disability, the Option may not be exercised prior to the date six months from the date hereof. 4. Fair Market Value of Common Stock. The fair market value of a share of Company Common Stock shall be determined for purposes of this Agreement by reference to the closing price on the New York Stock Exchange (or other principal stock exchange on which such shares are then listed) or, if such shares are not then listed on such exchange (or other principal stock exchange), by reference to the closing price (if a National Market Issue) or the mean between the bid and asked price (if other over-the-counter issue) of a share as supplied by the National Association of Securities Dealers through NASDAQ (or its successor in function), in each case as reported by The Wall Street Journal, for the date on which the option is granted or exercised, or if such date is not a business day, for the business day immediately preceding such date (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof). 5. Cessation of Services, Death or Permanent Disability. If a Participant ceases to be employed by the Company or one of its subsidiaries for any reason other than the Participant's death or permanent disability (within the meaning of Section 22(e)(3) of the Code), the Participant's Option shall be exercisable for a period of three (3) months after the date the Participant ceases to be an employee of the Company or such subsidiary (unless by its terms it sooner expires) to the extent exercisable on the date of such cessation of employment and shall thereafter expire and be void and of no further force or effect. A leave of absence approved in writing by the Committee shall not be deemed a termination of employment for the purposes of this paragraph 5, but no Option may be exercised during any such leave of absence, except during the first three (3) months thereof. If the Participant dies or becomes permanently disabled while employed by the Company or one of its subsidiaries, the Participant's Option shall expire one (1) year after the date of such death or permanent disability unless by its terms it sooner expires. During such period after death, such Option may, to the extent that it remained unexercised (but exercisable by the Participant according to such Option's terms) on the date of such death, be exercised by the person or persons to whom the Participant's rights under the Option shall pass by the Participant's will or by the laws of descent and distribution. 6. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules. No shares issuable upon the exercise of this Option shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended, and all applicable state securities or "Blue Sky" laws (whether by registration or qualification or satisfaction of exemption conditions), all applicable listing requirements of any principal securities exchange on which shares of the -3- 15 same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made. 7. Withholding of Taxes. If the Participant or the Participant's permitted successors in interest disposes of shares of Common Stock acquired pursuant to the exercise of this Option within two years after the date of this Agreement or within one year after exercise of this Option, the Company may deduct and withhold from the wages, salary, bonus and other compensation paid by the Company to the Participant the requisite tax upon the amount of taxable income, if any, recognized by the Participant in connection with the exercise in whole or in part of this Option or the sale of Common Stock issued to the Participant upon exercises hereof, all taxes as may be required from time to time under federal or state tax laws and regulations. This withholding of tax shall be made from the Company's concurrent or next payment of wages, salary, bonus or other compensation to the Participant or by payment to the Company by the Participant of required withholding tax, as the Committee may determine. 8. Adjustments for Reorganizations, Stock Splits, etc. If the outstanding shares of the Common Stock of the Company are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares or securities receivable upon the exercise of this Option, without change in the aggregate purchase price applicable to the unexercised portion of this Option but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon the sale of substantially all the property of the Company, the Committee shall provide in writing for appropriate satisfaction of this Option by one or more of the following alternatives to be made in connection with such transaction: (i) the immediate exercisability of this Option (provided that this Option was granted more than six months before such transaction) notwithstanding the provisions of Section 3 hereof, except that this Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (a) one hundred (100) shares or (b) the total number of shares then eligible for exercise if less than one hundred (100) shares; (ii) the assumption of this Option or the substitution therefore of a new option covering the stock of a successor corporation, with appropriate adjustments as to number and kind of shares and prices; (iii) the continuance of the Plan by such successor corporation in which event this Option shall remain in full effect under the terms so provided; or (iv) the payment of an amount in cash or stock, or any combination thereof, in lieu of and in complete satisfaction of this Option. -4- 16 Adjustments under this paragraph 8 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment. 9. Participation by Participant in Other Company Plans. Nothing herein contained shall affect the right of the Participant to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, profit sharing or other employee welfare plan or program of the Company or of any subsidiary of the Company. 