-----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, S6WxH+oGPmd+gULnaiqu/0NqcG2CzNELI8jjdrdIGvaNwJ+7yacOT8FPeqHV1/RU 5U/FBGQizy0FoNn3aBTbEg== 0000950134-06-005295.txt : 20060316 0000950134-06-005295.hdr.sgml : 20060316 20060316150802 ACCESSION NUMBER: 0000950134-06-005295 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060316 DATE AS OF CHANGE: 20060316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELL MICROPRODUCTS INC CENTRAL INDEX KEY: 0000900708 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 943057566 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21528 FILM NUMBER: 06691571 BUSINESS ADDRESS: STREET 1: 1941 RINGWOOD AVE CITY: SAN JOSE STATE: CA ZIP: 95131-1721 BUSINESS PHONE: 4084519400 MAIL ADDRESS: STREET 1: 1941 RINOWOOD AVENUE CITY: SAN JOSE STATE: CA ZIP: 95131-1721 10-K 1 c03257e10vk.txt FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________. COMMISSION FILE NUMBER: 0-21528 BELL MICROPRODUCTS INC. (Exact name of registrant as specified in its charter) CALIFORNIA 94-3057566 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number)
1941 RINGWOOD AVENUE, SAN JOSE, CALIFORNIA 95131-1721 (Address of principal executive office, including zip code) Registrant's telephone number, including area code: (408) 451-9400 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None. SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.01 par value Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large Accelerated filer [ ] Accelerated filer [X] Non-Accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The aggregate market value of the voting stock held by non-affiliates of the registrant, as of June 30, 2005, was approximately $231,819,895 based upon the last sale price reported for such date on the Nasdaq Global Market. The number of shares of Registrant's Common Stock outstanding as of March 10, 2006 was 30,210,984 DOCUMENTS INCORPORATED BY REFERENCE: Portions of the definitive Proxy Statement for the Company's 2006 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K. ================================================================================ PART I ITEM 1. BUSINESS FORWARD-LOOKING DISCLOSURE This Annual Report on Form 10-K ("Report") contains " forward-looking statements" within the meaning of the Private Litigation Reform Act of 1995 regarding future events and the future results of Bell Microproducts Inc. that are based on current expectations, estimates, forecasts, and projects as well as the beliefs and assumptions of Bell Microproducts Inc. management. Words such as "outlook", "believes", "expects", "appears", "may", "will", "should", "anticipates" or the negative thereof or comparable terminology, are intended to identify such forward looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this Report under the section entitled "Risk Factors" and elsewhere, and in other reports Bell Microproducts Inc. files with the Securities and Exchange Commission, specifically the most recent reports on Form 8-K and Form 10-Q. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. Bell Microproducts Inc. undertakes no obligation to revise or update publicly any forward-looking statements for any reason. GENERAL Founded in 1987, Bell Microproducts Inc. together with its subsidiaries, is a leading value-added distributor of storage products and systems, semiconductors and computer products and peripherals. We market and distribute our products at various levels of integration, from raw components to fully integrated, tested and certified systems. We carry over 140 brand name product lines as well as our own proprietary Rorke Data storage products and Markvision memory modules. Across our product lines, we emphasize our ability to combine our extensive product portfolio with comprehensive value-added services. We offer components that include disk drives, semiconductors, flat panel displays and related products, and other storage products and custom-configured computer products. Our products also include value-added services such as system design, integration, installation, maintenance and other consulting services combined with a variety of storage and computer hardware and software products. In addition, we offer network attached storage (NAS), storage area network (SAN) and other storage systems, computer platforms, tape drives and libraries and related software. Our selection of products and technologies, together with our independence, allows us to offer the best available hardware, software and service solutions for each customer. Customers can purchase our components as stand-alone products or in combination with certain value-added services. AVAILABLE INFORMATION All reports filed electronically by Bell with the Securities and Exchange Commission ("SEC"), including its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy statements, and other information and amendments to those reports filed (if applicable), are accessible at no cost on the Company's web site at www.bellmicro.com, and they are available by contacting our Investor Relations department at ir@bellmicro.com or 408-451-9400. These filings are also accessible on the SEC's web site at www.sec.gov. The public may read and copy at prescribed rates any materials filed by the Company with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information for the Public Reference Room by calling the SEC at 1-800-SEC-0330. 2 INDUSTRY The storage, semiconductor and computer industries have experienced significant growth over the past decade, due to rapid growth in Internet usage and e-commerce; enterprise applications such as enterprise resource planning and data mining; server, desktop and laptop computers; and wireless communications as well as a variety of emerging consumer products and applications. Traditionally, manufacturers have sold storage, semiconductor and computer products directly to end users and through both direct and indirect distribution channels. The use of distribution channels is growing rapidly as manufacturers focus on core activities such as product design, development and marketing and begin to divest or outsource other functions. The growth of the indirect channel reflects the need for manufacturers to increasingly use distributors for servicing OEMs, VARs, CEMs and system integrators. Customers are also driving the trend toward indirect distribution due to the value-added services that distributors often provide. The rapid growth of storage requirements and the need for sophisticated networked storage systems, such as NAS and SAN, have also increased enterprise customers' dependence on value-added service suppliers that can design, integrate, service and support their storage needs. Network Attached Storage. NAS appliances are advanced storage systems that attach directly to a local area network. A NAS appliance can be thought of as a thin file server with built-in storage. Similar to general-purpose servers, NAS appliances include a central processing unit, an operating system and internal hard disk drive storage. Storage Area Networks. A SAN is an architecture that directly connects multiple independent servers and storage subsystems through a network dedicated to storage. A SAN consists of a variety of heterogeneous networking equipment such as switches, hubs and routers; storage products such as disk subsystems, tape libraries and optical drives; and storage management software. A SAN is often connected using a protocol known as Fibre Channel. Both the NAS and SAN markets are projected to grow rapidly over the next few years. The complexity of sophisticated data storage solutions such as NAS and SAN combined with a shortage of qualified information technology personnel often requires companies to outsource the research, design, implementation and support of their networked storage solutions. Accordingly, significant growth in SAN and NAS is expected to be through indirect distribution channels. In recent years, a growing number of manufacturers began to reduce the number of distributors they use. Distributors themselves are also choosing to consolidate because of the competitive advantages that arise from expanded product offerings and economies of scale. The rapidly changing nature of the storage, semiconductor and computer industries has required distributors to significantly expand both their customer base and product and service offerings, to compete effectively. To be successful within these areas, we believe distributors must emphasize time-to-market and total cost reductions and focus on markets in which they have advantages in service, flexibility and component content. Distributors also need to distinguish themselves through a combination of value-added services such as consulting, design, integration, implementation and maintenance as well as more knowledgeable service and technical support. OUR STRATEGY Our goal is to expand our position as a leading distributor of storage solutions and systems and computer products and peripherals. We intend to achieve this goal by leveraging our strengths and implementing the following strategies: Continue to Focus on the Storage Market. We plan to continue to take advantage of the market 3 opportunities in the storage industry by maintaining our strategic focus on providing complete storage solutions. For example, we have devoted significant resources to broadening our range of value-added services, expanding our marketing efforts, deepening the expertise of our sales force and offering an extensive range of technologically-advanced products. We believe that we are well positioned to benefit from the strong growth and favorable market dynamics of the storage industry. Expand our Storage and Complementary Product Lines. We believe that our ability to offer customers an extensive line of leading storage products across technologies and manufacturers will continue to be a strong competitive advantage for us, particularly as it relates to SAN and NAS solutions. Our selection of products and technologies, together with our independence, allows us to reliably deliver the optimal package of appropriate hardware, software and services for each project. Expand our International Presence. We intend to deepen our presence in the United States, and expand our coverage in the major international markets we serve, including Canada, Latin America and Europe, through internal growth and strategic acquisitions. Increasingly, multinational companies, including our manufacturers and customers, require products and solutions that are able to address local operational and reporting requirements, but which are also heterogeneous and interoperable among countries, regions and offices. As we expand our global presence, we believe that we will be better able to address the demands of multinational customers, gain more access to multinational manufacturers and leverage our expertise. Deepen Relationships with Industry Leaders. We intend to leverage our position as a leading distributor of storage solutions to broaden our existing strategic relationships with industry leaders and to create new strategic relationships. We believe that distribution channels will continue to consolidate and leading manufacturers will align with those distributors that are best able to offer value-added services and access new customers. We believe being aligned with leading manufacturers will allow us to identify innovative products, exchange critical information, gain access to new technologies and create cross-marketing opportunities. We have developed strategic relationships with a number of vendors, including AMD, Brocade, EMC, Emulex, Hitachi, HP, IBM, Intel, Legato, LG Electronics, Maxtor, Microsoft, Network Associates, Qlogic, Seagate, StorageTek, Symantec, Veritas and Western Digital. Continue Cost Structure and Profitability Improvements. We intend to continue to improve our cost structure by maximizing the efficiency of personnel and resources throughout our global organization. During the past few years, we have undertaken various performance improvement initiatives such as realigning and streamlining operations. We have also made significant progress in reducing non-personnel related expenditures. We will continue to review our business and take advantage of opportunities to improve cost efficiencies. We also intend to continue to optimize our profitability by managing our assets and working capital through actions such as maximizing early payment discounts and other profit enhancement opportunities offered by vendors. Pursue Selective Acquisitions. We intend to pursue opportunities to acquire businesses that help us achieve our various strategic goals including further developing our solutions offerings, expanding key vertical product offerings and broadening our geographic footprint. PRODUCTS AND SERVICES We market and distribute more than 140 brand name product lines, as well as our own Rorke Data storage products and Markvision memory modules. We offer the following products as discrete components or as part of our solutions offering. 4 Storage Products and Related Software Our storage products include network attached storage, storage area network products, fibre channel networking products and systems, tape libraries and disk drives, as well as storage-related software products. We partner with the best-in-class storage providers in the industry to provide the most comprehensive cost effective solutions to enterprise customers worldwide. We offer a comprehensive set of products and services, supported through a network of worldwide integration and solution centers with more than 400 dedicated storage professionals available to serve our customer's enterprise needs. Our customer base includes leading Var2000 and vertical solution providers worldwide. Semiconductor and Other Components We distribute a variety of semiconductor components, including DRAM and Flash memory components and modules, microprocessors, microcontrollers, fiber optics, power management components, application-specific integrated circuits (ASICs), graphics and video devices, communications and power supplies. Computer Products and Software Our computer products include disk drives, a variety of standard and custom-configured motherboards, flat panel displays and related components, monitors, keyboards, chassis, scanners, servers, board level products and network interface controller (NIC) cards. Our software offering includes operating systems, middleware, database, replication, storage management and systems management. Among the computer products we offer are our own proprietary Markvision memory modules that complement the other products and technologies we provide. Value-Added Services We offer our customers a variety of value-added services as described below. Many of our value-added services are product focused, while others provide our customers assistance with a variety of product management activities. Storage System Consulting Services. We work with customers to determine data storage needs to make decisions regarding their storage strategies and to design storage systems to address these needs. Our consulting services draw from our core competencies in enterprise storage integration solutions. We perform tasks such as storage audit or feasibility studies, supplement specialist elements of a pre-defined project or provide full project management and implementation. NAS and SAN Solutions. We offer a broad range of professional services including design and consultation, installation, training and on-site service programs relating to NAS and SAN solutions. We have established a dedicated enterprise storage systems team that can address the challenges associated with enterprise storage systems. Our service programs also offer customers fibre channel interoperability testing and fully integrated turnkey storage solutions. For example, we integrate SANs with fibre channel-based technology including switches, bridges, archive libraries and network software. Storage Subsystems. We provide standard and custom subsystem products to our customers. We integrate standard products for our Rorke Data brand storage products. We also configure custom products to meet the needs of customers that cannot be served by industry-standard product offerings. Component Product Services. We provide value-added services to a full range of storage and computer products, including semiconductor device programming, tape and reeling, special labeling for disk drives. We provide image duplication, firmware modification, software downloading, special labeling and other hardware modification services. For other computer product components we provide kitting, testing and various configuration services. 5 Flat Panel Integration. We offer a comprehensive portfolio of Flat Panel Displays, technologies and integration services that include off-the-shelf solutions for Kiosk, point-of-sale (POS), Digital Display Signage, Medical Instrumentation, KVM (keyboard, video, mouse) and many other OEM applications. We also offer fully custom designs to support applications such as full sunlight readability and harsh environmental deployment. Board and Blade Level Building Blocks. We provide both standard and custom configured Board and Blade offerings geared for applications to include computers, servers, medical equipment, video/graphics, security, test and measurement and networking products offered in a variety of industry standard form factors including ATX, Micro-ATX, PCI and Compact PCI. We also provide complete integration services, manufacturing assembly, interoperability testing and application support. Application Support Services. Our application support services provide design support and product recommendations, training programs, maintenance options and testing, technical advice and prompt incident detection and resolution. Supply Chain Management. We provide a variety of materials-management solutions, including e-procurement services, Internet-enabled, real-time pricing and delivery quotations, electronic data interface programs, just-in-time inventory programs, bonded inventories, on-site consignment inventory and kitting. Retail Packaging and Software Duplication. We provide a value-added service to storage manufacturers, retailers and software/game customers, which combines the strengths of our hard drive value capabilities with custom third-party packaging. Our retail packaging programs deliver end consumer-ready storage products. These products are produced in high volume and require high quality software duplication, testing and drive assembly to meet demanding retail launch and release dates. The core materials planning and logistics capabilities of our distribution operations enable us to deliver retail-ready product to our customers' distribution centers or directly to their retail outlets. SALES AND MARKETING Our customer base primarily consists of OEMs, VARs, system integrators, contract electronic manufacturers, storage solution customers and retailers. For customers primarily seeking our solution offerings, our sales and marketing efforts often involve proactive efforts of our sales people and field application engineers. Sales and technical personnel focusing on these customers tend to spend time at customers' facilities assessing the customers' needs, developing and providing solutions as well as providing proof of concept supported by our technical capabilities and experience. Our component offering marketing efforts involve supply chain management programs, consignment and bonded inventory programs and end-of-life programs. Sales of our component offerings are principally driven by these factors, our design services, product breadth and depth, pricing and on-time availability. We also believe that our relationships with manufacturers provide us with significant opportunities to increase our sales and customer base. We work closely with many manufacturers to develop strategies to penetrate both targeted markets and customers. In many cases, our sales presentations to customers are a joint effort with manufacturers' sales representatives. We believe our e-commerce program will enhance our sales and marketing efforts by: - providing our customers with detailed product information, including availability and pricing; - providing customers additional channels to purchase our products; - reducing time and expenditures involved in customers' product procurement activities; and - providing our customers with resource planning tools to more accurately manage their product requirements. 6 COMPETITION In the distribution of storage, semiconductor components and computer products, we generally compete for customer relationships with numerous local, regional and national and international authorized and unauthorized distributors. We also compete for customer relationships with manufacturers, including some of our manufacturers and customers. Consistent with our sales and marketing efforts, we tend to view our competition, whether arising from the direct or indirect distribution channel, on a customer-category basis. We believe that our most significant competition for customers seeking both products and value-added services arises from Arrow Electronics, Avnet, and European value-added distributors including IN Technology, Magirus and ECT Best'Ware. We believe that our most significant competition for customers seeking commodity products comes from Ingram Micro, Tech Data and Synnex. Another key competitive factor in the electronic component and computer product distribution industry as a whole is the need to carry a sufficient amount of inventory to meet rapid delivery requirements of customers. However, to minimize our exposure related to valuation of inventory on hand, the majority of our product lines are purchased pursuant to non-exclusive distributor agreements which provide certain protections to us for product obsolescence and price erosion in the form of rights of return and price protection. Furthermore, these agreements are generally cancelable upon 30 to 180 days notice and, in most cases, provide for inventory return privileges upon cancellation. In addition, we enhance our competitive position by offering a variety of value-added services which entail the performance of services and/or processes tailored to individual customer specifications and business needs such as point of use replenishment, testing, assembly, supply chain management and materials management. We believe that competition for customers is based on product line breadth, depth and availability, competitive pricing, customer service, technical expertise, value-added services and e-commerce capabilities. We believe that we compete favorably with respect to each of these factors. We directly compete with numerous distributors, many of which possess superior brand recognition and financial resources. In the area of storage products and solutions, however, we believe that none of our competitors offers the full range of storage products and solutions that we provide. ACQUISITIONS In connection with our solution offerings, we have completed a number of strategic acquisitions. Through these acquisitions, we gained expertise in storage solutions and greater access to international markets. Our acquisition in December 2005 of MCE Computer Peripherie GmbH, MCE Computer Vertreibs Products GmbH, MCE Computer Technology Inc and MCE Limited, ("MCE") based in Munich, Germany has enabled us to continue to expand our growth in value added storage products and services in the key markets in Continental Europe and the UK and also has provided additional experienced management, sales and marketing resources. MCE is a European distributor of disk drives and components, and also has a substantial IBM enterprise business in Germany. MCE's customer base includes Enterprise VARs, system builders and industrial customers. Our acquisition in July 2005 of Net Storage Computers, LTDA. ("Net Storage"), a company headquartered in Sao Paulo, Brazil, with sales offices in Belo Horizonte, Porto Alegre, Recife, Rio de Janeiro and Tambore, Brazil has enabled us to further expand our presence in the Latin America marketplace and provides the opportunity to strengthen our relationships with key suppliers and expand overall products and services offerings. Net Storage is a distributor of storage products and peripherals to VARs and system integrators in Brazil. Their strategic partners include Intel, Seagate, LG, Western Digital and AMD. Our acquisition in June 2004 of OpenPSL Limited ("OpenPSL"), a company headquartered in Manchester, England, with offices in Dublin, Ireland, Leeds, Bracknell and Nottingham, has further enabled us to expand our 7 enterprise, storage solutions and service offerings in the United Kingdom and Ireland. OpenPSL is a value-added distributor of a broad range of IT products and technical services to VARs, system integrators and software companies, including server, storage, networking, technical computing, thin client, emulation, fax and security technologies. Their line card includes Hewlett Packard, IBM, Oracle, Veritas, Allied Telesyn and Microsoft. Our acquisition in October 2003 of EBM Mayorista ("EBM"), a company headquartered in Merida, Mexico with branch locations in Cancun, Monterrey, Oaxaca, Villahermosa, Tampico, Veracruz, Tuxla, Torreon, Puebla and Aguascaliente has enabled us to expand our presence in Latin America and provided us the ability to gain additional market share in the rapidly growing market in Mexico. EBM provides a diverse product line of computer hardware and software to Mexican resellers, retail locations and system integrators, including the Intel, Samsung, Epson and U.S. Robotics lines. Our 2001 acquisition of Total Tec, a company headquartered in Edison, NJ, and with sales offices in the eastern and southern United States, has significantly expanded our ability to address challenging SAN initiatives. Total Tec is one of Hewlett-Packard's ("HP") enterprise distributors and one of the nation's premier enterprise (computing and storage) solutions providers focused on implementing comprehensive IT solutions to Fortune 1000 firms. Bell Microproducts offers leading HP/Compaq enterprise products, services and solutions to its large customer base of VARs, resellers, OEMs and system integrators in the U.S. Our 2001 acquisition of Touch The Progress Group BV, a company based in the Netherlands and with offices in Germany, Belgium and Austria, has added enterprise storage solutions including storage management software products, integrated storage technology, infrastructure, and support services to our strategic effort. The company offers an extensive portfolio of storage solutions from some of the world's leading manufacturers. This portfolio allows the company and its business partners to provide a total storage management solution for multiple heterogeneous computing platforms, including IBM, HPQ, Veritas and other leading manufacturers. Our 2001 acquisition of Forefront Graphics, a company headquartered in Toronto, Canada, and with offices in Ottawa, Montreal, Calgary and Vancouver, has added high performance computer graphics, digital audio and video, storage and multimedia products targeted at both the computer reseller marketplace and the video production reseller marketplace. EMPLOYEES At December 31, 2005, we had a total of 1,827 employees, including 888 in sales and marketing functions, 744 in general administrative functions and 195 in technical and value-add integration functions. Of our total employees, 1,060 are located at our facilities outside of the United States, including 499 in the United Kingdom. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good. Many of our current key personnel have substantial experience in our industry and would be difficult to replace. The labor market in which we operate is highly competitive and, as a result, we may not be able to retain and recruit key personnel. If we fail to recruit, retain or adequately train key personnel, we will experience difficulty in implementing our strategy, which could negatively affect our business, financial condition and stock price. ITEM 1A. RISK FACTORS You should consider carefully the risks described below together with all of the other information included in this Form 10-K. The risks and uncertainties described below and elsewhere in this Form 10-K are not the only ones facing us. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall, and you may lose all or part of your investment. 8 OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR STOCK PRICE TO FLUCTUATE. Our future revenues and operating results are likely to vary significantly from quarter to quarter due to a number of factors, many of which are outside our control. Accordingly, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of future performance. It is possible that in some future periods our operating results will be below the expectations of public market analysts and investors. In this event, the price of our stock will likely decline. Factors that may cause our revenues, gross margins and operating results to fluctuate include: - the loss of key manufacturers or customers; - changes in vendor rebate and incentive programs; - heightened price competition; - problems incurred in managing inventories; - a change in the product mix sold by us; - customer demand (including the timing of purchases from significant customers); - changing global economic conditions; - our ability to manage credit risk and collect accounts receivable; - our ability to manage foreign currency exposure; - availability of product and adequate credit lines from manufacturers; and - the timing of expenditures in anticipation of increased sales. Due primarily to manufacturer rebate programs and increased sales volumes near the end of each quarter, a larger portion of our gross profit has historically been reflected in the third month of each quarter than in each of the first two months of such quarter. If we do not receive products from manufacturers or complete sales in a timely manner at the end of a quarter, or if rebate programs and marketing development funds are changed or discontinued, our operating results in a particular quarter could suffer. As a result of intense price competition, we have narrow gross profit margins. These narrow margins magnify the impact of variations in sales and operating costs on our operating results. Because our sales in any given quarter depend substantially on sales booked in the third month of the quarter, a decrease in such sales is likely to adversely and disproportionately affect our quarterly operating results. This is because our expense levels are partially based on our expectations of future sales, and we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Due to our narrow margins and our limited ability to quickly adjust costs, any shortfall in sales in relation to our quarterly expectations will likely have an adverse impact on our quarterly operating results. WE RELY ON A RELATIVELY SMALL NUMBER OF KEY MANUFACTURERS FOR PRODUCTS THAT MAKE UP A SIGNIFICANT PORTION OF OUR NET SALES AND THE LOSS OF A RELATIONSHIP WITH A KEY MANUFACTURER COULD HAVE AN ADVERSE EFFECT ON OUR NET SALES. We receive a significant portion of our net sales from products we purchase from a relatively small number of key manufacturers. In each of 2005 and 2004, five key manufacturers provided products that represented 44% and 50%, respectively, of our net sales. We believe that products from a relatively small number of manufacturers will continue to account for a significant portion of our net sales for the foreseeable future, and the portion of our net sales from products purchased from such manufacturers could continue to increase in the future. These key manufacturers have a variety of distributors to choose from and therefore can make substantial demands on us. In addition, our standard distribution agreement allows the manufacturer to terminate its relationship with us on short notice. Our ability to maintain strong relationships with our key 9 manufacturers, both domestically and internationally, is essential to our future performance. The loss of a relationship with a key manufacturer could have an adverse effect on our net sales. In addition, during the years 2001 through 2003, the downturn in the economy in general, and in the technology sector of the economy in particular, has led to increased consolidation among our manufacturers and may result in some manufacturers exiting the industry. Further, manufacturers have been consolidating the number of distributors they use. These events could negatively impact our relationships with our key manufacturers and may have an adverse effect on our net sales. WE OPERATE IN AN INDUSTRY WITH CONTINUAL PRICING AND MARGIN PRESSURE. The nature of our industry and our business is highly price-competitive. There are several distributors of products similar to ours in each of the markets in which we operate. As a result, we face pricing and margin pressure on a continual basis. Additionally, the mix of products we sell also affects overall margins. If we increase revenue from products that are more widely distributed, these products may carry lower gross margins that can reduce our overall gross profit percentage. There can also be a negative impact on gross margins from factors such as freight costs and foreign exchange exposure. These factors, alone or in combination, can have a negative impact on our gross profit percentage. THE FAILURE OF OUR KEY SUPPLIERS TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY AND TO SUCCESSFULLY DEVELOP NEW PRODUCTS COULD CAUSE OUR SALES TO DECLINE AND OUR REVENUES TO DECREASE. Our ability to generate increased revenues depends significantly upon the ability and willingness of suppliers to develop new products on a timely basis in response to rapid technological changes in our industry. Our suppliers must commit significant resources each time they develop a product. If they do not invest in the development of new products, then sales of our products to our customers may decline and our revenues may decrease. The ability and willingness of our suppliers to develop new products is based upon a number of factors beyond our control. THE TECHNOLOGY PRODUCTS MARKETPLACE HAS BEEN MATURING WHICH MAY AFFECT DEMAND FOR OUR PRODUCTS AND IMPACT OUR PRICING AND GROSS MARGINS. Over the past several years, the growth rate in spending on the types of technology products we distribute has decreased from the growth rates experienced prior to 2000. While there has been an increase recently in the rate of spending as compared with 2001 through mid-2003, this increase may not be sustainable at its current level and there may be declines in technology spending in the future. A reduction in spending may result in a decline in our net sales and gross margins due to decreased sales volumes and price competition. OUR INVENTORY MAY DECLINE IN VALUE DUE TO INVENTORY SURPLUS, PRICE REDUCTIONS OR TECHNICAL OBSOLESCENCE THAT COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS. The value of our inventory may decline as a result of surplus inventory, price reductions or technological obsolescence. Our distribution agreements typically provide us with only limited price protection and inventory return rights. In addition, we purchase significant amounts of inventory under contracts that do not provide any inventory return rights or price protection. Without price protection or inventory return rights for our inventory purchases, we bear the sole risk of obsolescence and price reductions. Even when we have price protection and inventory return rights, there can be no guarantee we will be able to return the products to the manufacturer or to collect refunds for those products in a timely manner, if at all. 10 SUPPLY SHORTAGES COULD ADVERSELY AFFECT OUR OPERATING RESULTS AND CASH FLOWS. We are dependent on the supply of products from our vendors. Our industry is characterized by periods of product shortages due to vendors' difficulty in projecting demand. When such shortages occur, we typically receive an allocation of product from the vendor. There can be no assurance that vendors will be able to maintain an adequate supply of products to fulfill all of our customers' orders on a timely basis. If we are unable to enter into and maintain satisfactory distribution arrangements with leading vendors and an adequate supply of products, we may be late in shipping products, causing our customers to purchase products from our competitors which could adversely affect our net sales, operating results and customer relationships. OUR FINANCIAL OBLIGATIONS MAY LIMIT OUR ABILITY TO OPERATE OUR BUSINESS. The agreements governing our revolving lines of credit and our 9% senior subordinated notes contain various restrictive covenants that, among other things, require us to comply with or maintain certain financial tests and ratios that limit our ability to operate our business. If we do not comply with the covenants contained in the agreements governing our revolving lines of credit and our 9% senior subordinated notes, our lenders may demand immediate repayment of amounts outstanding. Additionally, under the terms of our 3 3/4% Convertible Subordinated Notes, Series B due 2024, holders have the right to convert their notes upon the occurrence of certain events, including but not limited to the closing price of our common stock exceeding a certain threshold for at least 20 of the last 30 days in preceding fiscal quarters and upon specified corporate transactions, all as described in more detail in the prospectus filed in connection with the exchange offer. Upon the occurrence of any such conversion event, we have an obligation to deliver, at a minimum, cash in an amount equal to the principal amount of each note tendered for conversion. Our ability to comply with these debt obligations will depend upon our future operating performance, which may be affected by prevailing economic conditions and financial, business and other factors described herein and in our other SEC filings, many of which are beyond our control. If we are unable to meet our debt obligations, we may be forced to adopt one or more strategies such as reducing or delaying capital expenditures or otherwise slowing our growth strategies, selling assets, restructuring or refinancing our indebtedness or seeking additional equity capital. We do not know whether any of these actions could be effected on satisfactory terms, if at all. Additionally, any equity financing may be on terms that are dilutive or potentially dilutive. If we are unable to successfully manage our debt burden, and the potential short-term obligation relating to our convertible notes, our financial condition would suffer considerably. Changes in interest rates may also have a significant effect on our operating results. Furthermore, we are dependent on credit from our manufacturers to fund our inventory purchases. If our debt burden increases to high levels, our manufacturers may restrict our credit. Our cash requirements will depend on numerous factors, including the rate of growth of our sales, the timing and levels of products purchased, payment terms and credit limits from manufacturers, the timing and level of our accounts receivable collections and our ability to manage our business profitably. SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT OUR CASH FLOW. Our revolving lines of credit and our 9% senior subordinated notes impose significant debt service obligations on us and expose us to certain risks associated with being a substantially leveraged company. Upon the occurrence of certain events, our lenders may demand immediate repayment of amounts outstanding under our existing lines of credit and our 9% senior subordinated notes. In March 2004, we issued our 3 3/4% convertible subordinated notes (the "Old Notes"), resulting in net proceeds of $106,300,000. We used all of the net proceeds of the offering to repay a portion of amounts outstanding under our revolving lines of credit and our 9% senior subordinated notes. In December 2004, we exchanged 99.6% of the Old Notes for our 3 3/4% Convertible Subordinated Notes, Series B due 2024 (the "New Notes") pursuant to an exchange offer with holders of the Old Notes. As a result of the issuance of the notes, our leverage and debt service obligations may increase. Under the terms of the New Notes, holders have the right to convert their notes upon the occurrence of certain events, including but not limited to the closing price of our common stock exceeding a certain threshold for at least 20 of the last 30 days in preceding fiscal quarters and upon specified corporate transactions, as described in more detail in the prospectus filed in connection with the exchange offer. Upon the occurrence of any such conversion event, 11 we have an obligation to deliver to holders electing to convert their New Notes, at a minimum, cash in an amount equal to the principal amount of each note tendered for conversion. There is the possibility that we may be unable to generate cash sufficient to pay the principal of, interest on and other amounts due in respect of our indebtedness when due. Our substantial leverage could also have significant negative consequences, including: - increasing our vulnerability to general adverse economic and industry conditions; - increasing our exposure to fluctuating interest rates; - restricting our credit with our manufacturers which would limit our ability to purchase inventory; - limiting our ability to obtain additional financing; - requiring the dedication of a portion of our expected cash flow from operations to service our indebtedness, thereby reducing the amount of our expected cash flow available for other purposes, including capital expenditures; - limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and - placing us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have better access to capital resources. We are not restricted under the indenture governing the notes from incurring additional debt in the future. As a result of using the net proceeds to pay down amounts outstanding on our revolving lines of credit, we may also incur substantial additional debt under the facilities. If new debt is added to our current levels, our leverage and debt service obligations would increase and the related risks described above could intensify. IF WE DO NOT CONTROL OUR OPERATING EXPENSES, WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN OUR INDUSTRY. Our strategy involves, to a substantial degree, increasing revenues while at the same time controlling operating expenses. In furtherance of this strategy, we have engaged in ongoing, company-wide efficiency activities intended to increase productivity and reduce costs. These activities have included significant personnel reductions, reduction or elimination of non-personnel expenses and realigning and streamlining operations and consolidating business lines. We cannot assure you that our efforts will result in the increased profitability, cost savings or other benefits that we expect. Moreover, our cost reduction efforts may adversely affect the effectiveness of our financial and operational controls, our ability to distribute our products in required volumes to meet customer demand and may result in disruptions that affect our products and customer service. OUR ABILITY TO OPERATE EFFECTIVELY COULD BE IMPAIRED IF WE WERE TO LOSE THE SERVICES OF KEY PERSONNEL, OR IF WE ARE UNABLE TO RECRUIT QUALIFIED MANAGERS AND KEY PERSONNEL IN THE FUTURE. Our success largely depends on the continued service of our management team and key personnel. If one or more of these individuals, particularly W. Donald Bell, our Chairman, Chief Executive Officer and President, were to resign or otherwise terminate their employment with us, we could experience a loss of sales and vendor relationships and diversion of management resources. Competition for skilled employees is intense and there can be no assurance that we will be able to recruit and retain such personnel. If we are unable to retain our existing managers and employees or hire and integrate new management and employees, we could suffer material adverse effects on our business, operating results and financial condition. 12 OUR INTERNATIONAL OPERATIONS SUBJECT US TO RISKS WHICH MAY HURT OUR PROFITABILITY. Our international revenues represented 60% and 62% of our revenues in 2005 and 2004, respectively. We believe that international sales will represent a potentially increasing portion of our net sales for the foreseeable future. Our international operations are subject to a number of risks, including: - Fluctuations in currency exchange rates; - vendor programs, terms and conditions in multiple countries; - political and economic instability; - longer payment cycles and unpredictable sales cycles; - difficulty in staffing and managing foreign operations; - import and export license requirements, tariffs, taxes and other trade barriers; - our ability to prevent inventory theft in certain foreign jurisdictions; and - the burden of complying with a wide variety of foreign laws, treaties and technical standards and changes in those regulations. The majority of our revenues and expenditures in our foreign subsidiaries are transacted in the local currency of the country where the subsidiary operates. For each of our foreign subsidiaries, the local currency is also the functional currency. Fluctuations in currency exchange rates could cause our products to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. To the extent our revenues and expenses are denominated in currencies other than U.S. dollars, gains and losses on the conversion to U.S. dollars may contribute to fluctuations in our operating results. In addition, we have experienced foreign currency remeasurement gains and losses because a significant amount of our foreign subsidiaries' remeasurable net assets and liabilities are denominated in U.S. dollars rather than the subsidiaries' functional currency. As we continue to expand globally and the amount of our foreign subsidiaries' U.S. dollar or non-functional currency denominated, remeasurable net asset or liability position increases, our potential for fluctuations in foreign currency remeasurement gains and losses will increase. We have in the past, and expect in the future, to enter into hedging arrangements and enter into local currency borrowing facilities to reduce this exposure, but these arrangements may not be adequate. Our inability to successfully complete the restructuring of our European operations could negatively impact our results of operations. On November 23, 2005, we announced the commencement of certain restructuring activities with respect to our European operations. In connection with the restructuring, we closed an office in Sweden, reduced headcount and consolidated certain back office support functions. We also realigned certain product lines in response to market trends and streamlined our inventory warehousing and European product distribution system. There can be no guarantee that the assumptions underlying our decision to undertake the restructuring will prove to be correct or that we will be able to effectively manage the loss of certain personnel and other European distribution infrastructure or the discontinuation of certain product lines. General economic factors and other factors beyond our control could cause the actual results of the restructuring to differ materially from those expected by management. If our assumptions prove to be incorrect or we are unable to effectively manage the restructuring, our operating income from our European operations and our consolidated results of operations could be negatively impacted. Further, even if we are able to successfully implement and manage the restructuring, there can be no guarantee that the restructuring will improve our European results of operations. OUR INABILITY TO EFFECTIVELY MANAGE OUR ACCOUNTS RECEIVABLE COULD HAVE A SIGNIFICANT NEGATIVE IMPACT ON OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND LIQUIDITY. A significant portion of our working capital consists of accounts receivable from customers. If customers responsible for a significant percentage of our accounts receivable were to become insolvent or otherwise unable to pay for products and services, or were to become unwilling or unable to make payments in a 13 timely manner, our operating results and financial condition could be adversely affected. If there is an economic downturn which has a significant negative impact on our business, it could also have an adverse effect on the servicing of our accounts receivable, which could result in longer payment cycles, increased collection costs and defaults in excess of management's expectations. A significant deterioration in our ability to collect on accounts receivable could also impact the cost or availability of financing. Further, our revolving lines of credit enable us to borrow funds for operations based on our levels of accounts receivable and inventory and the agreement governing our senior subordinated notes restricts the amount of additional debt we can incur based on our levels of accounts receivable and inventory. If our accounts receivable and inventories are not at adequate levels, we may face liquidity problems in operating our business. IF WE ARE UNABLE TO EFFECTIVELY COMPETE IN OUR INDUSTRY, OUR OPERATING RESULTS MAY SUFFER. The markets in which we compete are intensely competitive. As a result, we will face a variety of significant challenges, including rapid technological advances, price erosion, changing customer preferences and evolving industry standards. Our competitors continue to offer products with improved price and performance characteristics, and we will have to do the same to remain competitive. Increased competition could result in significant price competition, reduced revenues, lower profit margins or loss of market share, any of which would have a material adverse effect on our business. We cannot be certain that we will be able to compete successfully in the future. We compete for customer relationships with numerous local, regional, national and international distributors. We also compete for customer relationships with manufacturers, including some of our manufacturers and customers. We believe our most significant competition for customers seeking both products and services arises from Arrow Electronics, Avnet and European value-added distributors including IN Technology, Magirus and ECT Best'Ware. We believe our most significant competition for customers seeking only products arises from Ingram Micro, Tech Data and Synnex. We also compete with regionalized distributors in North America, Europe and Latin America who use their localized knowledge and expertise as a competitive advantage. Competition for customers is based on product line breadth, depth and availability, competitive pricing, customer service, technical expertise, value-added services and e-commerce capabilities. While we believe we compete favorably with respect to these factors, some of our competitors have superior brand recognition and greater financial resources than we do. If we are unable to successfully compete, our operating results may suffer. We also compete with other distributors for relationships with manufacturers. In recent years, a growing number of manufacturers have begun consolidating the number of distributors they use. This consolidation will likely result in fewer manufacturers in our industry. As a result of this consolidation we may lose existing relationships with manufacturers. In addition, manufacturers have established and may continue to establish cooperative relationships with other manufacturers and data storage solution providers. These cooperative relationships may enable manufacturers to offer comprehensive solutions that compete with those we offer and the manufacturers may have greater resources to devote to internal sales and marketing efforts. If we are unable to maintain our existing relationships with manufacturers and establish new relationships, it could harm our competitive position and adversely affect our operating results. IF WE ARE UNABLE TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE, OUR RESULTS OF OPERATIONS, FINANCIAL CONDITION AND CASH FLOWS MAY SUFFER. Many of the products we sell are used in the manufacture or configuration of a wide variety of electronic products. These products are characterized by rapid technological change, short product life cycles and intense competition and pricing pressures. Our continued success depends upon our ability to continue to identify new vendors and product lines that achieve market acceptance, emerging technologies, develop technological 14 expertise in these technologies and continually develop and maintain relationships with industry leaders. If we are unsuccessful in our efforts, our results of operations and financial condition may suffer. FAILURE TO IDENTIFY ACQUISITION OPPORTUNITIES AND INTEGRATE ACQUIRED BUSINESSES INTO OUR OPERATIONS SUCCESSFULLY COULD REDUCE OUR REVENUES AND PROFITS AND MAY LIMIT OUR GROWTH. An important part of our growth has been the acquisition of complementary businesses. We may choose to continue this strategy in the future. Our identification of suitable acquisition candidates involves risks inherent in assessing the value, strengths, weaknesses, overall risks and profitability of acquisition candidates. We may be unable to identify suitable acquisition candidates. If we do not make suitable acquisitions, we may find it more difficult to realize our growth objectives. The process of integrating new businesses into our operations, including our recently completed acquisitions, poses numerous risks, including: - an inability to assimilate acquired operations, information systems, and internal control systems and products; - diversion of management's attention; - difficulties and uncertainties in transitioning the business relationships from the acquired entity to us; and - the loss of key employees of acquired companies. In addition, future acquisitions by us may be dilutive to our shareholders, cause us to incur additional indebtedness and large one-time expenses or create intangible assets that could result in significant amortization expense. If we spend significant funds or incur additional debt, our ability to obtain necessary financing may decline and we may be more vulnerable to economic downturns and competitive pressures. We cannot guarantee that we will be able to successfully complete any acquisitions, that we will be able to finance acquisitions or that we will realize any anticipated benefits from acquisitions that we complete. IF WE CANNOT EFFECTIVELY MANAGE OUR GROWTH, OUR BUSINESS MAY SUFFER. Our growth since our initial public offering in 1993 has placed, and continues to place, a significant strain on our management, financial, operational, technical, sales and administrative resources. We intend to continue to grow by increasing our sales efforts and completing strategic acquisitions. To effectively manage our growth, we must, among other things: - engage, train and manage a larger sales force and additional service personnel; - expand the geographic coverage of our sales force; - expand our information systems; - identify and successfully integrate acquired businesses into our operations; and - enforce appropriate financial and administrative control procedures. Any failure to effectively manage our growth may cause our business to suffer and our stock price to decline. WHILE WE BELIEVE THAT WE CURRENTLY HAVE ADEQUATE INTERNAL CONTROL PROCEDURES IN PLACE, WE ARE STILL EXPOSED TO POTENTIAL RISKS FROM RECENT LEGISLATION REQUIRING COMPANIES TO EVALUATE CONTROLS UNDER SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002. As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the company's internal control 15 over financial reporting in their annual reports on Form 10-K that contains an assessment by management of the effectiveness of the company's internal control over financial reporting. In addition, the independent registered public accounting firm auditing the company's financial statements must attest to and report on management's assessment of the effectiveness of the company's internal control over financial reporting. We have performed the system and process evaluation and testing required in an effort to comply with the management certification and auditor attestation requirements. While we intend to conduct a rigorous review of our internal control over financial reporting in order to assure compliance with the Section 404 requirements, if our independent registered public accounting firm interprets the Section 404 requirements and the related rules and regulations differently from us or if our independent registered public accounting firm is not satisfied with our internal control over financial reporting or with the level at which it is documented, operated or reviewed, they may decline to attest to management's assessment or issue a qualified report. Additionally, if we are not able to continue to meet the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the Nasdaq Global Market. Any such actions could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline. SOME OF OUR OPERATIONS ARE LOCATED IN CALIFORNIA AND, AS A RESULT, ARE SUBJECT TO NATURAL DISASTERS, WHICH COULD RESULT IN A BUSINESS STOPPAGE AND NEGATIVELY AFFECT OUR OPERATING RESULTS. Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel. Our corporate headquarters and a significant portion of our business operations, computer systems and personnel are located in the San Francisco Bay area which is in close proximity to known earthquake fault zones. Our facilities and transportation for our employees are susceptible to damage from earthquakes and other natural disasters such as fires, floods and similar events. Should an earthquake or other catastrophes, such as fires, floods, power loss, communication failure or similar events disable our facilities, we have limited available alternative facilities from which we could conduct our business, which stoppage could have a negative effect on our operating results. ITEM 1B. UNRESOLVED STAFF COMMENTS Not Applicable. ITEM 2. PROPERTIES In the Americas, we maintain 55 sales offices in a variety of locations, including the U.S., Canada, Argentina, Brazil, Chile and Mexico. In Europe, we maintain sales offices in Austria, Belgium, England, Ireland, France, Germany, Italy and the Netherlands. In addition to our sales offices, we operate six integration and service facilities and 18 warehouses. We currently operate five significant management and distribution centers. Our corporate headquarters is located in San Jose, California, where we currently lease office space and distribution facilities with approximately 170,000 square feet of space. The leases expire in 2007. In Chessington, England, we lease an office facility with approximately 40,000 square feet that serves as our center for directing and managing our operations in the United Kingdom and Europe. The lease expires in 2010. Our European distribution center is located in Birmingham, England where we lease a warehouse facility with approximately 78,000 square feet of space. This lease expires in 2019. In Manchester, England, we acquired a facility with approximately 23,000 square feet that serves as our center for directing and managing our value added and storage solutions services in the United Kingdom and Ireland. In Miami, Florida, we currently lease a facility with approximately 65,000 square feet that serves as our center for directing and managing our business in Latin America. The lease expires in 2010, with one 5-year option to extend. In Munich, Germany, we acquired a leased facility with approximately 49,000 square feet of space that serves as a distribution center on the European Continent. The lease expires in November 16 2007. In Montgomery, Alabama, we currently lease a facility with approximately 37,000 square feet that serves as our corporate technology and data center and our primary customer call center. The lease on this facility expires in October 2007. We believe that our existing facilities are adequate for our current operational needs. ITEM 3. LEGAL PROCEEDINGS Bell and/or its subsidiaries are parties to various other legal proceedings arising from time to time in the normal course of business. While litigation is subject to inherent uncertainties, management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position, cash flow or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our Common Stock is traded on the Nasdaq Global Market under the symbol "BELM". The following table sets forth for the periods indicated the high and low sale prices of the Common Stock as reported by Nasdaq.
HIGH LOW ------ ----- 2004 First quarter ............................ $10.50 $6.45 Second quarter ........................... 8.32 5.31 Third quarter ............................ 8.40 5.88 Fourth quarter ........................... 9.80 7.67 2005 First quarter ............................ $ 9.83 $7.46 Second quarter ........................... 10.11 7.11 Third quarter ............................ 11.00 8.59 Fourth quarter ........................... 10.55 6.62 2006 First quarter (through March 11, 2006) ... $ 7.90 $5.65
On March 11, 2006, the last sale price of the Common Stock as reported by Nasdaq was $6.24 per share. As of March 11, 2006, there were approximately 310 holders of record of the Common Stock (not including shares held in street name). To date, we have paid no cash dividends to our shareholders. We have no plans to pay cash dividends in the near future. Our line of credit agreements prohibit the payment of dividends or other distributions on any of our shares except dividends payable in our capital stock. 17 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated operations data for 2005, 2004 and 2003 and consolidated balance sheet data as of December 31, 2005 and 2004 set forth below have been derived from our consolidated financial statements and are qualified by reference to the consolidated financial statements included herein audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. The selected consolidated operations data for 2002 and 2001 and the consolidated balance sheet data as of December 31, 2003, 2002 and 2001 have been derived from our audited consolidated financial statements not included herein. These historical results are not necessarily indicative of the results of operations to be expected for any future period.
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA) -------------------------------------------------------------- 2005(1) 2004(2) 2003(3) 2002 2001(4) ---------- ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Net sales $3,193,833 $2,827,777 $2,230,287 $2,104,922 $2,007,102 Cost of sales 2,962,615 2,606,369 2,062,194 1,926,366 1,854,294 ---------- ---------- ---------- ---------- ---------- Gross profit 231,218 221,408 168,093 178,556 152,808 Selling, general and administrative expenses 190,585 185,240 155,710 165,624 157,910 Restructuring costs and special charges 16,515 -- 1,383 5,688 8,894 ---------- ---------- ---------- ---------- ---------- Total operating expenses 207,100 185,240 157,093 171,312 166,804 Income (loss) from operations 24,118 36,168 11,000 7,244 (13,996) Interest expense and other income 21,581 16,854 16,143 16,910 20,362 ---------- ---------- ---------- ---------- ---------- Income (loss) from operations before taxes 2,537 19,314 (5,143) (9,666) (34,358) Provision for (benefit from) income taxes 2,056 7,977 (669) (2,612) (12,251) ---------- ---------- ---------- ---------- ---------- Net income (loss) $ 481 $ 11,337 $ (4,474) $ (7,054) $ (22,107) ========== ========== ========== ========== ========== Earnings (loss) per shares Basic $ 0.02 $ 0.41 $ (0.20) $ (0.37) $ (1.34) ========== ========== ========== ========== ========== Diluted $ 0.02 $ 0.40 $ (0.20) $ (0.37) $ (1.34) ========== ========== ========== ========== ========== Shares used in per share calculation Basic 29,299 27,665 22,324 19,201 16,495 ========== ========== ========== ========== ========== Diluted 30,056 28,409 22,324 19,201 16,495 ========== ========== ========== ========== ==========
AS OF DECEMBER 31, ---------------------------------------------------- 2005(1) 2004(2) 2003(3) 2002 2001(4) -------- -------- -------- -------- -------- BALANCE SHEET DATA: Working capital $346,182 $276,487 $283,634 $206,786 $183,964 Total assets 933,332 840,589 712,999 614,191 643,687 Total long-term debt 260,458 208,602 207,827 179,237 176,441 Total shareholders' equity 220,381 222,690 193,410 145,849 125,769
(1) 2005 Statement of Operations data and Balance Sheet data include the results of operations of MCE Group since acquisition on December 1, 2005 and Net Storage since acquisition on July 8, 2006. See Note 4 of Notes to Consolidated Financial Statements. 18 (2) 2004 Statement of Operations data and Balance Sheet data include the results of operations of OpenPSL Holdings Limited since acquisition on June 22, 2004. See Note 4 of Notes to Consolidated Financial Statements. (3) 2003 Statement of Operations data and Balance Sheet data include the results of operations of EBM Mayorista S.A. de C.V. since acquisition on October 15, 2003. See Note 4 of Notes to Consolidated Financial Statements. (4) 2001 Statement of Operations data and Balance Sheet data include the results of operations of Touch The Progress Group BV since acquisition on May 22, 2001, Forefront Graphics on May 24, 2001 and Total Tec Systems, Inc. on November 13, 2001. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For an understanding of the significant factors that influenced our performance during the past three years, the following discussion should be read in conjunction with the consolidated financial statements and the other information appearing elsewhere in this report. Due to the impact of weakened market conditions and competitive pressures affecting our European distribution business, and in earlier years, the downturn in the electronic component, computer product industry and in the global economy as a whole, we have recorded charges that are discussed more fully in "Restructuring Costs and Other Charges" in this MD&A. These charges have had a significant impact on our results of operations for the years ended December 31, 2005 and 2003 presented in this Form 10-K as discussed further below. When used in this report, the words "expects," "anticipates," "estimates," "intends" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A under the Securities Act of 1933 and Section 21E under the Securities Exchange Act of 1934. Such statements include but are not limited to statements regarding our ability to obtain favorable product allocations, the annual employee expense and cost reductions related to our European restructuring, the timing of when certain restructuring and special charges liabilities will be extinguished, our plans related to the payment of dividends, our future cash requirements and our ability to increase gross profit while controlling expenses. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including those risks described under "Risk Factors" in Item 1 hereof. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated based on available information and experience; however actual amounts could differ from those estimates. The Securities and Exchange Commission defines critical accounting polices as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and those that require significant judgments and estimates. Management believes our most critical accounting policies relate to the following areas: 19 Revenue recognition Bell's policy is to recognize revenue from sales to customers when the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the price is fixed and determinable and collection of the resulting receivable is reasonably assured. The provision for estimated returns is recorded concurrently with the recognition of revenue based on historical sales returns and analysis of credit memorandum data. We maintain an allowance for doubtful accounts for losses that we estimate will arise from our customers' inability to make required payments. We make our estimates of the collectibility of our accounts receivable by analyzing historical bad debts, specific customer creditworthiness and current economic trends. At December 31, 2005 the allowance for doubtful accounts was $21.9 million and at December 31, 2004 it was $13.6 million. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. In 2005, our bad debt expense was $14.5 million compared to $9.0 million in 2004. Vendor Programs We receive funds from vendors for price protection, product rebates, marketing and promotions, infrastructure reimbursement and competitive pricing programs. Amounts related to price protection and other incentive programs are recorded as adjustments to inventories, cost of sales or selling, general and administrative expenses, depending on the nature of the program. Vendor receivables are generally collected through vendor authorized reductions to our accounts payable. There is a time delay between the submission of a claim by us and confirmation of agreement by our vendors. Historically, our estimated claims have approximated amounts agreed to by our vendors. Valuation of Inventory Inventories are recorded at the lower of cost (first in -- first out) or estimated market value. Our inventories include high-technology components, embedded systems and computing technologies sold into rapidly changing, cyclical and competitive markets whereby such inventories may be subject to early technological obsolescence. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, selling prices and market conditions. In the fourth quarter of 2005, we recorded inventory charges of $1.7 million related to excess inventory on hand. These additional write-downs resulted from our decision to exit certain unprofitable business lines in Europe. These charges were included in the Statement of Operations within the caption "Cost of Sales." We evaluate inventories for excess, obsolescence or other factors that may render inventories unmarketable at normal margins. Write-downs are recorded so that inventories reflect the approximate net realizable value and take into account our contractual provisions with our suppliers governing price protection, stock rotation and return privileges relating to obsolescence. Because of the large number of transactions and the complexity of managing the process around price protections and stock rotations, estimates are made regarding adjustments to the carrying amount of inventories. Additionally, assumptions about future demand, market conditions and decisions to discontinue certain product lines can impact the decision to write down inventories. If assumptions about future demand change or actual market conditions are less favorable than those projected by management, additional write-downs of inventories may be required. In any case, actual amounts could be different from those estimated. Special and Acquisition-Related Charges We have been subject to the financial impact of integrating acquired businesses and charges related to business reorganizations. In connection with such events, management is required to make estimates about the 20 financial impact of such matters that are inherently uncertain. Accrued liabilities are established to cover the cost of severance, facility consolidation and closure, lease termination fees, inventory adjustments based upon acquisition-related termination of supplier agreements and/or the evaluation of the acquired working capital assets (inventory and accounts receivable), change-in-control expenses, and write-down of other acquired assets including goodwill. Actual amounts incurred could be different from those estimated. Accounting for Income Taxes Management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against net deferred tax assets. The carrying value of our net foreign operating loss carry-forwards is dependent upon our ability to generate sufficient future taxable income in certain tax jurisdictions. In addition, we consider historic levels of income, expectations and risk associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing a tax valuation allowance. Should we determine that we are not able to realize all or part of our deferred tax assets in the future, a valuation allowance is recorded against the deferred tax assets with a corresponding charge to income in the period such determination is made. In 2006, we expect our effective tax rate to be approximately 40%. Valuation of Goodwill and Intangible Assets At December 31, 2005, goodwill amounted to $101.5 million and identifiable intangible assets amounted to $8.5 million. We regularly evaluate whether events and circumstances have occurred that indicate a possible impairment of goodwill. In determining whether there is an impairment of goodwill, we calculate the estimated fair value of our company based on the closing sales price of our common stock and projected discounted cash flows as of the date we perform the impairment tests. We then compare the resulting fair value to our respective net book value, including goodwill. If the net book value of our company exceeds its fair value, we measure the amount of the impairment loss by comparing the implied fair value of our goodwill with the carrying amount of that goodwill. To the extent that the carrying amount of our goodwill exceeds its implied fair value, we recognize a goodwill impairment loss. We perform this impairment test annually and whenever facts and circumstances indicate that there is a possible impairment of goodwill. We completed the required annual impairment test, which resulted in no impairment for fiscal year 2005. We believe the methodology we use in testing impairment of goodwill provides us with a reasonable basis in determining whether an impairment charge should be taken. Hedge Accounting We generate a substantial portion of our revenues in international markets, which subjects our operations and cash flows to the exposure of currency exchange fluctuations. We seek to minimize the risk associated with currency exchange fluctuations by entering into forward exchange contracts to hedge certain foreign currency denominated assets or liabilities. These derivatives do not qualify for SFAS 133 hedge accounting treatment. Accordingly, changes in the fair value of these hedges are recorded immediately in earnings on line item 'Interest Expense and Other Income' to offset the changes in the fair value of the assets or liabilities being hedged. RESULTS OF OPERATIONS EXECUTIVE SUMMARY For both the year overall and the fourth quarter we achieved record revenues. Revenues for the fourth quarter of 2005 reached a record $842 million, increasing 4% compared to last year's fourth quarter revenues, and revenues for the year reached a record $3.19 billion, increasing 13% over 2004. We had strong performance in 21 sales and operating profit performance in North and Latin America as well as our Enterprise business units, but performed below expectation in our European distribution business. Although our overall European sales grew 5% in 2005 from the prior year, the growth was primarily driven by our OpenPSL enterprise business, which continues to be profitable, and the year-end benefit of our recent acquisition of MCE. Our primary focus in our European distribution business during the fourth quarter was to ensure that we drove substantial cost reduction actions and repositioned these operations. We implemented a restructuring plan and made significant progress in this area through reductions in personnel and other expenses as further described below. We are currently implementing the next phase of our European plan, which is to drive revenue and margin in the Industrial market segments and we are confident that these actions will contribute to improved results and a differentiated business model in Europe. We remain optimistic that the overall IT market will continue to grow and believe Bell Microproducts is positioned to continue to gain market share in strategic products segments and generate significant improvements in earnings as we move forward. YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004 Net sales were $3,193.8 million for the year ended December 31, 2005, which represented an increase of $366.1 million, or 13% over 2004. The sales increase was driven by an increase of $202.2 million in sales of Components and Peripherals as well as an increase of $163.9 million in Solutions sales. The increase in sales of Components and Peripherals was due primarily to growth in Components sales in North and South America. The Solutions sales increase was due to the growth in the North American market for these products and the acquisition of OpenPSL Limited ("OpenPSL") in June of 2004. OpenPSL contributed approximately $239 million of our Solutions sales in 2005 and $120 million in 2004. Our gross profit for 2005 was $231.2 million, an increase of $9.8 million, or 4% from 2004. The increase in gross profit was primarily due to an increase in sales volume and the acquisition of OpenPSL in June 2004, partially offset by a decline in gross margin percentage to 7.2% from 7.8% in 2004. The acquisition of OpenPSL contributed approximately $26.1 million in 2005 and $19.3 million in 2004. The decrease in gross profit margin percentage was primarily due to the reduction in certain vendor incentives and market pressures in our European distribution operation. As part of our European restructuring plan, we also took an inventory charge of $1.7 million related to the write-down of inventory and the settlement of potential vendor claims from discontinued product lines, as discussed below. Selling, general and administrative expenses increased to $190.6 million in 2005 from $185.2 million in 2004, an increase of $5.3 million, or 3%. The increase in expenses was primarily attributable to our acquisitions of OpenPSL and Net Storage S.A. ("Net Storage") and sales volume related expense increases in the Americas. This increase in expenses was significantly offset by cost reductions in our European distribution operation. Our acquisition of OpenPSL added approximately $19.9 million to our consolidated expenses in 2005 and $10.2 million in 2004. Net Storage added approximately $1.9 million to our consolidated expenses in 2005. As a percentage of sales, selling, general and administrative expenses decreased to 6.0% compared to 6.6% in 2004. Interest expense and other income increased to $21.6 million from $16.9 million in 2004, an increase of approximately $4.7 million, or 28%. The increase in interest expense and other income was primarily due to overall increased bank borrowings during 2005 for worldwide working capital purposes and the acquisition of Net Storage. The average interest rate in 2005 was 5.8% versus 5.5% in 2004. In 2005, we recorded an effective tax rate of 81% on income before taxes compared to an effective tax rate of 41% in 2004. The change in the tax rate was primarily related to the losses incurred in certain of our European jurisdictions, primarily as a result of our restructuring plan, that we could not offset against profits we earned in 22 North America and Latin America. Our restructuring plan is further discussed below. Restructuring Costs and Other Charges In the fourth quarter of 2005, we implemented a restructuring plan for our European operations and as a result we incurred restructuring costs and special charges of $9.0 million during the quarter. These costs consisted primarily of $5.9 million related to future lease obligations for excess facilities; $1.7 million for inventory costs in excess of estimated net realizability, included within the income statement line item "Cost of Goods Sold," $200,000 for estimated vendor claims both related to discontinued product lines; severance and benefits of $936,000 for involuntary employee terminations, and $338,000 related to closure of our in-country operation in Sweden. We terminated 58 employees in the UK and Europe, in sales, marketing and support functions as of December 31, 2005. We expect annual employee expense reductions of approximately $4.6 million and cost reductions related to excess facilities of approximately $3.2 million. Also in the fourth quarter of 2005, we incurred a special charge due to a terminated components supply program in North America and provided a specific reserve for a partner account receivable balance that we believe may not be collectable as a result of the program termination. This amount has been classified as a special charge in the amount of $9.1 million, net of a $550,000 reversal of restructuring costs and special charges taken in prior years that were adjusted to reflect actual charges. Outstanding restructuring liabilities related to the charges expected to be paid in cash are summarized as follows (in thousands):
Balance at Restructuring Exchange Balance Beginning Reserve Cash Rate at End Year Ended December 31, of Period Restructuring Release Payments Changes of Period - ----------------------- ---------- ------------- ------------- -------- -------- --------- 2003 Severance costs $ 545 $1,327 $ -- $1,638 -- $ 234 Lease costs 2,079 56 -- 808 -- 1,327 ------ ------ ----- ------ ----- ------ Total 2,624 1,383 -- 2,446 -- 1,561 2004 Severance costs 234 -- -- 234 -- -- Lease costs 1,327 300 (300) 618 -- 709 ------ ------ ----- ------ ----- ------ Total 1,561 300 (300) 852 -- 709 2005 Severance costs -- 1,275 -- -- (19) 1,256 Lease costs 709 5,921 (82) 421 (81) 6,046 ------ ------ ----- ------ ----- ------ Total $ 709 $7,196 $ (82) $ 421 $(100) $7,302 ====== ====== ===== ====== ===== ======
Management expects to extinguish the restructuring and special charges liabilities of $7.3 million by December 2007. YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003 Net sales were $2,827.8 million for the year ended December 31, 2004, which represented an increase of $597.5 million, or 27% over 2003. The sales increase was driven by an increase of $343.8 million in Solutions sales as well as an increase of $253.7 million in sales of Components and Peripherals. The Solutions sales increase was due to the growth of this market, a growth in market share and the acquisition of OpenPSL Limited ("OpenPSL") in June of 2004. OpenPSL contributed approximately $120 million of our Solutions sales in 2004. The increase in sales of Components and Peripherals was due primarily to growth in components sales in North America. 23 Our gross profit for 2004 was $221.4 million, an increase of $53.3 million, or 32% from 2003. The increase in gross profit was primarily due to an increase in sales volume, product mix and the acquisition of OpenPSL in June 2004. The acquisition of OpenPSL contributed approximately $19.3 million in 2004. Our gross profit margin increased to 7.8% in 2004, compared to 7.5% in 2003. Selling, general and administrative expenses increased to $185.2 million in 2004 from $157.1 million in 2003, an increase of $28.1 million, or 18%. As a percentage of sales, selling, general and administrative expenses decreased to 6.6% compared to 7.0% in 2003. The increase in expenses was primarily attributable to the increase in sales volume. Additionally, our acquisition of OpenPSL added approximately $10.2 million to our consolidated expenses and we incurred approximately $3.5 million related to our profitability improvement actions in Europe which included involuntary terminations, consolidation of facilities and other non-personnel costs, and $1.3 million related to Sarbanes Oxley compliance. Interest expense and other income increased to $16.9 million from $16.1 million in 2003, an increase of approximately $800,000, or 5%. The increase in interest expense and other income was primarily due to overall increased bank borrowings during 2004 for worldwide working capital purposes and the acquisition of OpenPSL. The average interest rate in 2004 was 5.5% versus 6.8% in 2003. In 2004, we recorded an effective tax rate of 41% on the income before taxes compared to an effective tax benefit rate of 13% on losses before taxes for 2003. The change in the tax rate was primarily related to the shift to profitability in 2004 compared to a loss in 2003 and also related to the jurisdictions in which the profits were earned. The tax benefit rate for the 2003 loss was primarily driven by deferred tax valuation allowances established related to losses incurred in certain foreign jurisdictions. Restructuring Costs and Special Charges In the second quarter of 2004, we were released from certain contractual obligations related to excess facilities in the U.S. for which restructuring charges had been recorded in 2002. Accordingly, we released approximately $300,000 of our restructuring reserve related to that facility. Additionally, we revised our estimates for future lease obligations for non-cancelable lease payments for excess facilities in Europe and recorded an additional $300,000 of restructuring charges. In the first quarter of 2003, we continued to implement profit improvement and cost reduction measures, and recorded restructuring costs of $1.4 million. These charges consisted of severance and benefits of $1.3 million related to worldwide involuntary terminations and estimated lease costs of $56,300 pertaining to future lease obligations for non-cancelable lease payments for excess facilities in the U.S. We terminated 127 employees worldwide, across a wide range of functions including marketing, technical support, finance, operations and sales, and expect annual savings of approximately $8 million. Expected savings related to vacated facilities is not material. Future savings expected from restructuring related cost reductions will be reflected as a decrease in 'Selling, General and Administrative expenses' on the Statement of Operations. We also recorded an inventory charge of approximately $1.5 million related to significant changes to certain vendor relationships and the discontinuance of other non-strategic product lines. 24 Outstanding restructuring liabilities related to the charges expected to be paid in cash are summarized as follows (in thousands):
Balance at Restructuring Exchange Balance Beginning Reserve Cash Rate at End Year Ended December 31, of Period Restructuring Release Payments Changes of Period - ----------------------- ---------- ------------- ------------- -------- -------- --------- 2003 Severance costs $ 545 $1,327 $ -- $1,638 -- $ 234 Lease costs 2,079 56 -- 808 -- 1,327 ------ ------ ----- ------ --- ------ Total 2,624 1,383 -- 2,446 -- 1,561 2004 Severance costs 234 -- -- 234 -- -- Lease costs 1,327 300 (300) 618 -- 709 ------ ------ ----- ------ --- ------ Total 1,561 300 (300) 852 -- 709
Management expects to extinguish the restructuring and special charges liabilities of $709,000 by November 2007. LIQUIDITY AND CAPITAL RESOURCES In recent years, we have funded our working capital requirements principally through borrowings under subordinated term loans and bank lines of credit, as well as proceeds from warrant and stock option exercises. Working capital requirements have included the financing of increases in inventory and accounts receivable resulting from sales growth, and the financing of certain acquisitions. In March 2004, we completed a private offering of $110 million convertible subordinated notes with proceeds of $106 million, net of expenses. In August 2003, we completed a registered public offering of approximately 5.75 million shares of our common stock, with proceeds net of commissions, discounts and expenses of $34.9 million. To date, we have paid no cash dividends to its shareholders. We have no plans to pay cash dividends in the near future. Our line of credit agreements prohibit the payment of dividends or other distributions on any of our shares except dividends payable with our capital stock. Our future cash requirements will depend on numerous factors, including potential acquisitions and the rate of growth of our sales and our effectiveness at controlling and reducing costs. The net amount of cash used in operating activities in 2005 was $93.7 million. The net amount of cash provided by financing activities was $97.7 million which was primarily related to borrowings under our short-term borrowing facilities and the change in the book overdraft position. The net amount of cash provided in investing activities was $13.6 million in 2005, which was primarily related to the sale of property and equipment. Our accounts receivable increased to $421.5 million at December 31, 2005, from $376.0 million at December 31, 2004. Our inventories increased to $318.2 million at December 31, 2005, from $271.8 million at December 31, 2004. This increase was primarily due to our need to support our sales growth and the inventories acquired with the asset purchase of MCE Group ("MCE") in December 2005. Our accounts payable increased to $346.3 million in 2005 from $307.4 million in 2004 as a result of a change in the timing of inventory purchases and receipts and our efforts to manage working capital and the liabilities acquired with the asset purchase of MCE. The net amount of cash used in investing activities was $38.9 million in 2004, which was primarily related to the acquisitions of OpenPSL Limited and other property and equipment. The net amount of cash provided by financing activities was $26.5 million which was primarily related to the issuance of convertible notes and net repayments under our short and long-term borrowing facilities. The net amount of cash provided by operating activities in 2004 was $19.4 million. Our accounts receivable increased to $376.0 million at December 31, 2004, from $309.9 million at December 31, 2003. Increases to accounts receivable resulting from increased sales were offset by our reduction in 25 days sales outstanding to 42 at December 31, 2004, from 44 days at December 31, 2003. Our inventories increased to $271.8 million at December 31, 2004, from $257.0 million at December 31, 2003. This increase was primarily due to our need to support sales growth. However, due to management of inventory, there was a decrease in average days in inventory to 33 days at December 31, 2004 as compared to 39 days at December 31, 2003. Our accounts payable increased to $307.4 million in 2004 from $250.5 million in 2003 as a result of a change in the timing of inventory purchases and receipts and our efforts to manage working capital. On March 5, 2004, we completed a private offering of $110 million aggregate principal amount of 3 3/4% convertible subordinated notes due 2024 (the "Old Notes"). On December 20, 2004, we completed our offer to exchange newly issued 3 3/4% Convertible Subordinated Notes, Series B due 2024 (the "New Notes") for an equal amount of our outstanding Old Notes. Approximately $109,600,000 aggregate principal amount of the Old Notes, representing approximately 99.6 percent of the total principal amount of Old Notes outstanding, were tendered in exchange for an equal principal amount of New Notes. The New Notes mature on March 5, 2024 and bear interest at the rate of 3 3/4% per year on the principal amount, payable semi-annually on March 5 and September 5, beginning on March 5, 2005. Holders of the New Notes may convert the New Notes any time on or before the maturity date if certain conversion conditions are satisfied. Upon conversion of the New Notes, we will be required to deliver, in respect of each $1,000 principal of New Notes, cash in an amount equal to the lesser of (i) the principal amount of each New Note to be converted and (ii) the conversion value, which is equal to (a) the applicable conversion rate, multiplied by (b) the applicable stock price. The initial conversion rate is 91.2596 shares of common stock per New Note with a principal amount of $1,000 and is equivalent to an initial conversion price of approximately $10.958 per share. The conversion rate is subject to adjustment upon the occurrence of certain events. The applicable stock price is the average of the closing sales prices of our common stock over the five trading day period starting the third trading day following the date the New Notes are tendered for conversion. If the conversion value is greater than the principal amount of each New Note, we will be required to deliver to holders upon conversion, at their option, (i) a number of shares of our common stock, (ii) cash, or (iii) a combination of cash and shares of our common stock in an amount calculated as described in the prospectus filed by us in connection with the exchange offer. In lieu of paying cash and shares of our common stock upon conversion, we may direct the conversion agent to surrender any New Notes tendered for conversion to a financial institution designated by us for exchange in lieu of conversion. The designated financial institution must agree to deliver, in exchange for the New Notes, (i) a number of shares of our common stock equal to the applicable conversion rate, plus cash for any fractional shares, or (ii) cash or (iii) a combination of cash and shares of our common stock. Any New Notes exchanged by the designated institution will remain outstanding. We may redeem some or all of the New Notes for cash on or after March 5, 2009 and before March 5, 2011 at a redemption price of 100% of the principal amount of the New Notes, plus accrued and unpaid interest up to, but excluding, the redemption date, but only if the closing price of our common stock has exceeded 130% of the conversion price then in effect for at least 20 trading days within a 30 consecutive trading day period ending on the trading day before the date the redemption notice is mailed. We may redeem some or all of the New Notes for cash at any time on or after March 5, 2011 at a redemption price equal to 100% of the principal amount of the New Notes, plus accrued and unpaid interest up to, but excluding, the redemption date. We may be required to purchase for cash all or a potion of the New Notes on March 5, 2011, March 5, 2014 or March 5, 2019, or upon a change of control, at a purchase price equal to 100% of the principal amount of the new notes being purchased, plus accrued and unpaid interest up to, but excluding, the purchase date. On September 13, 2004, we entered into an amendment to our syndicated Loan and Security Agreement with Congress Financial Corporation (Western) ("Congress"), an affiliate of Wachovia Bank, N.A. ("Wachovia"), as administrative, collateral and syndication agent for the lenders of the revolving line of credit (the "Congress Facility"). The amendment reduced the Congress Facility from $160 million to $125 million, and extended the maturity date to July 31, 2007. The syndicate includes Bank of America N.A. as co-agent and other financial institutions as lenders. Borrowings under the Congress Facility bear interest at Wachovia's prime rate plus a margin of 0.0% to 0.5%, based on unused availability levels. At our option, all or any portion of the outstanding borrowings may be converted to a Eurodollar rate loan, which bears interest at the adjusted 26 Eurodollar rate plus a margin of 1.50% to 2.00%, based on unused availability levels. We also pay an unused line fee equal to 0.375% per annum of the unused portion of the facility, subject to certain adjustments. The average interest rate on outstanding borrowings under the Congress Facility during the quarter ended December 31, 2005 was 6.5%, and the balance outstanding at December 31, 2005 was $18.3 million. Our obligations under the Congress Facility are collateralized by certain assets of our North and South American subsidiaries. The Congress Facility requires us to meet certain financial tests and to comply with certain other covenants, including restrictions on incurrence of debt and liens, restrictions on mergers, acquisitions, asset dispositions, capital contributions, payment of dividends, repurchases of stock and investments. On September 20, 2004, and as further amended in January 2005, Bell Microproducts (the parent company only) ("Bell"), entered into a securitization program with Wachovia Bank, National Association ("Wachovia") and Blue Ridge Asset Funding Corporation ("Blue Ridge"), an affiliate of Wachovia, which expires on September 20, 2007 ("Wachovia Facility"). On December 31, 2005, Bell entered into an amendment to the Wachovia Facility with Wachovia and PNC Bank, National Association ("PNC Bank"), as Lender Group Agents and Variable Funding Capital Company LLC and Market Street Funding LLC as Lenders. Under the program, Bell will sell or contribute all of its receivables to a newly created special purpose bankruptcy remote entity named Bell Microproducts Funding Corporation ("Funding"), a wholly-owned subsidiary of Bell. Funding will obtain financing from Lender Group Agents or Lenders and other liquidity banks collateralized by the receivables to pay a portion of the purchase price for the receivables. The balance of the purchase price will be paid by advances made by Bell to Funding under a subordinated note of Funding payable to Bell and by capital contributions from Bell to Funding. The maximum principal amount available for Funding's credit facility is $120 million. The interest rate on advances made by Lenders shall be the cost of Lenders' commercial paper. In addition, Funding pays a program fee in the amount of 95 basis points per annum on the portion of the advances funded by Lender's commercial paper. The interest rate on advances made by Lender Group Agents and other liquidity banks shall be either an alternate base rate (which is the higher of the "prime rate" as announced by Wachovia, or 0.50% above the federal funds effective rate), or a rate based on an adjusted LIBO rate plus 1.50%. Funding also pays an unused line fee ranging from 0.20% to 0.25% per annum of the unused portion of the facility. Bell acts as a servicer for Funding and will collect all amounts due under, and take all action with respect to, the receivables for the benefit of Funding and its lenders. In exchange for these services, Bell receives a servicing fee determined on an arms-length basis. The cash flow from the collections of the receivables will be used to purchase newly generated receivables, to pay amounts to Funding's lenders, to pay down on the subordinated note issued to Bell and to make dividend distributions to Bell (subject at all times to the required capital amount being left in Funding). Including the program fee, the average interest rate on outstanding borrowings under the securitization program for the quarter ended December 31, 2005 was 5.0%, and the balance outstanding at December 31, 2005 was $89.4 million. Obligations of Funding under the Wachovia Facility are collateralized by all of Funding's assets. The Wachovia Facility requires Funding (and in certain circumstances, Bell) to meet certain financial tests and to comply with certain other covenants including restrictions on changes in structure, incurrence of debt and liens, payment of dividends and distributions, and material modifications to contracts and credit and collections policy. On December 2, 2002, as further amended in December 2004, we entered into a Syndicated Credit Agreement arranged by Bank of America, National Association ("Bank of America facility"), as principal agent, to provide a L75 million revolving line of credit facility, or the U.S. dollar equivalent of approximately $144 million at December 31, 2004. The Bank of America facility was scheduled to mature on July 15, 2006. On October 20, 2005, the agreement was amended to extend the maturity date for a further three years and reduce the facility to L60 million, or the USD equivalent of approximately $103 million at December 31, 2005, increasing to $138 million at our option. The syndicate includes Bank of America as agent and security trustee and other banks and financial institutions, as lenders. Borrowings under the line of credit bear interest at Bank of America's base rate plus a margin of 1.5% to 2.5%, based on certain financial measurements. At our option, all or any portion of the outstanding borrowings may be converted to a LIBOR Revolving Loan, which bears interest at the adjusted LIBOR rate plus a margin of 2.25% to 2.50%, based on certain financial measurements. The average interest rate on the 27 outstanding borrowings under the revolving line of credit during the quarter ended December 31, 2005 was 6.3%, and there was no balance outstanding at December 31, 2005. Our obligations under the revolving line of credit are collateralized by certain assets of our European subsidiaries. The revolving line of credit requires us to meet certain financial tests and to comply with certain other covenants, including restrictions on incurrence of debt and liens, restrictions on mergers, acquisitions, asset dispositions, capital contributions, payment of dividends, repurchases of stock, repatriation of cash and investments. On July 6, 2000, and as amended on May 3, 2004, we entered into a Securities Purchase Agreement with The Retirement Systems of Alabama and certain of its affiliated funds (the "RSA facility"), under which we borrowed $180 million of subordinated debt financing. This subordinated debt financing was comprised of $80 million bearing interest at 9.125%, repaid in May 2001; and $100 million bearing interest at 9.0%, payable in semi-annual principal installments of $3.5 million plus interest and in semi-annual principal installments of $8.5 million commencing December 31, 2007, with a final maturity date of June 30, 2010. On August 1, 2003, we entered into an interest rate swap agreement with Wachovia Bank effectively securing a new interest rate on $40 million of the outstanding debt. The new rate is based on the six month U.S. Libor rate plus a fixed margin of 4.99% and continues until termination of the agreement on June 30, 2010. The notional amount is amortized ratably as the underlying debt is repaid. The notional amount at December 31, 2005 was $34.7 million. We initially recorded the interest rate swap at fair value, and subsequently recorded changes in fair value as an offset to the related liability. At December 31, 2005, the fair value of the interest rate swap was ($1 million). The RSA facility is collateralized by a second lien on certain of our North American and South American assets. We must meet certain financial tests on a quarterly basis, and comply with certain other covenants, including restrictions of incurrence of debt and liens, restrictions on asset dispositions, payment of dividends, and repurchase of stock. We are also required to be in compliance with the covenants of certain other borrowing agreements. The balance outstanding at December 31, 2005 on this long-term debt was $45.0 million, $10.5 million is payable in 2006, $16.5 million is payable in 2007 and 2008 and $18 million thereafter. Net of the fair value of the interest rate swap, the balance outstanding on the RSA facility at December 31, 2005 was $44.0 million. On May 9, 2003, we entered into a mortgage agreement with Bank of Scotland for L6 million, or the U.S. dollar equivalent of approximately $10.3 million, as converted at December 31, 2005. The mortgage agreement had a term of 10 years, bearing interest at Bank of Scotland's rate plus 1.35%, and is payable in quarterly installments of approximately L150,000, or $288,000 USD, plus interest. On December 23, 2005, we sold the property for net proceeds of L13.4 million or $23.3 million USD. The proceeds of the sale were used to repay the mortgage balance outstanding at that date of $8.3 million, and the remaining proceeds were used to reduce the outstanding balance on our Bank of America Facility. On June 22, 2004, in connection with the acquisition of OpenPSL, we assumed a short-term financing agreement with GE Commercial Distribution Finance ("GE Facility") for up to L17.5 million or the U.S. dollar equivalent of $31.7 million. The loan was collateralized by certain OpenPSL accounts receivable and bore interest at Euribor plus 2.25%. This agreement was terminated on September 22, 2004 and the balance outstanding at that date was repaid in full. Our agreement with IFN Finance BV was amended in December 2004 to reduce our $7.5 million in short-term financing to $4.7 million. The loan is collateralized by certain European accounts receivable and inventories, bears interest at 5.5%, and continues indefinitely until terminated by either party upon 90 days notice. The balance outstanding at December 31, 2005 was $2.2 million. On December 1, 2005, in connection with the acquisition of MCE Group ("MCE"), we entered into a short-term financing agreement with Deutschland Kreditbank GmbH ("IBM") for up to $25 million. The loan is collateralized by certain assets and cross-company guarantees of our European subsidiaries and bears interest at US Libor or Euribor plus 2.00%, depending on the currency of the advance. The facility has no maturity date but continues indefinitely until terminated by either party upon six weeks notice. The balance outstanding at 28 December 31, 2005 was $18.9 million. Also on December 1, 2005, we entered into another short-term financing agreement with IBM for E6.5 million or the UDS equivalent of $7.7 million at December 31, 2005. The loan is collateralized by certain assets and cross-company guarantees of our European subsidiaries and bears interest at Euribor plus 3.85%. The facility has no maturity date but continues indefinitely until terminated by either party upon six weeks notice. The balance outstanding at December 31, 2005 was $7.7 million. On December 1, 2005, we entered into a loan agreement with Mr. Klaus Reichl for up to E4.0 million, or the USD equivalent of $4.7 million at December 31, 2005. The loan was used to finance the asset purchase of MCE. The loan is unsecured, bears interest at the fixed rate of 5.25% and matures on December 5, 2008. The balance outstanding at December 31, 2005 was $3.3 million. On June 22, 2004, in connection with the acquisition of OpenPSL, we assumed a mortgage with HSBC Bank plc ("HSBC") for an original amount of L670,000, or the U.S. dollar equivalent of approximately $1.2 million. The mortgage has a term of ten years, bears interest at HSBC's rate plus 1.25% and is payable in monthly installments of approximately L7,600, or $13,100 U.S. dollars. The balance on the mortgage was $692,000 at December 31, 2005. The following table describes our commitments to settle contractual obligations in cash as of December 31, 2005 (in thousands):
Payments Due By Period ------------------------------------------------- Up to 2-3 4-5 After Contractual Obligations 1 Year Years Years 5 Years Total - ----------------------- ------- ------- ------- -------- -------- Notes Payable (1) $10,615 $20,096 $18,181 $110,115 $159,007 Capital leases 838 -- -- -- 838 ------- ------- ------- -------- -------- Subtotal debt obligations 11,453 20,096 18,181 110,115 159,845 Operating leases 11,693 16,883 10,687 11,430 50,693 ------- ------- ------- -------- -------- Total contractual cash obligations $23,146 $36,979 $28,868 $121,545 $210,538 ======= ======= ======= ======== ========
(1) Notes payable primarily consist of the 3 3/4% convertible subordinated notes, the RSA facility, the mortgage with HSBC Bank and the note payable to Mr. Klaus Reichl. Other contractual obligations of ours include a $125 million revolving line of credit with Wachovia Bank, N.A., scheduled to mature July 31, 2007, a $120 million securitization program with Wachovia Bank, N.A. scheduled to mature September 20, 2007; and a $4.7 million borrowing facility with IFN Finance BV, a $25 million borrowing facility and a $7.7 million loan with IBM all of which continue until terminated by either party and a $103 million borrowing facility with Bank of America, scheduled to mature in 2009. Amounts outstanding at December 31, 2005 under these facilities were $18.3 million, $89.4 million, $2.2 million, $18.9 million, $7.7 million and 3.3 million, respectively. There was no balance outstanding under the Bank of America facility. In 2005, our profitability was negatively impacted by restructuring costs and special charges taken in the fourth quarter of 2005. These restructuring costs and special charges include costs related to the termination of a supplier components program in North America, future lease obligations for excess facilities, discontinued product lines and potential vendor claims, severance and benefits for involuntary employee terminations and the closure of our in-country operation in Sweden. Our net loss incurred in 2003 was related to declining product gross margins, certain restructuring initiatives including the reduction of headcount and the discontinuation of certain product lines. 29 We anticipate that our existing cash and our ability to borrow under our lines of credit will be sufficient to meet our anticipated cash needs for operations and capital requirements through December 31, 2006. Our expectations as to cash flows, and as to future cash balances, are subject to a number of assumptions, including assumptions regarding anticipated revenues, customer purchasing and payment patterns, and improvements in general economic conditions, many of which are beyond our control. If revenues do not match projections and if losses exceed our expectations, we will implement cost saving initiatives. If we are unable to sustain our profitability, in order to continue operations, we may need to obtain additional debt financing or sell additional shares of our equity securities. There can be no assurance that we will be able to obtain additional debt or equity financing on terms acceptable to us or at all. Our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our ability to achieve our intended business objectives. RECENT ACCOUNTING PRONOUNCEMENTS In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4." The amendments made by SFAS No.151 are intended to improve financial reporting by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred after June 15, 2005. The adoption of SFAS No. 151 did not have a material impact on our condensed consolidated financial statements. In December 2004, the FASB issued SFAS 123R (revised 2004), "Share Based Payment." SFAS 123R is a revision of FASB 123 and supersedes APB No. 25. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services or incurs liabilities in exchange for goods or services that are based on the fair market value of the entity's equity instruments. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair market value of the award over the period during which an employee is required to provide service for the award. The grant-date fair market value of employee share options and similar instruments must be estimated using option-pricing models adjusted for the unique characteristics of those instruments unless observable market prices for the same or similar instruments are available. In addition, SFAS 123R requires a public entity to measure the cost of employee services received in exchange for an award of liability instruments based on its current fair market value and that the fair market value of that award will be remeasured subsequently at each reporting date through the settlement date. The effective date of SFAS 123R for our Company is for the first annual period beginning after June 15, 2005, i.e. fiscal year ended December 31, 2006. Adoption of this statement will have a significant impact on our consolidated financial statements as we will be required to expense the fair value of our stock option grants and stock purchases under our employee stock purchase plan rather than disclose the impact on our consolidated net income within our footnotes, as is our current practice (See "Note 2 - Summary of Significant Accounting Policies" of the notes to the condensed consolidated financial statements contained herein.) On March 29, 2005, the SEC issued Staff Accounting Bulletin (SAB) 107 which expresses the views of the SEC regarding the interaction between SFAS No. 123R and certain SEC rules and regulations and provides the SEC's views regarding the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with nonemployees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instrument issues under share-based payment arrangements, the classification of compensation expenses, non-GAAP financial measures, first-time adoption of SFAS No. 123R in an interim period, capitalization of compensation costs related to share-based payment arrangements, the accounting for income tax effects of share-based payments arrangements upon adoption of SFAS No. 123R, the modification of employee share options prior to adoption of SFAS No. 123R, 30 and disclosures in Management's Discussion and Analysis of Financial Condition and Results of Operations subsequent to adoption of SFAS No. 123R. We are currently evaluating the impact that SAB 107 will have on our results of operations and financial position when adopted in fiscal 2006. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections." SFAS No. 154 replaces APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and is effective for fiscal years beginning after December 15, 2005, i.e. fiscal year ended March 31, 2007. SFAS No. 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. We do not expect the adoption of SFAS No. 154 to have a material impact on our condensed consolidated financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are subject to interest rate risk on our variable rate credit facilities and could be subjected to increased interest payments if market interest rates fluctuate. For the year ended December 31, 2005, average borrowings outstanding on the variable rate credit facilities include $26.2 million with Congress Financial, $85.6 million with Wachovia Bank, National Association and PNC Bank, National Association, $44.8 million with Bank of America, N.A., $26.6 million with IBM and $368,000 with the IFN. These facilities have interest rates that are based on associated rates such as Eurodollar and base or prime rates that may fluctuate over time based on changes in the economic environment. Based on actual borrowings throughout the year under these borrowing facilities, an increase of 1% in such interest rate percentages would increase the annual interest expense by approximately $1.8 million. A substantial part of our revenue and capital expenditures are transacted in U.S. dollars, but the functional currency for foreign subsidiaries is not the U.S. dollar. We enter into foreign forward exchange contracts to hedge certain balance sheet exposures against future movements in foreign exchange rates. The gains and losses on the forward exchange contracts are largely offset by gains or losses on the underlying transactions and, consequently, a sudden or significant change in foreign exchange rates should not have a material impact on future net income or cash flows. As a result of Bell or its subsidiaries entering into transactions denominated in currencies other than their functional currency, Bell recognized a foreign currency loss of $1.6 million during the year ended December 31, 2005. To the extent we are unable to manage these risks, our results, financial position and cash flows could be materially adversely affected. In August 2003, we entered into an interest rate swap agreement in order to gain access to the lower borrowing rates normally available on floating-rate debt, while avoiding prepayment and other costs that would be associated with refinancing long-term fixed-rate debt. The swap purchased has a notional amount of $40 million, expiring in June 2010, with a six-month settlement period and provides for variable interest at LIBOR plus a set rate spread. The notional amount is amortized ratably as the underlying debt is repaid. The notional amount at December 31, 2005 was $34.7 million. The notional amount does not quantify risk or represent assets or liabilities, but rather, is used in the determination of cash settlement under the swap agreement. As a result of purchasing this swap, we will be exposed to credit losses from counter-party non-performance; however, we do not anticipate any such losses from this agreement, which is with a major financial institution. The agreement will also expose us to interest rate risk should LIBOR rise during the term of the agreement. This swap agreement is accounted for under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). Under the provisions of SFAS 133, we initially recorded the interest rate swap at fair value, and subsequently recorded any changes in fair value as an offset to the related liability. Fair value is determined based on quoted market prices, which reflect the difference between estimated future variable-rate payments and future fixed-rate receipts. The fair value of the interest rate swap was ($1 million) at December 31, 2005. 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements
Form 10-K Page Number ----------- Report of Independent Registered Public Accounting Firm 33 Consolidated Balance Sheets at December 31, 2005 and 2004 35 Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2005, 2004 and 2003 36 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2005, 2004 and 2003 37 Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 38 Notes to Consolidated Financial Statements 39 Financial Statement Schedules: Consolidated Financial Statement Schedule II - Valuation and Qualifying Accounts and Reserves 66
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 32 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Bell Microproducts Inc. and Subsidiaries: We have completed integrated audits of Bell Microproducts Inc.'s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005 and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below. Consolidated Financial statements and financial statement schedule In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Bell Microproducts Inc. and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Internal control over financial reporting Also, in our opinion, management's assessment, included in "Management's Report on Internal Control Over Financial Reporting" appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and 33 procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As described in "Management's Report on Internal Control Over Financial Reporting", management has excluded MCE Germany and Net Storage from its assessment of internal control over financial reporting as of December 31, 2005 because they were acquired by the Company in a purchase business combination during 2005. We have also excluded MCE Germany and Net Storage from our audit of internal control over financial reporting. MCE Germany and Net Storage are wholly-owned subsidiaries whose total assets and total revenues represent 4% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2005. PricewaterhouseCoopers LLP San Jose, CA March 16, 2006 34 BELL MICROPRODUCTS INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31, ------------------- 2005 2004 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 29,927 $ 13,294 Accounts receivable, net 421,535 376,017 Inventories 318,174 271,797 Prepaid expenses and other current assets 29,039 24,676 -------- -------- Total current assets 798,675 685,784 Property and equipment, net 13,212 42,805 Goodwill 101,456 92,605 Intangibles, net 8,512 9,407 Deferred debt issuance costs and other assets 11,477 9,988 -------- -------- Total assets $933,332 $840,589 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $346,275 $307,373 Borrowings under lines of credit 28,747 17,577 Short-term note payable and current portion of long-term notes payable 10,639 12,183 Other accrued liabilities 66,832 72,164 -------- -------- Total current liabilities 452,493 409,297 Borrowings under lines of credit 107,733 42,686 Long-term notes payable 147,353 160,905 Other long-term liabilities 5,372 5,011 -------- -------- Total liabilities 712,951 617,899 -------- -------- Commitments and contingencies (Note 11) Shareholders' equity: Preferred Stock, $0.01 par value, 10,000 shares authorized; none issued and outstanding -- -- Common Stock, $0.01 par value, 80,000 shares authorized; 30,062 and 28,672 shares issued and outstanding 178,872 167,705 Retained earnings 32,655 32,174 Accumulated other comprehensive income 8,854 22,811 -------- -------- Total shareholders' equity 220,381 222,690 -------- -------- Total liabilities and shareholders' equity $933,332 $840,589 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 35 BELL MICROPRODUCTS INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31, ------------------------------------ 2005 2004 2003 ---------- ---------- ---------- Net sales $3,193,833 $2,827,777 $2,230,287 Cost of sales 2,962,615 2,606,369 2,062,194 ---------- ---------- ---------- Gross profit 231,218 221,408 168,093 Selling, general and administrative expenses 190,585 185,240 155,710 Restructuring costs and special charges 16,515 -- 1,383 ---------- ---------- ---------- Total operating expenses 207,100 185,240 157,093 Operating income 24,118 36,168 11,000 Interest expense and other income (21,581) 16,854 16,143 ---------- ---------- ---------- Income (loss) from operations before income taxes 2,537 19,314 (5,143) Provision for (benefit from) income taxes 2,056 7,977 (669) ---------- ---------- ---------- Net income (loss) $ 481 $ 11,337 $ (4,474) ========== ========== ========== Income (loss) per share Basic $ 0.02 $ 0.41 $ (0.20) ========== ========== ========== Diluted $ 0.02 $ 0.40 $ (0.20) ========== ========== ========== Shares used in per share calculation Basic 29,299 27,665 22,324 ========== ========== ========== Diluted 30,056 28,409 22,324 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 36 BELL MICROPRODUCTS INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
Common Stock Other ------------------ Deferred Retained Comprehensive Shares Amount Compensation Earnings Income Total ------- -------- ------------ -------- ------------- -------- Balance at December 31, 2002 20,127 $117,122 $(1,234) $25,311 $ 4,650 $145,849 Foreign currency translation -- -- -- -- 10,672 10,672 Net loss -- -- -- (4,474) -- (4,474) -------- Total comprehensive income 6,198 Issuance of Common Stock in secondary public offering, net of issuance costs of $990 5,750 34,947 34,947 Exercise of stock options, including related tax benefit of $156 604 3,720 -- -- -- 3,720 Issuance of Common Stock under Stock Purchase Plan 426 1,545 -- -- -- 1,545 Issuance of restricted stock -- 4,037 (4,037) -- -- -- Cancellation of restricted stock -- (107) 107 -- -- -- Amortization of deferred compensation -- -- 1,151 -- -- 1,151 ------- -------- ------- ------- -------- -------- Balance at December 31, 2003 26,907 161,264 (4,013) 20,837 15,322 193,410 Foreign currency translation -- -- -- -- 7,489 7,489 Net income -- -- -- 11,337 -- 11,337 -------- Total comprehensive income 18,826 Exercise of stock options, including related tax benefit of $615 737 3,529 -- -- -- 3,529 Issuance of Common Stock under Stock Purchase Plan 363 1,390 -- -- 1,390 Issuance of acquisition shares 665 4,107 -- -- -- 4,107 Issuance of restricted stock -- 2,117 (2,117) -- -- -- Cancellation of restricted stock -- (782) 782 -- -- -- Amortization of deferred compensation -- -- 1,428 -- -- 1,428 ------- -------- ------- ------- -------- -------- Balance at December 31, 2004 28,672 171,625 (3,920) 32,174 22,811 222,690 Foreign currency translation (13,957) (13,957) Net income 481 481 -------- Total comprehensive loss (13,476) Exercise of stock options, including related tax benefit of $1,407 769 4,848 -- -- -- 4,848 Issuance of Common Stock under Stock Purchase Plan 261 1,801 -- -- -- 1,801 Issuance of acquisition shares 360 3,013 -- -- -- 3,013 Issuance of restricted stock -- 1,365 (1,365) -- -- -- Cancellation of restricted stock -- (555) 555 -- -- -- Amortization of deferred compensation -- -- 1,505 -- -- 1,505 ------- -------- ------- ------- -------- -------- Balance at December 31, 2005 30,062 $182,097 $(3,225) $32,655 $ 8,854 $220,381 ======= ======== ======= ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 37 BELL MICROPRODUCTS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (INCREASE (DECREASE) IN CASH, IN THOUSANDS)
Year Ended December 31, ------------------------------ 2005 2004 2003 -------- -------- -------- Cash flows from operating activities: Net income (loss) $ 481 $ 11,337 $ (4,474) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 10,996 13,794 12,246 Provision for doubtful accounts 6,003 8,970 7,569 Loss (gain) on disposal of property, equipment and other (40) 18 197 Deferred income taxes (6,454) (393) (1,111) Tax benefit from stock options 1,407 615 156 Changes in assets and liabilities: Accounts receivable (43,919) (33,148) (16,415) Inventories (28,775) (3,873) (56,218) Prepaid expenses (1,544) (60) 3,756 Other assets 2,748 (2,076) 478 Accounts payable (28,081) 10,856 10,891 Other accrued liabilities (6,507) 13,406 (12,605) -------- -------- -------- Net cash (used in) provided by operating activities (93,685) 19,446 (55,530) Cash flows from investing activities: Acquisition of property, equipment and other (4,518) (4,353) (3,528) Proceeds from sale of property, equipment and other 23,162 54 53 Acquisitions of businesses, net of cash (Note 4) (5,083) (33,742) (5,867) -------- -------- -------- Net cash provided by (used in) investing activities 13,561 (38,041) (9,342) Cash flows from financing activities: Net borrowings (repayments) under line of credit agreements 60,173 (77,381) 14,896 Change in book overdraft 54,672 18,235 13,595 Repayments of long-term notes payable to RSA (7,000) (27,000) (7,000) Proceeds from issuance of convertible notes -- 110,000 -- Borrowings of notes and leases payable 108 218 10,715 Repayment of notes and leases payable (15,481) (1,845) (14,773) Proceeds from issuance of Common Stock and warrants 5,242 4,304 40,056 -------- -------- -------- Net cash provided by financing activities 97,714 26,531 57,489 Effect of exchange rate changes on cash (957) 454 262 -------- -------- -------- Net increase (decrease) in cash 16,633 8,390 (7,121) Cash at beginning of year 13,294 4,904 12,025 -------- -------- -------- Cash at end of year $ 29,927 $ 13,294 $ 4,904 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 21,133 $ 17,083 $ 16,789 Income taxes $ 15,252 $ 4,560 $ 715 Supplemental non-cash financing activities: Issuance of restricted stock $ 1,363 $ 2,117 $ 4,037 Common Stock issued for acquisition (Note 4) $ 3,013 $ 4,107 $ -- Change in fair value of interest rate swap $ (525) $ (490) $ --
The accompanying notes are an integral part of these consolidated financial statements. 38 BELL MICROPRODUCTS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - THE COMPANY: The Company operates in one business segment as a distributor of storage products and systems as well as semiconductor and computer products and peripherals to original equipment manufacturers (OEMs), value-added resellers (VARs) and dealers in the United States, Canada, Europe and Latin America. The Company is one of the world's largest storage-centric value-added distributors and a specialist in storage products and solutions. The Company's concentration on data storage systems and products allows it to provide greater technical expertise to its customers, form strategic relationships with key manufacturers and provide complete storage solutions to its customers at many levels of integration. The Company offers a wide range of storage products as well as semiconductors, computer platforms and software and peripherals. The Company's storage products include: - high-end computer and storage subsystems; - Fibre Channel connectivity products; - complete storage systems such as storage area networks (SAN), network attached storage (NAS) and direct attached storage (DAS); - storage management software; - disk, tape and optical drives; and - a broad selection of value-added services. In addition, the Company has developed a proprietary LDI software licensing system, which facilitates the sale and administration of software licenses. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION AND BASIS OF PREPARATION The consolidated financial statements include the accounts of the parent company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the Company's consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and actions that may impact the Company in the future, actual results may be different from the estimates. The Company's critical accounting policies are those that affect its financial statements materially and involve difficult, subjective or complex judgments by management. REVENUE RECOGNITION Revenue is recognized when title transfers to the customer and when the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the price is fixed and determinable and collection of the resulting receivable is reasonably assured. Transactions with sale terms of FOB shipping point are recognized when the products are shipped and transactions with sale terms of FOB destination are recognized upon arrival. Shipping and handling costs charged to customers are included in net sales and the associated expense is recorded in cost of sales for all periods presented. Provisions for estimated returns and expected warranty costs are recorded at the time of sale and are 39 adjusted periodically to reflect changes in experience and expected obligations. The Company's warranty reserve relates primarily to its storage solutions and value added businesses. Reserves for warranty items are included in other accrued liabilities. A reconciliation of the changes in the product warranty liability during 2005 and 2004 is as follows (in thousands):
2005 2004 ------ ----- Balance at January 1 $ 668 $ 638 Additions to provisions 683 275 Foreign currency translation (11) 9 Warranty expenses incurred (161) (254) ------ ----- Balance at December 31 $1,179 $ 668 ====== =====
VENDOR PROGRAMS The Company receives funds from it's vendors for price protection, product rebates, marketing and promotions, infrastructure reimbursement and competitive pricing programs. Amounts related to price protection and other incentive programs are recorded as adjustments to inventories, cost of sales or selling, general and administrative expenses, depending on the nature of the program. Vendor receivables are generally collected through vendor authorized reductions to accounts payable. There is a time delay between the submission of a claim by the Company and confirmation of agreement by its vendors. Historically, the Company's claims have approximated amounts agreed to by its vendors. CONCENTRATION OF CREDIT AND OTHER RISKS Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains allowances for estimated collection losses. No customer accounts for more than 10% of sales in any of the three years ended December 31, 2005, 2004 and 2003, or accounts receivable at December 31, 2005 and 2004. Five vendors accounted for 45% of the Company's inventory purchases during 2005 and four vendors accounted for 50% and 45% of the Company's inventory purchases during 2004 and 2003, respectively. In the fourth quarter of 2005, the Company incurred a special charge due to a terminated components supply program in North America and provided a specific reserve for a partner account receivable balance that the Company believes may not be collectable as a result of the program termination. This amount has been classified as a special charge in the amount of $9.1 million, net of a $550,000 reversal of restructuring costs and special charges taken in prior years that were adjusted to reflect actual charges. INVENTORIES Inventories are stated at the lower of cost or market, cost being determined by the first-in, first-out (FIFO) method. Market is based on estimated net realizable value. The Company assesses the valuation of its inventory on a quarterly basis and periodically writes down the value for estimated excess and obsolete inventory based on estimates about future demand, actual usage and current market value. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is computed using the straight-line method based upon the estimated useful lives of computer and other equipment, furniture and fixtures and warehouse equipment that range from three to five years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the estimated life of the asset or the lease term. GOODWILL In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the Company is required to perform an annual impairment test for goodwill. SFAS No. 142 requires the Company to compare the fair value of the Company to its carrying amount on an annual basis to determine if there is potential impairment. If the fair value of the Company is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill is less than the 40 carrying value. The fair value for goodwill is determined based on discounted cash flows. The Company performs this impairment test annually and whenever facts and circumstances indicate that there is a possible impairment of goodwill. The Company completed the required annual impairment test, which resulted in no impairment for fiscal year 2005. LONG-LIVED ASSETS Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the fair value of the asset. Other intangible assets are recorded at cost and amortized over periods ranging from 2 to 40 years. INCOME TAXES The Company accounts for income taxes in accordance with the liability method of accounting for income taxes. Under the liability method, deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. The provision for income taxes is comprised of the current tax liability and the change in deferred tax assets and liabilities. The Company establishes a valuation allowance to the extent that it is more likely than not that deferred tax assets will not be recoverable against future taxable income. EARNINGS PER SHARE Basic EPS is computed by dividing net income available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options, using the treasury stock method. Following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the periods presented below (in thousands, except per share data):
Year Ended December 31, --------------------------- 2005 2004 2003 ------- ------- ------- Net income (loss) $ 481 $11,337 $(4,474) ======= ======= ======= Weighted average common shares outstanding (basic) 29,299 27,665 22,324 Effect of dilutive options and grants 757 744 -- ------- ------- ------- Weighted average common shares outstanding (diluted) 30,056 28,409 22,324 ======= ======= ======= Earnings (loss) per share: Basic $ 0.02 $ 0.41 $ (0.20) ======= ======= ======= Diluted $ 0.02 $ 0.40 $ (0.20) ======= ======= =======
Respectively, at December 31, 2005 and 2004, 1,137,599 and 888,430 restricted stock grants and options to purchase shares of common stock were excluded from the calculation of diluted EPS because they were anti-dilutive. At December 31, 2003, all outstanding restricted stock grants and options to purchase 4,772,575 shares of common stock were excluded from the computation of diluted net loss per share because they were anti-dilutive. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS The financial statements of the Company's foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date. Income and expense items are translated at average monthly rates of exchange prevailing during the year. The resulting translation adjustments are included in accumulated other comprehensive income as a separate component of stockholders' equity. Gains and losses from foreign currency transactions are included in the Statements of Operations, and have not been significant for any of the periods presented. 41 COMPREHENSIVE INCOME Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the Company, comprehensive income consists of its reported net income or loss and the change in the foreign currency translation adjustment. STOCK-BASED COMPENSATION The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." The Company's policy is to grant options with an exercise price equal to the quoted market price of the Company's stock on the date of the grant. Accordingly, no compensation cost has been recognized in the Company's Statements of Operations. The Company provides additional pro forma disclosures as required under Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." The following table illustrates the effect on income from continuing operations and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation. The estimated fair value of each option is calculated using the Black-Scholes option-pricing model.