10. No Rights as a Shareholder Until Issuance of Stock Certificate. Neither the Participant nor any other person legally entitled to exercise this Option shall be entitled to any of the rights or privileges of a shareholder of the Company in respect of any shares issuable upon any exercise of this Option unless and until a certificate or certificates representing such shares shall have been actually issued and delivered to the Participant. 11. Not an Employment or Service Contract. Nothing contained herein shall be construed as agreement by the Company, express or implied, to employ Participant or contract for Participant's services, to restrict the Company's right to discharge Participant or cease contracting for Participant's services or to modify, extend or otherwise affect in any manner whatsoever the terms of any employment agreement or contract for services which may exist between the Participant and the Company. 12. Agreement Subject to Plan. The Option hereby granted is subject to, and the Company and the Participant agree to be bound by, all of the terms and conditions of the Plan, as the same shall be amended from time to time in accordance with the terms thereof, but no such amendment shall adversely affect the Participant's rights under this Option without the prior written consent of the Participant. 13. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 14. Notices. Any notice or other paper or payment required to be given or sent pursuant to the terms of this Agreement shall be sufficiently given or served hereunder to any party when transmitted by registered or certified mail, postage prepaid, addressed to the party to be served as follows: (a) if to the Company: Bell Industries, Inc. 11812 San Vicente Boulevard Los Angeles, CA 90049-5022 Attention: President (b) if to Participant: Thomas Woolf Saw Mill Road -5- 17 Newtown, Connecticut 06470 Any party, by written notice, may designate another address for notices to be sent from time to time. -6- 18 15. Execution. This Option has been granted, executed and delivered the day and year first above written at Los Angeles, California, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California. COMPANY BELL INDUSTRIES, INC. BY:____________________________ PARTICIPANT _______________________________ Thomas Woolf By his or her signature below, the spouse of the Participant agrees to be bound by all of the terms and conditions of the foregoing Agreement. _______________________________ NAME: -7- 19 EXHIBIT 5 FORM OF INDEMNIFICATION AGREEMENT INDEMNITY AGREEMENT This Agreement is made as of the _____ day of __________, 1996, by and between Milgray Electronics, Inc., a New York corporation (the "Corporation"), Bell Industries, Inc., a California corporation (the "Guarantor"), and Thomas Woolf (the "Indemnitee"), a Director and/or Officer of the Corporation. WHEREAS, it is essential to the Corporation to retain and attract as Directors and Officers the most capable persons available, and WHEREAS, the substantial increase in corporate litigation subjects Directors and Officers to expensive litigation risks at the same time that the availability of Directors' and officers' liability insurance has been severely limited, and WHEREAS, it is now and has always been the express policy of the Corporation to indemnify its Directors and Officers so as to provide them with the maximum possible protection permitted by law, and WHEREAS, the Corporation does not regard the protection available to Indemnitee as adequate in the present circumstances, and realizes that Indemnitee may not be willing to serve as a Director or Officer without adequate protection, and the Corporation desires Indemnitee to serve in such capacity; NOW, THEREFORE, in consideration of Indemnitee's service as a Director or Officer after the date hereof the parties agree as follows: 1. Definitions. As used in this Agreement: (a) The term "Proceeding" shall include any threatened, pending or completed action, suit or proceeding, whether brought by or in the right of the Corporation or otherwise and whether of a civil, criminal, administrative or investigative nature. (b) The term "Expenses" shall include, but is not limited to, expenses of investigations, judicial or administrative proceedings or appeals, damages, judgments, fines, amounts paid in settlement by or on behalf of Indemnitee, attorneys' fees and disbursements and any expenses of establishing a right to indemnification under this Agreement. 20 (c) The terms "Director" and "Officer" shall include Indemnitee's service at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise as well as a Director and/or Officer of the Corporation. 2. Indemnity of Director or Officer. Subject only to the limitations set forth in Section 3, Corporation will pay on behalf of the Indemnitee all Expenses actually and reasonably incurred by Indemnitee because of any claim or claims made against him in a Proceeding by reason of the fact that he is or was a Director and/or Officer. 