(In thousands, except per share amounts): --------------------------- 2005 2004 2003 ------- ------- ------- Net income (loss) as reported: $ 481 $11,337 $(4,474) Add: Stock-based employee compensation expense included in reported earnings, net of tax 960 831 1,001 Deduct: Stock-based employee compensation expense determined under the fair value method, net of tax (5,107) (4,064) (4,591) ------- ------- ------- Pro forma net income (loss) $(3,666) $ 8,104 $(8,064) ======= ======= ======= Income (loss) per share: As reported Basic $ 0.02 $ 0.41 $ (0.20) Diluted $ 0.02 $ 0.40 $ (0.20) Pro forma Basic $ (0.13) $ 0.29 $ (0.36) Diluted $ (0.13) $ 0.29 $ (0.36)
On November 16, 2005, the Compensation Committee (the "Committee") of the board of directors of the Company approved the acceleration of vesting of unvested and "out-of-the-money" stock options with exercise prices equal to or greater than $7.74 per share previously awarded to its employees, including its executive officers, and directors, under the Company's 1998 Stock Plan. The acceleration of vesting was effective for stock options outstanding as of December 30, 2005. The closing stock price on the Nasdaq Global Market at the effective date of the acceleration was $7.65. Options to purchase approximately 724,875 shares of common stock, or approximately 33% of the Company's outstanding unvested options, of which options to purchase approximately 76,250 shares are held by the Company's executive officers and directors, were subject to the acceleration. The weighted-average exercise price of the options subject to the acceleration was approximately $8.98. The purpose of the acceleration is to enable the Company to reduce compensation expense associated with these options in future periods on its consolidated statements of operations, upon adoption of FASB Statement No. 123R - -- Share-Based Payment in 2006. The pre-tax charges to be avoided amount to approximately $2.4 million, which is included in the pro forma results of operations above for 2005, over the course of the original vesting periods, which on average is approximately three years from the effective date of the acceleration. The Company also believes that because the options to be accelerated have exercise prices substantially in excess of the current market value of the Company's common stock, 42 the options have limited economic value and are not fully achieving their original objective of incentive compensation and employee retention. The vesting acceleration of these stock options did not result in a compensation charge to fourth quarter results based on accounting principles generally accepted in the United States. Weighted average basic and diluted shares outstanding are the same for the periods in which net losses were incurred, in the accompanying consolidated statement of operations. Because additional stock options and stock purchase rights are expected to be granted each year, the above pro forma disclosures are not considered by management to be representative of actual effects on reported financial results for future years. SEGMENT REPORTING Financial Accounting Standards Board Statement No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131") requires that companies report separately in the financial statements certain financial and descriptive information about operating segments' profit or loss, certain specific revenue and expense items and segment assets. Additionally, companies are required to report information about the revenues derived from their products and service groups, about geographic areas in which the Company earns revenues and holds assets, and about major customers (see Note 14). DERIVATIVE FINANCIAL INSTRUMENTS Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 137 and SFAS 138. SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities, and requires that all derivatives, including foreign currency exchange contracts, be recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, must be recognized currently in earnings. All of the Company's derivative financial instruments are recorded at their fair value in other current assets or accounts payable and accrued expenses. The transition adjustment upon adoption of SFAS 133 was not material. The Company generates a substantial portion of its revenues in international markets, which subjects its operations and cash flows to the exposure of currency exchange fluctuations. The Company seeks to minimize the risk associated with currency exchange fluctuations by entering into forward exchange contracts to hedge certain foreign currency denominated assets or liabilities. These derivatives do not qualify for SFAS 133 hedge accounting treatment. Accordingly, changes in the fair value of these hedges are recorded immediately in earnings on line item 'Interest Expense and Other Income' to offset the changes in the fair value of the assets or liabilities being hedged. RECENTLY ISSUED ACCOUNTING STANDARDS In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4." The amendments made by SFAS No.151 are intended to improve financial reporting by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred after June 15, 2005. The adoption of SFAS No. 151 did not have a material impact on the Company's condensed consolidated financial statements. In December 2004, the FASB issued SFAS 123R (revised 2004), "Share Based Payment." SFAS 123R is a revision of FASB 123 and supersedes APB No. 25. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services or incurs liabilities in exchange for goods or services that are based on the fair market value of the entity's equity instruments. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair market value of the award over the period during which an employee is required to provide service for the award. The grant-date fair market value of employee share options and similar instruments must be estimated using option-pricing models adjusted for the unique characteristics of those instruments unless observable market prices for the same or similar instruments are available. In addition, SFAS 123R requires a public entity to measure the cost of employee services 43 received in exchange for an award of liability instruments based on its current fair market value and that the fair market value of that award will be remeasured subsequently at each reporting date through the settlement date. The effective date of SFAS 123R for our Company is for the first annual period beginning after June 15, 2005, i.e. fiscal year ended December 31, 2006. Adoption of this statement will have a significant impact on our consolidated financial statements as we will be required to expense the fair value of our stock option grants and stock purchases under our employee stock purchase plan rather than disclose the impact on our consolidated net income within our footnotes, as is our current practice (See "Note 2 - Summary of Significant Accounting Policies" of the notes to the condensed consolidated financial statements contained herein.) On March 29, 2005, the SEC issued Staff Accounting Bulletin (SAB) 107 which expresses the views of the SEC regarding the interaction between SFAS No. 123R and certain SEC rules and regulations and provides the SEC's views regarding the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with non-employees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instrument issues under share-based payment arrangements, the classification of compensation expenses, non-GAAP financial measures, first-time adoption of SFAS No. 123R in an interim period, capitalization of compensation costs related to share-based payment arrangements, the accounting for income tax effects of share-based payments arrangements upon adoption of SFAS No. 123R, the modification of employee share options prior to adoption of SFAS No. 123R, and disclosures in Management's Discussion and Analysis of Financial Condition and Results of Operations subsequent to adoption of SFAS No. 123R. The Company is currently evaluating the impact that SAB 107 will have on its results of operations and financial position when adopted in fiscal 2006. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections." SFAS No. 154 replaces APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and is effective for fiscal years beginning after December 15, 2005, i.e. fiscal year ended March 31, 2007. SFAS No. 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The Company does not expect the adoption of SFAS No. 154 to have a material impact on its condensed consolidated financial statements. NOTE 3 - ACCOUNTING FOR GOODWILL AND CERTAIN OTHER INTANGIBLES: The Company performs an impairment test annually and whenever facts and circumstances indicate that there is a possible impairment of goodwill. The Company completed the required annual impairment test, which resulted in no impairment for fiscal year 2005. The Company has acquired certain intangible assets through acquisitions which include non-compete agreements, trademarks, trade names and customer and supplier relationships. The carrying values and accumulated amortization of these assets at December 31, 2005 and 2004 are as follows (in thousands):
As of December 31, 2005 -------------------------------------- Estimated Useful Life Gross Carrying Accumulated Net Amortized Intangible Assets for Amortization Amount Amortization Amount --------------------------- --------------------- -------------- ------------ ------ Non-compete agreements 3-6 years $ 1,763 $(1,409) $ 354 Trademarks 20-40 years 4,340 (568) 3,772 Trade names 20 years 400 (71) 329 Customer/supplier relationships 7-10 years 5,669 (1,612) 4,057 ------- ------- ------ Total $12,172 $(3,660) $8,512 ======= ======= ======
44
As of December 31, 2004 -------------------------------------- Estimated Useful Life Gross Carrying Accumulated Net Amortized Intangible Assets for Amortization Amount Amortization Amount --------------------------- --------------------- -------------- ------------ ------ Non-compete agreements 2-6 years $ 1,623 $(1,207) $ 416 Trademarks 20-40 years 4,835 (449) 4,386 Trade names 20 years 400 (51) 349 Customer/supplier relationships 4-10 years 5,023 (767) 4,256 ------- ------- ------ Total $11,881 $(2,474) $9,407 ======= ======= ======
The expected amortization of these balances over the next five fiscal years are as follows (in thousands): Aggregate Amortization Expense For year ended December 31, 2005 $1,182 Estimated Amortization Expense For year ending December 31, 2006 $1,210 For year ending December 31, 2007 $1,140 For year ending December 31, 2008 $ 953 For year ending December 31, 2009 $ 758 For year ending December 31, 2010 $ 654 Thereafter $3,797
NOTE 4 - ACQUISITIONS: All acquisitions below have been accounted for using the purchase method. Accordingly, the results of operations of the acquired businesses are included in the consolidated financial statements from the dates of acquisition. MCE Group Acquisition On December 1, 2005, the Company acquired certain assets and assumed certain liabilities of MCE Computer Peripherie GmbH, MCE Computer Vertreibs Products GmbH, MCE Computer Technology Inc and MCE Limited, ("MCE") based in Munich, Germany. The acquisition of MCE allows the Company to continue to expand its growth in value added storage products and services in the key markets in Continental Europe and the UK and adds additional experienced management, sales and marketing resources to the Company. MCE is a European distributor of disk drives and components, and also has a substantial IBM enterprise business in Germany. MCE's customer base includes Enterprise VARs, system builders and industrial customers. The MCE assets acquired were primarily inventories and accounts receivable. As consideration for the assets purchased, the Company paid $1.3 million including acquisition costs, and assumed certain liabilities, primarily notes payable and trade accounts payable. Management is currently finalizing the valuation of assets acquired and liabilities assumed. Accordingly, the final allocations could be different from the amounts reflected below. The preliminary allocation of the purchase price to acquired assets and assumed liabilities based upon management's estimates are as follows (in thousands): Cash $ 433 Accounts receivable 21,226 Inventories 24,586 Equipment and other assets 1,420 Goodwill 3,208 Intangibles 360 Accounts payable (22,837) Other accrued liabilities (1,472) Notes payable (25,576) -------- Total consideration $ 1,348 ========
Other intangibles include customer and supplier relationships and non-compete agreements, with estimated useful lives for amortization of four years, seven years and three years, respectively. 45 Pro forma results of operations have not been presented because the effect of the acquisition was not material to the results of prior periods presented. Net Storage Computers, LTDA. Acquisition On July 8, 2005, the Company acquired all of the outstanding capital stock of Net Storage Computers, LTDA. ("Net Storage"), a privately held company headquartered in Sao Paulo, Brazil, with sales offices in Belo Horizonte, Porto Alegre, Recife, Rio de Janeiro and Tambore, Brazil. The acquisition of Net Storage increases the Company's presence in the Latin America marketplace and provides the opportunity to strengthen relationships with key suppliers and expand overall products and services offerings. Net Storage is a distributor of storage products and peripherals to VARs and system integrators in Brazil. Their strategic partners include Intel, Seagate, LG, Western Digital and AMD. Net Storage was acquired for a total purchase price of approximately $3.4 million in cash, including acquisition costs. The Company is obligated to pay up to an additional $3.0 million based upon earnings achieved during each of the subsequent four anniversary years. The Company has also entered into a four year Management Service Agreement which obligates the Company to pay an additional $1.1 million. Management is currently finalizing the valuation of assets acquired and liabilities assumed. Accordingly, the final allocations could be different from the amounts reflected below. The preliminary allocation of the purchase price to acquired assets and assumed liabilities based upon management's estimates are as follows (in thousands): Cash $ 267 Accounts receivable 2,123 Inventories 1,789 Equipment and other assets 408 Goodwill 3117 Intangibles 421 Accounts payable (2,943) Other accrued liabilities (1,792) ------- Total consideration $ 3,390 =======
Other intangibles include customer and supplier relationships and non-compete agreements, with estimated useful lives for amortization of seven years and six years, respectively. Pro forma results of operations have not been presented because the effect of the acquisition was not material to the results of prior periods presented. OpenPSL Holdings Limited Acquisition On June 22, 2004, the Company acquired all of the outstanding capital stock of OpenPSL Holdings Limited ("OpenPSL"), a privately held Company headquartered in Manchester, United Kingdom, with branch offices in Dublin, Ireland and Leeds, Bracknell and Nottingham, United Kingdom. The acquisition of OpenPSL allows the Company to broaden its product offerings in a strategic geography. OpenPSL is a leading value added distributor of enterprise, storage and security products and related professional services to VARs, system integrators and software companies in the UK and Ireland. Their line card of franchised suppliers includes Hewlett Packard, IBM, Oracle, Veritas, Allied Telesyn, Microsoft and others. OpenPSL was acquired for a total purchase price of approximately $42.0 million which included cash of approximately $34.8 million, the issuance of 1,025,029 shares of the Company's Common Stock including consideration for all contingent incentive payments and acquisition costs. Total consideration paid in cash and stock for contingent incentives during 2005 was $4.1 million. The final allocation of the purchase price to acquired assets and assumed liabilities based upon management estimates are as follows (in thousands): 46 Accounts receivable $ 30,721 Inventories 4,743 Equipment and other assets 2,419 Goodwill 36,104 Intangibles 3,671 Accounts payable (18,785) Other accrued liabilities (9,203) Notes payable and long-term liabilities (7,704) -------- Total consideration $ 41,966 ========
Other intangibles include customer and supplier relationships and non-compete agreements with estimated useful lives of four years, seven years and two years, respectively. Pro forma disclosure (in thousands, except per share data): The following pro forma combined amounts give effect to the acquisition of OpenPSL as if the acquisition had occurred on January 1, 2004. The pro forma amounts do not purport to be indicative of what would have occurred had the acquisition been made as of the beginning of the period or of results which may occur in the future.
Year Ended December 31, 2004 ------------ Revenue $2,937,047 Net income $ 12,653 Net income per share - basic $ 0.46 Shares used in per share calculation - basic 27,665 Net income per share - diluted $ 0.45 Shares used in per share calculation 28,409
EBM Mayorista, S.A. de C.V. Acquisition On October 15, 2003, the Company acquired certain assets and assumed certain liabilities of EBM Mayorista, S.A. de C.V. ("EBM"), a privately held company headquartered in Merida, Mexico, with branch locations in Cancun, Monterrey, Oaxaca, Villahermosa, Tampico, Veracruz, Tuxtla, Torreon, Puebla and Aguascaliente. EBM distributes a diverse product line of computer hardware and software to Mexican resellers, retail locations and system integrators including the Intel, Samsung, Epson and U.S. Robotics lines. EBM was acquired for a total purchase price of approximately $7.1 million which included cash of approximately $6.2 million and acquisition costs. The Company is obligated to pay 35% of EBM's earnings before taxes as a contingent incentive payment based upon meeting minimum earnings targets during each of the subsequent four anniversary years. EBM met its earnings target for the second anniversary years and accordingly, the Company has paid additional cash and recorded $761,000 as additional consideration at December 31, 2005. The purchase price was allocated to the acquired assets and liabilities assumed, based upon management's estimate of their fair market values as of the acquisition date, as follows (in thousands): Inventories $ 5,177 Equipment and other assets 305 Goodwill 4,593 Other intangibles 850 Accounts payable (3,778) ------- Total consideration $ 7,147 =======
Other intangibles include customer and supplier relationships, trade name, and non-compete agreements, with estimated useful lives for amortization of 7 years, 20 years and 6 years, respectively. Pro forma results of operations have not been presented because the effect of the acquisition was not material to the results of prior periods presented. 47 NOTE 5 - BALANCE SHEET COMPONENTS:
December 31, ------------------- 2005 2004 -------- -------- (in thousands) Accounts receivable, net: Accounts receivable $460,050 $398,105 Less: allowance for doubtful accounts and sales returns (38,515) (22,088) -------- -------- $421,535 $376,017 ======== ======== Property and equipment: Computer and other equipment $ 41,255 $ 40,235 Land and buildings 1,664 27,055 Furniture and fixtures 5,816 10,640 Warehouse equipment 8,566 8,934 Leasehold improvements 4,705 4,440 -------- -------- 62,006 91,304 Less: accumulated depreciation (48,794) (48,499) -------- -------- $ 13,212 $ 42,805 ======== ======== Goodwill and other intangibles, net: Goodwill $108,174 $ 99,312 Other intangibles 12,172 11,881 Less: accumulated amortization (10,378) (9,181) -------- -------- $109,968 $102,012 -------- -------- Accounts payable: Accounts payable - trade $259,773 $275,543 Cash overdraft 86,502 31,830 -------- -------- $346,275 $307,373 ======== ======== Accrued liabilities: Taxes payable $ 16,974 $ 30,305 Other accrued liabilities 49,858 41,859 -------- -------- $ 66,832 $ 72,164 ======== ========
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in its existing accounts receivable. The Company determines the allowance based on historical write-off experience by industry and regional economic data. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. All other balances are reviewed on a pooled basis by type of receivable. Account balances are charged off against the allowance when the Company's management believes it is probable the receivable will not be recovered. The Company does not have any off-balance-sheet credit exposure related to its customers. In the fourth quarter of 2005, the Company terminated a components supply program in North America and provided a specific reserve for a partner balance that the Company believes may not be collectable as a result of the program termination. This amount has been included as a special charge in the amount of $9.1 million, net of a $550,000 reversal of restructuring costs and special charges taken in prior years that were adjusted to reflect actual charges. On December 23, 2005, the Company sold certain of its property located in the United Kingdom for net proceeds of L13.4 million or $23.3 million USD. Total depreciation expense on the Company's property and equipment was $8.1 million in 2005, $11.1 million in 2004 and $10.3 million in 2003. 48 NOTE 6 - LINES OF CREDIT AND TERM LOANS: LINES OF CREDIT
December 31, ------------------- 2005 2004 -------- -------- Congress Facility $ 18,319 $ 686 Wachovia Facility 89,414 42,000 IBM 26,558 Bank of America Facility -- 17,577 IFN Financing BV 2,189 -- -------- -------- 136,480 60,263 Less: amounts included in current liabilities (28,747) (17,577) -------- -------- Amounts included in non-current liabilities $107,733 $ 42,686 ======== ========
On September 13, 2004, the Company entered into an amendment to its syndicated Loan and Security Agreement with Congress Financial Corporation (Western) ("Congress"), an affiliate of Wachovia Bank, N.A. ("Wachovia"), as administrative, collateral and syndication agent for the lenders of the revolving line of credit (the "Congress Facility"). The amendment reduced the Congress Facility from $160 million to $125 million, and extended the maturity date to July 31, 2007. The syndicate includes Bank of America N.A. as co-agent and other financial institutions as lenders. Borrowings under the Congress Facility bear interest at Wachovia's prime rate plus a margin of 0.0% to 0.5%, based on unused availability levels. At the Company's option, all or any portion of the outstanding borrowings may be converted to a Eurodollar rate loan, which bears interest at the adjusted Eurodollar rate plus a margin of 1.50% to 2.00%, based on unused availability levels. The Company also pays an unused line fee equal to 0.375% per annum of the unused portion of the facility, subject to certain adjustments. The average interest rate on outstanding borrowings under the Congress Facility during the quarter ended December 31, 2005 was 6.5%, and the balance outstanding at December 31, 2005 was $18.3 million. Obligations of the Company under the Congress Facility are collateralized by certain assets of the Company and its North and South American subsidiaries. The Congress Facility requires the Company to meet certain financial tests and to comply with certain other covenants, including restrictions on incurrence of debt and liens, restrictions on mergers, acquisitions, asset dispositions, capital contributions, payment of dividends, repurchases of stock and investments. On September 20, 2004, Bell Microproducts, (the parent company only) ("Bell") entered into a securitization program with Wachovia Bank, National Association ("Wachovia") and Blue Ridge Asset Funding Corporation ("Blue Ridge"), an affiliate of Wachovia, which expires on September 20, 2007 ("Wachovia Facility"). On December 31, 2005, Bell entered into an amendment to the Wachovia Facility with Wachovia and PNC Bank, National Association ("PNC Bank"), as Lender Group Agents and Variable Funding Capital Company LLC and Market Street Funding LLC as Lenders. Under the program, Bell will sell or contribute all of its receivables to a newly created special purpose bankruptcy remote entity named Bell Microproducts Funding Corporation ("Funding"), a wholly-owned subsidiary of Bell. Funding will obtain financing from Lender Group Agents or Lenders and other liquidity banks collateralized by the receivables to pay a portion of the purchase price for the receivables. The balance of the purchase price will be paid by advances made by Bell to Funding under a subordinated note of Funding payable to Bell and by capital contributions from Bell to Funding. The maximum principal amount available for Funding's credit facility is $120 million. The interest rate on advances made by Lenders shall be the cost of Lenders' commercial paper. In addition, Funding pays a program fee in the amount of 95 basis points per annum on the portion of the advances funded by Lenders' commercial paper. The interest rate on advances made by Lender Group Agents and other liquidity banks shall be either an alternate base rate (which is the higher of the "prime rate" as announced by Wachovia, or 0.50% above the federal funds effective rate), or a rate based on an adjusted LIBO rate plus 1.50%. Funding also pays an unused line fee ranging from 0.20% to 0.25% per annum of the unused portion of the facility. Bell acts as a servicer for Funding and will collect all amounts due under, and take all action with respect to, the receivables for the benefit of Funding and its lenders. In exchange for these services, Bell receives a servicing fee determined on an arms-length basis. The cash flow from the collections of the receivables will be used to purchase newly generated receivables, to pay amounts to Funding's lenders, to pay down on the subordinated note issued to Bell and to make dividend distributions to Bell (subject at all times to the required capital amount being left in Funding). Including the program fee, the average interest rate on outstanding borrowings under the securitization program for the quarter ended December 31, 2005 was 5.0%, and the balance outstanding at December 31, 2005 was $89.4 million. Obligations of 49 Funding under the Wachovia Facility are collateralized by all of Funding's assets. The Wachovia Facility requires Funding (and in certain circumstances, Bell) to meet certain financial tests and to comply with certain other covenants including restrictions on changes in structure, incurrence of debt and liens, payment of dividends and distributions, and material modifications to contracts and credit and collections policy. On December 2, 2002, as further amended in December 2004, the Company entered into a Syndicated Credit Agreement arranged by Bank of America, National Association ("Bank of America facility"), as principal agent, to provide a L75 million revolving line of credit facility, or the U.S. dollar equivalent of approximately $144 million at December 31, 2004. The Bank of America facility was scheduled to mature on July 15, 2006. On October 20, 2005, the agreement was amended to extend the maturity date for a further three years and reduce the facility to L60 million, or the USD equivalent of approximately $103 million at December 31, 2005, increasing to $138 million at the Company's option. The syndicate includes Bank of America as agent and security trustee and other banks and financial institutions, as lenders. Borrowings under the line of credit bear interest at Bank of America's base rate plus a margin of 1.5% to 2.5%, based on certain financial measurements. At the Company's option, all or any portion of the outstanding borrowings may be converted to a LIBOR Revolving Loan, which bears interest at the adjusted LIBOR rate plus a margin of 2.25% to 2.50%, based on certain financial measurements. The average interest rate on the outstanding borrowings under the revolving line of credit during the quarter ended December 31, 2005 was 6.3%, and there was no balance outstanding at December 31, 2005. Obligations of the Company under the revolving line of credit are collateralized by certain assets of the Company's European subsidiaries. The revolving line of credit requires the Company to meet certain financial tests and to comply with certain other covenants, including restrictions on incurrence of debt and liens, restrictions on mergers, acquisitions, asset dispositions, capital contributions, payment of dividends, repurchases of stock, repatriation of cash and investments. On December 1, 2005, in connection with the acquisition of MCE Group ("MCE"), the Company entered into a short-term financing agreement with Deutschland Kreditbank GmbH ("IBM") for up to $25 million. The loan is collateralized by certain assets and cross-company guarantees of the Company's European subsidiaries and bears interest at US Libor or Euribor plus 2.00%, depending on the currency of the advance. The facility has no maturity date but continues indefinitely until terminated by either party upon six weeks notice. The balance outstanding at December 31, 2005 was $18.9 million. Also on December 1, 2005, the Company entered into another short-term financing agreement with IBM for E6.5 million or the UDS equivalent of $7.7 million at December 31, 2005. The loan is collateralized by certain assets and cross-company guarantees of the Company's European subsidiaries and bears interest at Euribor plus 3.85%. The facility has no maturity date but continues indefinitely until terminated by either party upon six weeks notice. The balance outstanding at December 31, 2005 was $7.7 million. The Company's agreement with IFN Finance BV was amended in December 2004 to reduce its $7.5 million in short-term financing to $4.7 million. The loan is collateralized by certain European accounts receivable and inventories, bears interest at 5.5%, and continues indefinitely until terminated by either party upon 90 days notice. The balance outstanding at December 31, 2005 was $2.2 million. TERM LOANS
December 31, ------------------- 2005 2004 -------- -------- Convertible Notes $110,000 $110,000 Note payable to RSA, net 43,985 51,509 Bank of Scotland Mortgage -- 10,150 HSBC Bank plc Mortgage 692 897 Note payable - Klaus Reichl 3,315 -------- -------- 157,992 172,556 Less: amounts due in current year 10,639 11,651 -------- -------- Long-term debt due after one year $147,353 $160,905 ======== ========
50 On March 5, 2004, the Company completed a private offering of $110 million aggregate principal amount of 3 3/4% convertible subordinated notes due 2024 (the "Old Notes"). On December 20, 2004, the Company completed its offer to exchange its newly issued 3 3/4% Convertible Subordinated Notes, Series B due 2024 (the "New Notes") for an equal amount of its outstanding Old Notes. Approximately $109,600,000 aggregate principal amount of the Old Notes, representing approximately 99.6 percent of the total principal amount of Old Notes outstanding, were tendered in exchange for an equal principal amount of New Notes. The New Notes mature on March 5, 2024 and bear interest at the rate of 3 3/4% per year on the principal amount, payable semi-annually on March 5 and September 5, beginning on March 5, 2005. Holders of the New Notes may convert the New Notes any time on or before the maturity date if certain conversion conditions are satisfied. Upon conversion of the New Notes, the Company will be required to deliver, in respect of each $1,000 principal of New Notes, cash in an amount equal to the lesser of (i) the principal amount of each New Note to be converted and (ii) the conversion value, which is equal to (a) the applicable conversion rate, multiplied by (b) the applicable stock price. The initial conversion rate is 91.2596 shares of common stock per New Note with a principal amount of $1,000 and is equivalent to an initial conversion price of approximately $10.958 per share. The conversion rate is subject to adjustment upon the occurrence of certain events. The applicable stock price is the average of the closing sales prices of the Company's common stock over the five trading day period starting the third trading day following the date the New Notes are tendered for conversion. If the conversion value is greater than the principal amount of each New Note, the Company will be required to deliver to holders upon conversion, at its option, (i) a number of shares of the Company's common stock, (ii) cash, or (iii) a combination of cash and shares of the Company's common stock in an amount calculated as described in the prospectus filed by the Company in connection with the exchange offer. In lieu of paying cash and shares of the Company's common stock upon conversion, the Company may direct its conversion agent to surrender any New Notes tendered for conversion to a financial institution designated by the Company for exchange in lieu of conversion. The designated financial institution must agree to deliver, in exchange for the New Notes, (i) a number of shares of the Company's common stock equal to the applicable conversion rate, plus cash for any fractional shares, or (ii) cash or (iii) a combination of cash and shares of the Company's common stock. Any New Notes exchanged by the designated institution will remain outstanding. The Company may redeem some or all of the New Notes for cash on or after March 5, 2009 and before March 5, 2011 at a redemption price of 100% of the principal amount of the New Notes, plus accrued and unpaid interest up to, but excluding, the redemption date, but only if the closing price of the Company's common stock has exceeded 130% of the conversion price then in effect for at least 20 trading days within a 30 consecutive trading day period ending on the trading day before the date the redemption notice is mailed. The Company may redeem some or all of the New Notes for cash at any time on or after March 5, 2011 at a redemption price equal to 100% of the principal amount of the New Notes, plus accrued and unpaid interest up to, but excluding, the redemption date. The Company may be required to purchase for cash all or a potion of the New Notes on March 5, 2011, March 5, 2014 or March 5, 2019, or upon a change of control, at a purchase price equal to 100% of the principal amount of the new notes being purchased, plus accrued and unpaid interest up to, but excluding, the purchase date. On July 6, 2000, and as amended on May 3, 2004, the Company entered into a Securities Purchase Agreement with The Retirement Systems of Alabama and certain of its affiliated funds (the "RSA facility"), under which the Company borrowed $180 million of subordinated debt financing. This subordinated debt financing was comprised of $80 million bearing interest at 9.125%, repaid in May 2001; and $100 million bearing interest at 9.0%, payable in semi-annual principal installments of $3.5 million plus interest and in semi-annual principal installments of $8.5 million commencing December 31, 2007, with a final maturity date of June 30, 2010. On August 1, 2003, the Company entered into an interest rate swap agreement with Wachovia Bank effectively securing a new interest rate on $40 million of the outstanding debt. The new rate is based on the six month U.S. Libor rate plus a fixed margin of 4.99% and continues until termination of the agreement on June 30, 2010. The notional amount is amortized ratably as the underlying debt is repaid. The notional amount at December 31, 2005 was $34.7 million. The Company initially recorded the interest rate swap at fair value, and subsequently recorded changes in fair value as an offset to the related liability. At December 31, 2005, the fair value of the interest rate swap was ($1 million). The RSA facility is collateralized by a second lien on certain of the Company's and its subsidiaries' North American and South American assets. The Company must meet certain financial tests on a quarterly basis, and comply with certain other covenants, including restrictions of incurrence of debt and liens, restrictions on asset dispositions, payment of dividends, and repurchase of stock. The Company is also required to be in compliance with the covenants of certain other borrowing agreements. The balance outstanding at December 31, 2005 on this long-term debt was $45.0 million, $10.5 million is payable in 2006, $16.5 million is payable in 2007 and 2008 and $18 million thereafter. Net of the fair value of the interest rate swap, the balance outstanding on the RSA facility at December 31, 2005 was $44.0 million. On May 9, 2003, the Company entered into a mortgage agreement with Bank of Scotland for L6 million, or the U.S. dollar equivalent of approximately $10.3 million, as converted at December 31, 2003. The Mortgage agreement had a term of 10 years, bears interest at Bank of Scotland's rate plus 1.35%, and was payable in quarterly installments of approximately L150,000, or $288,000 USD, plus interest. On December 23, 2005, the Company sold the property for net proceeds of L13.4 51 million or $23.3 million USD. The proceeds of the sale were used to repay the mortgage balance outstanding at that date of $8.3 million, and the remaining proceeds were used to reduce the outstanding balance on our Bank of America Facility. On June 22, 2004, in connection with the acquisition of OpenPSL, the Company assumed a mortgage with HSBC Bank plc ("HSBC") for an original amount of L670,000, or the U.S. dollar equivalent of approximately $1.2 million. The mortgage has a term of ten years, bears interest at HSBC's rate plus 1.25% and is payable in monthly installments of approximately L7,600, or $14,600 U.S. dollars. The balance on the mortgage was $692,000 at December 31, 2005. On December 1, 2005, the Company entered into a loan agreement with Mr. Klaus Reichl for up to E4.0 million, or the USD equivalent of $4.7 million at December 31, 2005. The loan was used to finance the asset purchase of MCE. The loan is unsecured, bears interest at the fixed rate of 5.25% and matures on December 5, 2008. The balance outstanding at December 31, 2005 was $3.3 million. NOTE 7 - COMMON STOCK: On August 27, 2003, the Company completed a secondary registered public offering of 5,000,000 shares of Common Stock, at an offering price to the public of $6.50 per share. In connection with the offering, the Company granted to the underwriters an option to purchase up to 750,000 shares to cover over allotments, and the option was exercised in full on September 18, 2003. The Company received proceeds of $34.9 million, net of commissions, discounts and expenses. NOTE 8 - RESTRUCTURING COSTS, SPECIAL CHARGES AND OTHER PROVISIONS: In the fourth quarter of 2005, the Company implemented a restructuring plan for its European operations and as a result the Company incurred restructuring costs and special charges of $9.0 million during the quarter. These costs consisted primarily of $5.9 million related to future lease obligations for excess facilities; $1.7 million for inventory costs in excess of estimatd net realizability, included within the income statement line item "Cost of Goods Sold," $200,000 for estimated vendor claims both related to discontinued product lines; severance and benefits of $936,000 for involuntary employee terminations and $338,000 related to closure of the Company's in-country operation in Sweden. The Company terminated 58 employees in the UK and Europe, in sales, marketing and support functions as of December 31, 2005. In the fourth quarter of 2005, the Company incurred a special charge due to a terminated components supply program in North America and provided a specific reserve for a partner account receivable balance that the Company believes may not be collectable as a result of the program termination. This amount has been classified as a special charge in the amount of $9.1 million, net of a $550,000 reversal of restructuring costs and special charges taken in prior years that were adjusted to reflect actual charges. In the second quarter of 2004, the Company was released from certain contractual obligations related to excess facilities in the U.S. for which restructuring charges had been recorded in 2002. Accordingly, the Company released approximately $300,000 of its restructuring reserve related to that facility. Additionally, the Company revised its estimates for future lease obligations for non-cancelable lease payments for excess facilities in Europe and recorded an additional $300,000 of restructuring charges. In the first quarter of 2003, the Company continued to implement profit improvement and cost reduction measures, and recorded restructuring costs of $1.4 million. These charges consisted of severance and benefits of $1.3 million related to worldwide involuntary terminations and estimated lease costs of $56,300 pertaining to future lease obligations for non-cancelable lease payments for excess facilities in the U.S. The Company terminated 127 employees worldwide, across a wide range of functions including marketing, technical support, finance, operations and sales. Future savings expected from restructuring related cost reductions will be reflected as a decrease in 'Selling, General and Administrative expenses' on the Statement of Operations. The Company also recorded an inventory charge of approximately $1.5 million related to significant changes to certain vendor relationships and the discontinuance of other non-strategic product lines, recorded in 'Cost of Sales'. In the second and third quarters of 2002, as part of the Company's plan to reduce costs and improve operating efficiencies, the Company recorded special charges of $5.7 million. These costs consisted primarily of estimated lease costs of $2.3 million pertaining to future lease obligations for non-cancelable lease payments for excess facilities in the U.S. and costs of $583,000 related to the closure of the Rorke Data Europe facilities, whose operations were consolidated into the 52 Company's TTP division in Almere, Netherlands. These special charges also included provisions for certain Latin American receivables of $1.7 million, and severance and benefits of $1.1 million related to worldwide involuntary terminations. The Company terminated 78 employees, predominately in sales and marketing functions and eliminated two executive management positions in the U.S. Future expected costs reductions will be reflected in the Statement of Operations line item 'Selling, General and Administrative expenses.' Outstanding restructuring liabilities related to the charges expected to be paid in cash are summarized as follows (in thousands):
Balance at Restructuring Exchange Balance Beginning Reserve Cash Rate at End Year Ended December 31, of Period Restructuring Release Payments Changes of Period - ----------------------- ---------- ------------- ------------- -------- -------- --------- 2003 Severance costs $ 545 $1,327 $ -- $1,638 -- $ 234 Lease costs 2,079 56 -- 808 -- 1,327 ------ ------ ----- ------ ----- ------ Total 2,624 1,383 -- 2,446 -- 1,561 2004 Severance costs 234 -- -- 234 -- -- Lease costs 1,327 300 (300) 618 -- 709 ------ ------ ----- ------ ----- ------ Total 1,561 300 (300) 852 -- 709 2005 Severance costs -- 1,275 -- -- (19) 1,256 Lease costs 709 5,921 (82) 421 (81) 6,046 ------ ------ ----- ------ ----- ------ Total $ 709 $7,196 $ (82) $ 421 $(100) $7,302 ====== ====== ===== ====== ===== ======
NOTE 9 - STOCK-BASED COMPENSATION PLANS: STOCK OPTION PLANS In May of 1998, the Company adopted the 1998 Stock Plan (the "Plan") which replaced the 1988 Amended and Restated Incentive Stock Plan (the "1988 Plan") and the 1993 Director Stock Option Plan (the "Director Plan"). The Plan provides for the grant of stock options and stock purchase rights to employees, directors and consultants of the Company at prices not less than the fair value of the Company"s Common Stock at the date of grant for incentive stock options and prices not less than 85% of the fair value of the Company"s Common Stock for nonstatutory stock options and stock purchase rights. Under the Plan, the Company has reserved for issuance a total of 6,039,327 shares of Common Stock plus 272,508 shares of Common Stock which were reserved but unissued under the 1988 Plan and 52,500 shares of Common Stock which were reserved but unissued under the Director Plan. The maximum aggregate number of shares of Common Stock which may be optioned and sold under the Plan is 3,323,351 shares, plus an annual increase to be added on January 1 of each year, equal to the lesser of (i) 600,000 shares, (ii) 4% of the outstanding shares on such date, or (iii) a lesser amount determined by the Board of Directors, subject to adjustment upon changes in capitalization of the Company. Since inception, the Company has reserved 9,717,975shares of Common Stock for issuance under the aggregate of all stock option plans. All stock options become exercisable over a vesting period as determined by the Board of Directors and expire over terms not exceeding ten years from the date of grant. If an optionee ceases to be employed by the Company, the optionee may, within one month (or such other period of time, as determined by the Board of Directors, but not exceeding three months) exercise options to the extent vested. As part of the Plan, the Board of Directors adopted a Management Incentive Program (the "Program") for key employees. Under this Program, options for 193,500 shares of Common Stock were granted in 2000 and no options were 53 granted in years 2003, 2004 or 2005. The Program provides for ten-year option terms with vesting at the rate of one tenth per year, with potential for accelerated vesting based upon attainment of certain performance objectives. The options lapse ten years after the date of grant or such shorter period as may be provided for in the stock option agreement. Options granted under the Director Plan prior to May 1998 and outstanding at December 31, 2004 total 60,000. Under the Director Plan, 112,500 options were granted in 1993 at an exercise price of $5.33 per share, and 30,000 options were granted in 1996 at an exercise price of $4.67 per share. In 1997, 30,000 options were granted at an exercise price of $8.42 per share. In 1998, 22,500 options were granted at an exercise price of $5.00 per share. On August 5, 1999, the Board of Directors approved the vesting in full of all options currently held by the Directors and modified the Plan to immediately vest all future Board of Directors options at the time they are granted. In 2003 and prior years beginning in 2000, the number of shares of Common Stock reserved under the Plan were not sufficient to accommodate the Company's growth through acquisitions and key employee retention efforts. To induce certain key employees to accept employment with the Company, the Company issued a total of 450,000, 898,000 and 520,000 nonqualified stock options outside the provisions of the Plan in 2003, 2002 and 2001 respectively, and 380,000 of these options were outstanding at December 31, 2005, net of cancellations, and are included in the table below. The following table presents all stock option activity:
Options Outstanding --------------------------- Options Weighted Available for Average Grant Shares Exercise Price ------------- ---------- -------------- Balance at December 31, 2002 494,410 5,367,246 $10.31 Increase in options available for grant 600,000 -- -- Options tendered in exchange for restricted stock units 1,346,500 (2,234,250) $15.43 Restricted stock rights granted in option exchange (744,802) 744,802 $ 0.00 Options canceled 295,191 (297,191) $ 7.78 Canceled options not available for grant (88,764) -- $ 5.29 Options granted (1,389,200) 1,839,200 $ 6.33 Options exercised -- (604,310) $ 5.88 ---------- ---------- Balance at December 31, 2003 513,335 4,815,497 $10.31 Increase in options available for grant 600,000 -- -- Options canceled 614,137 (614,137) $ 5.42 Canceled options not available for grant (303,749) -- $ 6.49 Options granted (1,146,348) 1,146,348 $ 6.05 Options exercised -- (737,224) $ 3.96 ---------- ---------- Balance at December 31, 2004 277,375 4,610,484 $ 5.92 Increase in options available for grant 600,000 -- -- Options canceled 798,583 (798,583) $ 6.29 Canceled options not available for grant (120,400) -- $ 5.86 Options granted (657,375) 657,375 $ 6.77 Options exercised -- (768,925) $ 4.46 ---------- ---------- Balance at December 31, 2005 898,183 3,700,351 $ 6.04 ========== ==========
At December 31, 2005, 2,257,588 options were exercisable under these Plans. Upon the adoption of the 1998 Stock Plan, canceled options under the 1988 Plan are not available for future grants. 54 The following table summarizes information about stock options and restricted stock outstanding for all plans at December 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------ ----------------------------- Number of Number of Options Weighted Shares Outstanding Average Exercisable As of Remaining Weighted As of Weighted Range of Exercise December 31, Contractual Life Average December 31, Average Prices 2005 In Years Exercise Price 2005 Exercise Price - ----------------- ------------ ---------------- -------------- ------------ -------------- $ 0.00 - $ 0.00 643,304 2.98 $ 0.00 -- $ 0.00 $ 3.90 - $ 4.42 530,600 2.02 4.12 374,750 4.12 $ 4.49 - $ 6.45 539,324 3.45 6.04 256,135 5.83 $ 6.55 - $ 7.23 621,574 3.20 7.12 294,154 7.14 $ 7.25 - $ 8.50 641,250 4.23 8.24 609,000 8.27 $ 8.65 - $10.28 570,799 3.23 9.56 570,799 9.56 $10.50 - $21.00 153,500 3.03 11.39 152,750 11.38 --------- --------- 3,700,351 3.20 6.04 2,257,588 7.69 ========= =========
EMPLOYEE STOCK PURCHASE PLAN The Employee Stock Purchase Plan ("ESPP"), as amended in 2004, provides for automatic annual increases in the number of shares reserved for issuance on January 1 of each year by a number of shares equal to the lesser of (i) 400,000 shares, (ii) 2.0% of the outstanding shares on such date, or (iii) a lesser amount determined by the Board of Directors, subject to adjustment upon changes in capitalization of the Company. Effective January 1, 2006, the Company terminated the ESPP in order to reduce compensation expense associated with the plan in future periods on its consolidated statements of operations, upon adoption of FASB Statement No. 123R -- Share-Based Payment in 2006. FAIR VALUE DISCLOSURES The Company applies APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its plans, all of which are fixed plans. To determine the additional pro forma disclosures required by SFAS 123 for the stock option plans, the fair value of each option grant used for calculating pro forma net income is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for grants in 2005, 2004 and 2003 respectively, expected volatility of 72%, 74% and 76%; risk free interest rate of 4.1%, 3.0% and 2.0% and expected lives of 3.61, 3.60 and 3.45 years. The Company has not paid dividends and assumed no dividend yield. The weighted average fair value of those stock options granted in 2005, 2004 and 2003 was $4.74, $4.09 and $3.46 per option, respectively. The fair value of each ESPP purchase right is estimated on the beginning of the offering period using the Black-Scholes option-pricing model with substantially the same assumptions as the option plans but expected lives of .5 years. The weighted average fair value of those purchase rights granted in 2005, 2004 and 2003 was $3.31 $2.86 and $3.62 per right, respectively. Had compensation cost for the Company's two stock-based compensation plans been determined based on the fair value at the grant dates for awards in 2005, 2004 and 2003 under those plans consistent with the provisions of SFAS 123, the Company's net income and earnings per share would have been reduced as presented in the disclosure in Note 2 Stock-Based Compensation. SFAS No. 123 requires the use of option pricing models that were not developed for use in valuing employee stock options. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the option's expected life and the price volatility of the underlying stock. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options. OPTION EXCHANGE On November 25, 2002, the Company made an exchange offer (the "Exchange") to current officers and employees of the Company to exchange stock options held by these employees for rights to receive shares of the Company's Common 55 Stock ("Restricted Units"). The offer period ended December 31, 2002 and the Restricted Units were issued on January 3, 2003 (the "Exchange Date"). Employee stock options eligible for the Exchange had a per share exercise price of $11.75 or greater, whether or not vested ("Eligible Options"). The offer provided for an exchange ratio of three option shares surrendered for each Restricted Unit to be received subject to vesting terms. In order to be eligible to participate in the Exchange ("Eligible Participant"), the employee may not receive stock options or other equity awards in the six months following the Exchange Date. In order to participate in the Exchange, an Eligible Participant could tender all Eligible Options held, or any selected Eligible Options granted by different stock option agreements. If an Eligible Participant chose to participate, all options granted on or after May 26, 2002 were tendered regardless of the exercise price of such options. The Units of restricted stock will vest in one-fourth increments on each of the first, second, third and fourth annual anniversary dates of the Exchange Date. If the employment of an employee who participated in the Exchange terminates prior to the vesting, the employee will forfeit the unvested shares of Restricted Units. As a result of the Exchange, the Company issued 744,802 rights to receive Restricted Units in return for 2,234,250 stock options. The total non-cash deferred compensation charge over the vesting period of four years is approximately $4 million computed based on the share price at the date of approval of $5.42 per share. The deferred compensation charge is unaffected by future changes in the price of the common stock. NOTE 10 - INCOME TAXES: The provision for (benefit from) income taxes consists of the following (in thousands):
2005 2004 2003 ------- ------ ------- Current: Federal $ 6,007 $3,723 $ (637) State 342 202 (122) Foreign 2,152 4,569 552 ------- ------ ------- 8,501 8,494 (207) Deferred: Federal (2,462) (464) (1,793) State 78 525 1,946 Foreign (4,061) (578) (615) ------- ------ ------- (6,445) (517) (462) ------- ------ ------- $ 2,056 $7,977 $ (669) ======= ====== =======
Deferred tax assets (liabilities) comprise the following (in thousands):
2005 2004 ------- ------- Bad debt, sales and warranty reserves $ 3,281 $ 3,850 Accruals, inventory and other reserves 5,694 6,265 Net operating losses 9,031 7,477 Foreign tax credits 1,987 321 Other 1,899 902 ------- ------- Gross deferred tax assets 21,892 18,815 ------- ------- Depreciation and amortization (1,316) (4,018) ------- ------- Gross deferred tax liabilities (1,316) (4,018) ------- ------- Valuation allowance (5,919) (5,280) ------- ------- Net deferred tax assets $14,657 $ 9,517 ======= =======
Valuation allowances reduce the deferred tax assets to the amount that, based upon all available evidence, is more likely than not to be realized. The deferred tax assets valuation allowance at December 31, 2005 and 2004 is attributed to certain foreign net operating loss carryovers that do not meet the more likely than not standard of realizability. 56 As of December 31, 2005, the Company had state net operating loss carryforwards of approximately $17,246,262 available to offset future state taxable income. The state net operating loss carryforwards will expire in varying amounts beginning 2006 through 2023. As of December 31, 2005, the Company also has foreign net operating loss carryforwards for the United Kingdom of approximately $4,817,000, for the Netherlands of approximately $6,476,000 and for Germany of approximately $4,433,900. The foreign net operating loss carryforwards for these three countries will not expire and can be carried forward indefinitely. As of December 31, 2005, the Company also has a foreign tax credit carryover in the amount of $1,987,153. The foreign tax credit will begin to expire in various amounts beginning in 2012 through 2016. The tax benefit associated with dispositions from employee stock plans for 2005 is approximately $1,406,730, which was recorded as an addition to paid-in capital and a reduction to taxes payable. A reconciliation of the Federal statutory tax rate to the effective tax (benefit) follows:
2005 2004 2003 ---- ---- ----- Federal statutory rate 35.0% 35.0% (35.0)% State income taxes, net of Federal tax benefit and credits 15.1% 3.0% 0.8% Difference between US and Foreign tax rate 11.1% 3.7% 34.0% Extraterritorial income exclusion (4.7)% (0.9)% (13.0)% Meals and entertainment 6.3% 0.8% 2.9% Non-deductible officer's compensation 14.2% 0.0% 0.0% Other 4.0% (0.3)% (2.7)% ---- ---- ----- Effective tax rate 81.0% 41.3% (13.0)% ==== ==== =====
NOTE 11 - COMMITMENTS AND CONTINGENCIES: The Company leases its facilities under cancelable and non-cancelable operating lease agreements. The leases expire at various times through 2019 and contain renewal options. Certain of the leases require the Company to pay property taxes, insurance, and maintenance costs. The Company leases certain equipment under capital leases with such equipment amounting to $2,405,000 less accumulated depreciation of $1,068,000 at December 31, 2005. Depreciation expense on assets subject to capital leases was $422,000 for the year ended December 31, 2005. The capital lease terms range from 24 months to 60 months. The following is a summary of commitments under non-cancelable leases:
CAPITAL OPERATING YEAR ENDING DECEMBER 31, LEASES LEASES ------------------------ ------- --------- (in thousands) 2005 $ 838 $11,693 2006 -- 9,978 2007 -- 6,905 2008 -- 5,982 2009 -- 4,705 2010 and beyond -- 11,430 ----- ------- Total minimum lease payments 838 $50,693 ======= Less: imputed interest (101) ----- Present value of minimum lease payments $ 737 =====
57 Total operating lease expense was $9,446,000, $9,068,000 and $8,343,000 for the years ended December 31, 2005, 2004 and 2003, respectively. The Company is subject to legal proceedings and claims that arise in the normal course of business. Management believes that the ultimate resolution of such matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows. NOTE 12 - TRANSACTIONS WITH RELATED PARTIES: One director of the Company is a director of one of the Company's customers, Company A. Another director of the Company is a director of one of the Company's customers/vendors, Company B. A third director of the Company is a director of one of the Company's customers, Company F. A fourth director of the Company is the President of one of the Company's consulting providers, Company D. A fifth director of the Company is the President of one of the Company's customers/vendors, Company E. A former president of one of the Company's subsidiaries was a co-owner of one of the Company's customers in 2003, Company G. The Company also leased a facility from Company G. Sales to these parties and purchases of inventory and other services from these parties for the three years ended December 31, 2005 and accounts receivable at December 31, 2005 and 2004 are summarized below:
(In thousands) -------------------- 2005 2004 2003 ------ ---- ---- SALES: Company A $ 68 $176 $647 Company B 1,940 288 562 Company E -- 25 29 Company F 2 12 -- Company G -- -- 918 ACCOUNTS RECEIVABLE: Company A (2) 12 Company B 45 34 INVENTORY PURCHASED: Company E 1 -- -- CONSULTING Company D -- 22 55 RENT Company G -- -- 78
NOTE 13 - SALARY SAVINGS PLAN: The Company has a Section 401(k) Plan (the "Plan") which provides participating employees an opportunity to accumulate funds for retirement and hardship. Participants may contribute up to 15% of their eligible earnings to the Plan. Beginning in 2006, the Company will provide a matching contribution of 25% of the employee's contribution to the Plan up to $2,500 per year. NOTE 14 - GEOGRAPHIC INFORMATION: The Company operates in one industry segment and markets its products worldwide through its own direct sales force. The Company attributes revenues from customers in different geographic areas based on the location of the customer. Sales in the U.S. were 40%, 38% and 38% of total sales for the years ended December 31, 2005, 2004 and 2003, respectively. Geographic information consists of the following:
(in thousands) ------------------------------------ 2005 2004 2003 ---------- ---------- ---------- Net sales: North America (1) $1,410,156 $1,181,643 $ 946,317 Latin America 409,059 339,546 249,893 Europe (2) 1,374,618 1,306,588 1,034,077 ---------- ---------- ---------- Total $3,193,833 $2,827,777 $2,230,287 ========== ========== ==========
58 (1) North America sales include sales in the United States of America of $1,287,000, $1,075,000 and $848,000 for the years ended December 31, 2005, 2004 and 2003, respectively. (2) Europe sales include sales in the United Kingdom of $866,000, $843,000, and $664,000 for the years ended December 31, 2005, 2004 and 2003, respectively. The following table presents long-lived assets located in the Company's country of domicile and located in all foreign countries.
December 31, ----------------- 2005 2004 ------- ------- Long -lived assets: United States $ 4,536 $ 5,878 United Kingdom 6,436 35,276 Other foreign countries 2,240 1,651 ------- ------- Total $13,212 $42,805 ======= =======
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): (in thousands, except per share amounts)
Quarter Ended --------------------------------------------------------------------------------------- Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, 2005 2005 2005 2005 2004 2004 2004 2004 -------- --------- -------- -------- -------- --------- -------- -------- Net sales .......................... $842,358 $759,056 $788,471 $803,948 $808,427 $728,731 $630,288 $660,331 Cost of sales ...................... 783,486 701,139 731,341 746,649 744,082 670,023 581,220 611,044 -------- -------- -------- -------- -------- -------- -------- -------- Gross profit ....................... 58,872 57,917 57,130 57,299 64,345 58,708 49,068 49,287 Operating expenses: Selling, general and administrative expenses ........................ 49,973 48,704 46,463 45,445 50,052 49,266 43,191 42,731 Restructuring costs and special charges ......................... 16,515 -- -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- Total operating expenses ........... 66,488 48,704 46,463 45,445 50,052 49,266 43,191 42,731 Operating income (loss) ............ (7,616) 9,213 10,667 11,854 14,293 9,442 5,877 6,556 Interest expense and other income .. 5,877 5,324 5,562 4,818 4,693 4,493 3,830 3,838 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) from operations before income taxes .................... (13,493) 3,889 5,105 7,036 9,600 4,949 2,047 2,718 Provision for (benefit from) income taxes ........................... (4,107) 1,573 1,930 2,660 3,800 2,175 996 1,006 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) .................. $ (9,386) $ 2,316 $ 3,175 $ 4,376 $ 5,800 $ 2,774 $ 1,051 $ 1,712 ======== ======== ======== ======== ======== ======== ======== ======== Earnings (loss) per share Basic ........................... $ (0.31) $ 0.08 $ 0.11 $ 0.15 $ 0.20 $ 0.10 $ 0.04 $ 0.06 Diluted ......................... $ (0.31) $ 0.08 $ 0.11 $ 0.15 $ 0.20 $ 0.10 $ 0.04 $ 0.06 ======== ======== ======== ======== ======== ======== ======== ======== Shares used in per share calculation Basic ........................... 29,906 29,496 28,999 28,795 28,407 27,990 27,194 27,068 ======== ======== ======== ======== ======== ======== ======== ======== Diluted ......................... 29,906 30,405 29,696 29,635 29,344 28,553 27,659 28,079 ======== ======== ======== ======== ======== ======== ======== ========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 59 ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures After evaluating the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 ("the Exchange Act") as of the end of the period covered by this annual report, our Chief Executive Officer and Chief Financial Officer, with the participation of our management, have concluded that our disclosure controls and procedures are effective to ensure that information that is required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules of the Securities Exchange Commission. Management's Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control system was designed to ensure that material information regarding our consolidated operations is made available to management and the board of directors to provide them reasonable assurance that the published financial statements are fairly presented. There are limitations inherent in any internal control. As a result, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation but may not prevent or detect misstatements. And, as conditions change over time so to may the effectiveness of internal controls. Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control--Integrated Framework issued by the Committee of the Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control--Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2005. Management has excluded MCE Germany and Net Storage from its assessment of internal control over financial reporting as of December 31, 2005 because they were acquired by the Company in purchase business combinations during 2005. Our management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein. Changes in Internal Controls There were no changes in our internal control over financial reporting that occurred during the period covered by this annual report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION In the fourth quarter of 2005, the Board of Directors, acting on the advice of the Company's Chief Executive Officer and Chief Financial Officer, concluded that a material charge was required in connection with the termination of a components supply program in North America. We incurred a charge of $9.1 million, net of a $550,000 reversal of restructuring costs and special charges taken in prior years that were adjusted to reflect actual charges. The impairment will not result in any future material cash expenditures. 60 PART III Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, portions of the information required by Part III of Form 10-K are incorporated by reference from the Company's Proxy Statement to be filed with the Commission in connection with the 2006 Annual Meeting of Shareholders (the "Proxy Statement"). ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Information concerning directors of Bell Microproducts Inc. appears in our Proxy Statement, under the captions "Corporate Governance" and "Election of Directors." This portion of the Proxy Statement is incorporated herein by reference. (b) EXECUTIVE OFFICERS OF THE REGISTRANT The following table and descriptions identify and set forth information regarding the Company's six executive officers:
Name Age Position ---- --- -------- W. Donald Bell...... 68 President, Chief Executive Officer and Chairman of the Board James E. Illson..... 52 Chief Operating Office, President of the Americas and Chief Financial Officer Richard J. Jacquet.. 66 Vice President of Human Resources Philip M. Roussey... 63 Executive Vice President, Enterprise Marketing Robert J. Sturgeon.. 52 Vice President of Information Technology Graeme Watt......... 44 President, Bell Microproducts Europe
W. Donald Bell has been President, Chief Executive Officer and Chairman of the Board of Bell Microproducts since its inception in 1987. Mr. Bell has over thirty years of experience in the electronics industry. Mr. Bell was formerly the President of Ducommun Inc. and its subsidiary, Kierulff Electronics Inc., as well as Electronic Arrays Inc. He has also held senior management positions at Texas Instruments Incorporated, American Microsystems and other electronics companies. James E. Illson has been our Chief Operating Officer and President of Americas since November 2005 and our Chief Financial Officer since September 2002. From March 2000 to April 2002, Mr. Illson was Chief Executive Officer and President of Wareforce Inc. a value added reseller. Mr. Illson was with Merisel Inc. from August 1996 to January 2000, serving in the position of Chief Financial Officer until March 1998, when he became President/Chief Operating Officer. Mr. Illson holds a Bachelors degree in Business Administration and a Masters degree in Industrial Administration. Mr. Illson has over 25 years experience in financial and operational fields. Richard J. Jacquet has been our Vice President of Human Resources since May 2000. From 1988 to May 2000, Mr. Jacquet served as Vice President of Administration of Ampex Corporation, an electronics manufacturing company. Prior to 1988, Mr. Jacquet served in various senior human resource positions with Harris Corporation and FMC Corporation. 61 Philip M. Roussey has been our Executive Vice President of our Enterprise Marketing since February 2002, prior to which he served as our Executive Vice President of Computer Products Marketing from April 2000 until February 2002 and as our Senior Vice President of Marketing for Computer Products and Vice President of Marketing from the inception of our Company in 1987 until April 2000. Prior to joining Bell Microproducts in 1987, Mr. Roussey served in management positions with Kierulff Electronics, most recently as Corporate Vice President of Marketing. Robert J. Sturgeon has been our Vice President of Information Technology since July 2000, prior to which, he served as our Vice President of Operations since joining the Company in 1992. From January 1991 to February 1992, Mr. Sturgeon was Director of Information Services for Disney Home Video. Prior to that time, Mr. Sturgeon served as Management Information Services ("MIS") Director for Paramount Pictures' Home Video Division from June 1989 to January 1991 and as a Marketing Manager for MTI Systems, a division of Arrow Electronics Inc., from January 1988 to June 1989. Other positions Mr. Sturgeon has held include Executive Director of MIS for Ducommun where he was responsible for ten divisions, including Kierulff Electronics. Graeme Watt has been our President of Bell Microproducts, Europe since April 2004. From 1988 through 2003 he held a number of positions in IT distribution with Frontline Distribution, Computer 2000 and Tech Data as the companies were acquired. His most recent roles were Managing Director, United Kingdom for Computer 2000, Northern Region Managing Director for Tech Data Europe, and European President for Tech Data from 2000 to 2003. Mr Watt holds a Bachelor of Sciences Degree in Biological Science from Edinburgh University and is a qualified Chartered Accountant. (c) Information concerning our Code of Ethics appears in our Proxy Statement, under the caption "Corporate Governance." This portion of the Proxy Statement is incorporated herein by reference. (d) Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 appears in our Proxy Statement, under the heading "Section 16(a) Beneficial Ownership Reporting Compliance," and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation appears in our Proxy Statement, under the captions "Corporate Governance," "Executive Compensation," "Additional Information Relating to Directors and Officers of the Company," and "Stock Performance Graph" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning the security ownership of certain beneficial owners and management appears in the Proxy Statement, under the caption "Security Ownership of Certain Beneficial Owners and Management," and is incorporated herein by reference. 62 The following table provides information concerning our equity compensation plans as of December 31, 2005: Equity Compensation Plan Information
Column (c) Column (a) Number of securities remaining Number of securities to Column (b) available for future issuance be issued upon exercise Weighted-average exercise under equity compensation plans of outstanding options, price of outstanding (excluding securities reflected Plan Category warrants and rights options warrants and rights in column (a) - ------------- ----------------------- --------------------------- ------------------------------- Equity compensation plans approved by security holders 2,677,047 $7.53 (1) 898,183 (2) Equity compensation plans not approved by security holders (3) 380,000 $5.77 -- --------- ----- ------- Total 3,057,047 $6.59 898,183 ========= ===== =======
(1) Weighted-average exercise price excludes 643,304 shares for restricted stock units with zero exercise price. (2) Includes shares under our 1998 Stock Plan, which plan provides for the automatic increase of shares on January 1 of each year of a number of shares equal to the lesser of (i) 600,000 shares, (ii) 4% of the outstanding shares on such date, or (iii) a lesser amount determined by the Board, subject to adjustment upon changes in our capitalization. (3) Represents stock options that have been granted to employees outside of the Company's 1998 Stock Plan, which options are represented by agreements substantially the same as agreements with respect to options under the 1998 Stock Plan and generally provide for a vesting period as determined by the Board of Directors and expire over terms not exceeding ten years from the date of grant. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions appears in our Proxy Statement, under the caption "Additional Information Relating to Directors and Officers of the Company," and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information concerning principal accountant fees and services appears in our Proxy Statement under the caption "Ratification of Appointment of Independent Registered Public Accounting Firm" and is incorporated herein by reference. 63 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Form 10-K: (1) Consolidated Financial Statements The financial statements (including the notes thereto) listed in the Index to Consolidated Financial Statements (set forth in Item 8 of this Form 10-K) are filed as part of this Annual Report on Form 10-K. (2) Consolidated Financial Statement Schedule II - Valuation and Qualifying Accounts and Reserves page 66 Schedules not listed above have been omitted because they are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes to Consolidated Financial Statements. (3) Exhibits - See Exhibit Index following signature page (b) Exhibits. See Item 15(a) above. (c) Financial Statements and Schedule. See Item 15(a) above. 64 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on March 16, 2006. BELL MICROPRODUCTS INC. By: /s/ James E. Illson ------------------------------------ James E. Illson Chief Operating Officer, President of Americas and Chief Financial Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints W. Donald Bell and James E. Illson and each of them, jointly and severally, his attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ W. Donald Bell Chairman of the Board, President and Chief Executive March 16, 2006 - ----------------------- Officer (Principal Executive Officer) (W. Donald Bell) /s/ James E. Illson Chief Operating Officer, President of Americas and March 16, 2006 - ----------------------- Chief Financial Officer (Principal Financial and (James E Illson) Accounting Officer) /s/ Gordon A. Campbell Director March 16, 2006 - ----------------------- (Gordon A. Campbell) /s/ Eugene B. Chaiken Director March 16, 2006 - ----------------------- (Eugene Chaiken) /s/ David M. Ernsberger Director March 16, 2006 - ----------------------- (David M. Ernsberger) /s/ Edward L. Gelbach Director March 16, 2006 - ----------------------- (Edward L. Gelbach) /s/ James E. Ousley Director March 16, 2006 - ----------------------- (James E. Ousley) /s/ Glenn E. Penisten Director March 16, 2006 - ----------------------- (Glenn E. Penisten) /s/ Mark L. Sanders Director March 16, 2006 - ----------------------- (Mark L. Sanders) /s/ Roger V. Smith Director March 16, 2006 - ----------------------- (Roger V. Smith)
65 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS)
Additions Balance Charged Balance at to Costs at End Beginning Other Special and Deductions- of Year Ended December 31, of Period (1) Charges Expenses Write-offs Period - ----------------------- --------- ----- ------- --------- ----------- ------- 2003 Allowance for doubtful accounts 19,340 -- -- 7,569 (9,342) 17,567 Allowance for excess and obsolete inventory 8,617 2,319 -- 8,405 (9,815) 9,526 Allowance for sales returns and warranty obligations 8,582 -- -- 57,340 (57,024) 8,898 Allowance for tax valuations 934 -- -- 3,147 (439) 3,641 2004 Allowance for doubtful accounts 17,567 721 -- 8,970 (13,661) 13,597 Allowance for excess and obsolete inventory 9,526 1,774 -- 5,923 (7,984) 9,239 Allowance for sales returns and warranty obligations 8,898 319 -- 63,433 (63,374) 9,276 Allowance for tax valuations 3,641 -- -- 2,443 (805) 5,279 2005 Allowance for doubtful accounts 13,597 678 9,133 6,003 (7,521) 21,890 Allowance for excess and obsolete inventory 9,239 5,017 648 7,414 (6,513) 15,805 Allowance for sales returns and warranty obligations 9,276 1,082 -- 76,584 (68,999) 17,943 Allowance for tax valuations 5,279 (290) -- 1,271 (341) 5,919
(1) Balance consists of allowance for doubtful accounts and inventory provisions related to the acquisitions of subsidiaries and the effects of cumulative translation adjustments. 66 INDEX TO EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT - ------ ----------------------- 3.1 Amended and Restated Articles of Incorporation of Registrant - incorporated by reference to Exhibit 4.1 filed with the Registrant's Registration Statement on Form S-3 (File No. 333-117555). 3.2 Amended and Restated Bylaws of Registrant - incorporated by reference to Exhibit 4.2 filed with the Registrant's Registration Statement on Form S-3 (File No. 333-117555). 4.1 Specimen Common Stock Certificate of the Registrant - incorporated by reference to exhibit filed with the Registrant's Registration Statement on Form S-1 (File No. 33-60954) filed on April 14, 1993 and which became effective on June 14, 1993. 4.2 Form of Indenture between the Company and Wells Fargo Bank, National Association, as Trustee, with respect to the Series B 3 3/4% Subordinated Convertible Notes due 2024 - incorporated by reference to Exhibit 4.1 to Registrant's Registration Statement on Form S-4 (File No. 333-120527). 4.3 Indenture dated as of April 30, 2004 between the Company and Wells Fargo Bank, National Association as Trustee, with respect to the 3 3/4% Subordinated Convertible Notes due 2024 - incorporated by reference to Exhibit 4.1 to Registrant's Registration Statement on Form S-3 (File No. 333-116130). 4.4 Form of Series B 3 3/4% Subordinated Convertible Notes due 2024 (contained in Exhibit 4.2). 4.5 Form of 3 3/4% Subordinated Convertible Notes due 2024 (contained in Exhibit 4.3). 4.6 Registration Rights Agreement dated March 5, 2004 by and among the Registrant, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Raymond James & Associates, Inc. - incorporated by reference to Exhibit 4.2 to Registrant's Registration Statement on Form S-3 (File No. 333-116130). 10.1* Registrant's 401(k) Plan - incorporated by reference to exhibit filed with the Registrant's Registration Statement on Form S-1 (File No 33-60954). 10.2 Lease dated March 17, 1992 for Registrant's facilities at 1941 Ringwood Avenue; Suite 100, San Jose, California - incorporated by reference to exhibit filed with the Registrant's Registration Statement on Form S-1 (File No. 33-60954) 10.3 Form of Indemnification Agreement - incorporated by reference to exhibit filed with the Registrant's Registration Statement on Form S-1 (File No. 33-60954). 10.4 Lease dated February 17, 1999 for Registrant's facilities at 4048 Castle Avenue, New Castle Delaware - incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarter ended March 31, 1999. 10.5 Lease dated August 1, 1999 for Registrant's facilities at 1941 Ringwood Avenue, Suite 200, San Jose, California - incorporated by reference to Exhibit 10.18 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1999. 10.6* Employment Agreement dated as of July 1, 1999 between the Registrant and W. Donald Bell, the Registrant's Chief Executive Officer - incorporated by reference to exhibit filed with the Registrant's Report on Form 8-K filed on January 13, 2000. 10.7 Office and warehouse lease, dated March 21, 1991, as amended by Amendment No. 1, Amendment No. 2, Amendment No. 3, Amendment No. 4 and Amendment No. 5 relating to Rorke Data facilities in Eden Prairie, Minnesota - incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 2000. 10.8 Lease, dated June 16, 2000, relating to Bell Microproducts - Future Tech facilities in Miami, Florida - incorporated by reference to Exhibit 10.2 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 2000. 10.9 Securities Purchase Agreement dated July 6, 2000 between the Registrant and The Retirement Systems of Alabama - incorporated by reference to exhibit filed with the Registrant's Report on Form 10-Q for the quarter ended September 30, 2000. 10.10* Management Retention Agreements between the Registrant and the following executive officers of the Registrant: Philip M. Roussey and Robert J. Sturgeon - incorporated by reference to Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000. 10.11* 1998 Stock Plan, as amended and restated through April 30, 2002, and form of option agreement - incorporated by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the years ended December 31, 2004. 10.12* Form of restricted stock unit agreement currently used under the 1998 Stock Plan - incorporated by reference to Exhibit 99(D)(3) to Schedule TO (File No. 005-44304) filed November 26, 2002.
67
NUMBER DESCRIPTION OF DOCUMENT - ------ ----------------------- 10.13* Amendment to Employment Agreement dated as of July 1, 1999 between the Registrant and W. Donald Bell date as of April 30, 2002 - incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002. 10.14* Executive Employment and Non-Compete Agreement dated as of August 13, 2002 between the Registrant and James E. Illson - incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002. 10.15 Syndicated Credit Agreement effective as of December 2, 2002, as amended and restated through August 16, 2005 by and among Ideal Hardware Limited, Bell Microproducts Europe Export Limited, BM Europe Partners C.V., Bell Microproducts Europe BV, Bank of America, N.A. and certain banks and financial institutions. 10.16 Syndicated Composite Guarantee and Debenture effective as of December 2, 2002 by and among Ideal Hardware Limited, certain other companies listed and Bank of America, N.A. - incorporated by reference to Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002. 10.17 Priority Agreement effective as of December 2, 2002 by and among Bell Microproducts Limited, National Westminster Bank PLC and Bank of America, N.A. - incorporated by reference to Exhibit 10.41 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002. 10.18 First Union National Bank Loan and Security Agreement dated May 14, 2001 - incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 - incorporated by reference to Exhibit 10.42 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002. 10.19 First Amendment to Loan and Security Agreement dated as of December 31, 2002 by and among the Registrant, certain subsidiaries of the Registrant, certain financial institutions and Congress Financial Corporation - incorporated by reference to Exhibit 10.43 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002. 10.20 Supplemental Agreement Re Syndicated Credit Agreement dated November 6, 2003 by and among Ideal Hardware Limited, Bell Microproducts Europe Export Limited, BM Europe Partners C.V., Bell Microproducts Europe BV, Bank of America, N.A. and certain banks and financial institutions - incorporated by reference to Exhibit 10.44 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2003. 10.21 Second Amendment to Loan and Security Agreement and Waiver dated October 9, 2003 with Congress Financial Corporation - incorporated by reference to Exhibit 10.45 to the Registrant's Annual Report on Form 10K for the year ended December 31, 2003. 10.22* Amendment to Employment Agreement dated October 19, 2000 between the Company and W. Donald Bell - incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. 10.23 First Amendment to Securities Purchase Agreement dated May 3, 2004 between the Registrant and the Retirement Systems of Alabama - incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. 10.24 Third Amendment to Loan and Security Agreement dated September 13, 2004 between the Registrant and Congress Financial Corporation - incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. 10.25 Credit and Security Agreement dated September 20, 2004 by and among Bell Microproducts Funding Corporation, the Registrant, Blue Ridge Asset Funding Corporation, certain Liquidity Banks and Wachovia Bank - incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. 10.26 Receivables Sales Agreement dated September 20, 2004 between the Registrant and Bell Microproducts Funding Corporation - incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. 10.27 Supplemental Agreement to Syndicated Credit Agreement dated September 22, 2004 by and among Ideal Hardware Limited, Bell Microproducts Europe Export Limited, BM Europe Partners C.V., Bell Microproducts Europe B.V., Bank of America, N.A. and certain banks and financial institutions - incorporated by reference to Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. 10.28 Amendment No. 1 to Credit and Security Agreement dated January 31, 2005 by and among the Registrants Blue Ridge Asset Funding Corporation, certain liquidity Banks and Wachovia Bank - incorporated by reference to Exhibit 10.30 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2004. 10.29* Director Compensation as of August 3, 2005 - incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on August 9, 2005.
68
NUMBER DESCRIPTION OF DOCUMENT - ------ ----------------------- 10.30* Stock Ownership Guidelines for Executive Officers and Directors as of August 3, 2005 - incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on August 9, 2005 10.31* Form of Management Retention Agreement between the Company and certain officers of the Company - incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005. 10.32* Supplemental Retirement Plan Benefit as of August 3, 2005 for W. Donald Bell - incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005. 10.33 Amended and Restated Credit and Security Agreement dated December 28,2005 by and among Bell Microproducts Funding Corporation, the Registrant, Variable Funding Capital Company LLC, certain liquidity banks and Wachovia Bank - incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on January 4, 2006. 10.34* 2005 Annual Incentive Program 21.1 Subsidiaries of the Registrant 23.1 Consent of PricewaterhouseCoopers LLP, independent registered accounting firm 24.1 Power of Attorney (Contained on Signature page of this Form 10-K). 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
* Management contract or compensatory plan, contract or arrangement required to be filed as an exhibit to this Form 10-K. 69 EX-10.15 2 c03257exv10w15.txt SYNDICATED CREDIT AGREEMENT Exhibit 10.15 DATED 2 DECEMBER 2002 IDEAL HARDWARE LIMITED BELL MICROPRODUCTS EUROPE EXPORT LIMITED AS ORIGINAL BORROWERS AND BM EUROPE PARTNERS C.V. BELL MICROPRODUCTS EUROPE BV BANK OF AMERICA, NATIONAL ASSOCIATION AS ARRANGER, ISSUER, SWINGLINE LENDER, AGENT AND SECURITY TRUSTEE AND CERTAIN BANKS AND FINANCIAL INSTITUTIONS AS LENDERS L80,000,000 SYNDICATED CREDIT AGREEMENT AS AMENDED BY SUPPLEMENTAL AGREEMENTS DATED 3 DECEMBER 2003, 22 SEPTEMBER 2004, 15 DECEMBER 2004, 17 MATCH 2005, 16 AUGUST 2005, AND [______] CONTENTS
CLAUSE PAGE - ------ ---- 1 INTERPRETATION........................................................ 6 2 THE REVOLVING FACILITY................................................ 36 3 ADDITIONAL BORROWERS AND UNSECURED GUARANTORS......................... 37 4 ADDITIONAL CHARGING COMPANIES......................................... 39 5 CONDITIONS PRECEDENT.................................................. 40 6 UTILISATION OF THE REVOLVING FACILITY................................. 40 7 INTEREST AND INTEREST PERIODS......................................... 50 8 MARKET DISRUPTION..................................................... 54 9 REPAYMENT, PREPAYMENT AND CANCELLATION................................ 55 10 TAXES................................................................. 57 11 INCREASED COSTS....................................................... 59 12 ILLEGALITY............................................................ 60 13 GUARANTEE............................................................. 61 14 REPRESENTATIONS AND WARRANTIES........................................ 65 15 FINANCIAL CONDITION................................................... 70 16 COVENANTS............................................................. 75 17 DEFAULT............................................................... 95 18 DEFAULT INTEREST...................................................... 100 19 INDEMNITIES AND CURRENCY OF ACCOUNT................................... 101 20 PAYMENTS.............................................................. 102 21 SET-OFF............................................................... 106 22 FEES.................................................................. 106 23 PRO RATA SHARING...................................................... 108 24 COSTS, EXPENSES AND STAMP DUTIES...................................... 110 25 CALCULATIONS AND EVIDENCE OF DEBT..................................... 111 26 THE AGENT, THE ARRANGER, THE SECURITY TRUSTEE AND THE LENDERS......... 113 27 TRUSTEE PROVISIONS.................................................... 117 28 ASSIGNMENTS AND TRANSFERS............................................. 123 29 TERM AND TERMINATION.................................................. 126 30 AMENDMENTS, WAIVERS AND REMEDIES...................................... 127 31 PARTIAL INVALIDITY.................................................... 128 32 NOTICES............................................................... 128 33 COUNTERPARTS.......................................................... 130 34 DUTCH PARALLEL DEBT................................................... 130 35 LAW AND JURISDICTION.................................................. 130 SCHEDULE 1 LENDERS AND COMMITMENTS...............................................
2 CONDITIONS PRECEDENT.................................................. 3 FORM OF OBLIGOR'S CERTIFICATE......................................... 4 FORM OF UTILISATION NOTICE............................................ 5 MANDATORY COST FORMULAE............................................... 6 FORM OF TRANSFER CERTIFICATE.......................................... 7 THE DORMANT COMPANIES THE CHARGING COMPANIES AND THE BABY BELLS....... 8 FORM OF ACCESSION NOTICE.............................................. 9 DOCUMENTS TO ACCOMPANY ACCESSION NOTICE OR SUPPLEMENTAL DEED.......... 10 THE MATERIAL CONTRACTS................................................
THIS AGREEMENT is made on 2 December 2002, as amended and/or restated on 3 December 2003, 22 September 2004, 17 March 2005, 16 August 2005 and [_____]. BETWEEN: (1) IDEAL HARDWARE LIMITED a company incorporated in England and Wales with registered number 03969946 whose registered office is at Fountain Court, Cox Lane, Chessington, Surrey KT9 1SJ ("IDEAL") and BELL MICROPRODUCTS EUROPE EXPORT LIMITED a company incorporated in England and Wales with registered number 03711148 whose registered office is at Fountain Court, Cox Lane, Chessington, Surrey KT9 1SJ ("BMEE") (each an "ORIGINAL BORROWER" and together, the "ORIGINAL BORROWERS"); (2) BM EUROPE PARTNERS C.V. a limited partnership (commanditaire vennootschap) established under the laws of the Netherlands, having its official seat in Emmen, the Netherlands and its registered office at Veluwezoom 42-50, 1327 AH Almere, the Netherlands and registered in the Commercial Register under number 04065637 ("BMEP"); (3) BELL MICROPRODUCTS EUROPE B.V. a private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid) incorporated under the laws of the Netherlands, having its official seat in Emmen, the Netherlands and its registered office at Veluwezoom 42-50, 1327 AH Almere, the Netherlands and registered in the Commercial Register under number 04064633 ("BMEBV"); (4) BANK OF AMERICA, NATIONAL ASSOCIATION acting through its London branch at 5 Canada Square, London, E14 5AQ in its capacity as arranger (the "ARRANGER"), in its capacity as agent for the Lenders (the "AGENT"), in its capacity as the Lender making Swingline Loans (the "SWINGLINE LENDER"), in its capacity as the Lender issuing any Letter of Credit or Guarantee (the "ISSUER") and in its capacity as security trustee under the Security Documents (the "SECURITY TRUSTEE"); and (5) THE BANKS AND FINANCIAL INSTITUTIONS named in Schedule 1 (the "ORIGINAL LENDERS"). IT IS AGREED as follows: 1 INTERPRETATION 1.1 DEFINITIONS Save as otherwise provided in this Agreement, the following words and phrases have the following meanings throughout this Agreement: ACCESSION NOTICE: a notice substantially in the form set out in Schedule 8 pursuant to which a Group Company may accede to this Agreement as an Additional Borrower or, as the case may be, an Unsecured Guarantor; 6 ACCOUNT: in relation to each Trading Company, its right to payment for a sale or lease and delivery of goods or rendering of services; ACCOUNT DEBTOR: each person having any obligation on or in connection with an Account; ACCOUNTS TRANSFER CONDITIONS: the accounts transfer conditions incorporated into the Invoice Discounting Agreements entered into by each IDF Company from time to time; ADDITIONAL BORROWER: a Group Company which has acceded to this Agreement as an Additional Borrower by executing and delivering to the Agent an Accession Notice in accordance with clause 3; ADDITIONAL COST RATE: has the meaning given to it in paragraph 2 of Schedule 5; ADDITIONAL MONITORING AND ADMINISTRATION FEE: the meaning given to it in clause 22.7; ADJUSTED TANGIBLE ASSETS: the meaning given to it in clause 15.4; ADJUSTED TANGIBLE NET WORTH: the meaning given to it in clause 15.4; AFFILIATE: (i) a person which, directly or indirectly, controls or is controlled by or is under common control with, a Borrower; (ii) a person which beneficially owns or holds, directly or indirectly, 5% or more of any class of voting shares of a Borrower; or (iii) a person in which 5% of any class of voting shares is beneficially owned or held, directly or indirectly, by a Borrower; AGENT LOAN: the meaning given to it in clause 6.15.1; AGENT'S SPOT RATE OF EXCHANGE: the Agent's spot rate of exchange for the purchase of the relevant currency with sterling in the London foreign exchange market at or about 11.00 am on a particular day; AGGREGATE EXPOSURE: at any time, the aggregate at such time of the Total Outstandings and the Invoice Discounting Facility Exposure at such time; ANNIVERSARY DATE: each anniversary of the Effective Date; APPLICABLE GAAP: (i) save as provided in paragraph (ii) of this definition, in respect of any person, the generally accepted accounting principles and policies in the country in which such person is incorporated or under whose laws it is otherwise established, consistently applied; and 7 (ii) in connection with the preparation of the Pro-Forma Balance Sheet and the Management Accounts and for the purposes of determining compliance by Ideal with the financial ratio set out in clause 15.4, generally accepted accounting principles and policies in the United States of America, consistently applied ("US GAAP"); APPLICABLE MARGIN: unless by virtue of the operation of clause 7.6 a lower rate applies, two and one half of one per cent. (2.50%) per annum; APPROVED ACQUISITION CONDITIONS: each of the following conditions: (i) that the relevant acquisition (the "RELEVANT ACQUISITION") is to be funded by the relevant Group Company (a "PURCHASER") entirely out of Excess Availability and that at the time of the relevant acquisition, the amount of Excess Availability was not less than L5,000,000 and the projections, forecasts and other information supplied to the Agent pursuant to clause 15.2 demonstrate that an average Excess Availability of not less than L5,000,000 will be maintained for a continuous period of three (3) months commencing on the date of completion of the relevant acquisition; (ii) that the costs of the relevant acquisition do not exceed L10,000,000 (or the equivalent in any other currency) and when aggregated with the costs of all other Pre-Approved Acquisitions made or in the process of being made by that or any other purchaser do not or, as the case may be, will not, exceed L20,000,000 (or the equivalent in any other currency) during the term of this Agreement; (iii) that the relevant purchaser (or Ideal on its behalf) has given written notice to the Agent (such notice to be served not less than 15 business days prior to the proposed date of completion of the relevant acquisition), such notice to include, without limitation, (A) the name of the company and/or a brief description of the assets being purchased and/or the nature of such company's business; (B) a breakdown of the total consideration payable (including any element of deferred consideration and/or the details of any earn-out or possible additional consideration payable); (C) the business case or other reason(s) underlying the relevant acquisition; (D) the basic terms and conditions of the relevant acquisition; (E) a brief business plan and a historic financial statement in relation to any company being purchased (to include a profit and loss account, balance sheet and cash flow statement relating to the immediately preceding 12 months); (iv) in the case of any relevant acquisition of shares in a company, such acquisition has been approved or recommended by the board of directors of such company; (v) that the finance director of Ideal has delivered a certificate to the Agent (together with such additional information or evidence as the Agent may have reasonably required) confirming, among other matters, (A) that no Default has occurred and is continuing or will occur as a result of the completion of the relevant acquisition or would have occurred if 8 the relevant acquisition had been completed on the last day of the Financial Quarter most recently ended; (B) the level of current creditors' days outstanding together with confirmation that the largest twenty (20) trade creditors of the Group are being paid in accordance with the credit terms prevailing between such parties; and (C) that each of the foregoing conditions set out in paragraphs (i) to (iv) (inclusive) has been satisfied and will continue to be complied with as at each relevant date prescribed in this definition of "APPROVED ACQUISITION CONDITIONS". For the purpose of this definition of "APPROVED ACQUISITION CONDITIONS", the expression "COSTS" shall be construed to mean the total initial, deferred or additional consideration paid or payable to any person(s) in connection with any relevant acquisition, together with all reasonable costs, fees and expenses (including legal or other professional advisers' fees) properly paid or payable in connection with the relevant acquisition; APPROVED ACQUISITION DOCUMENTS: any (i) sale agreement, (ii) share exchange agreement, (iii) offering circular or (iv) any other documents or instruments (howsoever described) relating to a Pre-Approved Acquisition or any other acquisition of assets approved by the Agent; AUDIT FEE: the meaning given to it in clause 22.4; AUDITORS: PricewaterhouseCoopers, chartered accountants, or any other firm of chartered accountants of similar standing selected by Ideal and satisfactory to the Agent; AVAILABLE COMMITMENT: in relation to a Lender at any time, the Commitment of that Lender less the sum at such time of the Original Sterling Amount of (i) the aggregate amount which it has advanced and (ii) (in the case of the Issuer) the aggregate of its contingent liabilities under any Letters of Credit or Guarantees issued by it; AVAILABLE FACILITY: at any time, the aggregate of the Available Commitments; AVAILABLE REVOLVING FACILITY AMOUNT: at any time, in relation to the Revolving Facility and any proposed Utilisation thereof by any Borrower, the Revolving Facility Amount as reduced by the sum at such time of the Original Sterling Amount of: (i) the aggregate principal amount of all Revolving Loans and Swingline Loans then outstanding; (ii) the aggregate face amount of all Letters of Credit and of the aggregate maximum contingent liability under all Guarantees issued by the Issuer; (iii) the amount by which the Commitment of any Lender is or is due to be permanently cancelled or reduced in accordance with the terms of this Agreement; 9 (iv) all reserves for accrued interest on the Revolving Loans and Swingline Loans; (v) the Invoice Discounting Facility Exposure at such time; (vi) any IDF Portfolio Loss; and (vii) all other reserves which the Agent in its discretion deems necessary or desirable to maintain with respect to any Borrower's account (including, without limitation, in respect of any day-to-day fluctuations in the value of sterling against any Foreign Currency and in respect of any liability of any Borrower under any Hedging Agreement or in respect of any cash management or foreign exchange services) and any amounts which the Agent, the Security Trustee, any Lender or any other Beneficiary may be obliged to pay in the future for the account of any Borrower; BABY BELLS: each IDF Company and each of the other companies listed in Part 3 of Schedule 7 and "BABY BELL" means any one of them; BELGIAN IDF COMPANY: Bell Microproducts BVBA, a corporation incorporated under the laws of Belgium with registered number 0474128872 and having its registered office at Mechelen Campus, Schalienhoevedreef 20 1, B-2800 Mechelen, Belgium; BELGIAN INVOICE DISCOUNTING AGREEMENT: the invoice discounting agreement dated 15 December 2004 and made between the Belgian IDF Company and Bank of America, National Association acting through its Antwerp branch at Uitbreidingstraat 180, Box 6, B2600, Antwerp, Belgium; BELGIAN PLEDGE: any pledge in respect of the Company Accounts and the Non-Vesting Accounts of the Belgian IDF Company, in form and substance satisfactory to the Agent and the Receivables Purchaser; BENEFICIARY: each of the Agent, the Arranger, any Hedge Provider (provided always that such Hedge Provider is the Arranger), the Swingline Lender, the Issuer, the Security Trustee and any Lender or, in relation to the Invoice Discounting Agreements, Bank of America, National Association in its capacity as Receivables Purchaser under such Invoice Discounting Agreements; BMEH: Bell Microproducts Europe (Holdings) B.V., a private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid) incorporated under the laws of the Netherlands, having its official seat in Almere, the Netherlands and its registered office at Veluwezoom 42-50, 1327 AH Almere, the Netherlands and registered in the Netherlands with the Trade Register under number: 39087200; BORROWERS: each Original Borrower and each Additional Borrower and "BORROWER" means any one of them; 10 BORROWING BASE CERTIFICATE: a certificate in such form as the Agent may from time to time reasonably require and completed by Ideal setting out, amongst other things, details of Accounts and with effect from the Inventory Eligibility Date, if applicable, Inventory (as specified in clause 16.4.1) and of preferential creditors so as to enable the Agent to determine the Available Revolving Facility Amount; BORROWINGS: a sum equal to the aggregate amount for the time being of the principal, capital or nominal amount (determined on a consolidated basis) of all financial indebtedness of any member of the Group (other than monies borrowed or raised from another member of the Group) and, without prejudice to the generality of the foregoing, shall be deemed to include the following: (a) the principal amount of any debenture, bond, note, loan stock, preference share capital, commercial paper or similar instrument of any member of the Group; (b) any amounts raised by any member of the Group under any bill of exchange (but excluding any bill drawn or accepted in the ordinary course of trade of the relevant member of the Group and which is payable at sight or not more than 90 days after sight or has a final maturity of not more than 90 days from the date thereof and is not refinancing another bill whether or not relating to the same underlying transaction) and the indebtedness of any member of the Group under any acceptance credit, bill discounting, note purchase or documentary credit facility; (c) the aggregate amount remaining to be paid by any member of the Group under any credit agreement save for amounts remaining to be paid which cannot properly be attributed to capital in accordance with Applicable GAAP; (d) the capitalised value (determined in accordance with Applicable GAAP) of the outstanding commitments of any member of the Group under any finance lease; (e) indebtedness under any receivables purchase, factoring or discounting arrangement including, without limitation, the Invoice Discounting Agreements (to the extent there is any recourse against any member of the Group); (f) the aggregate amount remaining to be paid in respect of any credit (other than normal trade credit which has been outstanding for a period of less than 90 days) granted to, or of any deferred payments due from, any member of the Group in respect of the acquisition or construction price of assets acquired or constructed or the purchase price of services supplied; (g) indebtedness of any member of the Group in respect of any other transaction having the commercial effect of a borrowing or other raising of money entered into by it in order to finance its business or operations or capital requirements; and 11 (h) (without double counting) indebtedness of any member of the Group under any guarantee or other assurance against financial loss in respect of the financial indebtedness of any person. For the purpose of determining the amount of "BORROWINGS" at any time, any amount which is on a particular day outstanding or repayable in a currency other than sterling shall on that day be taken into account (i) if that day is the last day of a Financial Year or Management Accounting Period, at its equivalent in sterling at the rate of exchange used for the purpose of preparing the balance sheet forming part of the Relevant Accounting Information prepared as at such date and (ii) in any other case, at its sterling equivalent as determined by the Agent by reference to the Agent's Spot Rate of Exchange; BORROWING COSTS: in relation to any financial period, a sum equal to the aggregate amount of all continuing, regular or periodic costs (excluding any prepayment or termination fee), charges and expenses incurred by the IHL/BB Group in respect of such period (and whether paid or not) in effecting, servicing or maintaining Borrowings including (but without double-counting): (a) interest (whether the same shall be payable immediately or be capitalised or otherwise deferred); (b) any fixed or minimum premium or dividend paid or payable on the maturity of any Borrowings; (c) consideration given whether by way of discount or otherwise in connection with finance by way of acceptance credit, bill discounting, note purchase, receivables purchase, debt factoring or other like arrangement including, without limitation, the discount charge payable under the Invoice Discounting Agreements; and (d) the gross amount payable under any finance lease or credit agreement less so much as can properly be attributed to capital, the amount of any such costs, charges and expenses to be allocated to each such period over the term of any Borrowings in accordance with Applicable GAAP; CAPITAL EXPENDITURE: all payments due (whether or not paid) in respect of the cost of any fixed asset or any improvement, replacement, substitution or addition thereto, which has a useful life of more than one year, including, without limitation, those arising in connection with the direct or indirect acquisition of such assets by way of increased product or service charges or offset items or in connection with finance leases; CAPITAL MARKETS TRANSACTION: any direct or indirect public offering or private placement of any debt or equity securities of (including any capital contribution to) any Borrower, BMEP, BMEH or BMEBV; CASH OUTFLOW: in relation to any financial period and without double- counting, the aggregate for that period of: 12 (i) Borrowing Costs; (ii) taxes paid; (iii) dividends paid or other distributions made; (iv) Capital Expenditure; (v) amortisation payments on Borrowings and the capital element of any rental payments or instalments under any credit agreement or finance lease; (vi) any expenditure which results in a corresponding release of any provision in the balance sheet; CHARGING COMPANY: the companies listed in Part 2 of Schedule 7 and any other Group Company which has executed the Debenture or any other Security Document or which has acceded to the Debenture or any other Security Document by executing a Supplemental Deed in accordance with clause 4; CHESSINGTON MORTGAGEE: as at the Effective Date, The Governor and Company of the Bank of Scotland as lender to Bell Microproducts Limited and as mortgagee of the Chessington Property in connection with such borrowings or such other bank or financial institution which may at any time refinance all or any part of such borrowings, provided that such bank or financial institution shall have entered into an intercreditor deed or other priority arrangement on terms and conditions mutually acceptable to such bank or financial institution, Bell Microproducts Limited and the Agent; CHESSINGTON PROPERTY: all that freehold property registered under title number SGL 638201 and more particularly known as land and buildings at Fountain Court, Cox Lane, Chessington, Surrey KT9 1SJ; CLOSING DATE: 2 December 2002; COLLATERAL: the meaning given to it in the Debenture; COLLATERAL MANAGEMENT FEE: the meaning given to it in clause 22.3; COMMITMENT: in relation to a Lender at any time, the amount in sterling set opposite its name in Schedule 1 (and/or, as the case may be, the amount in sterling specified as the portion transferred in the Transfer Certificate pursuant to which such Lender increased its Commitment or became a party to this Agreement) as the same may at any time be cancelled or reduced in accordance with this Agreement; COMMITMENT PERIOD: the period commencing on the Closing Date and ending on the date falling one month prior to the Termination Date; COMPANY ACCOUNTS: has, as the context requires, the meaning ascribed to it in the applicable Invoice Discounting Agreement; 13 DEBENTURE: the composite guarantee and debenture creating one or more encumbrances in favour of the Security Trustee on behalf of the Beneficiaries, dated 2 December 2002 and executed as a deed by certain Charging Companies to secure the obligations of the Obligors under the Finance Documents; DEFAULT: an Event of Default or any condition, act or event which (with the giving of notice, lapse of time, making of any determination, fulfilment of any condition or any combination of any of the foregoing) may become an Event of Default; DISCHARGE: a release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration of a Hazardous Substance into the indoor or outdoor environment or into or out of any real estate or other property, including the movement of Hazardous Substances through or in the air, soil, surface water, groundwater or real estate or other property; DISTRIBUTION: any dividend or other distribution (whether in cash or in kind) in respect of share capital, including any bonus issue or return of capital (whether at a premium or otherwise); DORMANT COMPANY: a company which is a "DORMANT" company as defined in section 249AA Companies Act 1985 and which does not at any time have assets (other than intercompany indebtedness) in excess of L5,000 (or the equivalent in any other currency) and which expression shall include, for the purposes of this Agreement, each of the companies whose names are set out in Part 1 of Schedule 7; DUTCH IDF COMPANY: Bell Microproducts BV, a corporation incorporated under the laws of the Netherlands, having its official seat in Almere, the Netherlands and its registered office at Veluwezoom 42-50 1327 AH Almere, Netherlands, the Netherlands and registered in the Commercial Register under number 04041697; DUTCH INVOICE DISCOUNTING AGREEMENT: the invoice discounting agreement dated 15 December 2004 and made between the Dutch IDF Company and Bank of America, National Association acting through its branch at 5 Canada Square, London, E14 5AQ; DUTCH BANK ACCOUNTS PLEDGE: any pledge in respect of the Company Accounts of the Dutch IDF Company, in form and substance satisfactory to the Agent and the Receivables Purchaser; DUTCH NON-VESTING ACCOUNTS PLEDGE: a pledge in respect of the Non-Vesting Accounts of the Dutch IDF Company, in form and substance satisfactory to the Agent and the Receivables Purchaser; EBITDA: in relation to any financial period, a sum equal to the IHL/BB Group's profit on ordinary activities before taxation (save to the extent that such profit is attributable to any interest received) after adding back Borrowing Costs, depreciation and amortisation and deducting any release to profits of negative goodwill in respect of such period but excluding: 14 (a) profits or losses on the sale or termination of an operation; (b) profits or losses on the disposal of fixed assets; and (c) extraordinary items; EC INSOLVENCY REGULATION: Council Regulation (EC) No. 11346/2000 of 29 May 2000 on insolvency proceedings; EFFECTIVE DATE: means the date on which the notice referred to in Clause 3 of the Sixth Supplemental Agreement is given by the Agent; ELIGIBLE ACCOUNTS: the Accounts of a Borrower which the Agent in the exercise of its commercial discretion determines to be Eligible Accounts. Without limiting the discretion of the Agent to establish other criteria of ineligibility, Eligible Accounts shall not, unless the Agent in its commercial discretion elects, include any Account: (a) with respect to which more than ninety (90) days have elapsed since the date of the original invoice or sixty (60) days have elapsed since the due date therefor; (b) with respect to which any of the representations, warranties, covenants and agreements contained in the Debenture are incorrect or have been breached; (c) with respect to which Account (or any other Account due from the applicable Account Debtor), in whole or in part, a cheque, promissory note, draft, trade acceptance or other instrument for the payment of money has been received, presented for payment, and returned uncollected for any reason; (d) which represents a progress billing (as hereinafter defined) or as to which the applicable Borrower has extended the time for payment without the consent of the Agent (for the purposes hereof, "PROGRESS BILLING" means any invoice for goods sold or leased or services rendered under a contract or agreement pursuant to which the Account Debtor's obligation to pay such invoice is conditional upon such Borrower's completion of any further performance under such contract or agreement); (e) with respect to which any one or more of the following events has occurred to the Account Debtor on such Account: (i) death or judicial declaration of incompetency of such Account Debtor who is a natural person; (ii) the filing by or against such Account Debtor of a request, notice of intention to appoint or petition for winding-up, dissolution, liquidation or bankruptcy of such person or for the appointment of an administrative receiver, receiver, manager or administrator in respect of such person or its assets or any other bankruptcy, insolvency or similar laws of the United Kingdom or any foreign jurisdiction now or hereafter in effect; (iii) the making of any general assignment by such Account Debtor for the benefit of its creditors; (iv) the appointment of 15 a receiver or trustee of such Account Debtor or of any of the assets of the Account Debtor; (v) the institution by or against such Account Debtor of any other type of insolvency proceeding or of any formal or informal proceeding for the dissolution or liquidation of, settlement of claims against, or winding up of affairs of, such Account Debtor; (vi) the non-payment generally of such Account Debtor of its debts as they become due; or (vii) the cessation of the business of such Account Debtor as a going concern; (f) if fifty per cent. (50%) or more of the aggregate sterling equivalent of outstanding Accounts owed at such time by the Account Debtor thereon is classified as ineligible pursuant to the other provisions of this definition; (g) owed by an Account Debtor which (i) does not maintain its registered office or principal place of business in the United States, Canada (other than the Province of Newfoundland), the United Kingdom or another country within the European Union prior to 1 May 2004, (ii) is not organised under the laws of the United States, Canada, part of the United Kingdom or another country within the European Union prior to 1 May 2004 or any political subdivision, state or province thereof, or (iii) is the government of any foreign country or sovereign state, or of any state, province municipality or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof, except to the extent that such Account is secured or payable by a letter of credit satisfactory to the Agent in its discretion; (h) owed by an Account Debtor which is an Affiliate or employee of such Borrower or an Account which the Agent determines is an Intercompany Account or an internal account; (i) with respect to Accounts of a Borrower, with respect to which either the perfection, enforceability or validity of the security over such Account constituted by the Debenture, or the Security Trustee's or the Agent's right or ability to obtain direct payment to the Agent or, as appropriate, the Security Trustee, of the proceeds of such Account, is governed by any laws other than the local state or federal laws of the United States of America (including the UCC) or the laws of Canada, any part of the United Kingdom or another member of the European Union prior to 1 May 2004; (j) owed by an Account Debtor to which a Borrower or any Affiliate thereof is indebted in any way, or which is subject to any right of set-off or recoupment by the Account Debtor (or otherwise a contra account), unless the Account Debtor has entered into an agreement acceptable to the Agent to waive set-off rights, or if the Account Debtor thereon has disputed liability or made any claim with respect to any other Account due from such Account Debtor; (k) [intentionally omitted]; 16 (l) which represents a sale on a bill-and-hold, guaranteed sale, sale and return, sale on approval, consignment or other repurchase or return basis; (m) which is evidenced by a promissory note or other similar instrument; (n) with respect to which the Agent believes, in the exercise of its commercial judgment, that the prospect of collection of such Account is impaired or that such Account may not be paid by reason of the Account Debtor's financial inability to pay; (o) which arises out of a sale not made in the ordinary course of such Borrower's business; (p) with respect to which the goods giving rise to such Account have not been shipped and delivered to and accepted by, or have been rejected or objected to by, the Account Debtor or the services giving rise to such Account have not been fully performed by such Borrower, and, if applicable, accepted by the Account Debtor, or the Account Debtor revokes its acceptance of such goods or services; (q) owed by an Account Debtor or group of affiliated Account Debtors which is obligated to the Borrowers, or any of them, representing Accounts the aggregate unpaid balance of which exceeds ten per cent. (10%) of the aggregate unpaid balance of all Accounts owed to the Borrowers at such time by all of the Borrowers' Account Debtors; (r) which is not subject to a first priority, perfected Security Interest in favour of the Security Trustee, for the benefit of the Beneficiaries established in a manner satisfactory to the Agent; (s) owed by an Account Debtor incorporated outside the United Kingdom with whom such Borrower is trading in excess of its agreed credit limits; (t) with respect to which such Borrower or the Agent has deemed such Account as uncollectible or has any reason to believe that such Account is uncollectible; and (u) which the Agent determines, in its commercial discretion, is ineligible for any other reason. The Agent will consider a request from Ideal for the inclusion of Accounts in excess of ten per cent. (10%) of the total Eligible Accounts (as described in paragraph (q)) on a case by case basis, upon production by Ideal of such financial or other information regarding the business condition (financial or otherwise) of the Borrowers and the Group as the Agent may require and upon Ideal demonstrating to the satisfaction of the Agent, an improvement in its trading and financial position since the date of the Supplemental Agreement. 