3. Limitations on Indemnity. Corporation shall not be obligated under this Agreement to make any payment of Expenses to the Indemnitee (a) which payment it is prohibited by applicable law from paying as indemnity; (b) for which payment is actually made to the Indemnitee under an insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) for which payment the Indemnitee is indemnified by Corporation otherwise than pursuant to this Agreement and payment is actually made to the Indemnitee except in respect of any excess beyond the amount of the payment under such indemnification; (d) resulting from a claim decided in a Proceeding adversely to the Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal profit or advantage to which he was not legally entitled; (e) resulting from a claim decided in a Proceeding adversely to the Indemnitee for an accounting of profits made from the purchase or sale by the Indemnitee of securities of Corporation within the meaning of Section 16(b) or 16(c) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any state statutory law or common law; or (f) brought about or contributed to by the dishonesty of the Indemnitee seeking payment hereunder; however, notwithstanding the foregoing, the Indemnitee shall be indemnified under this Agreement as to any claims upon which suit may be brought against him by reason of any alleged dishonesty on his part, unless it shall be decided in a Proceeding that he committed (i) acts of active and deliberate dishonesty (ii) with actual dishonest purpose and intent, and (iii) which acts were material to the cause of action so adjudicated. For purposes of Sections 3 and 4, the phrase "decided in a Proceeding" shall mean a decision by a court, arbitrator(s), hearing officer or other judicial agent having the -2- 21 requisite legal authority to make such a decision, which decision has become final and from which no appeal or other review proceeding is permissible. 4. Advance Payment of Costs. Expenses incurred by Indemnitee in defending a claim against him in a Proceeding shall be paid by the Corporation as incurred and in advance of the final disposition of such Proceeding; provided, however, that Expenses of defense need not be paid as incurred and in advance where the judicial agent of first impression has decided the Indemnitee is not entitled to be indemnified pursuant to this Agreement or otherwise. Indemnitee hereby agrees and undertakes to repay such amounts advanced if it shall be decided in a Proceeding that he is not entitled to be indemnified by the Corporation pursuant to this Agreement or otherwise. 5. Enforcement. If a claim under this Agreement is not paid by Corporation, or on its behalf, within thirty days after a written claim has been received by Corporation, the Indemnitee may at any time thereafter bring suit against Corporation to recover the unpaid amount of the claim and if successful in whole or in part, the Indemnitee shall be entitled to be paid also the Expenses of prosecuting such claim. 6. Subrogation. In the event of payment under this Agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Corporation effectively to bring suit to enforce such rights. Notwithstanding the foregoing, if any of the provisions hereof would impair or jeopardize Indemnitee's coverage under the Corporation's Directors' and Officers' Liability Policy, such provisions shall be ineffective and shall be deemed deleted from this Agreement. 7. Notice. The Indemnitee, as a condition precedent to his right to be indemnified under this Agreement, shall give to Corporation notice in writing as soon as practicable of any claim made against him for which indemnity will or could be sought under this Agreement. Notice to Corporation shall be given at its principal office and shall be directed to the President (or such other address as Corporation shall designate in writing to the Indemnitee); notice shall be deemed received if sent by prepaid mail properly addressed, the date of such notice being the date postmarked. In addition, the Indemnitee shall give Corporation such information and cooperation as it may reasonably require. 8. Saving Clause. If this Agreement or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 9. Indemnification Hereunder Not Exclusive. Nothing herein shall be deemed to diminish or otherwise restrict the Indemnitee's right to indemnification under any provision of the Articles of Incorporation or Bylaws of the Corporation or under California law. -3- 22 10. Applicable Law. This Agreement shall be governed by and construed in accordance with California law. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. 12. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns. 13. Continuation of Indemnification. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a Director and/or Officer and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 14. Coverage of Indemnification. The indemnification under this Agreement shall cover Indemnitee's service as a Director and/or Officer prior to or after the date of the Agreement. 15. Guaranty. Guarantor unconditionally guarantees all of the Corporation's obligations hereunder. Guarantor agrees that Indemnitee may proceed directly against Guarantor in the event of the Corporation's failure to perform all of its obligations hereunder and shall not be obligated to exhaust his remedies against the Corporation. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and signed as of the day and year first above written. INDEMNITEE CORPORATION By:_______________________ By:___________________ GUARANTOR By:___________________ -4- -----END PRIVACY-ENHANCED MESSAGE-----