17 If any Account at any time ceases to be an Eligible Account, then such Account shall promptly be excluded from the calculation of the Maximum Eligibility Amount and the Revolving Facility Amount; ELIGIBLE INVENTORY: with effect from the Inventory Eligibility Date, if any, Inventory valued at the lower of cost (on a FIFO basis) or market value, which is eligible as the basis for Revolving Loans, based on such criteria as the Agent may from time to time establish in its reasonable commercial discretion; ENVIRONMENTAL AUTHORISATION: any authorisation, permit, licence, consent, registration or other approval required by or pursuant to any Environmental Law; ENVIRONMENTAL LAWS: all applicable laws, regulations, codes of practice, circulars, statutory guides, guidance notes and the like (whether in the United Kingdom or in any other jurisdiction in which any Obligor carries on its business or in which its assets may be situated) relating to contamination, human health, safety or the environment including but not limited to those relating to Discharges, waste, nuisance, health and safety, noise, packaging or the manufacture, processing, use, handling, treatment, storage, labelling, recovery, recycling, transport or disposal of Hazardous Substances; EQUIPMENT: in relation to each Trading Company, all of its now owned and hereafter acquired machinery, equipment, furniture, furnishings, fixtures and other tangible personal property of any kind (except Inventory), as well as all of such types of property leased by it and all of its rights and interest with respect thereto under such leases together with all present and future additions and accessions thereto and replacements therefor, component and auxiliary parts and supplies used or to be used in connection therewith and all substitutes for any of the foregoing, and all manuals, drawings, instructions, warranties and rights with respect thereto, wherever any of the foregoing is located; EVENT OF DEFAULT: any of those events specified in clause 17.1; EXCESS AVAILABILITY: at any time, the amount, if any, by which the Revolving Facility Amount exceeds the Aggregate Exposure at such time; FACILITY OFFICE: in relation to a Lender at any time, the office set out under its name at the end of this Agreement or, in the case of a Transferee, in the Transfer Certificate to which it is a party as Transferee or, in the case of a Lender which is an assignee or other successor of any other Lender, the office notified to the Agent by the assignee or other successor on or before the date it becomes a Lender or such other office as such Lender may from time to time notify to the Agent; FEE LETTER: means any letter or letters dated on or about the date of this Agreement and/or the date of the Sixth Supplemental Agreement between the Arranger and Ideal (or the Agent and/or the Security Trustee and Ideal) setting out and/or relating to any of the fees referred to in clause 22; 18 FIFTH SUPPLEMENTAL AGREEMENT: the agreement supplemental to this Agreement dated 16 August 2005 and entered into by, amongst others, the parties to this Agreement; FINANCE DOCUMENTS: this Agreement, the Invoice Discounting Agreements, any Fee Letter, any Accession Notice, any Hedging Agreement, the Security Documents, the Supplemental Agreement, the Second Supplemental Agreement, the Third Supplemental Agreement, the Fourth Supplemental Agreement, the Fifth Supplemental Agreement, the Sixth Supplemental Agreement and any other agreement, deed, notice, document or certificate designated as such by the Agent and Ideal; FINANCIAL QUARTER: any period of three months in any Financial Year, ending on the day which is, respectively, three, six or nine months after the first day of that Financial Year or on the last day of that Financial Year; FINANCIAL STATEMENTS: according to the context in which it is used, the Pro-Forma Balance Sheet or any financial statements required to be delivered to the Agent pursuant to clause 15.2 and complying with the provisions of clause 15.3; FINANCIAL YEAR: any period of twelve months ending on 31 December; FOREIGN CURRENCY: dollars, euros or such other currency which is freely transferable and freely convertible into sterling as may at any time be specifically agreed by the Agent; FOURTH SUPPLEMENTAL AGREEMENT: the agreement supplemental to this Agreement dated 17 March 2005 and entered into by, amongst others, the parties to this Agreement; FRENCH IDF COMPANY: Bell Microproducts Sarl, a corporation incorporated under the laws of France with registered number 43474497500013 and having its registered office at 23 avenue General Leclerc, 92340, Bourg La Reine, Paris, France; FRENCH INVOICE DISCOUNTING AGREEMENT: the invoice discounting agreement dated 15 December 2004 and made between the French IDF Company and Bank of America, National Association acting through its Paris branch at 43-47 Avenue de la Grande Armee, 75116 Paris, France; FRENCH BANK ACCOUNTS PLEDGE: any pledge in respect of the Company Accounts of the French IDF Company, in form and substance satisfactory to the Agent and the Receivables Purchaser; GROUP: BMEH and its Subsidiaries at any time including, whether or not a Subsidiary of BMEH, each IDF Company (but excluding, in each case, unless the Agent otherwise agrees, any member of the Solutions Group) and "GROUP COMPANY" shall mean any one of them; 19 GUARANTEE: any guarantee (which has been specifically agreed between the relevant Borrower and the Agent) of the obligations of any person issued by the Issuer at the request of that Borrower pursuant to the terms of clause 6.4; GUARANTORS: each Secured Guarantor and each Unsecured Guarantor and "GUARANTOR" means any one of them; HAZARDOUS SUBSTANCE: any radioactive emissions and any natural or artificial substance (whether in solid or liquid form or in the form of a gas or vapour and whether alone or in combination with any other substance) capable of causing harm to the environment, human health or welfare or to any organism, including (without limitation) any type of waste or any form of energy; HEDGE PROVIDER: the Arranger, any Lender or any other bank or financial institution of international standing whose long term unsecured debt securities are, on the date that it enters into any Hedging Agreement, rated at least A+ by S&P or A1 by Moody's; HEDGING AGREEMENT: any agreement or instrument between a Borrower and a Hedge Provider relating to the hedging of an interest rate or a currency exposure (including a swap, option, cap, collar or floor); IDEAL PRO-FORMA BALANCE SHEET: the pro-forma consolidated (and consolidating) balance sheet of the IHL Group as at 31 August 2003 prepared by Ideal in accordance with Applicable GAAP; IDF COMPANIES: means the Belgian IDF Company, the Dutch IDF Company, the French IDF Company, the Italian IDF Company, the Swedish IDF Company and any other company which has entered into an Invoice Discounting Agreement and which has consequently been designated an IDF Company by the Receivables Purchaser from time to time and "IDF COMPANY" means any one of them; IDF GUARANTEE: the guarantee by the Borrowers contained in clause 7 (Guarantee) of the Third Supplemental Agreement; IDF PORTFOLIO LOSS: an amount equal to the amount by which the Remittances (as defined in the Accounts Transfer Conditions) received in respect of an Account (as defined in the Accounts Transfer Conditions) purchased by the Receivables Purchaser pursuant to an Invoice Discounting Agreement fall short of the Purchase Price (as defined in the Accounts Transfer Conditions) paid by the Receivables Purchaser pursuant to that Invoice Discounting Agreement less the amount (if any) received by the Receivables Purchaser by way of repurchase consideration or indemnity from the relevant IDF Company, or from any other Obligor, in respect of that Account; IHL/BB GROUP: collectively, the IHL Group and each of the Baby Bells; IHL GROUP: Ideal and its Subsidiaries (which term includes, for the avoidance of doubt, OpenPSL Holdings Limited, OpenPSL Limited and Open Computing Limited) for the time being; 20 INFORMATION MEMORANDUM: the document in the form approved by Ideal concerning the Group which, at Ideal's request, and on its behalf, was prepared by the Arranger in relation to the transactions contemplated by this Agreement and distributed to selected financial institutions; INTER COMPANY SALE AGREEMENT: the inter company sale agreement dated 17 March 2005 between Ideal and the USD Co pursuant to which Ideal will sell US Inventory acquired by it to the USD Co and the USD Co will, immediately prior to Ideal selling such US Inventory to its customers, re-sell such US Inventory back to Ideal to enable Ideal to make such sales; INTERCOMPANY ACCOUNTS: all assets and liabilities, however arising, which are due to any Trading Company from, which are due from any Trading Company to, or which otherwise arise from any transaction by any Trading Company with, any Affiliate; INTEREST PERIOD: any of those periods referred to in clause 7 (by reference to which interest is calculated on any LIBOR Revolving Loan) or in clause 18.2 (by reference to which interest is calculated on an unpaid sum) provided that, save in respect of any Interest Periods relating to an unpaid sum, no Interest Period shall extend beyond the Termination Date; INVENTORY: in relation to each Trading Company, all of its now owned and hereafter acquired inventory, goods and merchandise, wherever located, to be furnished under any contract of service or held for sale or lease, all raw materials, work-in-progress, finished goods, returned goods and materials and supplies of any kind, nature or description which are or might be used or consumed in its business or used in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, merchandise and other personal property, and all documents of title or other documents representing them; INVENTORY ELIGIBILITY DATE: the date, if any, upon which the Lenders shall have agreed, and the Agent shall have advised Ideal to that effect, that Eligible Inventory may be eligible as the basis for Revolving Loans; INVOICE DISCOUNTING AGREEMENTS: the Belgian Invoice Discounting Agreement, the Dutch Invoice Discounting Agreement, the French Invoice Discounting Agreement, the Italian Invoice Discounting Agreement and the Swedish Invoice Discounting Agreement including, in each case, the Account Transfer Conditions incorporated therein in accordance with their respective terms together with any other Invoice Discounting Agreement entered into from time to time by an IDF Company, including in each case, the Accounts Transfer Conditions incorporated therein in accordance with their respective terms; INVOICE DISCOUNTING FACILITIES: the invoice discounting facilities made available or to be made available to the IDF Companies under the Invoice Discounting Agreements; INVOICE DISCOUNTING FACILITY EXPOSURE: at any time, the aggregate of the Total MDL Balance (as defined in the Accounts Transfer Conditions) at such 21 time, the sterling equivalent of any Prepayments to be made on the date on which the computation falls to be made and the sterling equivalent of all other amounts owing, actually or contingently, by the IDF Companies under the Invoice Discounting Agreements at such time, as notified to the Agent from time to time by each Receivables Purchaser; ITALIAN IDF COMPANY: Bell Microproducts S.r.l, a corporation incorporated under the laws of Italy with registered number 13456670150 and having its registered office at Via V Pisani 12/a, 20124 Milan, Italy; ITALIAN INVOICE DISCOUNTING AGREEMENT: the invoice discounting agreement dated 15 December 2004 and made between the Italian IDF Company and Bank of America, National Association acting through its Milan branch at Corso Matteotti 10,20121 Milan, Italy; ITALIAN BANK ACCOUNTS PLEDGE: any pledge in respect of the Company Accounts of the Italian IDF Company, in form and substance satisfactory to the Agent and the Receivables Purchaser; JURISDICTION: the jurisdiction of incorporation of the relevant Baby Bell; LATEST PROJECTIONS: (i) until the Agent receives new projections pursuant to clause 15.2.3, the projections provided by Ideal of the consolidated (and consolidating) monthly financial condition, results of operations and cash flow of Ideal and the Baby Bells for the period ending 31 December 2005 (and showing separate projections for the period up to 31 December 2004 and the subsequent period from 1 January 2005 until 31 December 2005) and (ii) thereafter, the projections most recently received by the Agent pursuant to clause 15.2.3; LENDER: means: (i) any Original Lender; and (ii) any bank, financial institution, trust, fund or other entity which has become a party to this Agreement in accordance with clause 28.3, which in each case has not ceased to be a party to this Agreement in accordance with the terms of this Agreement; LETTER OF CREDIT: any standby letter of credit (which has been specifically agreed between a Borrower and the Agent) issued by the Issuer at the request of a Borrower pursuant to the terms of clause 6.4; LETTER OF CREDIT AND GUARANTEE FEE: the meaning given to it in clause 22.5; LIBOR: in relation to any LIBOR Revolving Loan or any unpaid sum and any Interest Period relating to it: (i) the applicable Screen Rate; or 22 (ii) (if no Screen Rate is available for the currency or Interest Period of that Loan or unpaid sum) the arithmetic mean of the rates (rounded up to 4 decimal places) as supplied to the Agent at its request quoted by the Reference Banks to leading banks in the London Interbank Market, at or about 11.00 a.m. in London on the Quotation Date for a period comparable to the relevant Interest Period; LIBOR REVOLVING LOAN: a revolving loan made or to be made by the Lenders in relation to which interest thereon is to be calculated by reference to LIBOR; LOANS: each Revolving Loan and Swingline Loan and "LOAN" means any one of them; MAJORITY LENDERS: Lenders whose Outstandings together exceed sixty-six and two-thirds per cent (66 2/3%) of the Outstandings of all the Lenders (or, if there are no Outstandings, Lenders whose Commitments together exceed sixty-six and two-thirds per cent (66 2/3%) of the Total Commitments) provided that, if at any time there are only two Lenders party to this Agreement "MAJORITY LENDERS" shall mean both of them together; MANAGEMENT ACCOUNTING PERIOD: each period of one calendar month ending on the last day of that month; MANAGEMENT ACCOUNTS: the then latest unaudited but consolidated and consolidating management accounts of BMEH, BMEP, BMEBV, BMEE, Ideal and the Group (other than the members of the Solutions Group but including in any event each IDF Company) in respect of each Management Accounting Period to be prepared in accordance with Applicable GAAP and in a format agreed by the Agent required to be delivered to the Agent pursuant to clause 15.2.2; MANDATORY COST: the percentage rate per annum calculated by the Agent in accordance with Schedule 5; MATERIAL CONTRACTS: each of the contracts details of which are set out in Schedule 10 and any other contract from time to time designated as a Material Contract by the Agent and Ideal; MAXIMUM ELIGIBILITY AMOUNT: the amount which is equal to the sum of: (a) 80% of the Net Amount of Eligible Accounts (the "ACCOUNTS ADVANCE RATE"). If at any time the Agent determines that the Dilution Percentage for the Borrowers (as a whole) has been equal to or less than 5% for a continuous period of three (3) months ending on the date of such determination, the Agent, in its absolute discretion (upon completing a field exam and such other reviews as it deems appropriate), may increase the Accounts Advance Rate to 85%. "DILUTION PERCENTAGE" means the percentage figure obtained by dividing (A) all credits, allowances, discounts, write-offs, contra-accounts and other set-offs incurred in any month which reduce the 23 value of Accounts for the Borrowers (as a whole) by (B) the gross amount of all cash received and retained in the Receivables Accounts from all Accounts created by the Borrowers (as a whole) in such month: notwithstanding but without prejudice to the foregoing, the Agent shall have the right to reduce the Accounts Advance Rate or to establish reserves, if the Agent at any time determines that the Dilution Percentage has increased; plus (b) after the Inventory Eligibility Date, if applicable, up to 60% of the value of Eligible Inventory; MAXIMUM REVOLVING CREDIT LINE: the maximum amount which is available under this Agreement; being L60,000,000 or, if the Agent has received a notice in accordance with Clause 2.7 and the period referred to in Clause 2.7 has expired, L80,000,000 (or such other amount as may be agreed between the Agent and Ideal from time to time); NET AMOUNT OF ELIGIBLE ACCOUNTS: the gross amount of Eligible Accounts less sales, excise or similar taxes, and less returns, discounts, claims, credits and allowances of any nature at any time issued, owing, granted, outstanding, available or claimed in respect of such Eligible Accounts; NON-VESTING ACCOUNTS: has the meaning given to it in the Accounts Transfer Conditions; NOTICE OF CONVERSION/CONTINUATION: the meaning given to it in clause 7.5.2; OBLIGORS: each Borrower, each Charging Company, each Guarantor, BMEP, BMEH and each other member of the Group which has, or may be required by the Agent to have, any liability from time to time, whether actual or contingent, present or future, for the payment of any amounts outstanding or capable of becoming outstanding under any of the Finance Documents and "OBLIGOR" means any one of them; ORIGINAL STERLING AMOUNT: in relation to a Loan, the amount specified in sterling in the Utilisation Notice relating to that Loan (or, if the amount requested is denominated in a Foreign Currency, that amount converted into sterling at the Agent's Spot Rate of Exchange on the date which is three business days before the Utilisation Date or, if later, on the date the Agent received the Utilisation Notice); OUTSTANDINGS: in relation to a Lender at any time, the Original Sterling Amount of the aggregate principal amount of its share of all (if any) Utilisations, including (in relation to the Issuer) the Original Sterling Amount of the aggregate of its contingent liabilities in respect of any such Utilisations consisting of the issue of any Letters of Credit or Guarantees outstanding at that time; PARENT: Bell Microproducts Inc.; 24 PARTICIPATING PROPORTION: in relation to a Lender and a sum payable to or by it on any date, the proportion which the Commitment of that Lender bears to the Total Commitments on that date; PERMITTED ENCUMBRANCE: any encumbrance permitted under clause 16.3.1; PERMITTED INDEBTEDNESS: any indebtedness permitted under clause 16.3.5; PLEDGE AGREEMENTS: the Belgian Pledge, the Dutch Bank Accounts Pledge, the Dutch Non-Vesting Accounts Pledge, the French Bank Accounts Pledge, the Italian Bank Accounts Pledge and the Swedish Bank Accounts Pledge and any other pledge agreement entered into by an IDF Company pursuant to the terms of an Invoice Discounting Agreement; PRE-APPROVED ACQUISITION: any acquisition of any business, shares or other assets of any kind by any Group Company which does not require the prior consent or approval of the Agent or the Lenders by virtue of the fact that both prior to and at the time of its completion, each of the Approved Acquisition Conditions were satisfied; PREPAYMENT: has the meaning given to it in the Accounts Transfer Conditions; PRIORITY AGREEMENT: the priority agreement dated 9 May 2003 between (1) Bell Microproducts Limited, (2) the Security Trustee and (3) The Governor and Company of the Bank of Scotland in its capacity as existing Chessington Mortgagee; PRO-FORMA BALANCE SHEET: the pro-forma consolidated (and consolidating) balance sheet of the Group and each Group Company as of 31 October 2002 prepared by Ideal in accordance with Applicable GAAP; QUALIFYING LENDER: a lender which either: (i) is a bank as defined in section 840A of the Taxes Act which, for the purposes of section 349 of the Taxes Act, is within the charge to corporation tax as regards all interest payable to it under this Agreement; or (ii) is a lender (a "TREATY LENDER") which has the benefit of a double tax treaty which provides a complete exemption from UK income tax on interest; or (iii) is a lender (a "UK NON-BANK LENDER") which is beneficially entitled to interest payable to that lender in respect of a Loan under this Agreement and is: (a) a company resident in the United Kingdom for United Kingdom tax purposes; (b) a partnership each member of which is a company resident in the United Kingdom for United Kingdom tax purposes; or 25 (c) a company not so resident in the United Kingdom which carries on a trade in the United Kingdom through a branch or agency and which is required to bring that interest into account in computing its chargeable profits (within the meaning given by section 11(2) of the Taxes Act), and has given a Tax Confirmation to the Borrowers; QUOTATION DATE: in relation to any period for which an interest rate is to be determined, the day on which quotations would ordinarily be given by prime banks in the London Interbank Market for deposits in the currency in relation to which such rate is to be determined for delivery on the first day of that period provided that, if, for any such period, quotations would ordinarily be given on more than one date, the Quotation Date for that period shall be the last of those dates; RECEIVABLES ACCOUNT: has the meaning given to it in the Security Documents; RECEIVABLES PURCHASER: has the meaning given to it in the Third Supplemental Agreement; REFERENCE BANKS: such banks as may be appointed by the Agent in consultation with Ideal; REFERENCE RATE: in relation to any Loan or unpaid sum denominated in sterling or any Foreign Currency (as the case may be) on which interest is to be calculated by reference to Reference Rate, the Agent's reference rate for sterling or such Foreign Currency being the rate from time to time set by the Agent based on various factors including the Agent's cost of funds, desired return and general economic conditions and which is used as a reference point for pricing loans made by it in sterling or such Foreign Currency; REFERENCE RATE REVOLVING LOAN: a revolving loan made or to be made by the Lenders in relation to which interest thereon is to be calculated by reference to the Reference Rate; RELEVANT ACCOUNTING INFORMATION: the meaning given to it in clause 15.4; RELEVANT AGREEMENTS: the Finance Documents, the Material Contracts and any Approved Acquisition Documents; RESERVATIONS: the principle that equitable remedies are remedies which may be granted or refused at the discretion of the court, the limitation of enforcement by laws relating to bankruptcy, insolvency, liquidation, reorganisation, court schemes, moratoria, administration and other laws generally affecting the rights of creditors, the time barring of claims under the Limitation Act 1980, the possibility that an undertaking to assume liability for or to indemnify against non-payment of United Kingdom stamp duty may be void, the unenforceability of penalty provisions and defences of set-off or counterclaim and similar principles arising under the laws of any other jurisdiction in which relevant obligations must be performed; 26 RESTRICTED INVESTMENT: any acquisition of any assets by any Group Company in exchange for cash or other assets, whether in the form of an acquisition of shares, debt securities or other indebtedness or obligation, or the purchase or acquisition of any other assets, or a loan, advance, capital contribution or subscription, except the following: (i) acquisitions of fixed assets to be used in the business of such Group Company, so long as the acquisition costs thereof constitute Capital Expenditure permitted hereunder; and (ii) acquisitions of goods held for sale or lease or to be used in the rendering of services by such Group Company in the ordinary course of business; (iii) any acquisition of shares, debt securities or other indebtedness or obligation, or the making of any loan, advance, capital contribution or subscription by any Group Company in or to any other Group Company which is loss-making and solely for the purpose of recapitalising such loss-making Group Company, provided always that, unless (A) the funds (the "INVESTMENT FUNDS") employed by the investing Group Company have been made available to it wholly by the Parent (directly or through BMEH) and not by the utilisation of any amounts drawn down under this Agreement and (B) the investment funds are the proceeds of a new capital injection (whether by way of debt or equity) into the investing Group Company occurring after the date of the Supplemental Agreement and not monies already available to such investing Group Company, then such capital injection by the relevant investing Group Company may not exceed L500,000 without the prior consent of the Agent; (iv) any Pre-Approved Acquisition; REVOLVING FACILITY: the facility referred to in clause 2.1; REVOLVING FACILITY AMOUNT: the lesser of: (i) the Maximum Revolving Credit Line; and (ii) the Maximum Eligibility Amount; REVOLVING LOAN: each LIBOR Revolving Loan and each Reference Rate Revolving Loan made or to be made by the Lenders pursuant to the Revolving Facility; SCREEN RATE: the British Bankers Association Interest Settlement Rate for the relevant currency and period displayed on page 3750 of the Telerate screen; if the agreed page is replaced or service ceases to be available, the Agent may specify another page or service displaying the appropriate rate after consultation with Ideal and the Lenders; 27 SECOND SUPPLEMENTAL AGREEMENT: the agreement supplemental to this Agreement dated 22 September 2004 and entered into by, amongst others, the parties to this Agreement; SECURED GUARANTOR: each Charging Company; SECURED OBLIGATIONS: the meaning given to it in the Debenture; SECURITY DOCUMENTS: the Debenture, the Priority Agreement, the Pledge Agreements and any document creating an encumbrance over any asset of any Obligor and/or any IDF Company entered into pursuant thereto or pursuant to any other Finance Document and any other security document granted to the Security Trustee as security for the obligations of the Obligors and/or any IDF Company to the Beneficiaries; SECURITY INTEREST: collectively the encumbrances granted to the Security Trustee pursuant to the Security Documents or any other agreement or instrument; SIXTH SUPPLEMENTAL AGREEMENT: the agreement supplemental to this Agreement dated [__] and entered into by, amongst others, the parties to this Agreement; SOLUTIONS GROUP: at any time, Bell Microproducts Solutions BV and its Subsidiaries at such time and "MEMBER OF THE SOLUTIONS GROUP" means any one of them but so that an IDF Company shall be deemed not to be a member of the Solutions Group even if this is in fact the case; ST. CRISPIN MORTGAGEE: as at the date of the Second Supplemental Agreement, HSBC Bank PLC as lender to OpenPSL Limited and as mortgagee of the St. Crispin Property in connection with such borrowing or such other bank or financial institution which may at any time refinance all or any part of such borrowings, provided that such bank or financial institution shall have entered into an intercreditor deed or other priority arrangement on terms and conditions mutually acceptable to such bank or financial institution, OpenPSL Limited and the Agent; ST. CRISPIN PRIORITY AGREEMENT: the priority agreement, in form and substance satisfactory to the Agent, entered or to be entered into between (1) OpenPSL Limited, (2) the Security Trustee and (3) HSBC Bank PLC; ST. CRISPIN PROPERTY: all that freehold property registered under title number LA596977 and more particularly known as land to the west side of St. Crispin Way, Haslingden, Rossendale, Lancashire; SUBSIDIARY: of a person means any company or entity directly or indirectly controlled by such person; SUPPLEMENTAL AGREEMENT: the agreement supplemental to this Agreement dated 3 December 2003 entered into by the parties hereto; 28 SUPPLEMENTAL DEED: a deed supplemental to the Debenture or any other Security Document, substantially in the form set out in schedule 9 to the Debenture or, as the case may be, substantially in the form set out in such Security Document, entered or to be entered into by a Group Company pursuant to which that Group Company accedes to the Debenture or, as the case may be, any other Security Document, as a Charging Company; SWEDISH IDF COMPANY: Bell Microproducts AB, a corporation incorporated under the laws of Sweden with registered number SE556597-7385 and having its registered office at Rotebergsvagen 1, 192 78 Sollentuna, Sweden; SWEDISH INVOICE DISCOUNTING AGREEMENT: the invoice discounting agreement dated 15 December 2004 and made between the Swedish IDF Company and Bank of America, National Association acting through its branch at 5 Canada Square, London, E14 5AQ; SWEDISH BANK ACCOUNTS PLEDGE: a pledge in respect of the Company Accounts of the Swedish IDF Company, in form and substance satisfactory to the Agent and the Receivables Purchaser; SWINGLINE LOAN: a swingline loan made or to be made by the Swingline Lender pursuant to clause 6.3; TAXES ACT: the Income and Corporation Taxes Act 1988; TAX CONFIRMATION: a confirmation by a person which is a Lender under this Agreement that the person beneficially entitled to interest payable to that Lender in respect of a Loan under this Agreement is either: (i) a company resident in the United Kingdom for United Kingdom tax purposes; or (ii) a partnership each member of which is a company resident in the United Kingdom for United Kingdom tax purposes; or (iii) a company not so resident in the United Kingdom which carries on a trade in the United Kingdom through a branch or agency and which is required to bring that interest into account in computing its chargeable profits (within the meaning given by section 11(2) of the Taxes Act); TERMINATION DATE: subject to clause 9.5, the third Anniversary Date; THIRD SUPPLEMENTAL AGREEMENT: the agreement supplemental to this Agreement dated 15 December 2004 between, amongst others, the parties to this Agreement; TOTAL COMMITMENTS: the aggregate at any time of the Commitments of all the Lenders; TOTAL OUTSTANDINGS: the aggregate at any time of the Outstandings of all the Lenders; 29 TRADING COMPANY: each Group Company with Eligible Accounts and, if applicable following the Inventory Eligibility Date, with such Eligible Inventory as the Agent may agree in writing; TRANSFER CERTIFICATE: a certificate substantially in the form set out in Schedule 6 completed in accordance with clause 28; TRANSFEREE: a Lender or other financial institution which is a Qualifying Lender to which a Lender seeks to transfer rights and obligations under this Agreement in accordance with clause 28; TRUST PROPERTY: all or any of the assets, rights, powers, authorities and discretions at any time subject to or expressed to be subject to the security from time to time constituted by or arising pursuant to the Security Documents or vested in the Security Trustee or given under or pursuant to the Security Documents including all income and other sums at any time received or receivable by the Security Trustee in respect thereof; UNSECURED GUARANTOR: a Group Company which has acceded to this Agreement as an unsecured guarantor by executing and delivering to the Agent an Accession Notice in accordance with clause 3 and "UNSECURED GUARANTOR" means any one of them; UNUSED LINE FEE: the meaning given to it in clause 22.1; US INVENTORY: Inventory purchased by Ideal from third party suppliers where the purchase price paid by Ideal to such third party suppliers is settled in dollars; USD CO: Bell Microproducts (US) Limited (Company Number: 5305904) whose registered office is at Fountain Court, Cox Lane, Chessington, Surrey KT9 1SJ; UTILISATION: a utilisation consisting of the drawdown of a Swingline Loan or Revolving Loan or the issue by the Issuer of a Letter of Credit or Guarantee; UTILISATION NOTICE: a notice of Utilisation substantially in the form set out in Schedule 4; and VAT: value added tax or any similar tax substituted therefore. 1.2 CONSTRUCTION Any reference in this Agreement to: 1.2.1 the "AGENT", the "ARRANGER", the "RECEIVABLES PURCHASER", the "SECURITY TRUSTEE", the "ISSUER", the "SWINGLINE LENDER" or any "LENDER" shall be construed so as to include their respective successors, Transferees and assignees in accordance with their respective interests; 30 1.2.2 "THIS AGREEMENT" or to any other agreement or document shall, unless the context otherwise requires, be construed as a reference to this Agreement or such other agreement or document as the same may from time to time be amended, varied, supplemented, novated or replaced and shall include any document which is supplemental to, is expressed to be collateral with, or is entered into pursuant to or in accordance with, the terms of this Agreement or, as the case may be, such other agreement or document; 1.2.3 the "ASSETS" of any person shall be construed as a reference to all or any part of its business, operations, undertaking, property, assets, revenues (including any right to receive revenues) and uncalled capital; 1.2.4 a "BUSINESS DAY" is a reference to a day (other than a Saturday or Sunday) on which banks generally are open for business in London and: (a) (in relation to any date for the payment or purchase of a currency other than euro) in the principal financial centre of the country of that currency; or (b) (in relation to any date for the payment or purchase of euro) which is a TARGET Day; 1.2.5 a "CAPITAL ADEQUACY REGULATION" shall be construed as a reference to any guideline, request or directive of any central bank or public authority, or any other law, rule or directive or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank; 1.2.6 a document being a "CERTIFIED COPY" of another means such document is certified by a duly authorised officer of the relevant Obligor (or by reputable solicitors to the relevant Obligor from time to time) as being a true, complete, accurate and up-to-date copy of the original; 1.2.7 a person being "CONTROLLED" by another means that that other (whether directly or indirectly and whether by the ownership of share capital, the possession of voting power, contract or otherwise) has the power to appoint and/or remove all or the majority of the members of the board of directors or other governing body of that person or otherwise controls or has the power to control the affairs and policies of that person; 1.2.8 a "CREDIT AGREEMENT" shall be construed as a reference to any conditional sale agreement (as defined in the Consumer Credit Act 1974), hire purchase or credit sale agreement or other similar agreement entered into primarily as a method of financing the acquisition of the asset which is the subject of such agreement; 31 1.2.9 a Default which is "CONTINUING" shall be construed as a reference to a Default which has not been remedied or waived; 1.2.10 "DOLLARS" and "US$" shall mean the lawful currency of the United States of America; 1.2.11 "EMU LEGISLATION" means legislative measures of the European Communities for the introduction of, changeover to or operation of the euro; 1.2.12 an "ENCUMBRANCE" shall be construed as a reference to a mortgage, charge, assignment by way of security, pledge, lien, hypothecation, right of set-off, reservation of title arrangement, preferential right (save as arising under the general law for the protection of certain classes of creditors) or any trust, flawed asset or other arrangement for the purpose of and having a similar effect to the granting of security, or other security interest of any kind; 1.2.13 "EURO" and "EUR" means the single currency adopted by certain participating member states of the European Communities in accordance with EMU legislation; 1.2.14 a "FINANCE LEASE" shall be construed as a reference to any lease or other similar agreement entered into primarily as a method of financing the use of the asset which is the subject of such lease or agreement; 1.2.15 "FINANCIAL INDEBTEDNESS" shall be construed as a reference to any indebtedness under or in respect of: (a) monies borrowed or raised (including by way of preference share capital but excluding by way or ordinary shares); (b) any debenture, bond, note, loan stock, commercial paper or similar instrument; (c) any acceptance credit, bill-discounting, note purchase or documentary credit facility; (d) any credit agreement or finance lease; (e) any receivables purchase, factoring or discounting arrangement under which there is recourse in whole or in part to any member of the Group including, without limitation, the Invoice Discounting Agreements; (f) credit (other than normal trade credit for a period not exceeding 90 days) or deferred payment arrangements in respect of the acquisition or construction price of assets acquired or constructed or the purchase price of services supplied; 32 (g) any other transaction having the commercial effect of a borrowing or other raising of money entered into by a person to finance its business or operations or capital requirements; or (h) (without double counting) any guarantee or other assurance against financial loss in respect of the indebtedness of any person arising under an obligation falling within (a) to (g) above; 1.2.16 the "FINANCIAL STATEMENTS" or the "MANAGEMENT ACCOUNTS" shall be construed so as to include any notes, reports, statements or other documents annexed or attached to any of them; 1.2.17 a "GUARANTEE" shall be construed so as to include an indemnity, bond, standby letter of credit and any other obligation (whatever called) of any person to pay for, purchase, provide funds (whether by the advance of money, the purchase or subscription for shares or other securities, the purchase of assets or services or otherwise) for the payment of, indemnify against the consequences of default in the payment of, or otherwise be responsible for, any indebtedness or other obligation of any other person (and "GUARANTEED" and "GUARANTOR" shall be construed accordingly); 1.2.18 "INDEBTEDNESS" shall be construed as a reference to any obligation for the payment or repayment of money, whether as principal or as surety and whether present or future, actual or contingent; 1.2.19 a document expressed to be "IN THE APPROVED TERMS" is a reference to a document the terms, conditions and form of which have been initialled for the purpose of identification by or on behalf of the Agent; 1.2.20 something having a "MATERIAL ADVERSE EFFECT" on a person shall be construed as a reference to it having a material adverse effect (i) on its financial condition, business or operations or on the consolidated financial condition, business or operations of it and its Subsidiaries or (ii) on its ability to comply with its payment obligations under any Finance Document; 1.2.21 a "MONTH" is a reference to a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month save that, where any such period would otherwise end on a day which is not a business day, it shall end on the next business day, unless that day falls in the calendar month succeeding that in which it would otherwise have ended, in which case it shall end on the preceding business day provided that, if a period starts on the last business day in a calendar month or if there is no numerically corresponding day in the month in which that period ends, that period shall end on the last business day in that later month; 33 1.2.22 a "PARTICIPATING MEMBER STATE" is a reference to any member state of the European Communities which adopts or has adopted the euro as its lawful currency in accordance with EMU legislation; 1.2.23 a "PERSON" shall be construed as a reference to any individual, firm, company, corporation, public authority or any association or partnership (whether or not having separate legal personality) of two or more of the foregoing; 1.2.24 a "PUBLIC AUTHORITY" shall be construed as a reference to any government of any country or sovereign state or any political sub-division thereof or any department, agency, public corporation or other instrumentality of any of the foregoing; 1.2.25 a "REGULATION" shall be construed so as to include any regulation, rule, by-law, official directive, requirement, request or guideline (whether or not having the force of law) of any governmental body, agency, department or regulatory, self-regulatory or other authority or organisation; 1.2.26 "STERLING" and "L" denotes the lawful currency of the United Kingdom; 1.2.27 the "STERLING EQUIVALENT" of (i) any amount denominated in a Foreign Currency shall mean the equivalent in sterling of such amount as determined by the Agent by reference to the Agent's Spot Rate of Exchange and of (ii) any amount denominated in sterling shall mean such sterling amount; 1.2.28 "TARGET" is a reference to Trans-European Automated Real-time Gross Settlement Express Transfer payment system; 1.2.29 "TARGET DAY" is a reference to any day on which TARGET is open for the settlement of payments in euro; 1.2.30 "TAX" shall be construed so as to include any present and future tax, levy, impost, deduction, withholding, duty or other charge of a similar nature (including, without limitation, any penalty or interest payable in connection with any failure to pay or any delay in paying any of the same); 1.2.31 "TAX ON OVERALL NET INCOME" of a person shall be construed as a reference to tax (other than tax deducted or withheld from any payment) imposed on that person by the jurisdiction in which its principal office (and/or, in the case of a Lender, its Facility Office) is located on (i) the net income, profits or gains of that person world-wide or (ii) such of its net income, profits or gains as arise in or relate to that jurisdiction; 1.2.32 an "UNPAID SUM" is a reference to an unpaid sum as that term is defined in clause 18.1; 34 1.2.33 the "WINDING-UP", "DISSOLUTION", "ADMINISTRATION", "RECEIVERSHIP" or "BANKRUPTCY" of a person and references to the "LIQUIDATOR", "ADMINISTRATOR", "RECEIVER", "ADMINISTRATIVE RECEIVER", "RECEIVER AND MANAGER", "MANAGER" or "TRUSTEE" of a person shall be construed so as to include any equivalent or analogous proceedings or, as the case may be, insolvency representative or officer under the law of the jurisdiction in which such person or, as the case may be, insolvency representative or officer is incorporated or constituted or of any jurisdiction in which such person or, as the case may be, insolvency representative or officer, carries on business. 1.3 Any reference in this Agreement to any statute or statutory provision shall, unless the context otherwise requires, be construed as a reference to such statute or statutory provision (including all instruments, orders or regulations made thereunder or deriving validity therefrom) as in force at the date of this Agreement and as subsequently re-enacted or consolidated. 1.4 Any reference in this Agreement to a time of day shall, save where the context otherwise requires, be construed as a reference to London time. 1.5 In construing this Agreement general words introduced by the word "OTHER" shall not be given a restrictive meaning by reason of the fact that they are preceded by words indicating a particular class of acts, matters or things and general words shall not be given a restrictive meaning by reason of the fact that they are followed by particular examples intended to be embraced by the general words. 1.6 The illegality, invalidity or unenforceability of any provision of this Agreement under the law of any jurisdiction shall not affect its legality, validity or enforceability under the law of any other jurisdiction nor the legality, validity or enforceability of any other provision of this Agreement. 1.7 This Agreement supersedes any previous agreement, whether written or oral, express or implied, between the Original Borrowers, the Arranger, the Agent, the Security Trustee and the Lenders, or any of them, in relation to the subject matter of this Agreement. 1.8 The headings in this Agreement are for convenience only and shall not affect its meaning and references to a clause, Schedule or paragraph are (unless otherwise stated) to a clause of, or schedule to, this Agreement and to a paragraph of the relevant Schedule. 1.9 This Agreement may be signed in any number of counterparts, all of which taken together shall constitute one and the same instrument. Any party may enter into this Agreement by signing any such counterpart. 1.10 Save where the context otherwise requires, the plural of any term includes the singular and vice versa. 1.11 Except as provided in clause 27.13, the terms of this Agreement may only be enforced by a party to it and the operation of the Contracts (Rights of Third 35 Parties) Act 1999 is excluded. Notwithstanding such clause, the parties to this Agreement do not require the consent of any third party to rescind or vary this Agreement or any Finance Document at any time. 1.12 Nothing in this Agreement or envisaged hereby shall operate, whether directly or indirectly, to constitute a partnership between any Obligor and any of the Beneficiaries. 1.13 The liabilities and obligations of the Obligors under the Finance Documents to which each of them is expressed to be a party are and shall be construed as being, joint and several. 2 THE REVOLVING FACILITY 2.1 THE REVOLVING FACILITY Subject to the terms and conditions of this Agreement, the Lenders shall make available to the Borrowers a revolving credit facility (the "REVOLVING FACILITY") of up to the Maximum Revolving Credit Line. The Revolving Facility (as described in clause 6) shall consist of Revolving Loans (to be denominated in sterling and/or, if agreed between the relevant Borrower and the Agent, dollars, euro or one or more other Foreign Currencies) to be made by the Lenders and, if specifically agreed by the Agent (on the instructions of the Issuer), Letters of Credit and/or Guarantees to be issued by the Issuer (subject to reimbursement by the relevant Borrower and each of the Lenders on the terms set out in this Agreement) and Swingline Loans (to be denominated in sterling and/or dollars, euros or such one or more other Foreign Currencies as may be agreed between the relevant Borrower and the Swingline Lender), to be made by the Swingline Lender (subject to reimbursement by the Lenders on the terms set out in this Agreement) in a maximum aggregate principal Original Sterling Amount not exceeding the Revolving Facility Amount. 2.2 PURPOSE The Revolving Facility is to be applied to meet each Borrower's general working capital purposes and each Borrower shall apply all amounts raised by it under this Agreement accordingly provided that none of the Agent, the Security Trustee or any of the Lenders shall be obliged to concern itself with the application of amounts raised by any Borrower under this Agreement. 2.3 OBLIGATIONS SEVERAL The obligations of each Lender under this Agreement are several. The failure by any Lender to perform its obligations under this Agreement shall not affect the obligations of any Obligor towards any other party to this Agreement nor shall any such other party be liable for the failure by such Lender to perform its obligations. 36 2.4 RIGHTS SEVERAL The rights of each Lender are several. The amount at any time owing by any Borrower to any party under this Agreement shall be a separate and independent debt from the amount owing to any other party. 2.5 FINANCIAL ASSISTANCE None of the proceeds of any Utilisation of the Revolving Facility under this Agreement may be used in any way which infringes section 151 Companies Act 1985 or any similar or other statutory obligation whether in the United Kingdom or elsewhere unless the provisions of sections 155 to 158 thereof are actually complied with. 2.6 CONTINUING OBLIGATIONS The obligations of any party under or in respect of clauses 10, 11, 18, 19, 20.7, 24 and 26.9 shall continue even after the date (the "Discharge Date") upon which the Total Commitments have been cancelled or otherwise reduced to zero and the Outstandings of all the Lenders have been permanently repaid or prepaid, to the extent of and in respect of any cost, expense, loss, liability or claim indemnifiable under any such clause and suffered or incurred by any Beneficiary on or prior to the Discharge Date 2.7 INCREASE OF MAXIMUM REVOLVING CREDIT LINE Ideal may, by not less than 30 days' prior written notice to the Agent, request that the Maximum Revolving Credit Line be increased from L60,000,000 to L80,000,000. Upon receipt of such notice, the Agent shall notify the Lenders and, upon the expiry of such period, the Maximum Revolving Credit Line shall be increased to L80,000,000. The Lenders shall enter into such documents and other agreements and carry out such actions as the Agent may require to give effect to such increase. 3 ADDITIONAL BORROWERS AND UNSECURED GUARANTORS 3.1 REQUEST OR REQUIREMENT Ideal may request that any Group Company shall become an Additional Borrower or, as applicable, the Agent may require that any Group Company shall become an Unsecured Guarantor by giving to the Agent or, as applicable, to Ideal not less than 10 business days' notice. For the avoidance of doubt, any Additional Borrower shall, unless the Agent otherwise agrees, automatically be required also to become a Charging Company pursuant to clause 4, without the need for the Agent to serve a further notice in accordance with clause 4. 3.2 ACCESSION The Group Company in respect of which the request or, as the case may be, requirement is made pursuant to clause 3.1 shall become an Additional Borrower or, as applicable, an Unsecured Guarantor: 37 3.2.1 if the Lenders approve or, as applicable, require the addition of that Group Company as an Additional Borrower or, as applicable, as an Unsecured Guarantor; 3.2.2 upon Ideal delivering to the Agent a duly completed and executed Accession Notice; 3.2.3 in the case of a request to appoint an Additional Borrower, if no Default has occurred or is likely to occur as a result of that Group Company becoming an Additional Borrower; 3.2.4 if the Agent has received all of the documents and other evidence specified in Schedule 9 in relation to that Group Company and each is in form and substance satisfactory to the Agent. For the avoidance of doubt, no Accounts or Inventory of any Group Company which is to become an Additional Borrower shall be considered as Eligible Accounts or Eligible Inventory, unless the Agent has completed a field examination and such other due diligence as the Agent may require and such Accounts and Inventory satisfy the applicable conditions set forth in this Agreement. 3.3 TIMING The Agent shall notify Ideal and the Lenders promptly upon being satisfied that it has received all of the documents and other evidence specified in Schedule 9 in relation to the relevant Group Company and that each is in form and substance satisfactory to it, whereupon subject always to clauses 3.2.1, 3.2.2 and, in the case of a proposed Additional Borrower, clause 3.2.3, the relevant Group Company shall become an Additional Borrower or, as applicable, an Unsecured Guarantor. 3.4 IDEAL AS AGENT Each Borrower and each Unsecured Guarantor shall be deemed to appoint Ideal as its agent for the purposes of the Finance Documents by its execution of an Accession Notice. The Agent may rely on a document signed by Ideal as if it had been signed by any other Borrower or any Unsecured Guarantor. Ideal may give a good receipt for any sum payable by any Finance Party to any other Borrower or an Unsecured Guarantor. Any communication delivered to Ideal shall be deemed to have been delivered to each of the Borrowers and each Unsecured Guarantor. Any communication made by Ideal to the Agent or any other Finance Party shall, to the extent permissible by law, be deemed to have been made with the consent of each other Borrower and each Unsecured Guarantor. 3.5 REPETITION OF REPRESENTATIONS Delivery of an Accession Notice constitutes confirmation by the relevant Additional Borrower or, as applicable, Unsecured Guarantor that the representations and warranties set out in clause 14.1 which are required to be repeated pursuant to clause 14.3 are true and correct in all material respects in 38 relation to it as at the date of delivery as if made by reference to the facts and circumstances then existing. 3.6 INVOICE DISCOUNTING AGREEMENTS By executing an Accession Notice an Additional Borrower shall accede to, and be bound by, the IDF Guarantee as if it had been named in clause 7 (Guarantee) of the Third Supplemental Agreement as a Borrower. 4 ADDITIONAL CHARGING COMPANIES 4.1 REQUIREMENT The Agent (acting on the instructions of the Lenders) may require that any Group Company becomes a Charging Company by giving to Ideal not less than 10 business days' notice, provided that any Group Company which has acceded to this Agreement as an Additional Borrower shall, unless the Agent otherwise agrees, automatically be required to become a Charging Company without the need for the Agent to serve a notice under this clause 4. 4.2 ACCESSION The Group Company in respect of which the requirement is made (or, in the case of an acceding Additional Borrower, is deemed to have been made) pursuant to clause 4.1 shall become a Charging Company: 4.2.1 (other than in the case of a Group Company acceding to this Agreement as an Additional Borrower (in which case, accession as a Charging Company shall, unless the Agent otherwise agrees, be automatic)), if the Lenders require the addition of that Group Company as a Charging Company; 4.2.2 upon Ideal delivering to the Agent a duly completed and executed Supplemental Deed or such other security document as the Agent may require in form and substance satisfactory to the Agent; 4.2.3 if no Default has occurred or is likely to occur as a result of that Group Company becoming a Charging Company; and 4.2.4 if the Agent has received all of the following documents and other evidence in relation to that Group Company specified in Schedule 9 (which shall be required to be delivered within 60 days of receipt (or deemed receipt) of notice under clause 4.1) and each is in form and substance satisfactory to the Agent. 4.3 TIMING The Agent shall notify Ideal and the Lenders promptly upon being satisfied that it has received all of the documents and other evidence specified in Schedule 9 in relation to the relevant Group Company and that each is in form and substance satisfactory to it, whereupon subject always to clauses 4.2.1 to 39 4.2.3 (inclusive) the relevant Group Company shall become a Charging Company. 4.4 IDEAL AS AGENT Each Charging Company shall be deemed to appoint Ideal as its agent for the purposes of the Finance Documents by its execution of a Supplemental Deed or other Security Document. The Agent may rely on a document signed by Ideal as if it had been signed by each other Charging Company. Ideal may give a good receipt for any sum payable by any Beneficiary to each other Charging Company. Any communication delivered to Ideal shall be deemed to have been delivered to each of the Charging Companies. Any communication made by Ideal to the Agent shall, to the extent permissible by law, be deemed to have been made with the consent of each other Charging Company. 4.5 REPETITION OF REPRESENTATIONS Delivery of a Supplemental Deed constitutes confirmation by the relevant Charging Company that the representations and warranties set out in clause 14.1 which are required to be repeated pursuant to clause 14.3 are true and correct in all material respects in relation to it as at the date of delivery as if made by reference to the facts and circumstances then existing. 5 CONDITIONS PRECEDENT The Lenders shall be under no obligation to make the Revolving Facility available under this Agreement unless the Agent has received, or the Lenders are satisfied that the Agent will receive at the same time as or immediately prior to the making available of the Revolving Facility, in form and substance satisfactory to it, all of the documents and evidence referred to in Schedule 2 (save to the extent that the Agent may at any time waive such receipt). 6 UTILISATION OF THE REVOLVING FACILITY 6.1 GENERAL CONDITIONS OF UTILISATION The Lenders shall not be obliged to make the Revolving Facility available and no Utilisation Notice in respect of the Revolving Facility shall become effective unless the provisions with respect to Excess Availability outlined at clause 16.2.14 are complied with; and either: 6.1.1 no Default has occurred and is continuing or would occur if the Revolving Facility was made available and the representations set out in clauses 14.1 and 14.2 to be repeated on and as of the proposed date for the making available of the Revolving Facility are true and correct in all material respects on and as of such date; or 40 6.1.2 the Lenders have agreed (notwithstanding any such matter) to make the Revolving Facility available and no notice of termination of this Agreement has been given by Ideal as referred to in clause 29. 6.2 REVOLVING LOANS Subject to the terms of this Agreement, a Revolving Loan will be made by the Lenders to a Borrower on its request if: 6.2.1 not later than 11.00 am on the business day immediately prior to the day which is the proposed date for the making of such Revolving Loan (or three business days in the case of any Revolving Loan to be denominated in a Foreign Currency), or such lesser period as the Agent may agree prior to the proposed date for the making of such Revolving Loan, the Agent has received from the relevant Borrower a Utilisation Notice in respect of such Revolving Loan; 6.2.2 the proposed date for the making of such Revolving Loan is a business day during the Commitment Period; 6.2.3 the Original Sterling Amount of the proposed amount of such Revolving Loan is a minimum amount of L3,000,000 and an integral multiple of L1,000,000 (or, where the Revolving Loan is to be made pursuant to clause 6.8.3, an amount equal to the Original Sterling Amount of the aggregate principal amount of the Swingline Loans then outstanding) which is less than or equal to the lesser of the amount of the Available Facility and the Available Revolving Facility Amount; and 6.2.4 the proposed Interest Period in respect of such Revolving Loan is a period of one, two or three months (or such other period as the Agent may agree) ending on or before the Termination Date. 6.3 SWINGLINE LOANS Subject to the terms of this Agreement, a Swingline Loan (which may be denominated in sterling, dollars, euro or such other Foreign Currency as the Swingline Lender may agree) will be made by the Swingline Lender to a Borrower on its request if: 6.3.1 not later than 11.00 am on the day which is the proposed date for the making of such Swingline Loan, the Agent has received from the relevant Borrower a Utilisation Notice in respect of such Swingline Loan; 6.3.2 the proposed date for the making of such Swingline Loan is a business day during the Commitment Period. 41 6.4 LETTERS OF CREDIT AND GUARANTEES Subject to the terms of this Agreement, if the Agent agrees with a Borrower (acting on the instructions of the Issuer), the Issuer shall, at that Borrower's request (contained in a Utilisation Notice) issue one or more documentary letters of credit (each a "LETTER OF CREDIT") or Guarantees (each a "GUARANTEE"), in each case denominated in sterling or any Foreign Currency as the Issuer may agree, for that Borrower's account. The Issuer will not issue any Letter of Credit or Guarantee: 6.4.1 if the Original Sterling Amount of the maximum face amount of the requested Letter of Credit or of the maximum contingent liability under the requested Guarantee, in each case plus all commissions, fees and charges due from the relevant Borrower in connection with its issue, would cause its Available Commitment or the Available Revolving Facility Amount to be exceeded at such time; 6.4.2 if the expiry date of the Letter of Credit or Guarantee would be later than 30 days prior to the Termination Date or a date falling more than 12 months from its date of issue; 6.4.3 if the Original Sterling Amount of the maximum face amount of the requested Letter of Credit or of the maximum contingent liability under the requested Guarantee, when aggregated with the Original Sterling Amount of the maximum face value of all Letters of Credit and of the maximum contingent liability under all Guarantees, in each case then in issue, would exceed L5,000,000, unless the Issuer has specifically agreed with that Borrower that it is prepared to do so. 6.5 UTILISATION NOTICES 6.5.1 Subject to the terms of this Agreement, each Utilisation Notice shall be irrevocable and shall oblige the relevant Borrower to borrow the amount so requested or, as the case may be, to give effect to the Utilisation so requested on the date specified in such Utilisation Notice upon the terms and subject to the conditions set out in this Agreement. 6.5.2 The first Utilisation Notice delivered hereunder shall include a request to draw down as part of the relevant Revolving Loan an amount equal to the amount of any fees then due and payable to the Arranger, the Agent and the Lenders and to such other valuers and professional advisers as shall have been agreed with the Agent and the Lenders as being payable therefrom and an authorisation and direction to the Agent to appropriate for such purpose the proceeds of so much of the relevant Revolving Loan as is required to satisfy the payment in full of such fees. 42 6.6 TERMINATION OF COMMITMENTS If it has not already been cancelled or otherwise reduced to zero prior to such time the Commitment of each of the Lenders shall be reduced to zero at close of business in London on the last day of the Commitment Period. 6.7 SPECIAL PROVISIONS RELATING TO REVOLVING LOANS AGENT'S RIGHT TO EXCEED LIMITS: The Agent, in its discretion, may elect to allow the limits of the Available Revolving Facility Amount to be exceeded on one or more occasions, provided that the Agent may never exceed the Maximum Revolving Credit Line. If the Agent does exceed the limits of the Available Revolving Facility Amount, it may not do so by an amount which exceeds five (5) per cent. of the amount of the Maximum Revolving Credit Line and if it does exceed the limits of the Available Revolving Facility Amount on any occasion, the Agent shall not be deemed thereby to have changed such limits or to be obliged to exceed such limits on any other occasion. SHARING OF APPLICABLE MARGIN: on the first business day of each month following a month in which a Reference Rate Revolving Loan shall have been outstanding and on the first business day of the next Interest Period following an Interest Period during which a LIBOR Revolving Loan shall have been outstanding, the Agent shall pay to each of the Lenders an amount equal to each such Lender's Participating Proportion of the interest which would have been payable on any Reference Rate Revolving Loan outstanding during that month or, as the case may be, on any LIBOR Revolving Loan outstanding during that Interest Period, if such interest had been calculated on the basis of the Applicable Margin less 0.25% provided that the Agent shall have actually received all interest due from the relevant Borrowers on such Reference Rate Revolving Loans or LIBOR Revolving Loans at the rates applicable to them. Each Lender agrees that the Agent shall pay such additional interest actually received from the Borrowers above that paid to the Lenders in accordance with this Clause 6.7 to Bank of America, National Association (in its capacity as a Lender) for its own account. 6.8 SPECIAL PROVISIONS RELATING TO SWINGLINE LOANS 6.8.1 NOTIFICATION: The Swingline Lender shall notify the Agent and the Lenders at the end of each week of the net amount of Swingline Loans then outstanding. 6.8.2 REPAYMENT OF SWINGLINE LOANS: The principal amount of the Swingline Loans denominated in any currency shall be repaid on a daily basis by the transfer of the full credit balance on each Receivables Account to any loan account denominated in that currency maintained by each Borrower with the Agent as contemplated in clause 20.8 or otherwise on demand by the Swingline Lender, any such credit balance denominated in any particular currency to be applied first to the unpaid principal amount of Swingline Loans denominated in the same currency and thereafter in or towards repayment of the unpaid principal amount of any Swingline Loans denominated in any other currency, the manner and extent of such application to be at the Agent's discretion. 43 6.8.3 REFUNDING OF SWINGLINE LOANS BY THE LENDERS: The Agent will not less than weekly and may, at any time in its sole and absolute discretion or upon request of the Swingline Lender, on behalf of the Borrowers (each of which hereby irrevocably directs the Agent to act on its behalf in this respect), give notice to the Lenders (including the Swingline Lender) requiring that they make a Reference Rate Revolving Loan to the relevant Borrower in an amount equal to the aggregate principal amount of the Swingline Loans then outstanding together with all interest accrued thereon but unpaid. Interest on any such Reference Rate Revolving Loan shall be calculated and payable in accordance with the provisions of clause 7.2.2. 6.8.4 APPLICATION OF REFERENCE RATE REVOLVING LOANS: Regardless of whether the conditions in this Agreement for the making of Revolving Loans are then satisfied, each Lender shall make its share of any Reference Rate Revolving Loan referred to in clause 6.8.3 available to the Agent for the benefit of the Swingline Lender on the date notice of the requirement for any such Reference Rate Revolving Loan is given to the Lenders. 6.9 SPECIAL CONDITIONS FOR ISSUE OF LETTERS OF CREDIT AND GUARANTEES In addition to being subject to the satisfaction of the applicable conditions precedent referred to in clause 5, the obligation of the Issuer to issue any Letter of Credit or Guarantee is subject to the following conditions having been satisfied in a manner satisfactory to the Agent: 6.9.1 the relevant Borrower shall have delivered to the Agent, at such times and in such manner as the Agent may prescribe, an application in form and substance satisfactory to the Agent for the issue of the Letter of Credit or Guarantee and such other documents as may be required pursuant to the terms thereof; 6.9.2 the form and terms of the proposed Letter of Credit or Guarantee shall be satisfactory to the Agent and the Issuer; and 6.9.3 as of the date of issue, no order of any court, arbitrator or public authority shall purport by its terms to prohibit or restrain the Issuer or banks generally from issuing letters of credit or guarantees of the type and in the amount of the proposed Letter of Credit or Guarantee (as the case may be), and no law, rule or regulation applicable to the Issuer or banks generally and no request or directive (whether or not having the force of law) from any central bank or public authority with jurisdiction over the Issuer or banks generally shall prohibit, or request that the Issuer refrain from, the issue of letters of credit or guarantees generally or the issue of such Letter of Credit or Guarantee. 6.10 GENERAL CONDITIONS FOR ISSUE OF LETTERS OF CREDIT AND GUARANTEES 6.10.1 REQUESTS FOR ISSUE OF LETTERS OF CREDIT OR GUARANTEES: A Borrower shall give to the Agent four business days' prior written notice of that Borrower's request for the issue of any Letter of Credit or Guarantee. In the case of a Guarantee, such notice shall specify the maximum contingent liability to be 44 guaranteed, the beneficiary in whose favour the Guarantee is to be issued, the effective date of issue of such Guarantee (which shall be a business day), details of the obligation in respect of which the contingent liability might arise and the date on which such obligation is due to mature or expire. In the case of a Letter of Credit, such notice shall specify the original face amount and currency denomination of the Letter of Credit requested, the effective date of issue of such Letter of Credit (which shall be a business day), whether such Letter of Credit may be drawn in a single or partial draws, the date on which such Letter of Credit is to expire and the beneficiary of such Letter of Credit. 6.10.2 NO EXTENSIONS OR AMENDMENT: The Issuer shall not be obliged to extend or amend or cause to be extended or amended any Letter of Credit or Guarantee it has issued. 6.10.3 EVENTS OF DEFAULT: The Issuer need not, before issuing a Letter of Credit or Guarantee, make any enquiry or otherwise concern itself as to whether any event has occurred which, under the terms hereof, would relieve the Issuer from its obligations to issue that Letter of Credit or Guarantee and accordingly none of the Borrowers nor any of the Lenders shall have any right to resist any claim under clause 6.12 nor otherwise on the ground that any such event had occurred before the issue of the Letter of Credit or Guarantee, provided that, before issuing a Letter of Credit or Guarantee, the Issuer shall inform each of the Lenders of any Event of Default of which it has actual notice. 6.11 COMPENSATION FOR LETTERS OF CREDIT AND GUARANTEES Each Borrower agrees to pay to the Agent for the account of the Issuer with respect to each Letter of Credit or Guarantee, the Letter of Credit and Guarantee Fee and such other reasonable fees and other charges as are charged by the Issuer for letters of credit or guarantees issued by it including, without limitation its standard fees for issuing, administering, amending, renewing, paying and cancelling letters of credit and guarantees and all other fees associated with issuing or servicing letters of credit, as and when assessed, all as specified in clause 22.5. 6.12 PAYMENTS PURSUANT TO LETTERS OF CREDIT AND GUARANTEES 6.12.1 DEMANDS UNDER A LETTER OF CREDIT OR GUARANTEE: If a demand for payment is made under a Letter of Credit or Guarantee on the Issuer, the Issuer shall promptly notify the Agent of such demand and pay the sum demanded in accordance with the terms of the relevant Letter of Credit or Guarantee, whereupon: (a) the Agent shall not later than four hours after receipt of such demand, if such demand is made prior to 1.00 pm (London time) on any business day, or otherwise by 10.00 am (London time) on the next succeeding business day, notify each Lender of the amount of such demand and such Lender's proportion thereof which such Lender shall be obliged to pay; and 45 (b) each Lender shall on the date of such notification make its share of the amount demanded available to the Agent for the benefit of the Issuer in immediately available funds. If any Lender is unable to make its share of such amount available on such date, it shall nevertheless do so as soon as possible thereafter and in any event by no later than two business days after the date notice of such requirement was given to it by the Agent, together with interest thereon from the date of such notice to the date of payment at the rate specified by the Agent as representing the Issuer's cost of funds. 6.12.2 INDEMNITY: Each Borrower agrees to indemnify and hold harmless the Issuer in sterling or sterling equivalent from and against all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable legal fees) which the Issuer may incur or sustain as a consequence of the issue of any Letter of Credit or Guarantee or the performance of its obligations thereunder (save where the same are caused by the Issuer's gross negligence or wilful misconduct). This is a continuing indemnity, extends to the ultimate balance of each Borrower's obligations and liabilities under clause 6 and shall continue in force notwithstanding any intermediate payment in whole or in part of those obligations or liabilities. 6.12.3 PAYMENT OF LETTER OF CREDIT OR GUARANTEE OBLIGATIONS: Without limiting or affecting any of the provisions of this clause 6.12, each Borrower agrees to reimburse the Agent and each Lender for any draw under any Letter of Credit or Guarantee immediately upon demand, and to pay the Agent the amount of all other obligations and other amounts payable to it under or in connection with any Letter of Credit or Guarantee immediately when due, irrespective of any claim, set-off, defence or other right which that Borrower may have at any time against the Agent, the Lenders, the Issuer or any other person. 6.12.4 REFERENCE RATE REVOLVING LOANS TO SATISFY REIMBURSEMENT OBLIGATIONS: If the Issuer honours a draw under any Letter of Credit or makes a payment under a Guarantee and the relevant Borrower shall not have repaid such amount to the Agent pursuant to clause 6.12.3, the honouring of such draw or the making of such payment by the Issuer shall of itself cause there to arise a Reference Rate Revolving Loan by the Lenders of the amount of such draw or payment which Reference Rate Revolving Loan that Borrower shall be obliged to repay immediately. In the event of non-payment of such Reference Rate Revolving Loan, interest thereon shall be calculated by reference to successive periods of such duration as the Agent may select at a rate per annum which is the sum of (i) two per cent (2%) (ii) the Applicable Margin and (iii) the Reference Rate and shall be paid by the relevant Borrower at the end of the period by reference to which it is calculated or on such other date as the Agent may specify by written notice to that Borrower. If not paid on the due date, the interest shall be added to and form part of the Reference Rate Revolving Loan on which interest shall accrue and be payable in accordance with the provisions of this clause 6.12.4. 46 6.13 LETTERS OF CREDIT AND GUARANTEES - ASSUMPTION OF RISK 6.13.1 AUTHORISATIONS: Each of the Borrowers and the Lenders unconditionally and irrevocably: (a) authorise and direct the Issuer to pay any request or demand for payment under and in accordance with any Letter of Credit or Guarantee issued by it without requiring proof of the relevant Borrower's agreement that any amount so demanded or paid is or was due and notwithstanding that the relevant Borrower may dispute the validity of any such request, demand or payment; (b) confirms that the Issuer deals in documents only and shall not be concerned with the legality of any claim under any Letter of Credit or Guarantee or any other underlying transaction or any set-off, counterclaim or defence as between the relevant Borrower and any beneficiary of any Letter of Credit or Guarantee; and (c) agrees that the Issuer need not have any regard to the sufficiency, accuracy or genuineness of any such request or demand or any certificate or statement in connection therewith or any incapacity of or limitation upon the powers of any person signing or issuing any such request, demand, certificate or statement which appears on its face to be in order and agrees that the Issuer shall not be obliged to enquire as to any such matters and may assume that any such request, demand, certificate or statement which appears on its face to be in order is correct and properly made. 6.13.2 RIGHTS OF CONTRIBUTION AND SUBROGATION: Until all amounts which are or may become payable by the Obligors under or in connection with the Finance Documents have been irrevocably paid in full and the Agent, the Issuer, the Swingline Lender and/or the Lenders are under no liability hereunder, whether actual or contingent, no Borrower shall, by virtue of any payment made by it under or in connection with or referable to this clause 6 or otherwise be subrogated to any rights, security or monies held or received by the Agent, the Lenders and/or the Security Trustee or be entitled at any time to exercise, claim or have the benefit of any right of contribution or subrogation or similar right against any of them and each Borrower irrevocably waives all rights of contribution or similar rights against each of them. 6.13.3 WAIVER OF DEFENCES: Each Borrower's obligations under this clause 6 shall not be affected by any act, omission, matter or thing which, but for this provision, might reduce, release or prejudice any of its obligations hereunder in whole or in part, including without limitation and whether or not known to it: (a) any time or waiver granted to or composition with any beneficiary or any other person; (b) any taking, variation, compromise, exchange, renewal or release of, or refusal or neglect to perfect, take up or enforce, any rights, remedies or 47 securities available to the Issuer or other person or arising under any Letter of Credit or Guarantee; or (c) any unenforceability, illegality or invalidity of any Letter of Credit or Guarantee to the intent that each Borrower's obligations under this clause 6 shall remain in full force and be construed as if there were no such effect. 6.14 SUPPORTING LETTER OF CREDIT; CASH COLLATERAL If, notwithstanding the provisions of this clause 6 and clause 29 any Letter of Credit or Guarantee is outstanding upon the termination of this Agreement, then upon such termination each Borrower shall deposit with the Security Trustee, at its discretion, with respect to each Letter of Credit or Guarantee then outstanding, in its favour and at its request either: 6.14.1 a standby letter of credit (a "SUPPORTING LETTER OF CREDIT") in form and substance satisfactory to the Agent and the Security Trustee, issued by an issuer satisfactory to the Lenders in an amount equal to the greatest amount for which such Letter of Credit may be drawn (or, as the case may be, the maximum contingent liability under such Letter of Credit or Guarantee) together with all fees, expenses and charges in respect thereof (together the "MAXIMUM LIABILITY") under which Supporting Letter of Credit the Security Trustee is entitled to draw amounts necessary to reimburse the Issuer (through the Agent) for payments made by the Issuer under such Letter of Credit or Guarantee; or 6.14.2 cash in an amount equal to such maximum liability. Such Supporting Letter of Credit or deposit of cash shall be held by the Security Trustee as security for, and to provide for the payment of, the aggregate face amount of all Letters of Credit or, as the case may be, the aggregate maximum contingent liability under all Guarantees, remaining outstanding. 6.15 AGENT LOANS 6.15.1 AUTHORISATION: Subject to the provisions of this clause 6.15, the Agent is hereby authorised by each Borrower and the Lenders, from time to time in the Agent's reasonable discretion, after the occurrence of a Default or an Event of Default which is continuing unremedied or unwaived or at any time that any of the other conditions to the making available of any Loans hereunder have not been satisfied (and provided in any such case that it is impractical to contact the Lenders), to make Reference Rate Revolving Loans (but in any event not to exceed the Available Facility) to a Borrower on behalf of the Lenders which the Agent, in its reasonable business judgement, deems necessary or desirable (i) to preserve or protect any Collateral, (ii) to enhance the likelihood of, or maximise the amount of, repayment of any of the Outstandings or (iii) to pay any other amount chargeable to that Borrower pursuant to the terms of this Agreement, including without limitation any 48 costs, fees and expenses (any such Reference Rate Revolving Loan described in this clause 6.15 being an "AGENT LOAN"). 6.15.2 REVOCATION OF AUTHORISATION: The Lenders may at any time revoke the Agent's authorisation contained in clause 6.15.1 to make Agent Loans, any such revocation to be in writing and to become effective only upon the Agent's actual receipt thereof. 6.15.3 REPAYMENT: Agent Loans shall constitute Reference Rate Revolving Loans under this Agreement repayable by the relevant Borrower on demand and shall bear interest at the rate per annum applicable to Reference Rate Revolving Loans plus 2%. The Agent shall notify each Lender in writing of each Agent Loan that it makes. 6.15.4 SETTLEMENT: It is agreed that each Lender shall participate in each such Reference Rate Revolving Loan constituted by an Agent Loan in an amount equal to its Participating Proportion of the amount of such Reference Rate Revolving Loan. Notwithstanding such agreement, the Agent and the Lenders agree (which agreement shall not be for the benefit of or enforceable by the Borrowers) that in order to facilitate the administration of this Agreement settlement of Agent Loans shall take place on a periodic basis on such date or dates as the Agent may specify by written notice to the Lenders. On receipt of any such notice, each Lender shall make an amount equal to its Participating Proportion of the outstanding principal amount of the Agent Loans in respect of which settlement is requested available to the Agent in immediately available funds to such account of the Agent as the Agent may designate, not later than 2.00 pm on the proposed settlement date (which shall be not less than three business days following the date of such notice). If any such amount is not made available to the Agent by any Lender on such settlement date, such Lender shall pay such amount to the Agent on demand together with interest thereon from such settlement date to the date of actual payment calculated at a rate per annum which is the sum of (i) two per cent (2%) (ii) the Applicable Margin and (iii) the Reference Rate. 6.16 PARTICIPATION AND NOTIFICATION 6.16.1 PARTICIPATION BY LENDERS: Each Lender will participate through its Facility Office in each Utilisation hereunder, comprising the making of the Revolving Loans, or in any amount to be reimbursed to the Swingline Lender or the Issuer following any non-payment by any Borrower of any amount due from it in respect of a Swingline Loan or, as appropriate, a Letter of Credit or Guarantee, in the proportion which its Commitment bears to the Total Commitments immediately prior to the making available of that Utilisation or, as the case may be, at the time of any such non-payment. 6.16.2 NOTIFICATION TO LENDERS: The Agent shall, promptly after receipt by it of a Utilisation Notice, notify each Lender of the details of such notice and of the amount of that Lender's share of the Utilisation to be made available to the relevant Borrower. 49 1.1 AGGREGATE EXPOSURE The Aggregate Exposure shall at no time exceed the Maximum Revolving Credit Line and if at any time this limit is exceeded as a consequence of currency fluctuations, the Borrowers shall provide cash cover in an amount equal to such excess. 7 INTEREST AND INTEREST PERIODS 7.1 DATES OF PAYMENT OF INTEREST Each Revolving Loan shall bear interest on its unpaid principal amount from the date made until paid in cash at a rate determined by reference to the Reference Rate or to LIBOR, as applicable, and the relevant Borrower shall pay accrued interest on each such Revolving Loan (i) in the case of each Reference Rate Revolving Loan, on the first day of each month thereafter and (ii) in the case of each LIBOR Revolving Loan, on the last day of each Interest Period relating to such LIBOR Revolving Loan. If the audited consolidated Financial Statements for the Group and related certificate of Ideal for a Financial Year delivered in accordance with Clauses 15.2.1 and 15.3.3 show that a higher Applicable Margin should have applied during a certain period, then BMEH shall (or shall ensure that the relevant Borrower shall) promptly pay to the Agent any amounts necessary to put the Agent and the Lenders in the position they would have been in had the appropriate rate of the Applicable Margin applied during such period. 7.2 RATE OF INTEREST 7.2.1 The rate of interest applicable to a LIBOR Revolving Loan from time to time during an Interest Period relating to it shall be the rate per annum which is the sum of (i) the Applicable Margin at such time, (ii) LIBOR relating to such LIBOR Revolving Loan for such Interest Period and (iii) the Mandatory Cost, if any, applicable to that LIBOR Revolving Loan. 7.2.2 The rate of interest applicable to a Swingline Loan and each Reference Rate Revolving Loan shall be a fluctuating rate per annum which is the sum of the Reference Rate and the Applicable Margin. Each change in the Reference Rate and the Applicable Margin shall be reflected in such interest rate as of the effective date of such change. 7.3 INTEREST PERIODS - LIBOR REVOLVING LOANS Save as otherwise provided in this Agreement, the duration of each Interest Period relating to a LIBOR Revolving Loan shall be the period selected by the relevant Borrower in the Utilisation Notice relating to that LIBOR Revolving Loan. 50 7.4 MAXIMUM NUMBER OF INTEREST PERIODS A Borrower may not select an Interest Period in respect of any LIBOR Revolving Loan of such a duration that there shall at any time be more than five Interest Periods in existence at the same time. 7.5 CONVERSION AND CONTINUATION OF REVOLVING LOANS 7.5.1 Ideal (on behalf of the Borrowers) may, upon irrevocable written notice to the Agent in accordance with clause 7.5.2: (a) at any time after the Outstandings in respect of Reference Revolving Rate Loans are equal to or exceed an amount equal to an Original Sterling Amount of L20,000,000 elect, as of any business day, in the case of Reference Rate Revolving Loans, to convert any such Reference Rate Revolving Loans (or any part thereof) in an amount or integral multiple of not less than L1,000,000 into LIBOR Revolving Loans; (b) elect, as of the last day of the applicable Interest Period, to continue any LIBOR Revolving Loans having Interest Periods expiring on such day (or any part thereof) in an amount or integral multiple of not less than L1,000,000. 7.5.2 If any Revolving Loans are to be converted into or continued as LIBOR Revolving Loans, Ideal shall deliver a notice of conversion or continuation (a "NOTICE OF CONVERSION/CONTINUATION") to be received by the Agent not later than 11.00 a.m. at least 1 business day (in the case of any Revolving Loan denominated in sterling) and at least 3 business days (in the case of any Revolving Loan denominated in a Foreign Currency), in advance of the proposed date of conversion or continuation specifying: (a) the proposed date of such conversion or continuation; (b) the aggregate amount of Revolving Loans to be converted or continued; and (c) the type of Revolving Loans resulting from the proposed conversion or continuation. 7.5.3 If upon drawdown of any Revolving Loan or upon the expiry of any Interest Period applicable to any LIBOR Revolving Loan, Ideal has failed to select a new Interest Period to be applicable thereto or if any Default or Event of Default then exists, Ideal shall be deemed to have elected to convert such LIBOR Revolving Loan into a Reference Rate Revolving Loan as of the expiry date of such Interest Period. 7.5.4 During the existence of a Default or an Event of Default, Ideal may not elect to have a Revolving Loan converted into or continued as a LIBOR Revolving Loan. 51 7.6 MARGIN RATCHET 7.6.1 On the first business day of each Management Accounting Period, the Agent shall calculate the average daily Available Revolving Facility Amount during the previous Management Accounting Period. Subject to the provisions of this Clause 7.6, if the average daily Available Revolving Facility Amount during the previous Management Accounting Period was within a range set out below then the Applicable Margin for that Management Accounting Period will (subject to any adjustment pursuant to Clause 7.6.3 below) be deemed to have been the percentage per annum set out below in the column opposite that range:
AVERAGE DAILY AVAILABLE REVOLVING FACILITY AMOUNT APPLICABLE MARGIN (%) PER ANNUM - --------------------------------- ------------------------------- Less than L10,000,000 2.00 Equal to or greater than L10,000,000 but less than L15,000,000 1.75 Equal to or greater than L15,000,000 1.50
7.6.2 Any increase or decrease (as applicable) in the Applicable Margin as a result of the operation of Clauses 7.6.1 shall be deemed to have taken effect on the first business day of the previous Management Accounting Period. 7.6.3 At the same time as it prepares the next set of Management Accounts that are required to be delivered to the Agent in accordance with Clause 15.2.2 following the end of a Financial Quarter ending on or after (but not before) 31 December 2005 (each such Financial Quarter being for the purposes of this Clause 7.6 the "PREVIOUS FINANCIAL QUARTER"), Ideal shall calculate the actual EBITDA achieved from the start of the Financial Year in which the Previous Financial Quarter fell to the end of the Previous Financial Quarter (the "ACTUAL YTD EBITDA") and shall compare it against the projected EBITDA for that period (as set out in the projections delivered to the Agent prior to the Effective Date or, in any Financial Year commencing after the Effective Date, the Latest Projections delivered to the Agent in accordance with Clause 15.2.3 for that Financial Year) (the "PROJECTED YTD EBITDA"). Ideal shall, at the same time as it delivers those Management Accounts to the Agent, deliver a certificate to the Agent (signed by its finance director) (an "ACTUAL YTD EBITDA CERTIFICATE") certifying the Actual YTD EBITDA achieved to the end of the Previous Financial Quarter and calculating (as a percentage) the amount (if any) by which the Projected YTD EBITDA to the end of the Previous Financial Quarter exceeds the Actual YTD EBITDA achieved to the end of the Previous Financial Quarter (the "VARIANCE"). Subject to the provisions of this Clause 7.6, if the Actual YTD EBITDA Certificate delivered to the Agent demonstrates that the Variance is within a range set out below then the Applicable Margin (as determined from time to 52 time in accordance with Clause 7.6.1) will be increased by the amount set out below in the column opposite that range:
AMOUNT BY WHICH THE APPLICABLE MARGIN DETERMINED IN ACCORDANCE VARIANCE WITH CLAUSE 7.6.1 IS INCREASED - -------- ------------------------------------- Less than 30% 0 basis points Equal to or greater than 30% but less than 50% 25 basis points Equal to or greater than 50% 50 basis points
For the avoidance of doubt, if an Actual YTD EBITDA Certificate delivered to the Agent demonstrates that the Actual YTD EBITDA achieved to the end of the Previous Financial Quarter exceeds the Projected YTD EBITDA to the end of the Previous Financial Quarter then the Applicable Margin (determined in accordance with Clause 7.6.1) will be increased by 0 basis points. If Ideal does not deliver an Actual YTD EBITDA Certificate in accordance with Clause 7.6.3 then the Applicable Margin (determined in accordance with Clause 7.6.1) will be increased by 50 basis points. 7.6.4 Any increase in the Applicable Margin (determined in accordance with Clause 7.6.1) as a result of the operation of Clause 7.6.3 shall be deemed to have taken effect on the first business day of the Financial Quarter in which the Actual YTD EBITDA Certificate is delivered or should have been delivered. 7.6.5 For the avoidance of doubt, the Applicable Margin shall never be less than 1.50% per annum. 7.6.6 If, following receipt by the Agent of the audited consolidated Financial Statements for the Group and related certificate of Ideal in accordance with Clauses 15.2.1 and 15.3.3, those Financial Statements and related certificate of Ideal show that the Variance stated in any Actual YTD EBITDA Certificate delivered in respect of any Financial Quarter falling in the Financial Year to which those Financial Statements relate was greater than the Variance stated in any Actual YTD EBITDA Certificate delivered in respect of any Financial Quarter falling in the Financial Year to which those Financial Statements relate, then the provisions of Clause 7.1 shall apply and the Applicable Margin shall be determined using the table set out in Clause 7.6.3 above and each Variance in respect of a period shall be calculated using audited consolidated Financial Statements for the Group and related certificate of Ideal delivered for that Financial Year. 7.6.7 At any time while a Default has occurred and is continuing, the Applicable Margin shall be 2.50% per annum, notwithstanding any previous reduction of the Applicable Margin made pursuant to this clause 7.6 and no reduction shall be instituted while a Default has occurred and is continuing. For the avoidance 53 of doubt, nothing in this Clause 7.6.7 shall limit any default interest or other charges that may be payable under this Agreement and if any default interest or other charges are payable under this Agreement then they shall be paid in addition to the Applicable Margin calculated under this Clause 7.6. 8 MARKET DISRUPTION 8.1 CIRCUMSTANCES If at or about 11.00 am on the Quotation Date for an Interest Period in respect of any LIBOR Revolving Loan the Agent (in consultation with the Lenders) determines it is not possible by reason of circumstances affecting the London Interbank Market generally (i) to determine LIBOR in accordance with its definition, or (ii) for the Lenders to obtain requisite matching deposits in the required currency in the London Interbank Market at the relevant time to fund their respective shares during such Interest Period, or (iii) for the Majority Lenders to obtain such deposits for such period at a cost less than or equal to the rate offered to the Agent in accordance with the definition of LIBOR, then the Agent shall forthwith notify Ideal and the Lenders and notwithstanding the provisions of clause 7, the Interest Period in respect of that LIBOR Revolving Loan and the amount of interest payable in respect of that LIBOR Revolving Loan during its Interest Period shall be determined in accordance with the following provisions of this clause 8. 8.2 APPLICABLE INTEREST RATE If clause 8.1 applies in relation to a LIBOR Revolving Loan the duration of the Interest Period relating to that Loan shall be one month or, if less, such that it shall end on the Termination Date and the rate of interest applicable to that LIBOR Revolving Loan during its Interest Period shall be the rate per annum which is the sum of (i) the Applicable Margin, (ii) the Mandatory Cost, if any, and (iii) the rate determined by the Agent (and notified to Ideal) to be that which expresses as a percentage rate per annum the weighted average of the cost to each of the Lenders of funding its share of such LIBOR Revolving Loan during such Interest Period from whatever sources and in whatever manner each such Lender may reasonably select. 8.3 REVIEW OF CIRCUMSTANCES So long as any alternative basis for the calculation of interest as provided in clause 8.2 is in force the Agent shall from time to time review whether or not the circumstances referred to in clause 8.1 still prevail with a view to returning to the normal provisions of this Agreement relating to the determination of the rates of interest applicable to any LIBOR Revolving Loan. 8.4 DISTRIBUTION OF INTEREST Interest on a LIBOR Revolving Loan during an Interest Period relating to it calculated at the rates specified in clause 8.1 or 8.2 shall be distributed by the Agent to the Lenders in proportion to the amounts which represent the cost to each Lender of funding its share of such LIBOR Revolving Loan during such Interest Period provided that any such interest which is attributable to the 54 Applicable Margin shall be distributed by the Agent to the Lenders in proportion to their respective shares in such LIBOR Revolving Loan. 9 REPAYMENT, PREPAYMENT AND CANCELLATION 9.1 REPAYMENT OF REVOLVING LOANS Each Borrower shall repay each LIBOR Revolving Loan made to it, together with accrued but unpaid interest thereon, on the last day of the Interest Period applicable to that Loan. Each Borrower may repay each Reference Rate Revolving Loan and each Swingline Loan made to it, together with accrued but unpaid interest thereon, at any time. Each Borrower shall, in any event, repay the outstanding principal balance of all Revolving Loans made to it, plus all accrued but unpaid interest thereon, upon the termination of this Agreement for any reason. In addition, and without limiting the generality of each foregoing, each Borrower shall pay to the Agent, on demand, the amount by which the Original Sterling Amount of the unpaid principal balance of any Revolving Loans and any Swingline Loans when aggregated with the Original Sterling Amount of the maximum face amount of all Letters of Credit and the maximum contingent liability under all Guarantees then in issue (together "CONTINGENCY OUTSTANDINGS") at any time exceeds the Available Facility in respect of the Revolving Facility or the Available Revolving Facility Amount, the Available Facility and Available Revolving Facility Amount being determined for this purpose as if the amount of the Revolving Loans, Swingline Loans and contingency outstandings were zero. Subject to the other terms of this Agreement and to availability, Revolving Loans and Swingline Loans may be reborrowed. 9.2 CANCELLATION OF TOTAL COMMITMENTS Any Borrower may, by giving to the Agent not less than 30 business days' prior notice to that effect, permanently cancel the whole (but subject to clause 29) or any part (being a minimum amount of L5,000,000 and an integral multiple of L1,000,000) of the Total Commitments, provided that both on the date of such notice and upon the effective date of cancellation, the amount to be so cancelled does not exceed an amount equal to the difference between the Maximum Revolving Credit Line and the Aggregate Exposure and the Agent has not, pursuant to clause 6.7, permitted the limits of the Available Revolving Facility Amount to have been exceeded. Any such cancellation shall reduce the Commitment of each Lender pro rata. If a Borrower cancels any part (but not the whole) of the Total Commitments, Ideal shall (or shall procure that such other Borrower shall) pay to the Agent (for the rateable benefit of the Lenders), on or prior to the date of such cancellation: 9.2.1 0.75% of the amount of the Total Commitments so cancelled, if such cancellation is made on or prior to the first Anniversary Date; 9.2.2 0.5% of the amount of the Total Commitments so cancelled, if such cancellation is made at any time after the first Anniversary Date but on or prior to the second Anniversary Date; and 55 9.2.3 0.25% of the amount of the Total Commitments so cancelled, if such cancellation is made at any time after the second Anniversary Date but on or prior to the date falling two months before the third Anniversary Date. 9.3 PREPAYMENT AND CANCELLATION OF INDIVIDUAL LENDERS If a Borrower becomes obliged to pay an increased amount pursuant to clauses 10.1 or 11.1 or any Lender claims indemnification from Ideal under clause 10.2 or clause 11.1 and the Agent receives from Ideal at least fifteen days' prior notice of the intention of the Borrowers to prepay such Lender's Outstandings, such Lender shall, upon receipt by the Agent of such notice, cease to be obliged to participate in any further Loans, its Commitment shall be permanently cancelled and reduced to zero and each Borrower shall on the last day of each of the then current Interest Periods or earlier, if the Agent or such Lender so requires, prepay such Lender's portion of the Loan to which such Interest Period relates together with any applicable break costs payable under clause 19.2 but otherwise without premium or penalty. 9.4 NOTICES IRREVOCABLE Any notice of cancellation or prepayment given by a Borrower (or Ideal on its behalf) pursuant to clause 9.2 or clause 9.3 shall be irrevocable, shall specify the date upon which such prepayment is to be made and the amount of such prepayment and shall oblige that Borrower to make such prepayment on such date. A Borrower shall not be entitled to reborrow any amount so prepaid. 9.5 EXTENSION OF TERMINATION DATE 9.5.1 On the second Anniversary Date (and if the Termination Date is extended in accordance with this clause 9.5, on any subsequent Anniversary Date), Ideal may deliver a request to the Agent (which the Agent shall promptly forward to the Lenders), requesting that the Lenders shall extend the maturity of the Revolving Facility for a further period of twelve (12) months from the then applicable Termination Date (as the same may be extended from time to time under this clause 9.5). 9.5.2 The decision whether or not to extend the Termination Date shall be in the absolute discretion of the Agent to determine (acting on the instructions of all of the Lenders) and shall be based upon such factors as the Agent may deem relevant (including, without limitation, the business condition (financial or otherwise) of the Group at the relevant time and after reviewing such forecasts, projections and financial and other information regarding the Borrowers and the Group as the Agent may require. The Borrowers acknowledge that the Agent and the Lenders shall not be under any obligation to extend the Termination Date. 9.5.3 If extended pursuant to this clause 9.5, references to the "TERMINATION DATE" in this Agreement and the other Finance Documents shall be construed as a reference to the Termination Date as from time to time extended. 56 10 TAXES 10.1 REQUIREMENT TO GROSS-UP All payments to be made by any of the Obligors to any person under this Agreement shall be made free and clear of and without deduction for or on account of tax unless such Obligor is required by law to make such a payment subject to the deduction or withholding of tax, in which case the sum payable by such Obligor in respect of which such deduction or withholding is required to be made shall be increased to the extent necessary to ensure that, after the making of such deduction or withholding (including any deduction or withholding applicable to additional sums payable under this clause), such person receives and retains (free from any liability in respect of any such deduction or withholding) a net sum equal to the sum which it would have received and so retained had no such deduction or withholding been made or been required to be made. 10.2 INDEMNITY Without prejudice to the provisions of clause 10.1, if any person or the Agent is required to make any payment on account of tax (other than tax on its overall net income) on or calculated by reference to the amount of any Loan made or to be made under this Agreement or by reference to any Letter of Credit or Guarantee issued under this Agreement and/or by reference to any sum received or receivable under this Agreement by such person or the Agent on its behalf (including, without limitation, any sum received or receivable under this clause 10) or any liability in respect of any such payment is asserted, imposed, levied or assessed against such person or the Agent on its behalf, the relevant Obligor shall, upon demand of the Agent, promptly indemnify such person against such payment or liability, together with any interest, penalties and expenses payable or incurred in connection therewith provided that the foregoing shall not apply to the extent that the payment or liability (a) is compensated for by an increased payment under clause 10.1 or (b) would have been so compensated but was not so compensated, solely because one of the exclusions in clause 10.6 applied. 10.3 NOTIFICATION A Lender intending to make a claim pursuant to clause 10.2 shall notify the Agent of the event by reason of which it is entitled to do so whereupon the Agent shall notify the relevant Obligor. 10.4 TAX RECEIPTS Without prejudice to the provisions of clause 10.1, if any Obligor makes any payment under this Agreement in respect of which it is required by law to make any deduction or withholding it shall pay the full amount to be deducted or withheld to the relevant taxation or other authority within the time allowed for such payment under applicable law and shall deliver to the Agent (no later than one week after the end of the time allowed for such payment under applicable law) an original receipt or other appropriate evidence issued by 57 such authority evidencing the payment to such authority of all amounts so required to be deducted or withheld from such payment. 10.5 TAX CREDITS If any Obligor makes an increased payment under clause 10.1 for the account of any person and such person in its sole opinion and based on its own interpretation of any relevant laws or regulations (but acting in good faith) determines that it has received or been granted a credit against or relief or remission for or in respect of any tax paid or payable by it in respect of or calculated by reference to the deduction or withholding giving rise to such payment, such person shall, to the extent that it determines that it can do so without prejudice to the retention of the amount of such credit, relief, remission or payment and, to the extent it is reasonably identifiable and quantifiable, as soon as practicable pay to such Obligor an amount equal to such part or all of such credit, relief, remission or repayment as can be made available to such Obligor in such a way as to leave such person (after such payment) in no better or worse position than it would have been in if such Obligor had not been required to make such deduction or withholding. Nothing contained in this clause 10.5 shall interfere with the right of a person to arrange its tax affairs in whatever manner it thinks fit nor oblige any person to disclose any information relation to its tax affairs or any computation in respect thereof. 10.6 LIMITATION ON REQUIREMENT TO GROSS-UP 10.6.1 If any Lender ceases to be a Qualifying Lender, no Obligor shall be liable to pay to such Lender under clause 10.1 any amount in excess of the amount it would have been obliged to pay if such Lender had not ceased to be a Qualifying Lender provided that this clause 10.6 shall not apply and each Obligor shall continue to be obliged to comply with its obligations under clause 10 if and to the extent that after the date of this Agreement there shall have been any change in, or in the interpretation, administration or application of, any relevant law or double taxation treaty or any published practice or concession of any relevant taxing authority and as a result of such change (i) such Lender ceases to be a Qualifying Lender or (ii) such Obligor would be required to make a deduction or withholding on account of tax irrespective of whether the recipient of the relevant payment was or was not a Qualifying Lender. 10.6.2 No Obligor shall be liable to make a payment to a Lender under Clause 10.1 if on the date on which the payment falls due the relevant Obligor is able to show that the payment could have been made to such Lender without any deduction or withholding had such Lender complied with its obligations under clause 10.7. 10.7 DOUBLE TAXATION RELIEF If, and to the extent that, the effect of clause 10.1 or 10.2 can be mitigated by virtue of the provisions of any applicable double tax treaty entered into by the United Kingdom (whether by a claim to repayment of any taxes referred to in clause 10.1 or 10.2 or otherwise) each Lender agrees to co-operate (to the 58 extent reasonably required) with affected Obligor(s) with a view to submitting any forms required for the purpose of ensuring the application of such double tax treaty so far as relevant, provided that no Lender shall be required pursuant to this clause 10.7 to complete or co-operate in completing any form which is not substantially similar to any form in use at the date of this Agreement for the purpose of claiming exemption or relief from or repayment of taxes envisaged hereunder pursuant to a double taxation treaty between the United Kingdom and such Lender's jurisdiction of residence and which requires the Lender to undertake obligations which, in its reasonable opinion, are more onerous than those imposed upon it as at the date of this Agreement. 11 INCREASED COSTS 11.1 INCREASED COSTS AND REDUCTION OF RETURN If the Agent or, as the case may be, any Lender, in its sole discretion determines that, as a result of (i) the introduction of, or any change in any law or in any treaty, directive or regulation (whether or not having the force of law but if not having the force of law, only if such treaty, directive or regulation is generally applicable to banks and of the type with which the relevant Lender is accustomed to comply) or the interpretation or application thereof, in each case after the date hereof, or (ii) compliance with any request from or requirement (whether or not having the force of law but if not having the force of law, only if such request or requirement is generally applicable to banks and of the type with which the relevant Lender is accustomed to comply) of any central bank or other fiscal, monetary or other authority made or imposed after the date hereof: 11.1.1 it incurs a cost in assuming or maintaining all or any part of any Commitment under this Agreement and/or in making, maintaining or funding all or any part of its Outstandings or any unpaid sum and/or assuming or maintaining a contingent liability under or pursuant to this Agreement (whether under any Letter of Credit or Guarantee or otherwise), or that cost is increased; or 11.1.2 any sum received or receivable by it under this Agreement or the effective return to it under this Agreement is reduced; or 11.1.3 it suffers a reduction in the rate of return on its overall capital below that which might reasonably have been anticipated at the date of this Agreement and which it would have been able to achieve but for having entered into and/or performing its obligations and/or assuming or maintaining a commitment or contingent liability under or pursuant to this Agreement; or 11.1.4 it makes any payment or forgoes any interest or other return on or calculated by reference to the amount of any sum received or receivable by it under or pursuant to this Agreement; or 11.1.5 it incurs a cost or increased cost, or suffers a reduction in any amount payable to it or in the effective return on its capital, or forgoes any interest or any other return as a result of the 59 introduction of, changeover to or operation of the euro in the United Kingdom, and in any such case, the same is attributable to its liabilities or obligations under this Agreement, then the person concerned shall notify the Agent of the relevant event (setting out in reasonable detail the basis on which its claim has been computed) promptly upon its becoming aware of the same, whereupon the Agent shall notify Ideal and, upon demand of the Agent, Ideal shall pay, or shall procure that there is paid, on demand to the Agent for the account of the person concerned an amount sufficient to indemnify that person against the relevant cost, increased cost, reduction, reduction in the rate of return, payment or forgone interest or other return or such proportion thereof as is, in the opinion of such person, attributable to its obligations under or pursuant to this Agreement. 11.2 CAPITAL ADEQUACY If the Agent, or as the case may be, any Lender, in its sole discretion determines that (i) the introduction of, or any change in, any capital adequacy regulation or in the interpretation or application thereof, in each case after the date hereof, or (ii) compliance by such person or any corporation controlling it with any capital adequacy regulation, affects or would affect the amount of capital, reserves or special deposits required or expected to be maintained by such person or any corporation controlling it and (taking into consideration such person's or such corporation's policies with respect to capital adequacy) determines that the amount of such capital, reserves or special deposits is increased as a consequence of its loans, contingent liabilities or obligations under this Agreement then, upon demand of the Agent (having been so notified by such person) to Ideal, Ideal shall pay, or shall procure that there is paid, to the Agent for the account of the person concerned, from time to time as specified by the Agent, additional amounts sufficient to compensate such person for such increase. 11.3 EXCEPTIONS Clauses 11.1 and 11.2 do not apply to any cost, increased cost, reduction, reduction in the rate of return, payment or forgone interest or other return compensated for by (a) payment of the Mandatory Cost, (b) by the operation of clause 10, (c) by a change in the rate of tax on the overall net income of the Agent or any Lender or (d) which is attributable to the wilful breach by the relevant Lender or any of its Affiliates of any law or regulation. 12 ILLEGALITY 12.1 CONSEQUENCES OF ILLEGALITY If at any time it is unlawful, or contrary to any directive or request of any applicable central bank or other fiscal, monetary or other authority, or impossible for a Lender to make, fund or allow to remain outstanding any Loan made or to be made under this Agreement or to assume or remain under any obligations hereunder in relation to or under any Letter of Credit or 60 Guarantee, then the Agent shall, promptly after becoming aware of the same, deliver to Ideal a certificate to that effect and: 12.1.1 such Lender shall not thereafter be obliged to make or participate in any Loan under this Agreement or (in the case of the Issuer) issue any Letter of Credit or Guarantee and its Commitment shall immediately be cancelled and reduced to zero; and 12.1.2 if the Agent on behalf of such Lender so requires, each Borrower shall on the last day of the Interest Period for each such Loan occurring after the Agent has notified Ideal or (if earlier) on such date as the Agent shall have specified (being no earlier than the last day upon which the Lender is legally able to permit such Loans to remain outstanding) repay such Lender's Outstandings together with accrued interest thereon (any such repayment to be without premium or penalty or the payment of any amount to be calculated in accordance with clause 29.2.3) and all other amounts owing to such Lender under this Agreement, and, with respect to any Letter of Credit or Guarantee then outstanding, deposit with the Security Trustee for the benefit of the Issuer a Supporting Letter of Credit or cash, in either such case in the same manner as contemplated in clause 6.14. 12.2 MITIGATION OF ADVERSE CIRCUMSTANCES If, in respect of any Lender, circumstances arise which would, or would upon the giving of notice, result in additional amounts becoming payable under clause 10 or clause 11.1 or result in a cancellation of its Commitment pursuant to clause 12.1.1 then, without in any way limiting, reducing or otherwise qualifying the obligations of any Borrower hereunder such Lender will, at the request of Ideal, consider means of mitigating the effects of such circumstances provided that such Lender shall be under no obligation to take any such action if to do so would or might in its opinion have an adverse effect on its business, operations or financial condition. 13 GUARANTEE 13.1 GUARANTEE Each Unsecured Guarantor, jointly and severally, unconditionally and irrevocably guarantees to the Beneficiaries the due and punctual payment, performance and discharge by the Obligors of all the monies, obligations and liabilities (whether present or future, actual or contingent) on the part of the Obligors to be paid, performed or discharged, whether directly or indirectly, under or pursuant to the terms of this Agreement and/or in connection with the Facility and/or otherwise under the Finance Documents (together in this clause 13 the "GUARANTEED OBLIGATIONS"). If and whenever any Obligor shall default in the payment, discharge or performance of any of the guaranteed obligations, each Unsecured Guarantor shall, upon written demand by the Agent, promptly pay, perform or discharge the guaranteed obligations in respect of which such default has been made. 61 13.2 INDEMNITY Each Unsecured Guarantor agrees to indemnify and hold harmless the Beneficiaries from time to time on demand for and against any loss incurred by any of them as a result of any of the guaranteed obligations being or becoming void, voidable or unenforceable for any reason whatsoever, whether known to such person or persons or not. The amount of such loss shall be the amount which the person or persons suffering it would otherwise have been entitled to recover from the Obligors. 13.3 CONTINUING SECURITY The obligations of each Unsecured Guarantor under this Agreement are continuing obligations and shall remain in force until all of the guaranteed obligations have been satisfied in full. The obligations of each Unsecured Guarantor under this Agreement shall not be (or be construed so as to be) discharged by any intermediate discharge or payment of or on account of any of the guaranteed obligations or any settlement of account or any other matter (other than the discharge in full of the guaranteed obligations). 13.4 PROTECTIVE PROVISIONS Neither the obligations of each Unsecured Guarantor nor the rights and remedies of the Beneficiaries under this Agreement, any other Finance Document or otherwise conferred by law shall be discharged, prejudiced or impaired by reason of: 13.4.1 any variation of any of the guaranteed obligations or of the terms of conditions of this Agreement, any other Finance Document or of any encumbrance, guarantee or other assurance held or to be held as security for the payment, performance or discharge of the guaranteed obligations (any such encumbrance, guarantee or other assurance together referred to in this clause 13 as "RELATED SECURITY"); 13.4.2 any failure (whether intentional or not) to take, perfect or realise (whether in full or in part) any related security now or in the future agreed to be taken in respect of any of the guaranteed obligations; 13.4.3 any incapacity or change in the constitution of any party to this Agreement, any other Finance Document or to any related security; 13.4.4 any of the guaranteed obligations or any obligation of any person under any related security being or becoming invalid, illegal, void or unenforceable for any reason; 13.4.5 any time or other indulgence given or agreed to be given to, or any composition or other arrangement made with or accepted from, any Obligor in respect of any of the guaranteed obligations or any other person in respect of any of its obligations under any related security; 62 13.4.6 any waiver or release of any of the guaranteed obligations or of any obligation of any person under any related security or any failure to realise, in full or in part, the value of, or any discharge or exchange of any related security; 13.4.7 any Obligor or any other person party to this Agreement, any other Finance Document or any related security being wound up, going into administration or liquidation or making any composition or arrangement with its creditors (whether or not sanctioned by the court and whether or not the Agent has agreed to such compromise or arrangement) and so that where, by virtue of any compromise or arrangement, any of the guaranteed obligations are transferred to any other person, the guarantee and indemnity of each Unsecured Guarantor contained in this Agreement shall take effect as if the expression "Obligor" included such other person; or 13.4.8 any other act, event or omission which, but for this provision, would or might operate to offer any legal or equitable defence for or impair or discharge any of the guaranteed obligations or any obligation of any person under any related security or prejudicially affect the rights or remedies of the Beneficiaries or any of them under this Agreement, any other Finance Document or otherwise conferred by law. 13.5 INDEPENDENT OBLIGATIONS The obligations of each Unsecured Guarantor under this Agreement are additional to, and not in substitution for, any related security and the obligations assumed by each Unsecured Guarantor under this Agreement may be enforced without first having recourse to any related security and without making or filing any claim or proof in a winding-up or dissolution of any Obligor or any other person party to this Agreement or any related security or first taking any steps or proceedings against any Obligor or any such person. 13.6 NON-COMPETITION Until all of the guaranteed obligations have been satisfied in full, no Unsecured Guarantor shall: 13.6.1 exercise any right of subrogation, indemnity, set-off or counterclaim against any Obligor, any other Unsecured Guarantor or any person party to any related security; 13.6.2 claim payment of any other monies for the time being due to it by any Obligor, any other Unsecured Guarantor or any person party to any related security by reason of the performance by it of its obligations under this Agreement or on any account whatsoever or exercise any other right or remedy or enforce any encumbrance, guarantee or other assurance which it has in respect thereof; 13.6.3 claim any contribution from any other Unsecured Guarantor or any person party to any related security; 63 13.6.4 negotiate, assign, charge or otherwise dispose of any monies, obligations or liabilities now or at any future time due or owing to it by any Obligor or any other Unsecured Guarantor or any person party to any related security or any encumbrance, guarantee or other assurance in respect thereof; or 13.6.5 claim or prove in a winding up or dissolution of any Obligor or any other Unsecured Guarantor in competition with the Beneficiaries or any of them; and 13.6.6 if any Unsecured Guarantor receives any sums in contravention of this clause 13.6, it shall hold them on trust to be applied promptly in or towards the satisfaction of its obligations under this Agreement. 13.7 WARRANTY Each Unsecured Guarantor warrants that it has not taken, and agrees that (without the prior written consent of the Agent acting on the instructions of the Majority Lenders) it will not take, from any Obligor, any other Unsecured Guarantor or any person party to any related security any encumbrance, guarantee or other assurance in respect of or in connection with its obligations under this Agreement. If any Unsecured Guarantor takes any such encumbrance, guarantee or other assurance in contravention of this clause 13.7, it shall hold the same on trust for the Beneficiaries until such time as all of the guaranteed obligations have been satisfied in full and shall on request promptly deposit the same with and/or charge the same to the Agent for and on behalf of itself and such persons in such manner as the Agent may require as security for the due performance and discharge by the relevant Unsecured Guarantor of the guaranteed obligations 13.8 SUSPENSE ACCOUNT If any Obligor or any of the Unsecured Guarantors is wound up, goes into liquidation or makes any composition or arrangement with its creditors, neither the existence of the guarantee of the relevant Unsecured Guarantor contained in this Agreement nor any monies received or recovered by the Beneficiaries or any of them under to pursuant to this Agreement shall impair the right of such persons to prove in such winding-up, liquidation, composition, or arrangement for the total amount due from the Obligor or the relevant Unsecured Guarantor. The Agent may at any time and from time to time place and, for so long as it thinks fit, keep any monies received or recovered under this Agreement in a separate or suspense account, in such name as it thinks fit, without any intermediate obligation on its part to apply the same in or towards discharge of any part of such total amount, provided that if the monies are at any time sufficient to discharge the guaranteed obligations in full, they shall promptly be so applied. 13.9 CONDITIONAL DISCHARGE Any settlement or discharge between any of the Unsecured Guarantors and the Arranger, the Agent, the Lenders or any of them shall be conditional upon no 64 security or payment to the Arranger, the Agent and the Lenders or any of them by any Obligor or the relevant Unsecured Guarantor or any other person being avoided or set aside or ordered to be refunded or reduced by or pursuant to any applicable law or regulation and, if such condition is not satisfied, the Arranger, the Agent and the Lenders shall each be entitled to recover from the relevant Unsecured Guarantor on demand the value of any such security or the amount of any such payment as if such settlement or discharge had not occurred. 14 REPRESENTATIONS AND WARRANTIES 14.1 GENERAL REPRESENTATIONS AND WARRANTIES Each Obligor represents and warrants (in respect of itself and each other Obligor) to and for the benefit of each other party to this Agreement that, except as disclosed to and accepted by the Agent in writing: 14.1.1 STATUS: (other than in the case of BMEP) it is a limited liability company duly incorporated or a corporation duly organised and validly existing under the laws of its jurisdiction of incorporation and BMEP is a partnership properly established and validly existing under the laws of the Netherlands, in each case having the power and authority to own its assets and to conduct the business and operations which it conducts or proposes to conduct; 14.1.2 POWERS AND AUTHORITY: it has full power and authority to enter into and perform each of the Relevant Agreements to which it is or will be a party and any other document to be entered into by it pursuant thereto and has taken all necessary corporate or other action to authorise the execution, delivery and performance of each such Relevant Agreement and each such other document; 14.1.3 AUTHORISATIONS: save for any necessary registrations which will be made within the applicable registration period, all actions, conditions and things required by all applicable laws and regulations to be taken, fulfilled, obtained or done in order (i) to enable it lawfully to enter into, exercise its rights under and perform and comply with its obligations under each of the Relevant Agreements to which it is or will be a party and any other document to be entered into pursuant thereto (ii) to ensure that those obligations are valid, legally binding and enforceable in accordance with their respective terms and (iii) to make each of the Relevant Agreements and all such other documents admissible in evidence in England and Wales and, if different, its jurisdiction of incorporation have been taken, fulfilled, obtained or done; 14.1.4 NON-VIOLATION: the execution by it of and the exercise by it of its rights and performance of or compliance with its obligations under each of the Relevant Agreements to which it is or will be a party do not and will not violate (i) any law or regulation to which it or any of its assets is subject or (ii), to an extent or in a manner which has or could have a material adverse effect on it, any agreement to 65 which it is a party or which is binding on it or its assets or conflict with its constitutional documents and in particular will not cause any limit on its borrowing or other powers or the exercise of such powers by its board of directors to be exceeded; 14.1.5 OBLIGATIONS BINDING: subject to the Reservations, its obligations under each of the Relevant Agreements are legal, valid and binding and enforceable in accordance with their respective terms; 14.1.6 LITIGATION: save as disclosed in writing to and agreed by the Agent prior to the date of this Agreement, it is not involved or engaged in any litigation, arbitration or administrative proceedings (whether as plaintiff or defendant) nor, to the best of its knowledge is any such litigation, arbitration or administrative proceedings threatened, nor are there any circumstances likely to give rise to any such litigation, arbitration or proceedings which in any such case may have a material adverse effect on it, any other Obligor or on the Group (taken as a whole); 14.1.7 NO DEFAULT: it is not in breach of or default under any agreement or arrangement (including, without limitation, under any Relevant Agreement) or any statutory or legal requirement to an extent or in a manner which has or could have a material adverse effect on it or on any other Obligor and no Event of Default has occurred and is continuing; 14.1.8 EXISTING ENCUMBRANCES: no encumbrance exists over its present or future assets except for Permitted Encumbrances; 14.1.9 FUTURE ENCUMBRANCES: the execution by it of each of the Relevant Agreements to which it is or will be a party and the exercise by it of its rights and performance of or compliance with its obligations thereunder will not result in the existence of or oblige it to create any encumbrance over all or any of its present or future assets except for Permitted Encumbrances; 14.1.10 FINANCIAL STATEMENTS: (a) its audited consolidated Financial Statements were prepared in accordance with Applicable GAAP and give a true and fair view of the financial condition of the Group at the date as of which they were prepared and the results of the Group's business and operations during the Financial Year then ended and (in the case of its Financial Statements) disclose or reserve against all liabilities (contingent or otherwise) of each Group Company as at that date and all unrealised or anticipated losses from any commitment entered into by each Group Company and which existed on that date; (b) the Latest Projections represent its best estimate of the Group's future financial performance for the periods 66 referred to in them and have been prepared on the basis of the stated assumptions, which it believes are fair and reasonable in the light of current and reasonably foreseeable business conditions; (c) the Ideal Pro Forma Balance Sheet presents fairly and accurately the financial condition of the IHL Group as at such date, and has been prepared in accordance with Applicable GAAP; 14.1.11 CAPITALISATION: the Adjusted Tangible Net Worth is not less than L26,936,000, BMEBV's authorised share capital consists of EUR90,000 of which 200 shares of EUR100 are validly issued and fully paid and are owned beneficially by BMEP and Ideal's authorised share capital consists of 5,000,000 ordinary shares of L1 per share and 5,000,000 preference shares of L1 per share, of which 4,000,500 ordinary shares and 1,225,963 preference shares are validly issued and fully paid and are beneficially owned by BMEBV, in the case of the ordinary shares, and the Parent, in the case of the preference shares; 14.1.12 INDEBTEDNESS: no Group Company has any indebtedness except for Permitted Indebtedness; 14.1.13 DISTRIBUTIONS: since 1 January 2002 no Distribution has been declared, paid, or made upon or in respect of any shares or other securities of any Group Company other than in accordance with the provisions of clause 16.3.3; 14.1.14 TITLE TO ASSETS: except for assets which are leased, it is the beneficial owner free from all encumbrances (other than Permitted Encumbrances) of all its other assets including, without limitation, the assets reflected on the most recent Financial Statements delivered to the Agent, except as disposed of since the date thereof in the ordinary course of trading; 14.1.15 LABOUR DISPUTES: there is no pending or, to the best of its knowledge, threatened strike, work stoppage, material unfair labour practice claim, or other material labour dispute against or affecting its or its employees; 14.1.16 ENVIRONMENTAL LAWS: to the best of its knowledge and belief (having made all due and reasonable enquiry) it has not breached any Environmental Law and no condition exists or act or event has occurred which will or might reasonably be expected to give rise to any breach of, or any liability of any kind under, any Environmental Law; 14.1.17 ENVIRONMENTAL AUTHORISATIONS: to the best of its knowledge and belief (having made all due and reasonable enquiry) it is in possession of all Environmental Authorisations required for the conduct of its business or operations (or any part thereof) and it has 67 not breached any of the terms or conditions of any such Environmental Authorisation; 14.1.18 NOTICES OF ENVIRONMENTAL BREACHES: (i) it has not received any summons, complaint, order or similar written notice that it is not in compliance with, or any public authority is investigating its compliance with, any Environmental Law or that it is or may be liable to any other person as a result of a potential or actual Discharge of a Hazardous Substance and (ii) none of its present or past operations is the subject of any investigation by any public authority evaluating whether any remedial action is needed to respond to a potential or actual Discharge of a Hazardous Substance; 14.1.19 NO DEPOSIT OF HAZARDOUS SUBSTANCES: to the best of its knowledge and belief (having made all due and reasonable enquiry) no Hazardous Substance has at any time been used, disposed of, generated, stored, transported, dumped, released, deposited, buried, discharged or emitted at, on, from or under any premises owned, leased, occupied or controlled by it; 14.1.20 LIABILITY FOR ENVIRONMENTAL CLAIMS: it has not entered into any negotiations or settlement agreements with any person (including, without limitation, any prior owner of its property) imposing material obligations or liabilities on it with respect to any remedial action in response to the potential or actual Discharge of a Hazardous Substance or environmentally related claim; 14.1.21 TAXES: it has filed all tax returns and other reports required to be filed and has paid all taxes imposed on it or upon any of its assets that are due and payable (save for any that are being contested in good faith and by appropriate action and in respect of which it has provided or maintained adequate reserves to meet any such liability); 14.1.22 MATERIAL ADVERSE CHANGE: there has been no material adverse change in its financial condition or the financial condition of the Group (taken as a whole) since the date of the Pro-Forma Balance Sheet nor in the consolidated financial condition, business, assets or operations of the Group nor in the Collateral since that date which will nor might reasonably be expected to result in a material adverse effect; 14.1.23 INFORMATION: all factual information delivered by it or on its behalf to the Agent in connection with the business, operations and assets of the Group or in connection with any of the Relevant Agreements from time to time was, in each such case at the date of its delivery, true and correct in all material respects and not misleading and all expressions of opinion, forecasts and projections have been arrived at in good faith and have been based upon reasonable grounds; 68 14.1.24 INFORMATION MEMORANDUM: (a) all statements of fact contained in the Information Memorandum relating to the Group are, or will be, true in all respects material to the Revolving Facility, (b) all expressions of opinion or expectations and all forecasts and projections provided in the Information Memorandum, have been, or will be, arrived at in good faith and have been, or will be, based upon reasonable grounds (in each case as at the date at which they are, or will be, made or expressed to be made and in final form), and (c) it is not aware, having made all due and reasonable enquiry, of any facts or circumstances that have not been disclosed to the Agent, the Arranger and the Lenders which would, if disclosed, be reasonably likely to affect the decision of a person considering whether or not to provide finance to the Borrowers; 14.1.25 DEDUCTIONS AND WITHHOLDINGS: it is not required to make any deduction or withholding from any payment it may make under this Agreement; 14.1.26 WINDING-UP: neither it nor any other Group Company has taken any corporate action nor have any other steps been taken or legal proceedings been started or (to the best of its knowledge and belief) threatened against it or any Group Company for its winding-up, dissolution or re-organisation (other than for the purposes of a bona fide solvent scheme of reconstruction or amalgamation previously approved in writing by the Agent) or for the appointment of a receiver, administrator, administrative receiver, trustee or similar officer of it or of any or all of its assets. 14.1.27 USD CO: since the date of its incorporation (save for professional fees) the USD Co has incurred no liabilities and has acquired no assets and has undertaken no transactions other than the entry into of and the performance of its obligations under the Inter Company Sale Agreement. 14.2 ACCOUNTS Each Obligor represents and warrants to and for the benefit of each other party to this Agreement that, except as disclosed to and accepted by the Agent in writing: 14.2.1 ACCOUNTS: (a) each existing Account represents, and each future Account will represent, a bona fide sale or lease and delivery of goods by a Trading Company, or the rendering of services by a Trading Company, in the ordinary course of such Trading Company's business; (b) each existing Account is, and each future Account will be, for a liquidated amount payable by the Account Debtor thereon on the terms set forth in the invoice therefor or in the schedule thereof 69 delivered to the Agent, without set-off, deduction, defence, or counterclaim; (c) no payment will be received with respect to any Account, and no credit, discount, or extension, or agreement therefor will be granted on any Account, except as reported to the Agent in accordance with this Agreement; (d) each copy of an invoice delivered to the Agent will be a genuine copy of the original invoice sent to the Account Debtor named in it; and (e) all goods described in any invoice representing a sale of goods will have been delivered to the Account Debtor and all services of any Trading Company described in any invoice will have been performed; 14.2.2 INVENTORY: with effect from any Inventory Eligibility Date, in relation to each Trading Company, all of its Inventory is and will be held for sale or lease, or to be furnished in connection with the rendering of services in the ordinary course of its business and is and will be fit for such purpose and will be kept by it, at its own expense, in good and marketable condition (save for damaged or obsolete items as notified to and agreed by the Agent). 14.3 REPETITION Each of the representations and warranties in clauses 14.1 and 14.2 will be correct and complied with on the date of this Agreement and the Effective Date and (other than the representations in clauses 14.1.10(c), 14.1.13, 14.1.24 and 14.1.25) will also be correct and complied with on each date on which a Loan is requested or to be made (or, as the case may be, a Letter of Credit or Guarantee is issued or requested to be issued) and on each date on which a Prepayment (as defined in the Accounts Transfer Conditions) is made under an Invoice Discounting Agreement as if repeated then by reference to the then existing circumstances. 15 FINANCIAL CONDITION 15.1 BOOKS AND RECORDS 15.1.1 MAINTENANCE: BMEH shall maintain, and shall procure that each Group Company shall maintain, at all times, books, records and accounts which are complete and correct in all material respects and in relation to which timely entries are made of their transactions in accordance with Applicable GAAP. BMEH shall, and shall procure that each Group Company shall, by means of appropriate entries, reflect in such accounts and in all Financial Statements proper liabilities and reserves for all taxes and proper provision for depreciation and amortisation of any property or asset and bad debts, all in accordance with Applicable GAAP. BMEH shall, and shall procure that each Group Company shall, maintain at all times books and records pertaining to any applicable Collateral in such detail, form and scope as the Agent shall reasonably require, including without limitation records of (i) all payments 70 received and all credits and extensions granted with respect to the Accounts; (ii) the return, rejection, repossession, stoppage in transit, loss, damage or destruction of any Inventory; and (iii) all other dealings affecting the Collateral. 15.1.2 ACCESS: BMEH and/or, as applicable, Ideal shall, upon receiving not less than two business days' notice from the Agent (or without notice following a Default which is continuing), permit and procure that each Group Company permits the Agent or any person authorised by the Agent at any reasonable time to have access to its premises and books, records and accounts and to make extracts from and take copies of such books, records and accounts. 15.2 PROVISION OF FINANCIAL INFORMATION BMEH, BMEP, BMEBV, BMEE and Ideal shall each deliver to the Agent in sufficient copies for each of the Lenders: 15.2.1 FINANCIAL STATEMENTS: as soon as the same become available, but in any event within 120 days after the end of each Financial Year, the audited consolidated Financial Statements of the Group for such Financial Year together with (i) the audited statutory accounts of each Group Company for such Financial Year and (ii) a consolidation of such audited Financial Statements for each member of the IHL/BB Group and to the extent that any Financial Statements have been prepared in accordance with or otherwise converted to or conformed with US GAAP, such Financial Statements shall be accompanied by a note or similar document prepared by the Auditors (or prepared by the Parent and signed by the Auditors) which (a) reconciles the Financial Statements to the Management Accounts delivered for the relevant Financial Year pursuant to clause 15.2.2 and (b) explains, in reasonable detail, any changes or adjustments made to the figures contained in such Management Accounts, to comply with US GAAP; 15.2.2 MANAGEMENT ACCOUNTS: as soon as the same become available, but in any event within 25 days of the end of each Management Accounting Period, Management Accounts of itself and each member of the Group (other than the members of the Solutions Group) (incorporating, without limitation, a break-out of all intercompany balances) as at the end of and for that Management Accounting Period and, in relation to the Management Accounting Periods ending on 31 March, 30 June, 30 September and 31 December in each year, within 45 days of the end of such Financial Quarter a consolidation of those Management Accounts showing the consolidated and consolidating financial position for the Financial Quarter ending on each such date and for the Financial Year to date and a further consolidation of those Management Accounts showing the consolidated and consolidating financial position for the Financial Quarter ending on each such date and for the Financial Year to date of each member of the IHL/BB Group; 71 15.2.3 LATEST PROJECTIONS: no sooner than 90 days and no later than 15 days prior to the beginning of each Financial Year, consolidated and consolidating projected balance sheets, statements of income and expense and statements of cash flow for the IHL/BB Group and the Group as at the end of and for each month of such Financial Year and a statement of projected EBITDA from the start of such Financial Year to the end of each Financial Quarter falling within such Financial Year (such projected EBITDA calculations to be acceptable to the Agent); 15.2.4 CAPITAL EXPENDITURE: within 45 days after the end of each Financial Quarter, a report of the Capital Expenditure of the Group for such Financial Quarter and forecast of the projected Capital Expenditure for the remainder of the then current Financial Year or, in the case of the last Financial Quarter in any Financial Year, for the following Financial Year; 15.2.5 TAXES AND CLAIMS: together with the Management Accounts delivered under clause 15.2.2 and a certificate signed by the finance director of Ideal that all the sums referred to in clause 16.2.6 have been paid in respect of the period covered by such Management Accounts; 15.2.6 GENERAL INFORMATION: at the same time as sent to its shareholders or creditors generally, any circular, document or other written information sent to its shareholders or creditors as such or the shareholders or creditors of any other Obligor; 15.2.7 QUARTERLY SALES CERTIFICATES: Ideal shall, at the same time as it delivers the next set of Management Accounts that are required to be delivered to the Agent in accordance with Clause 15.2.2 following the end of a Financial Quarter, deliver to the Agent a certificate (signed by its finance director) (a "QUARTERLY SALES CERTIFICATE") specifying (1) the total sales (the "TOTAL YEAR 1 SALES") made by the Group in the 12 month period to the end of that Financial Quarter (the "PREVIOUS SALES YEAR"), (2) the total sales (the "TOTAL YEAR 2 SALES") made by the Group in the 12 month period immediately preceding the Previous Sales Year and (3) the total sales (the "TOTAL LOST CUSTOMER SALES") made by the Group in the Previous Sales Year to customers to whom sales have not been made in the previous Financial Quarter; 15.2.8 QUARTERLY SUPPLY CERTIFICATES: Ideal shall, at the same time as it delivers the next set of Management Accounts that are required to be delivered to the Agent in accordance with Clause 15.2.2 following the end of a Financial Quarter, deliver to the Agent a certificate (signed by its finance director) (a "QUARTERLY SUPPLY CERTIFICATE") specifying (1) the total amount invoiced to the Group by suppliers of goods and services to the Group (the "TOTAL YEAR 1 SUPPLY COSTS") in the 12 month period to the end of that Financial Quarter (the "PREVIOUS PURCHASING YEAR"), (2) the total amount 72 invoiced to the Group by suppliers of goods and services to the Group (the "TOTAL YEAR 2 SUPPLY COSTS") in the 12 month period immediately preceding the Previous Purchasing Year and (3) the total amount invoiced to the Group by suppliers of goods and services to the Group (the "TOTAL REDUCED SUPPLY COSTS") in the Previous Purchasing Year and from whom the Group has not received invoices in respect of goods or services supplied by those suppliers in the previous Financial Quarter; and 15.2.9 OTHER INFORMATION: from time to time on the request of the Agent, such information about the business, operations and financial condition of each Group Company as the Agent may reasonably require, other than any information disclosure of which will cause such Group Company to breach any confidentiality undertaking to which it is a party, in which case it shall and shall procure that any relevant Group Company shall, use all reasonable efforts to procure the consent of the counterparty to such undertaking to make disclosure. 15.3 FINANCIAL INFORMATION - BASIS OF PREPARATION BMEH, BMEP, BMEBV, Ideal and BMEE shall each ensure that: 15.3.1 TRUE AND FAIR VIEW: each set of Financial Statements delivered by it or at its request pursuant to clause 15.2.1 is prepared (except as stated therein) using the same accounting principles and policies as were used in the preparation of the Ideal Pro-Forma Balance Sheet and gives a true and fair view of the financial condition of the IHL/BB Group and of the Group, as the case may be, as at the end of the period to which those Financial Statements relate and of the result of their respective businesses and operations during such period; 15.3.2 AUDIT: each set of Financial Statements delivered by it or at its request pursuant to clause 15.2.1 has been audited by the Auditors and each set of Management Accounts delivered by it pursuant to clause 15.2.2 has been certified as being correct by Ideal (acting through its finance director), subject to normal year-end adjustments; 15.3.3 CERTIFICATE OF IDEAL: each set of Financial Statements delivered pursuant to clause 15.2.1 and each set of Management Accounts delivered by it pursuant to clause 15.2.2 in respect of a Management Accounting Period ending on the last day of any Financial Quarter (as consolidated for that Financial Quarter) is accompanied by a certificate of Ideal (acting through its finance director) setting forth in reasonable detail (i) when delivered with the Financial Statements delivered pursuant to Clause 15.2.1 only, the calculations required to show the actual EBITDA achieved from the start of the Financial Year to which those Financial Statements relate to the end of each Financial Quarter falling 73 within that Financial Year and the Variance (if any) for each Financial Quarter falling within that Financial Year and (ii) in each case, the calculations required to establish that Ideal was in compliance with its covenants set forth in clause 15.4 during the period covered in such Financial Statements (or, as the case may be, during such Financial Quarter) and stating that, except as explained in reasonable detail in such certificate: (a) all of the representations and warranties of each Obligor contained in this Agreement and the other Finance Documents are correct and complete as at the date of such certificate as if made at such time; and (b) no Event of Default then exists or existed during the period covered by such Financial Statements or, as the case may be, Management Accounts, and describing and analysing in reasonable detail all material trends, changes and developments in such Financial Statements or Management Accounts. If such certificate discloses that a representation or warranty is not correct or complete, or that a covenant has not been complied with, or that an Event of Default existed or exists, such certificate shall set forth what action Ideal or the relevant Obligor has taken or proposes to take with respect thereto. 15.4 FINANCIAL RATIOS Ideal shall ensure that, at all times, the consolidated financial condition of the IHL/BB Group shall be such that Adjusted Tangible Net Worth shall not at any time be less than L26,936,000 as determined at the end of each Financial Quarter by reference to the accounting information (the "RELEVANT ACCOUNTING INFORMATION") most recently delivered under this Agreement being (i) the Financial Statements delivered under clause 15.2.1 and (ii) each set of Management Accounts (consolidated and consolidating for the relevant Financial Quarter) delivered under clause 15.2.2. In this Agreement, unless the context otherwise requires: "ADJUSTED TANGIBLE ASSETS": means all of the IHL/BB Group's assets except: (i) deferred assets, other than prepaid insurance and prepaid taxes; (ii) patents, copyrights, trademarks, trade names, franchises, goodwill and other similar intangibles; (iii) Restricted Investments; (iv) unamortised debt discount and expense; (v) assets constituting Intercompany Accounts; and 74 (vi) fixed assets to the extent of any write-up in the book value thereof resulting from a revaluation effective after the date of this Agreement; and "ADJUSTED TANGIBLE NET WORTH": means, at any date: (i) the book value (after deducting related depreciation, amortisation, valuation and other proper reserves as determined in accordance with Applicable GAAP) at which the Adjusted Tangible Assets would be shown on a consolidated balance sheet of the IHL/BB Group at such date prepared in accordance with Applicable GAAP; less (ii) the amount at which the IHL/BB Group's liabilities would be shown on such balance sheet, including as liabilities all reserves for contingencies and other potential liabilities which would be required to be shown on such balance sheet. 15.5 CHANGES IN BASIS OF PREPARATION OF RELEVANT ACCOUNTING INFORMATION Where any Relevant Accounting Information to be delivered under clause 15 has been prepared in a manner which is inconsistent with the accounting principles or policies in accordance with which the Pro-Forma Balance Sheet was prepared, whether as a result of any change in such principles or otherwise, BMEH or Ideal shall provide to the Agent a written explanation of any such inconsistency, together with details of its effects. If any such inconsistency would be likely to affect the ability of the Agent to satisfy itself from the information delivered as Relevant Accounting Information as to compliance with the provisions of clause 15.4, the Agent shall have the right to adjust the financial ratios set out in clause 15.4 or the relevant definitions set out in clause 15.5 so as to reflect so far as is practicable the effect of any such change (provided that the effect of such adjustments, taking into consideration such change, shall not be such as to render the said financial ratios more onerous upon Ideal than as at the date of this Agreement). 16 COVENANTS 16.1 DURATION The undertakings in this clause 16 shall remain in force from the date of this Agreement and so long as any amount is outstanding under this Agreement. 16.2 POSITIVE COVENANTS Each Obligor undertakes that: 16.2.1 CONSENTS: it will, and will procure that each of the Obligors will, obtain, comply with the terms of and do all that is necessary to maintain in full force and effect all authorisations, approvals, licences and consents required by all applicable laws and regulations to enable it lawfully to enter into, perform and comply with its obligations under each of the Relevant Agreements to which it is or will be a party and any document to be entered into 75 pursuant thereto or to ensure the legality, validity, enforceability or admissibility in evidence of such Relevant Agreements and each such document in England and Wales and, if different, its jurisdiction of incorporation and any jurisdiction in which any of its assets may be situated; 16.2.2 INSURANCE: it will maintain, and procure that each Obligor maintains, policies of insurance on and in relation to its business and assets with financially sound and reputable insurers acceptable to the Agent against such risks and to such extent as is usual for companies carrying on a business such as that carried on by it and each Obligor whose practice is not to self insure; 16.2.3 COMPLIANCE WITH LAW: it will comply, and will procure that each Obligor complies, with all applicable laws and regulations including, without limitation, any applicable Environmental Law; 16.2.4 ENVIRONMENTAL LAWS: it will, and will procure that each Obligor will, take prompt and appropriate action to respond to and remedy any non-compliance with any Environmental Law and shall regularly report to the Agent on such response and remedying. Without limiting the generality of the foregoing, whenever Ideal gives notice to the Agent of such non-compliance pursuant to clause 16.2.7 Ideal will, at the Agent's request and Ideal's expense: (a) cause an independent environmental engineer acceptable to the Agent to investigate and conduct such tests of the site where any Obligor's non-compliance or alleged non-compliance with any Environmental Law has occurred and prepare and deliver to the Agent a report setting forth the results of such tests, a proposed plan for responding to any environmental problems described therein, and an estimate of the costs thereof; and (b) provide to the Agent a supplemental report of such engineer whenever the scope of the environmental problems, or Ideal's response thereto or the estimated costs thereof, changes; 16.2.5 CONDUCT OF BUSINESS it has, and will ensure that each Obligor has, the right to conduct its business and operations as they are conducted in all applicable jurisdictions and will do, and will procure that each Obligor does, all things necessary (including compliance with all terms and conditions of any licences and consents) to obtain, preserve and keep in full force and effect all rights, licences and consents) to obtain, preserve and keep in full force and effect all rights, licences and authorisations (including, without limitation, all Environmental Authorisations) and consents as are necessary for the conduct of such business and operations; 16.2.6 PAYMENT OF TAXES AND CLAIMS: (a) it will, and will procure that each Obligor will, and BMEBV will procure that each Baby Bell 76 will, duly and punctually pay and discharge (i) all taxes imposed upon it or its properties (save where the same are being contested in good faith and by appropriate proceedings and where adequate reserves are being maintained with respect thereto) and (ii) all lawful claims which, if unpaid, would by law become encumbrances upon any of its properties; and (b) BMEBV will procure that each Baby Bell will duly and punctually pay and discharge all obligations to: (i) pay all emoluments and benefits to which its employees are entitled (including, without limitation, all wages and salaries, sick pay, maternity pay, pension contributions, bonuses, commission, any liability to taxation (including income tax and national insurance contributions deducted or deductible from such amounts under the PAYE system in the United Kingdom or such equivalent taxation and social security payments)) in the relevant Jurisdiction; and (ii) comply with (in all material respects) all statutes, regulations and collective agreements relevant to the conditions of service of its employees or to the relations between it and its employees (or former employees, as the case may be), any recognised trade union or works council and the laws applicable to the employment of the employees in the relevant Jurisdiction; 16.2.7 NOTICES TO AGENT: Ideal will notify the Agent in writing of the following matters at the following times (each such notice to describe the subject matter thereof in reasonable detail and to set out the action that Ideal or the relevant Obligor has taken or proposes to take with respect thereto): (a) immediately after becoming aware of the existence of any Default; (b) immediately after becoming aware that any shareholder in, or any creditor of, any Obligor has given notice or taken any action with respect to a claimed default by such Obligor and in circumstances where such shareholder or creditor has taken or is threatening to take any action or steps which will or might reasonably be expected to have a material adverse effect; (c) immediately after becoming aware of any material adverse change in the assets, business, operations or condition (financial or otherwise) of any Obligor or of the Group (taken as a whole); 77 (d) immediately after becoming aware of any pending or threatened action, suit, proceeding or counterclaim by any person which may have a material adverse effect on any Obligor, or any pending or threatened investigation by a public authority; (e) immediately after becoming aware of any pending or threatened strike, work stoppage, material unfair labour practice claim, or other material labour dispute affecting any Obligor; (f) immediately after becoming aware of any violation of any law, statute, regulation, or ordinance of a public authority applicable to any Obligor or its assets which may have a material adverse effect on it or on such Obligor; (g) immediately after becoming aware of any violation by any Obligor of any Environmental Law or immediately upon receipt of any notice (including a works notice) delivered pursuant to any Environmental Law or of any notice that a public authority has asserted that any Obligor is not in compliance with any Environmental Law or that its compliance is being investigated; (h) ten (10) days prior to any Obligor changing its name or the address of its registered office; (i) immediately upon becoming aware that any Group Company has received a notice or other document from any of its suppliers notifying such Group Company of a breach by such Group Company of any supply agreement to which it is a party; 16.2.8 HEDGING: Ideal and each other relevant Borrower shall, within 60 days of the Closing Date or, in the case of any Additional Borrower, within 60 days of the date upon which it becomes an Additional Borrower, enter into such Hedging Agreements with a Hedge Provider as the Agent may require (after consultation with Ideal) and in such form as the Agent (acting reasonably) may require; 16.2.9 CHESSINGTON PROPERTY/ST. CRISPIN PROPERTY: Ideal shall or shall procure that Bell Microproducts Limited or, as the case may be, Open PSL Limited shall promptly notify the Agent of any proposed refinancing of all or any part of the financial indebtedness secured by any encumbrance over the Chessington Property or, as the case may be, the St. Crispin Property and shall not complete such refinancing without the relevant Chessington Mortgagee or, as the case may be, St Crispin Mortgagee having entered into any intercreditor deed or other priority arrangements in form and substance mutually acceptable to the relevant replacement Chessington Mortgagee, Bell Microproducts Limited and the Agent 78 (in the case of the Chessington Property) or the relevant replacement St. Crispin Mortgagee, Open PSL Limited and the Agent (in the case of the St. Crispin Property); 16.2.10 AMENDMENT OF MATERIAL CONTRACTS: it will not and will procure that none of the Trading Companies shall amend or terminate any of the Material Contracts or agree to waive any material or persistent breach of any of the Material Contracts without the prior written consent of the Agent; 16.2.11 AMENDMENT TO OR BREACH OF MATERIAL CONTRACT OR STANDARD TERMS OF BUSINESS: it will and will procure that each relevant Trading Company will promptly (a) notify the Agent of any proposed material change in, or amendment to, the standard terms and conditions of business that it has entered into with its suppliers or which it requires its customers to enter into (including, without limitation, any material change to any retention of title or similar provisions) and will not agree to or make any such proposed material change without the prior approval of the Agent (such approval not to be unreasonably withheld or delayed) and (b) notify the Agent of any material or persistent breach by any such Trading Company or any other person of any of the Material Contracts and, if relevant, of any steps being taken or proposed to remedy such breach and shall further notify the Agent of any proposal to or purported repudiation or cancellation of, any of the Material Contracts; 16.2.12 ADDITIONAL SECURITY: without prejudice to the obligations of each of the Obligors pursuant to the Security Documents to which each of them it is expressed to be a party, it will grant or procure that there is granted to the Security Trustee, such new or further security ("ADDITIONAL SECURITY") over any business, shares or other assets which may be acquired pursuant to any Pre-Approved Acquisition or any other acquisition permitted pursuant to the Finance Documents; any such additional security shall be in such form and contain such terms and conditions as the Agent or the Lenders (having carried out all necessary due diligence) may require having regard to the nature and location of the assets in question and shall be required to be effected in favour of the Security Trustee within 90 days (or such later date as the Agent may agree) of the date of completion of the relevant acquisition; it will provide the Security Trustee with such evidence as the Security Trustee may require that all applicable laws and regulations relating to the execution of such additional security have been duly complied with (including any statutory declarations and/or special resolutions required under sections 155 and 156 Companies Act 1985; all costs and expenses (including legal fees) incurred by any of the Beneficiaries in preparing, negotiating and perfecting any such additional security shall be for the account of Ideal; 79 16.2.13 DORMANT COMPANIES: it will ensure that each of the Dormant Companies remains dormant and promptly notify the Agent of any proposal for any of such companies to recommence trading, which they shall not be permitted to do unless Ideal has received the prior written consent of the Agent; 16.2.14 EXCESS AVAILABILITY: the Borrowers will ensure that the average daily Excess Availability (calculated for each month on the last day of such month) shall be not less than L4,000,000; and 16.2.15 EC INSOLVENCY REGULATION: it will maintain, and procure that all other members of the IHL Group maintain, its centre of main interests (within the meaning of the EC Insolvency Regulation) in the United Kingdom. 16.2.16 USD CO: it will procure that the USD Co will (and the USD Co undertakes that it shall): (a) maintain books and records separate from any other person or entity; (b) maintain its accounts separate from any other person or entity; (c) ensure that all of its assets are capable of being identified as belonging to the USD Co and are readily capable of being removed without any physical obstruction or impediment or any interference as a result of the exercise of the rights of any Group Company, member of the Solutions Group or of any other third party or any agent or other person acting on behalf of any of them; (d) conduct its own business in its own name; (e) maintain separate financial statements; (f) observe all statutory obligations imposed on private limited companies generally; (g) use stationery and invoices in its name only; (h) hold itself out as a separate entity; (i) take prompt action to correct any known misunderstanding on the part of any person dealing with the USD Co regarding its separate identity; and (j) maintain its registered office and established place of business in England and Wales and carry out its business in England and Wales and maintain its centre 80 of main interests (within the meaning of the EC Insolvency Regulation) in the United Kingdom. 16.3 NEGATIVE COVENANTS Each Obligor undertakes that: 16.3.1 ENCUMBRANCES: it will not, and will ensure that no Obligor will, without the prior consent of the Agent, create, agree to create or permit to subsist any encumbrance on or over their respective assets to secure any indebtedness of any person other than the following: (a) any encumbrance on or over the assets of any Obligor subsisting at the date of this Agreement or, in the case of Open PSL Limited, at the date of the Second Supplemental Agreement and agreed to by the Agent (and in the case of the encumbrances held by the Chessington Mortgagee or the St. Crispin Mortgagee, any replacement thereof) provided that, (save for indebtedness secured as at the date of this Agreement by any encumbrance created in favour of the Chessington Mortgagee, which may be increased by up to L500,000), the principal, capital or nominal amount secured by any such encumbrance may not be increased beyond the amount currently secured by the relevant encumbrance as at the date of this Agreement or, in the case of encumbrances created by Open PSL Limited, the date of the Second Supplemental Agreement, without the prior written consent of the Agent; (b) encumbrances in favour of the Security Trustee; (c) the Pledge Agreements; (d) liens or rights of set-off arising solely by operation of law incurred in the ordinary course of business and not in connection with the borrowing of money, for sums not more than 30 days overdue; (e) encumbrances arising out of title retention provisions in a supplier's standard conditions of supply in respect of goods acquired by the relevant person in the ordinary course of trading; (f) any other encumbrance created or outstanding with the prior written consent of the Agent; (g) agreements and arrangements of the type referred to in clause 16.3.5(d) to the extent that the same constitute security; 81 (h) any encumbrance over any asset (other than Accounts or Inventory) acquired by any Obligor after the date of this Agreement and subject to which such asset is acquired provided that (1) except with the prior consent of the Agent, the principal, capital or nominal amount secured by such encumbrance may not be increased beyond the amount secured thereby at the date of such acquisition and (2) the same is discharged within 90 days of the date of such acquisition; (i) any encumbrance over the assets of any company which becomes a Subsidiary after the date of this Agreement pursuant to clause 16.3.11 provided that (1) except with the prior written consent of the Agent, the principal, capital or nominal amount secured by such encumbrance may not be increased beyond the amount secured thereby at the date of the acquisition and (2) the same is discharged within 90 days of the date of such acquisition; provided that, in the case of any encumbrance created or existing pursuant to sub paragraphs (a) and (f) above, it shall be a condition to the creation of such encumbrance that Ideal shall, if so requested by the Agent, procure that the beneficiary of the relevant encumbrance shall accede to an intercreditor deed or other priority arrangement on terms acceptable to the Agent; 16.3.2 DISPOSALS: without the prior consent of the Agent, it will not, and it will ensure that no Group Company will (whether by a single transaction or a number of related or unrelated transactions and whether at one time or over a period of time), sell, transfer, assign, lease out, lend or otherwise dispose of (whether outright, by a sale and repurchase or sale and leaseback arrangement or otherwise) any part of its or their assets having an aggregate value in excess of L750,000 in any one Financial Year except, sales of Inventory in the ordinary course of trading, sales to Affiliates permitted under clause 16.3.8 and sales of Equipment permitted under clause 16.4.11 provided that, where any matter relating to any leasing, sub-leasing or other similar arrangement with respect to the Chessington Property or the St. Crispin Property requires the consent of the Agent pursuant to the terms of this clause 16.3.2, such consent shall not be withheld if the relevant subject matter also requires the consent of the Chessington Mortgagee or, as the case may be, the St. Crispin Mortgagee and the relevant Chessington Mortgagee or, as the case may be, St. Crispin Mortgagee has granted its consent to such matter; 16.3.3 DISTRIBUTIONS AND CHANGES IN CAPITAL STRUCTURE: without the prior consent of the Agent, it will not, and it will ensure that no Group Company will: 82 (a) directly or indirectly declare, make or pay, or incur any liability to make or pay, any Distribution, or return any capital to any shareholder by way of capital reduction or otherwise, provided that: (i) BMEE may make Distributions or returns of capital to Ideal; (ii) Ideal and any one or more of the Baby Bells may make Distributions or returns of capital to BMEBV; (iii) BMEBV may make Distributions or returns of capital to BMEP; (iv) BMEP may make Distributions or returns of capital to BMEH; and (v) BMEH may make Distributions or returns of capital to the Parent, all of which payments in aggregate (together with the aggregate principal amount of all loans made pursuant to clause 16.3.7(a)), do not exceed L2,000,000 (or the equivalent in any other currency) in any period of twelve (12) months commencing on the Closing Date and do not exceed L6,000,000 (or the equivalent in any other currency) during the term of this Agreement, and provided further that the Agent shall have received a certificate signed by the finance director of Ideal confirming that: (1) each of the Obligors is in compliance with all of its obligations under the Finance Documents to which it is a party and no Default has occurred and is continuing or will result from the payment of the Distribution or return of capital proposed; (2) there is Excess Availability under the Revolving Facility of not less than L5,000,000 as at the date of such certificate and there will be an average Excess Availability of not less than L5,000,000 both as at the proposed date of payment of the relevant Distribution or return of capital and for a continuous period of six (6) months thereafter; and (3) in the case of a Distribution to be paid by BMEH to the Parent only, the largest twenty (20) trade creditors of the Borrowers (as a whole) are being paid in full when the relevant amounts become due in accordance with their prevailing credit terms; 83 OR (b) make any change in the capital structure of any Group Company which could have a material adverse effect on any Obligor or the Group (taken as a whole) For the avoidance of doubt, no Group Company may make any Distribution to any member of the Solutions Group; 16.3.4 TRANSACTIONS HAVING A MATERIAL ADVERSE EFFECT: it will not, and it will ensure that no Obligor will, enter into any transaction which has or might reasonably be expected to have, a material adverse effect on any Obligor; 16.3.5 INDEBTEDNESS: it will not, and it will ensure that no Group Company will, incur or maintain any indebtedness other than: (a) indebtedness under the Finance Documents; (b) trade payables and contractual obligations to suppliers and customers incurred in the ordinary course of trading; (c) indebtedness between members of the Group as disclosed to and permitted by the Agent; (d) indebtedness under any finance leases disclosed to the Agent prior to the date of this Agreement or which are fully disclosed in the Latest Projections and budgets for Capital Expenditure of the Group as delivered to the Agent pursuant to clauses 15.2.3 and 15.2.4 and as approved by the Agent; (e) indebtedness due and owing under any foreign exchange or interest-rate swap, under any option, cap, collar or floor or under any other hedging agreement or similar arrangement with any bank or other financial institution and disclosed to the Agent prior to the date of this Agreement and any replacement thereof or other hedging arrangement (which is intended to hedge exposure to interest rate or currency exchange fluctuations and not an arrangement of a speculative nature) entered into after the date of this Agreement, in the case of interest rate hedging only, with the prior consent of the Agent and provided that, if the relevant Hedge Provider is not the Arranger, any financial indebtedness due and owing under the relevant hedging arrangement may not be secured without the consent of the Agent (acting on the instructions of all of the Lenders); or (f) indebtedness due and owing by Ideal to the Parent provided that (a) such indebtedness is unsecured and is incurred on terms no less favourable to Ideal than would be applicable in a comparable arm's length transaction with a third party 84 that is not an Affiliate and (b) the aggregate amount of such indebtedness does not exceed at any time US$15,000,000; or (g) indebtedness due and owing by Ideal or any of its Affiliates to the Chessington Mortgagee, provided that the aggregate principal amount of such indebtedness may not be increased after the date of this Agreement by an amount, in aggregate, exceeding L500,000; (h) indebtedness due and owing by Open PSL Limited to the St. Crispin Mortgagee, provided that the aggregate principal amount of such indebtedness may not be increased after the date of the Second Supplemental Agreement; or (i) (x) indebtedness due and owing by Ideal to BMEBV provided that (a) such indebtedness is unsecured and is incurred on terms no less favourable to Ideal than would be applicable in a comparable arm's length transaction with a third party that is not an Affiliate and (b) the aggregate amount of such indebtedness does not exceed at anytime US$40,000,000 and (y) indebtedness due and owing by BMEBV to BMEP provided that (a) such indebtedness is unsecured and is incurred on terms no less favourable to BMEBV than would be applicable in a comparable arm's length transaction with a third party that is not an Affiliate and (b) the aggregate amount of such indebtedness does not exceed at anytime US$40,000,000, and will not, in any event, pay any amount in respect of any financial indebtedness due to the Chessington Mortgagee or the St Crispin Mortgagee, save in accordance with the provisions of the Priority Agreement or, as the context requires, the St. Crispin Priority Agreement or any subsequent intercreditor deed or priority arrangement approved by the Agent in accordance with this Agreement; 16.3.6 PREPAYMENT: it will not, and it will ensure that no Group Company will, voluntarily prepay or redeem any financial indebtedness, save that each Borrower may make prepayments under this Agreement in accordance with its terms and save that any Group Company may, in the ordinary course of business, make early payments to any trade creditor; 16.3.7 LOANS AND GUARANTEES: it will not, and will ensure that no Group Company will, make, roll-over or continue to remain outstanding any loans, grant any credit (save in the ordinary course of trading) or give any guarantee to or for the benefit of any person (other than any guarantee permitted pursuant to clause 16.4.13) or otherwise voluntarily assume any liability, whether actual or contingent, in respect of any obligation of any other person, save that 85 (a) BMEH, BMEP, BMEBV, each of the Borrowers and each of the Baby Bells may make any loans or grant any credit to each other or to the Parent and to any one or more of the Baby Bells (but, subject to paragraph (d) and (e) of this clause 16.3.7, not to any member of the Solutions Group) which, in the case of loans to the Parent and/or BMEH and/or BMEP and/or BMEBV, in aggregate (and taking into account the aggregate amount of any Distributions or returns of capital made by any such persons to the Parent and/or BMEH and/or BMEP and/or BMEBV in accordance with the terms of clause 16.3.3), do not exceed L2,000,000 (or the equivalent in any other currency) in any period of twelve (12) months commencing on the Closing Date and do not exceed L6,000,000 (or the equivalent in any other currency) during the term of this Agreement; (b) a Group Company may make loans to its employees (other than its directors) provided that the aggregate amount of all such loans made by all of the Group Companies shall not exceed L20,000; and (c) a Group Company may roll-over or continue to make available (but not increase the principal amount thereof, other than through the capitalisation of accrued interest) any existing loans or financial accommodation to any other Group Company or, subject to any other applicable restrictions in this Agreement, to a member of the Solutions Group (and for the avoidance of doubt the aggregate amount of loans and accrued interest outstanding to the Solutions Group as at the date of this Agreement is EUR8,302,070); and (d) BMEH may make loans or other financial accommodation to one or more members of the Solutions Group, provided always that BMEH is able to provide evidence satisfactory to the Agent (acting reasonably), whether by way of the provision of Management Accounts, Financial Statements or otherwise, from which the Agent is able to determine that such loans or other advances will be funded wholly out of new funds made available to BMEH after the Closing Date by loans from the Parent or which have otherwise been invested in BMEH by the Parent after the Closing Date by way of the subscription for equity or other capital contribution in or to BMEH and not funded by any existing funds of BMEH as at the Closing Date; and (e) the Borrowers and the IDF Companies may maintain inter company balances between themselves in an aggregate amount not exceeding E2,000,000 at any time provided that the same are maintained on arms' length commercial terms in the ordinary course of business; 86 (f) each of the loans referred to in clause 16.3.5(i) may be made; and (g) Ideal may, in consideration of Hewlett-Packard Company and certain of its affiliates, subsidiaries and associated companies providing credit to OpenPSL Limited, guarantee the obligations of OpenPSL Limited to Hewlett-Packard Company and certain of its affiliates, subsidiaries and associated companies. 16.3.8 TRANSACTIONS WITH AFFILIATES: save to the extent permitted by the foregoing sub clauses of this clause 16.3, it will not, and will ensure that no Group Company will: (a) sell, transfer, distribute or pay any money or assets to any Affiliate (other than sales of US Inventory by Ideal to the USD Co and subsequent sales of US Inventory by the USD Co back to Ideal immediately prior to Ideal selling such US Inventory to its customers pursuant to the terms of the Inter Company Sale Agreement); (b) lend or advance money or assets to any Affiliate; or (c) invest in (by capital contribution or otherwise) or purchase or repurchase any shares or indebtedness or any assets of any Affiliate, save that, if no Default has occurred and is continuing, a Group Company may engage in transactions relating to the sale and purchase of Inventory (but not, save as otherwise permitted in this Agreement, involving any sales of Equipment or other fixed assets) with an Affiliate in the ordinary course of trading in amounts and upon terms fully disclosed to the Agent in the Management Accounts and no less favourable to that Group Company than would obtain in a comparable arm's length transaction with a third party which is not an Affiliate, provided that Accounts generated between the Group Companies and their Affiliates shall not account for more than three per cent (3%) of the total number of Accounts generated by the Borrowers and/or any other Charging Companies; 16.3.9 CHANGE OF BUSINESS OR OPERATIONS: it will ensure that there is no material change in the nature of its business or operations or the business or operations of the Group taken as a whole (whether by a single transaction or a number of related or unrelated transactions, whether at one time or over a period of time and whether by disposal, acquisition or otherwise); 16.3.10 ACCOUNTING REFERENCE DATE: it will not, without the prior approval of the Agent, change, and will procure that no other Group Company changes, its accounting reference date; 87 16.3.11 SUBSIDIARIES: save pursuant to any Pre-Approved Acquisition or otherwise with the Agent's prior written consent, it will not, directly or indirectly, organise or acquire any Subsidiary (other than a Dormant Company or those in existence as at the date of this Agreement and which have been advised to the Agent in writing); 16.3.12 RESTRICTED INVESTMENTS: it will not, and will ensure that no Group Company will make any Restricted Investment; 16.3.13 CAPITAL EXPENDITURE: it will not, and will ensure that no Group Company will, without the prior consent of the Agent, make or incur any Capital Expenditure if, after giving effect thereto, the aggregate amount of all Capital Expenditure by the Group in any Financial Year would exceed L1,500,000 (or the equivalent in any other currency); 16.3.14 LEASE OR SIMILAR OBLIGATIONS: save with the prior written consent of the Agent and save for any finance leases agreed with the Agent pursuant to clause 16.3.5, it will not, and will ensure that no Group Company will enter into any lease of real or personal property as lessee or sublessee or enter into any hire purchase, conditional sale or other similar arrangement if, after giving effect thereto, the aggregate amount of Rentals payable by the Group Companies in any Financial Year in respect of such lease and all other such leases, hire purchase, conditional sale or similar arrangements would exceed L500,000. The term "RENTALS" means all payments due from the lessee or sublessee under a lease or all payments, liabilities or obligations due from the hirer or other relevant obligor or debtor (howsoever described) under any hire purchase, conditional sale or similar arrangement, including, without limitation, rent, service charge, utility or maintenance costs and insurance premiums together with any VAT thereon; 16.3.15 CAPITAL MARKETS: if any Borrower, BMEP, BMEH or BMEBV or any other Group Company shall enter into any Capital Markets Transaction then, subject to the following provisions of this clause 16.3.15, it shall apply or BMEH shall procure that there is applied, thirty per cent (30%) of the net proceeds of such Capital Markets Transaction to prepay (subject to payment of any broken funding costs) a commensurate amount of the then Total Outstandings, provided that, if the average Excess Availability during the period of six (6) months ending on the date upon which the Capital Markets Transaction is completed was in excess of L5,000,000, then the relevant issuer(s) shall not be obliged to apply such proceeds in prepayment in the manner prescribed by this clause 16.3.15; and 16.3.16 VENDOR FINANCING: it will not and will procure that no other Group Company will enter into any vendor financing programme or similar arrangement for financing the acquisition of Equipment, any other fixed asset or Inventory (which has not already been 88 disclosed in its budget for Capital Expenditure and approved by the Agent), without the prior written consent of the Agent and without the Agent being provided with such information as it may require as to the terms and conditions of such vendor financing programme or other arrangement and assessing the impact, if any, upon the Collateral and/or the encumbrances created by the Debenture. 16.3.17 USD CO: without prejudice to the terms of any other Finance Document, it will procure that the USD Co will not (and the USD Co undertakes that it shall not) and, in relation to clause 16.3.17(p) only, Ideal undertakes that it will not: (a) except as provided for in the Inter Company Sale Agreement, sell, assign, convey, transfer or otherwise dispose of any US Inventory or any other asset; (b) cancel, terminate, amend, modify or waive any term or condition of the Inter Company Sale Agreement or any other Finance Document to which it is a party or any document entered into by it thereunder; (c) create or permit to subsist any encumbrance over all or any of its assets other than in favour of the Security Trustee; (d) amend its accounting policies, except as may be required by Applicable GAAP; (e) take any action which may prejudice the validity of the Inter Company Sale Agreement or any other Finance Document to which it is a party; (f) incur or permit to subsist any indebtedness of any kind other than pursuant to the Inter Company Sale Agreement; (g) merge or consolidate with any other company or person; (h) except as contemplated by the Inter Company Sale Agreement, sell, transfer or otherwise, dispose of or cease to exercise direct control over any part of its present or future undertaking, assets, rights or revenues whether by one or a series of transactions related or not; (i) make any loans grant any credit or give any guarantee to or for the benefit of any person; (j) engage in any business or activity other than those necessary or incidental to the requirements of the Inter Company Sale Agreement; 89 (k) allot, issue or purchase any shares or alter any of the rights attaching to its shares currently in issue; ( ) declare or pay any dividend or make any other Distribution (whether in cash or in specie) in respect of its share capital; ( ) have any employees; ( ) make or agree to make any payment to any person otherwise than in accordance with the terms of the Inter Company Sale Agreement; ( ) own, rent, lease or be in possession of any buildings or equipment; ( ) in relation to Ideal in its capacity as sole shareholder of the USD Co, not petition or commence proceedings for the administration or winding up (nor participate in any ex parte proceedings with regard thereto, seek to enforce a judgment against the USD Co with regard thereto, nor join any person in the petition or commencement of proceedings for the administration or winding up) of the USD Co, nor to convene a meeting for the purposes of considering a resolution or other steps taken by USD Co for the winding up, dissolution, administration or reorganisation of USD Co, other than for the purposes of a solvent reorganisation which has been approved in writing in advance by the Agent; ( ) permit to subsist any Subsidiary and it will not form or acquire any Subsidiary, 16.4 COVENANTS RELATING TO THE COLLATERAL Ideal (and, in the case of clause 16.4.16 only, BMEH) undertakes that: 16.4.1 COLLATERAL REPORTING: it will provide the Agent, in each case in respect of each Trading Company, and on a consolidated and consolidating basis, with the following documents at the following times in form satisfactory to the Agent: (a) on a weekly basis on each Wednesday based on figures as of the previous Friday, a Borrowing Base Certificate incorporating, inter alia, a schedule of credit notes, a summary of collections of accounts receivable, a schedule of Accounts created since the last such schedule, with effect from any Inventory Eligibility Date, a report of the Inventory balance (by location) based on the perpetual inventory reports and such further details as the Agent may request; 90 (b) upon request, copies of invoices, credit notes, shipping and delivery documents; (c) monthly ageings of accounts receivable to be delivered no later than the 10th day of each month in respect of the immediately preceding month; (d) monthly perpetual inventory reports by category to be delivered no later than the 10th day of each month in respect of the immediately preceding month; (e) on a monthly basis, a report listing the top ten (10) customers of Ideal during that month, providing (i) details of the level of sales made to each such customer; (ii) details of any credit notes issued to each such customer or any other account adjustments made in respect of such customer; and (iii) the amount of cash actually received from each such customer during the relevant month; (f) with effect from any Inventory Eligibility Date, upon request, monthly perpetual inventory reports with effect from any Inventory Eligibility Date, a quarterly report of all Inventory based on a physical stock count; (g) monthly ageings of accounts payable no later than the 10th day of the following month, together with a specific breakdown (in reasonable detail) of the monthly ageings of accounts payable to the largest ten supplier creditors of Ideal and details of the Inventory held by Ideal in respect of such accounts payable and each such supplier; (h) with effect from any Inventory Eligibility Date, upon request, copies of purchase orders, invoices, and delivery documents for Inventory and Equipment acquired by that Trading Company; (i) such other reports as to the Collateral and the Accounts (and each Borrower hereby authorises the Agent to make enquiries of its customers in this respect) as the Agent shall request from time to time; and (j) certificates of an officer of Ideal certifying as to the foregoing; 16.4.2 INSPECTION: upon receiving not more than two business days' notice from the Agent (or without notice following a Default which is continuing), it will, and will procure that each Trading Company will, permit the Agent or any person authorised by the Agent to have access to its premises to carry out a periodic inspection of the Collateral, the regularity of such periodic inspections to be at the Agent's discretion, but initially to be no more often than every 60 days; 91 16.4.3 ACCOUNTS: it will not, and will ensure that no Trading Company will, re-date any invoice or sale or make sales on extended credit beyond 45 days from its standard credit terms or modify any Account except with the prior written consent of the Agent. If Ideal or any other Obligor becomes aware of any material matter affecting any material Account (including information regarding any Account Debtor's creditworthiness and any information in respect of an Account Debtor against whom a Trading Company has commenced, or is proposing to commence, legal proceedings), it will promptly so advise the Agent; 16.4.4 ACCEPTANCE OF NOTES OR OTHER INSTRUMENTS: it will not, and will ensure that no Trading Company will, accept any note or other instrument (except a cheque or other instrument for the immediate payment of money) with respect to any Account without the Agent's written consent. If the Agent consents to the acceptance of any such note or other instrument, it shall be considered as evidence of the Account and not payment thereof, and Ideal will promptly deliver such note or instrument to the Agent appropriately endorsed. Regardless of the form of presentment, demand, notice of dishonour, protest and notice of protest with respect thereto, Ideal will remain liable thereon until such note or instrument is paid in full; 16.4.5 DISPUTES WITH ACCOUNT DEBTORS: it will notify the Agent promptly of all disputes and claims with Account Debtors in excess of L50,000 and settle or adjust them, or ensure that the relevant Trading Company settles or adjusts them, at no expense to the Lenders, but no discount, credit or allowance shall be granted to any Account Debtor without the Agent's consent, except for discounts, credits and allowances made or given in the ordinary course of trading when no Event of Default exists hereunder. Ideal shall send, or procure that there is sent to, the Agent a copy of each credit note in excess of L1,000,000 as soon as issued and a list of all credit notes in excess of L750,000 on a weekly basis, with copies of any such credit notes to be supplied to the Agent at the Agent's request; 16.4.6 RETURNS OF INVENTORY: if after the Inventory Eligibility Date, an Account Debtor returns any Inventory to any Borrower or any Trading Company when no Event of Default exists, then that Borrower shall promptly determine the reason for such return and shall issue, or procure that the relevant Trading Company shall issue, a credit note to the Account Debtor in the appropriate amount. Each Borrower shall immediately report to the Agent any return involving an amount in excess of L1,000,000. Each such report shall indicate the reasons for the returns and the locations and condition of the returned Inventory. Whenever any Inventory is returned, the related Account shall be deemed ineligible, and the Available Revolving Facility Amount shall be adjusted accordingly; 92 16.4.7 INVENTORY: after the Inventory Eligibility Date, it will not, and will ensure that no Trading Company will, without prior written notice to the Agent, acquire or accept any Inventory on consignment or approval; 16.4.8 INVENTORY - REPORTING SYSTEM: after the Inventory Eligibility Date, it will maintain, and will ensure that each Trading Company maintains, a perpetual inventory reporting system at all times; it will conduct a physical count of the Inventory of all the Trading Companies at least once per Financial Year and after the occurrence of an Event of Default at such other times as the Agent requests, and shall promptly, upon completion, supply the Agent with a copy of such count accompanied by a report of the value of such Inventory (valued at the lower of cost, on a FIFO basis, or market value); no Borrower will, and will ensure that no Trading Company will, without the Agent's prior written consent, sell any Inventory on a sale or return, sale on approval, consignment or other repurchase or return basis; 16.4.9 CONDITION OF THE EQUIPMENT: it will keep and maintain, and will ensure that each Trading Company keeps and maintains, its Equipment in good operating condition and repair (ordinary wear and tear excepted) and will make all necessary replacements; 16.4.10 ADDITIONS TO THE EQUIPMENT: it will include information regarding any material additions to or deletions from any Equipment (which, in the case of any additions, are to be within the agreed Capital Expenditure budget) within the Management Accounts required to be delivered pursuant to clause 15.2.2; 16.4.11 DISPOSAL OF THE EQUIPMENT: it will not, and will ensure that no Trading Company will, without the Agent's prior written consent, sell, lease as a lessor, or otherwise dispose of any Equipment provided that obsolete or unusable Equipment having an orderly liquidation value no greater than L500,000 individually and L1,500,000 in the aggregate in any Financial Year, may be disposed of without the Agent's consent, subject to the conditions set forth below. If any of the Equipment is sold, transferred or otherwise disposed of with the Agent's prior written consent or as otherwise permitted hereby then: (a) if such sale, transfer or disposal is effected without replacement of such Equipment, or such Equipment is replaced by leased Equipment, or by Equipment purchased subject to a Permitted Encumbrance, Ideal will, or will procure that the relevant Trading Company will, deliver all of the cash proceeds of any such sale, transfer or disposal to the Agent, which proceeds shall be applied in or towards prepayment of all sums due from the Borrowers hereunder; or 93 (b) if such sale, transfer or disposal is made in connection with the purchase of replacement Equipment (other than subject to a Permitted Encumbrance), Ideal will use the proceeds of such sale, transfer or disposal to finance the purchase of such replacement Equipment which shall be free and clear of all liens, claims and encumbrances, except for the Security Interest and other Permitted Encumbrances and shall deliver to the Agent written evidence of the use of the proceeds for such purchase; 16.4.12 CHESSINGTON MORTGAGE: it will procure that Bell Microproducts Limited does not agree to or complete any refinancing of the indebtedness relating to the Chessington Property unless: (a) the Agent shall be afforded a reasonable opportunity (subject to any applicable confidentiality constraints) to review the terms and conditions of such refinancing; and (b) Ideal shall procure (or shall procure that Bell Microproducts Limited shall procure) that the relevant Chessington Mortgagee shall enter into an intercreditor deed or priority arrangement mutually acceptable to the relevant Chessington Mortgagee, Bell Microproducts Limited and the Agent; 16.4.13 CHESSINGTON PROPERTY GUARANTEE: it will not give and will procure that no other Group Company shall provide any guarantee, indemnity or other assurance in respect of the obligations of Ideal or any relevant Affiliate to the Chessington Mortgagee (other than any guarantees in existence as at the date hereof) unless the obligations of each relevant Group Company and the rights and recourse of the Chessington Mortgagee are fully subordinated to the rights of the Beneficiaries under the Finance Documents. 16.4.14 ST. CRISPIN MORTGAGE: it will procure that Open PSL Limited does not agree to or complete any refinancing of the indebtedness relating to the St. Crispin Property unless: (a) the Agent shall be afforded a reasonable opportunity (subject to any applicable confidentiality constraints) to review the terms and conditions of such refinancing; and (b) Ideal shall procure (or shall procure that Open PSL Limited shall procure) that the relevant St. Crispin Mortgagee shall enter into an intercreditor deed or priority arrangement mutually acceptable to the relevant St. Crispin Mortgagee, Open PSL Limited and the Agent; 16.4.15 ST. CRISPIN PROPERTY GUARANTEE: it will not give and will procure that no other Group Company shall provide any guarantee, indemnity or other assurance in respect of the obligations of Open PSL Limited or any relevant Affiliate to the St. Crispin Mortgagee 94 unless the obligations of each relevant Group Company and the rights and recourse of the St. Crispin Mortgagee are fully subordinated to the rights of the Beneficiaries under the Finance Documents 16.4.16 USD CO: it will (a) procure that no Group Company or member of the Solutions Group will take any action or omit to take any action which has the effect of the USD Co becoming liable for any amount or incurring any liability or expense to any person save for any action to be taken, or permitted to be taken, under or pursuant to the Inter Company Sale Agreement and (b) pay to the USD Co an amount equal to any amount for which the USD Co becomes liable notwithstanding clause 16.4.16(a) immediately upon the USD Co becoming so liable or to make such arrangements as are acceptable to the Agent for the immediate discharge of such liability. 17 DEFAULT 17.1 EVENTS OF DEFAULT Each of the events set out below is an Event of Default: 17.1.1 NON-PAYMENT: any Obligor or any IDF Company does not pay any sum due from it under any Finance Document at the time and in the manner specified in the relevant Finance Document, or where the non-payment results solely from technical difficulties relating to the transfer of that amount from the relevant Obligor or IDF Company to the Agent or, as the case may be, the Receivables Purchaser, within five (5) days of the due date; 17.1.2 BREACH OF REPRESENTATION OR WARRANTY: any representation or warranty made or deemed to be repeated by any Obligor or any IDF Company in any Finance Document or in any document delivered pursuant to it is not complied with or is or proves to have been incorrect or misleading in any material respect when made or deemed to be repeated; 17.1.3 BREACH OF UNDERTAKING: any Borrower fails duly to perform or comply with any obligation expressed to be assumed by it in clause 2.2, 15, 16.2.8 to 16.2.9 inclusive, 16.3 or 16.4 or any Obligor or any IDF Company fails duly to perform any obligation in, or comply with any of the terms of, any of the Security Documents; 17.1.4 BREACH OF OTHER OBLIGATION: any Obligor or any IDF Company fails duly to perform or comply with any other obligation expressed to be assumed by it in any of the Finance Documents and such failure (if capable of remedy) is not remedied within ten business days after the earlier of (i) the date upon which any such Obligor or, as the case may be, IDF Company becomes aware of such default or (ii) the date upon which the Agent or, as the case may be, Receivables Purchaser has notified such Obligor or, as the case 95 may be, IDF Company of such default or if any such Finance Document shall terminate (other than in accordance with its terms or with the written consent of the Agent) or become void or unenforceable; 17.1.5 CROSS-DEFAULT: any indebtedness (other than indebtedness to any one or more trade creditors arising in the ordinary course of business which is not overdue by more than 60 days and in respect of which the relevant trade creditor has not sought repayment or otherwise taken steps to procure or enforce repayment or in respect of which repayment has been sought and the relevant Obligor or, as the case may be, IDF Company is contesting in good faith by appropriate means its liability to make payment thereof) of any Obligor or any IDF Company of an amount in excess of L1,000,000 (or its equivalent in any other currency) is not paid when due or is declared to be or otherwise becomes due and payable prior to its specified maturity or any creditor of any Obligor or any IDF Company becomes entitled to declare any such indebtedness due and payable prior to its specified maturity; 17.1.6 INSOLVENCY: any Obligor or Group Company is unable to pay its debts as they fall due (or is deemed by law or by a court to be unable to pay its debts), stops, suspends or threatens to stop or suspend payment of all or any part of its indebtedness or commences negotiations with any one or more of its creditors with a view to the general readjustment or re-scheduling of all or any part of its indebtedness or makes a general assignment for the benefit of, or composition with, its creditors or a moratorium is agreed or declared in respect of, or affecting, all or any part of its indebtedness; 17.1.7 ENFORCEMENT PROCEEDINGS: a distress, attachment, execution, diligence or other legal process is levied, enforced or sued out on or against all or any part of the assets of any Obligor or Group Company and is not discharged within five business days; 17.1.8 WINDING-UP: any Obligor or Group Company takes any corporate action or other steps are taken or legal or other proceedings are started for its winding-up, dissolution or re-organisation other than for the purposes of a bona fide, solvent scheme of reconstruction or amalgamation previously approved in writing by the Agent (other than a petition for winding up which a Borrower has satisfied the Agent is vexatious, groundless or an abuse of process and in relation to which the relevant Group Company has taken steps within seven days of the petition to restrain the petitioner from advertising the petition and which in any event has been discharged within thirty days of the petition) or for the appointment of a receiver, administrator, administrative receiver, trustee or similar officer of it or of any or all of its assets; 96 17.1.9 ANALOGOUS PROCEEDINGS: anything analogous to or having a substantially similar effect to any of the events specified in clauses 17.1.6 to 17.1.8 inclusive shall occur under the laws of any applicable jurisdiction; 17.1.10 ENCUMBRANCE ENFORCEABLE: any encumbrance on or over the assets of any Obligor or Group Company securing indebtedness in excess of L500,000 becomes enforceable and any step (including the taking of possession or the appointment of a receiver, manager or similar person) is taken to enforce that encumbrance; 17.1.11 EXPROPRIATION: all or any material part of the shares or assets of any Obligor is seized, compulsorily acquired, nationalised or otherwise expropriated or custody or control of the same is assumed by any public authority or any court of competent jurisdiction at the instance of any public authority, except where contested in good faith by proper proceedings diligently pursued where a stay of enforcement is in effect; 17.1.12 TERMINATION OF ANY GUARANTEE: any guarantee of any amounts due and payable under any of the Finance Documents shall be terminated, revoked or declared void or invalid; 17.1.13 JUDGMENTS: one or more final judgments for the payment of money aggregating in excess of L50,000 (whether or not covered by insurance) shall be rendered against any Obligor and such Obligor shall fail to discharge the same within thirty (30) days from the date of entry thereof or to appeal therefrom; 17.1.14 LOSS OF COLLATERAL: any loss, theft, damage or destruction of any item or items of the Collateral occurs which in the opinion of the Agent (i) could materially and adversely affect the operation of any Borrower's or any Obligor's business or the business of the Group (taken as a whole) or (ii) is material in amount and is not adequately covered by insurance; 17.1.15 CESSATION OF BUSINESS: any Obligor ceases to carry on the business it carries on today or enters into any unrelated business; 17.1.16 ILLEGALITY: it is or will become unlawful for any Obligor to perform or comply with any of its obligations under any Relevant Agreement, or any such obligation is not or ceases to be legal, valid and binding; 17.1.17 REPUDIATION: any Obligor repudiates, or does or causes to be done anything evidencing an intention to repudiate any Relevant Agreement; 17.1.18 LOSS OF A MATERIAL NUMBER OF CUSTOMERS: if, on receipt by the Agent of a Quarterly Sales Certificate in accordance with Clause 15.2.7, that Quarterly Sales Certificate demonstrates that the result of the formula specified below is less than 0.75. 97 A - C ----- B Where: "A" is the Total Year 1 Sales specified in that Quarterly Sales Certificate; "B" is the Total Year 2 Sales specified in that Quarterly Sales Certificate; and "C" is the Total Lost Customer Sales specified in that Quarterly Sales Certificate. 17.1.19 LOSS OF A MATERIAL NUMBER OF SUPPLIERS: if, on receipt by the Agent of a Quarterly Supply Certificate in accordance with Clause 15.2.8, that Quarterly Supply Certificate demonstrates that the result of the formula specified below is less than 0.65. X - Z ----- Y Where: "X" is the Total Year 1 Supply Costs specified in that Quarterly Supply Certificate; "Y" is the Total Year 2 Supply Costs specified in that Quarterly Supply Certificate; and "Z" is the Total Reduced Supply Costs specified in that Quarterly Supply Certificate. 17.1.20 CHANGE OF CONTROL: any person or group of connected persons which does not have control at the date of this Agreement acquires control of BMEH, BMEP, BMEBV or any Obligor and for this purpose "CONNECTED PERSON" shall be construed in accordance with section 839 Income and Corporation Taxes Act 1988; 17.1.21 INVOICE DISCOUNTING AGREEMENTS: any Event of Default as defined in and referred to in the Accounts Transfer Conditions (other than an Event of Default set out in Condition 17.1(i) (Encumbrance Enforceable) or Condition 17.1(l) (Judgments) of the Accounts Transfer Conditions) shall occur. 17.2 ACCELERATION If at any time and for any reason (and whether within or beyond the control of any party to any of the Finance Documents) any Event of Default has occurred, then at any time thereafter, whilst such Event of Default is continuing, the Agent may, and shall, if so instructed by the Majority Lenders, 98 by written notice to Ideal do one or more of the following at any time or times and in any order: 17.2.1 reduce or cancel the Available Facility or any one or more of its elements or reduce or cancel the Available Revolving Facility Amount; 17.2.2 restrict the amount of or refuse to make available any Revolving Loan or Swingline Loan or to issue any Letter of Credit or Guarantee; 17.2.3 terminate this Agreement and the Revolving Facility made or to be made available hereunder; 17.2.4 declare any Revolving Loan or any Swingline Loan, all unpaid accrued interest or fees and any other sum then payable under this Agreement to be due and payable on demand or on such date as it may specify in such notice whereupon all such monies shall become so due and payable on demand or on such date (as the case may be); 17.2.5 require that the Borrower deposit with the Security Trustee with respect to any Letter of Credit or Guarantee then outstanding a Supporting Letter of Credit or cash, in the same manner as contemplated in clause 6.14; 17.2.6 declare the Revolving Facility to be cancelled, whereupon it shall be so cancelled and the Commitment of each Lender shall immediately be reduced to zero; 17.2.7 enforce any or all of its rights or require that the Security Trustee enforce any or all of its rights under any of the Finance Documents or under applicable law. 17.3 ON DEMAND FACILITY If, pursuant to clause 17.2.4, the Agent declares any of the Loans (or any other monies which may become payable hereunder) to be due and payable on demand of the Agent, then, at any time thereafter, the Agent may by written notice to Ideal call for repayment of any such Loans (and any other such monies) on such date as it may specify in such notice (whereupon the same shall become due and payable on such date together with all unpaid accrued interest, fees and any other sums then owed by the Borrowers hereunder) or withdraw its declaration with effect from such date as it may specify in such notice. 17.4 LETTER OF CREDIT AND GUARANTEE FEE FOLLOWING EVENT OF DEFAULT From the date of the occurrence of any Event of Default until such Event of Default is remedied to the satisfaction of the Agent, or until all sums payable hereunder have been satisfied or discharged in full and none of the Lenders is under any contingent liability hereunder or under any Letter of Credit or 99 Guarantee, the Letter of Credit and Guarantee Fee shall be calculated at the rate per annum equal to an additional 2% per annum to that referred to in clause 22.5 on the maximum face value of any Letter of Credit or maximum contingent liability of the Issuer under each Guarantee then outstanding. 17.5 TERMINATION FEE If the Agent terminates this Agreement upon an Event of Default, Ideal shall pay the Agent for the account of the Lenders in their Participating Proportion, immediately upon termination, a fee equal to the early termination fee that would have been payable under clause 29 if this Agreement had been terminated on that date pursuant to Ideal's election. 18 DEFAULT INTEREST 18.1 INTEREST ON UNPAID SUMS If any relevant Obligor does not pay any sum payable by it under this Agreement on its due date in accordance with the provisions of clause 20 or if any sum due and payable by any relevant Obligor under any judgment of any court in connection with this Agreement is not paid on the date of such judgment, it shall pay interest on the balance for the time being outstanding (such balance being referred to in this Agreement as the "UNPAID SUM") for the period beginning on such due date or, as the case may be, the date of such judgment, in accordance with the provisions of this clause 18. 18.2 DEFAULT INTEREST PERIODS Interest under this clause 18 shall be calculated by reference to successive periods, each of which (other than the first, which shall begin on the due date for payment or, as the case may be, the date of judgment as referred to in clause 18.1) shall begin on the last day of the preceding period. Each such period shall be of such duration as the Agent may select. 18.3 DEFAULT INTEREST RATES The rate of interest applicable to an unpaid sum from time to time during each period relating to that unpaid sum shall be the rate per annum which is the sum of (i) two per cent (2%) (ii) the Applicable Margin (iii) LIBOR relative to such period (or, in respect of any Swingline Loans or Reference Rate Revolving Loans, the Reference Rate) and (iv) the Mandatory Cost, if any, applicable to that unpaid sum provided that: 18.3.1 if, at or about 11.00 a.m. on the Quotation Date in respect of such unpaid sum, it is not possible to determine LIBOR in accordance with the definition of LIBOR there shall be substituted for LIBOR the rate determined by the Agent (and notified to Ideal) to be the weighted average of the rates (as notified to the Agent by the Lenders prior to the first day of the relevant Interest Period) which represent the cost to each Lender of funding its portion of such unpaid sum during such period from whatever sources and in whatever manner it may select; and 100 18.3.2 if the unpaid sum is of the principal amount of a LIBOR Revolving Loan which became due and payable other than on the last day of any Interest Period relating to it, the first default period applicable to that unpaid sum shall be of a duration equal to the unexpired portion of that Interest Period and the rate of interest applicable to it during that Interest Period shall be the rate per annum equal to the sum of two per cent (2%) and the rate applicable to it immediately before it became due. 18.4 PAYMENT AND COMPOUNDING OF DEFAULT INTEREST Any interest accrued due under clause 18.3 in respect of an unpaid sum shall be due and payable and shall be paid by the relevant Obligor at the end of the period by reference to which it is calculated or on such other date as the Agent may specify by written notice to Ideal. If not paid on the due date, the interest shall be added to and form part of the unpaid sum on which interest shall accrue and be payable in accordance with the provisions of this clause 18. 19 INDEMNITIES AND CURRENCY OF ACCOUNT 19.1 GENERAL INDEMNITIES Ideal shall (or will procure that an Obligor will) indemnify on demand each of the Beneficiaries against any funding or other cost, loss (including any foreign exchange contract loss incurred by any of them), expense or liability which it may sustain or incur, directly or indirectly, as a result of: 19.1.1 a Loan not being made by reason of any of the conditions set out in Schedule 2 not being satisfied or any Borrower cancelling or purporting to cancel a Utilisation Notice; or 19.1.2 the occurrence of any Default; or 19.1.3 the receipt or recovery by it (or the Agent on its behalf) of all or any part of its share of any Loan or unpaid sum other than on the last day of any Interest Period relating to that Loan or unpaid sum. 19.2 BREAK COSTS Ideal's liability under clause 19.1.3 shall include the amount (if any) by which (i) the additional interest which would have been payable under this Agreement on the amount so received or recovered had it been received or recovered by the relevant party on the last day of the relevant Interest Period exceeds (ii) the amount of interest which, in the opinion of the Beneficiary concerned, would have been payable to such Beneficiary on the last day of that Interest Period in respect of a deposit denominated in the currency of the Loan or unpaid sum in question equal to the amount so received or recovered placed by it with a prime bank in London for a period starting on the second business day following the date of such receipt or recovery and ending on the last day of that Interest Period. For the avoidance of doubt (but without prejudice to their obligations to pay break costs), neither Ideal nor any other relevant Obligor shall be liable to compensate any Beneficiary for any loss of 101 Applicable Margin if any amount is repaid, prepaid or cancelled by virtue of the operation of clauses 9.3 or 12.1.2. 19.3 CURRENCY INDEMNITY Any amount received or recovered by any Beneficiary in respect of any sum expressed to be due to it from any Obligor under any Finance Document in a currency other than the currency (the "CONTRACTUAL CURRENCY") in which such sum is so expressed to be due (whether as a result of, or of the enforcement of, any judgment or order of a court or tribunal of any jurisdiction, the winding-up of such Obligor or otherwise) shall only constitute a discharge to such Obligor to the extent of the amount of the contractual currency that the recipient is able, in accordance with its usual practice, to purchase with the amount of the currency so received or recovered on the date of receipt or recovery (or, if later, the first date on which such purchase is practicable). If the amount of the contractual currency so purchased is less than the amount of the contractual currency so expressed to be due, such Obligor shall indemnify the recipient against any loss sustained by it as a result, including the cost of making any such purchase. 19.4 INDEMNITY TO THE AGENT Ideal shall (or shall procure that an Obligor shall) promptly indemnify the Agent against any cost, loss or liability incurred by the Agent (other than any loss occasioned by the gross negligence or wilful misconduct of the Agent) as a result of: 19.4.1 investigating any event which it reasonably believes is a Default; or 19.4.2 entering into or performing any foreign exchange contract for the purposes of any Loan being made in a Foreign Currency; or 19.4.3 acting or relying on any notice, request or instruction which it believes to be genuine, correct and appropriately authorised. 19.5 NATURE OF INDEMNITIES Each of the indemnities in this clause 19 constitutes a separate and independent obligation from the other obligations in this Agreement, shall give rise to a separate and independent cause of action, shall apply irrespective of any time or indulgence granted by the Agent or any Lender and shall continue in full force and effect notwithstanding any order, judgment, claim or proof for a liquidated amount in respect of any sum due under this Agreement or any other judgment or order. 20 PAYMENTS 20.1 CURRENCY OF ACCOUNT AND PAYMENT Sterling is the currency of account and payment for all sums at any time due from the Borrower under or in connection with any of the Finance Documents (including damages) provided that (i) each repayment of a Loan or a part 102 thereof shall be made in the currency in which such Loan is denominated at the time of that repayment; (ii) each payment of interest shall be made in the currency in which the sum in respect of which such interest is payable is denominated; (iii) each payment in respect of costs and expenses shall be made in the currency in which the same were incurred; and (iv) any amount expected to be payable in a currency other than sterling shall be paid in that other currency. 20.2 PAYMENTS BY THE BORROWER AND THE LENDERS On each date on which this Agreement requires an amount to be paid by any Obligor or any of the Lenders to the Agent, that Obligor or, as the case may be, such Lender shall make the same available to the Agent: 20.2.1 where such amount is denominated in sterling, by payment in sterling and in same day funds (or in such other funds as may for the time being be customary in London for the settlement in London of banking transactions in sterling) to the Agent at Bank of America, NA, 5 Canada Square, London, E14 5AQ, sort code 16-50-50, Attn: Loans Service (or as the Agent may otherwise specify for this purpose); or 20.2.2 where such amount is denominated in a Foreign Currency (other than euro), by payment in such Foreign Currency and in immediately available, freely transferable, cleared funds to such account with such bank in the principal financial centre of the country of such Foreign Currency as the Agent may specify for this purpose; or 20.2.3 where such amount is denominated in euro, such sum shall be made available to the Agent by payment in euro and in immediately available, freely transferable, cleared funds to such account with such bank in such principal financial centre in such participating member state of the European Union or in London as the Agent shall from time to time nominate for this purpose. 20.3 PAYMENTS BY THE AGENT Save as otherwise provided herein, each payment received by the Agent for the account of another person pursuant to clause 20.2 shall be made available by the Agent (subject, without any liability therefor, for delays outside the Agent's control in crediting cleared funds) to such other person (in the case of a Lender, for the account of its Facility Office) for value the same day (provided that such payment has been received by the Agent by no later than 12.00 noon) by transfer to such account of such person with such bank in the principal financial centre of the country of the currency of such payment as such person shall have previously notified to the Agent or (in the case of a Borrower) in the agreed currency denomination to the account of that Borrower specified in the Utilisation Notice. 103 20.4 PAYMENTS DUE ON NON-BUSINESS DAYS If any payment of principal, interest, premium or other sum to be made hereunder becomes due and payable on a day other than a business day, the due date of payment shall be extended to the next succeeding business day and interest thereon shall be payable at the applicable interest rate during such extension (unless that next succeeding business day falls in the following calendar month in which case the due date of payment shall be the immediately preceding business day). 20.5 IMPRACTICABLE TO MAKE PAYMENTS If, at any time, it shall become impracticable (by reason of any action of any governmental authority or any change in law, exchange control regulations or any similar event) for any Obligor to make any payments hereunder in the manner specified in clause 20.2, then that Obligor may agree with each or any of the Lenders to make alternative arrangements for the payment direct to such Lender of amounts due to such Lender hereunder provided that, in the absence of any such agreement with any Lender, that Obligor shall be obliged to make all payments due to such Lender in the manner specified in this Agreement. Upon reaching such agreement the relevant Obligor and such Lender shall immediately notify the Agent and shall thereafter promptly notify the Agent of all payments made direct to such Lender. 20.6 NO SET-OFF OR COUNTERCLAIM All payments made by an Obligor under this Agreement shall be made free and clear of and without any deduction for or on account of any set-off or counterclaim. 20.7 REFUNDING OF PAYMENTS Where a sum is to be paid to the Agent under this Agreement for account of another person, the Agent shall not be obliged to (but may) make the same available to that other person until it has been able to establish to its satisfaction that it has actually received that sum. If and to the extent that it does so but it proves to be the case that it had not actually received the sum which it paid out, then, the person to whom the Agent made that sum available shall on request refund it to the Agent and that person or (at the option of the Agent) the person by whom that sum should have been made available shall on request pay to the Agent the amount (as certified by the Agent) which will indemnify the Agent against any funding or other cost, loss, expense or liability which it may have sustained or incurred as a result of paying out that sum before receiving it. 20.8 DEBIT TO LOAN ACCOUNT The Agent is hereby authorised to debit all Swingline Loans and all Reference Rate Revolving Loans and interest thereon to a loan account or accounts denominated in the currency denomination of each such Loan maintained with the Agent. All fees, commissions, costs, expenses and other charges under or pursuant to the Finance Documents and all payments made and out-of-pocket 104 expenses incurred by the Agent and/or the Lenders pursuant to the Finance Documents will be debited to such loan account(s) as of the date due from the relevant Borrower or the date paid or incurred by the Agent and/or the Lenders, as the case may be. 20.9 CHANGE OF CURRENCY TO EURO With effect from the date (if any) upon which sterling is converted into euro in accordance with EMU legislation: 20.9.1 REDENOMINATION: each obligation under this Agreement of any party to this Agreement which, up to such time, had been denominated in sterling shall be redenominated into euro in accordance with EMU legislation provided that, if and to the extent that any EMU legislation provides that an amount denominated either in euro or in sterling as a national currency unit of the euro can be paid by the debtor either in euro or in that national currency unit, each party to this Agreement shall be entitled to pay or repay any such amount either in euro or in sterling as such national currency unit; 20.9.2 ROUNDING: without prejudice and in addition to any method of conversion or rounding prescribed by any EMU legislation and without prejudice to the respective liabilities for indebtedness of any Obligor to the Beneficiaries and the Beneficiaries to any Obligor under or pursuant to this Agreement each reference in this Agreement to a minimum amount (or an integral multiple thereof) in sterling to be paid to or by the Agent and/or the Lenders shall be replaced by a reference to such reasonably comparable and convenient amount (or an integral multiple thereof) in euro as the Agent (after consultation with Ideal but without prejudice to its rights under this clause 20.9.2) may from time to time specify; and 20.9.3 CONSEQUENTIAL CHANGES: each provision of this Agreement shall be subject to such reasonable changes of construction as the Agent may (after consultation with Ideal but without prejudice to its rights under this clause 20.9.3)from time to time specify to be necessary or appropriate to reflect the changeover of sterling to euro. 20.10 ORDER OF DISTRIBUTION TO LENDERS If the amount received by the Agent from an Obligor (or, as the case may be, from the Security Trustee pursuant to the exercise by the Security Trustee of any rights or powers it may have pursuant to the Security Documents) on any date is less than the total sum due under this Agreement on that date, the Agent shall apply that amount in or towards payment of the following sums in the following order: 20.10.1 first, in or towards payment of any sum then due to the Agent in its capacity as such; 105 20.10.2 secondly, in or towards payment of any sum then due to the Arranger in its capacity as such; 20.10.3 thirdly, in or towards payment pro rata of any sums (other than principal of or interest on the Loans) then due to the Lenders (or any of them); 20.10.4 fourthly, in or towards payment pro rata of any interest then due; 20.10.5 fifthly, in or towards payment pro rata of any principal then due, and any such applications shall be made notwithstanding any purported appropriation to the contrary by any person. 21 SET-OFF Each Obligor authorises any other party to this Agreement at any time after an Event of Default has occurred and is continuing and without prior notice to that Obligor to apply any credit balance (whether or not then due) to which that Obligor is at any time beneficially entitled on any account at any office of that party in or towards satisfaction of any sum then due from it to that party under this Agreement and unpaid and for this purpose to purchase with the monies standing to the credit of any such account such other currencies as may be necessary to effect such application (but so that nothing in this clause 21 shall be effective to create a charge). No party shall be obliged to exercise any of its rights under this clause which shall be without prejudice to and in addition to any right of set-off, combination of accounts, lien or other right to which it is at any time otherwise entitled (whether by operation of law, contract or otherwise). 22 FEES 22.1 UNUSED LINE FEE For every month during the term of this Agreement, Ideal shall (or shall procure that another Obligor shall) pay the Agent for the account of the Lenders a fee (the "UNUSED LINE FEE") in an amount equal to 0.25% per annum, multiplied by the average daily amount by which the Total Commitments (provided that for the purposes of this Clause 22.1 and calculating the Unused Line Fee only, the Total Commitments shall be deemed to be L60,000,000 until such time as Ideal has served a notice in accordance with Clause 2.7 and the period referred to in such Clause 2.7 has expired after which time they shall be L80,000,000) exceed the sum of the sterling equivalent of (i) the average daily outstanding amount of the Revolving Loans and Swingline Loans during such month (with the outstanding amount of Revolving Loans and Swingline Loans calculated for this purpose by applying payments immediately upon receipt), (ii) the maximum contingent liability of the Issuer under each Letter of Credit and Guarantee or, if any demand is made under any Letter of Credit or Guarantee, the average daily amount outstanding under any account to which any such payment made thereunder is debited and (iii) the Invoice Discounting Facility Exposure. Such fee shall be calculated on the basis of a year of three hundred 106 sixty five (365) days and actual days elapsed, and shall be payable to the Agent on the first day of each month following the Closing Date and on the termination of this Agreement, in each case with respect to the prior month or portion thereof. 22.2 ARRANGEMENT FEE Ideal shall pay to the Arranger for its own account an arrangement fee in the amount and at the times agreed in a Fee Letter dated on or around the Closing Date from the Arranger to Ideal. 22.3 COLLATERAL MANAGEMENT FEE Ideal will pay the Agent for its own account a fee of an amount set out in a Fee Letter dated on or about the date of the Sixth Supplemental Agreement addressed by the Agent to Ideal (the "COLLATERAL MANAGEMENT FEE"). The total amount of such fee shall be deemed to have accrued due and become payable in full on the Effective Date but the Agent agrees, subject to clause 29.3 (Effect of Termination), that such fee shall be paid in equal instalments on the Effective Date and on the first day of each calendar month thereafter prior to the termination of this Agreement. Ideal will also pay to the Agent for its own account such other fees as are referred to in the Fee Letter dated on or about the date of the Sixth Supplemental Agreement in the amounts and at the times referred to in such Fee Letter. 22.4 AUDIT FEE Ideal shall pay to the Agent for its own account an audit fee of L500 per day per field examiner charge (the "AUDIT FEE") in respect of the periodic inspection of the Collateral required by the Agent in accordance with this Agreement and shall also pay on demand all out of pocket expenses incurred by the Agent in connection with any such inspection. 22.5 LETTER OF CREDIT AND GUARANTEE FEE Ideal agrees to pay (or procure that the relevant Borrower shall pay) to the Agent for account of the Issuer a fee (the "LETTER OF CREDIT AND GUARANTEE FEE") equal to 2.00% per annum of the face amount of each Letter of Credit or maximum contingent liability under each Guarantee issued by the Issuer, plus all out-of-pocket costs, fees and expenses incurred by the Issuer (other than where such fees, costs or expenses are indemnified pursuant to clause 6.11.2) in connection with the application for, issue of, or amendment to any Letter of Credit or Guarantee, such Letter of Credit and Guarantee Fee to be calculated on the basis of a year of 365 days and actual days elapsed and to be payable monthly in arrears on the first day of each month following any month in which a Letter of Credit or Guarantee was issued and/or in which a Letter of Credit or Guarantee remains outstanding and, to the extent that it has been calculated by reference to a Letter of Credit or Guarantee denominated other than in sterling, shall be satisfied by payment of the sterling equivalent of the amount so calculated. Any out-of-pocket costs, fees and expenses incurred by the Issuer in connection with the application for, issue of, or amendment to 107 any Letter of Credit or Guarantee shall be payable at the time of such application, issue or amendment. 22.6 AGENCY AND TRUSTEE FEES Ideal shall pay to the Agent and the Security Trustee each for its own account the agency fees or, as the case may be, the trustee fees specified in a Fee Letter dated on or about the date of the Sixth Supplemental Agreement from the Agent and the Security Trustee respectively to Ideal. The full amount of such fees shall be deemed to have accrued due and become payable in full on the Effective Date but the Agent and the Security Trustee each agree, subject to clause 29.3, that such fees shall be paid in equal instalments on the Effective Date and on the first day of each calendar month thereafter prior to the termination of this Agreement. 22.7 ADDITIONAL MONITORING AND ADMINISTRATION FEE Without prejudice to any other rights that the Agent, the Security Trustee or any of the Beneficiaries may have at such time under this Agreement or any other Finance Document, Ideal agrees that, upon the appointment of a receiver, administrator, administrative receiver, trustee, examiner or any other similar officer or office holder of any Obligor or of any or all of the assets of any Obligor or upon an order being made for the winding-up, liquidation or dissolution of any Obligor (the date of such event or occurrence being the "INSOLVENCY DATE"), Ideal shall become liable to pay forthwith to the Agent for its own account, an additional monitoring and administrative fee (the "ADDITIONAL MONITORING AND ADMINISTRATION FEE") in an amount equal to one per cent. (1%) of the higher of (a) the aggregate total of all Accounts then due and owing from any Account Debtor to the Borrowers (as determined by the Agent by reference to the most recent information provided to it under clause 15.2 and clause 16.4) and (b) the Total Commitments, in each case, as at the Insolvency Date. 22.8 TERMINATION FEE On the date on which the Loans are finally repaid and each Letter of Credit or Guarantee is no longer outstanding, the Borrowers shall pay to the Agent, for the account of the applicable Receivables Purchaser, a termination fee in an aggregate amount equal to the lesser of (a) L10,000,000 and (b) each IDF Portfolio Loss. 23 PRO RATA SHARING 23.1 If a Beneficiary (a "RECOVERING BENEFICIARY") receives or recovers any amount from an Obligor other than in accordance with clause 20 and applies that amount to a payment due under the Finance Documents then: 23.1.1 the Recovering Beneficiary shall, within three business days, notify details of the receipt or recovery to the Agent; 23.1.2 the Agent shall determine whether the receipt or recovery is in excess of the amount the Recovering Beneficiary would have been 108 paid had the receipt or recovery been received or made by the Agent and distributed in accordance with clause 20, without taking account of any tax which would be imposed on the Agent in relation to the receipt, recovery or distribution; and 23.1.3 the Recovering Beneficiary shall, within three business days of demand by the Agent, pay to the Agent an amount (the "SHARING PAYMENT") equal to such receipt or recovery less any amount which the Agent determines may be retained by the Recovering Beneficiary as its share of any payment to be made, in accordance with clause 20.11. 23.2 REDISTRIBUTION OF PAYMENTS The Agent shall treat the Sharing Payment as if it had been paid by the relevant Obligor and distribute it between the Beneficiaries (other than the Recovering Beneficiary) in accordance with clause 18.9. 23.3 RECOVERING BENEFICIARY'S RIGHTS 23.3.1 On a distribution by the Agent under clause 23.2 the Recovering Beneficiary will be subrogated to the rights of the Beneficiaries which have shared in the redistribution. 23.3.2 If and to the extent that the Recovering Beneficiary is not able to rely on its rights under sub-clause 23.3.1 above, the relevant Obligor shall be liable to the Recovering Beneficiary for a debt equal to the Sharing Payment which is immediately due and payable. 23.4 REVERSAL OF REDISTRIBUTION If any part of the Sharing Payment received or recovered by a Recovering Beneficiary becomes repayable and is repaid by that Recovering Beneficiary, then: 23.4.1 each Beneficiary which has received a share of the relevant Sharing Payment pursuant to clause 23.2 shall, upon request of the Agent, pay to the Agent for account of that Recovering Beneficiary an amount equal to the appropriate part of its share of the Sharing Payment (together with an amount as is necessary to reimburse that Recovering Beneficiary for its proportion of any interest on the Sharing Payment which that Recovering Beneficiary is required to pay); and 23.4.2 that Recovering Beneficiary's rights of subrogation in respect of any reimbursement shall be cancelled and the relevant Obligor will be liable to the reimbursing Beneficiary for the amount so reimbursed. 109 23.5 EXCEPTIONS 23.5.1 This clause 23 shall not apply to the extent that the Recovering Beneficiary would not, after making any payment pursuant to this clause 23, have a valid and enforceable claim against the relevant Obligor. 23.5.2 A Recovering Beneficiary is not obliged to share with any other Beneficiary any amount which the Recovering Beneficiary has received or recovered as a result of taking legal or arbitration proceedings, if: (a) it notified that other Beneficiary of the legal or arbitration proceedings; and (b) that other Beneficiary had an opportunity to participate in those legal or arbitration proceedings but did not do so as soon as reasonably practicable having received notice and did not take separate legal or arbitration proceedings. 24 COSTS, EXPENSES AND STAMP DUTIES 24.1 INITIAL AND CONTINUING COSTS AND EXPENSES Ideal shall (or shall procure that an Obligor shall), from time to time on demand of the Agent, reimburse the Agent for all costs and expenses (including, without limitation, legal fees) together with VAT thereon incurred by it in connection with the negotiation, preparation, execution and administration of each of the Finance Documents and the completion of the transactions contemplated therein and/or any amendment, variation or novation of, supplement to, or waiver or consent in respect of, any of the Finance Documents, the cost of any appraisals, inspections, verifications and audits of the Collateral or Group's operation the costs and expenses of forwarding loan proceeds, of the collection of all cheques and other items of payment, of the establishment and maintenance of any Receivables Account or other account and the costs and expenses of defending any claims made or threatened against the Agent arising out of the transactions contemplated hereby. 24.2 ENFORCEMENT COSTS AND EXPENSES Ideal shall, from time to time on demand of the Agent, reimburse the Agent, the Security Trustee and each of the Lenders for all costs and expenses (including legal fees and a reasonable estimate of the allocable cost of in-house counsel and staff) together with VAT thereon incurred in or in connection with the termination of this Agreement or the preservation and/or enforcement of any of the rights of any of the Beneficiaries under any of the Finance Documents. 24.3 STAMP DUTIES Ideal shall (or shall procure that an Obligor shall) pay all stamp, registration and other taxes to which any of the Finance Documents or any judgment given in connection with any of the Finance Documents is or at any time may be 110 subject and shall, from time to time on demand of the Agent, indemnify the Agent and any other Beneficiaries against any liabilities, costs, claims and expenses resulting from any failure to pay or any delay in paying any such tax. 24.4 PROVISIONS RELATING TO PAYMENTS All payments to be made by Ideal (or any other Obligor) under this clause 24 shall be made whether or not any Loan is made or Letter of Credit or Guarantee is issued under this Agreement. 24.5 INDEMNITY BY BANKS If Ideal fails to perform any of its obligations under this clause 24, each Lender shall (i) in the proportion borne by its Outstandings to the aggregate of the Outstandings of all the Lenders; or (ii) if there are no Outstandings, in the proportion borne by its Commitment to the Total Commitments; or (iii) if there are no Outstandings and the Total Commitments have been cancelled at such time, in the proportion borne by its Commitment to the Total Commitments immediately before they were cancelled (in each case determined, and as at such time as may be specified, by the Agent), indemnify the Agent, the Security Trustee and the other Lenders against any loss incurred by any of them as a result of such failure (save for any failure caused by the gross negligence or wilful default of any such party) and Ideal shall forthwith reimburse each Lender for any payment made by it pursuant to this clause 24.5. 25 CALCULATIONS AND EVIDENCE OF DEBT 25.1 BASIS OF CALCULATION Interest shall accrue from day to day and shall be calculated in the case of sterling on the basis of a year of 365 days (or, in the case of dollars or euros, 360 days or, in any case where market practice differs, in accordance with market practice) and the actual number of days elapsed (not counting within any Interest Period the last day of that Interest Period). If the basis of accrual of interest or any other amount expressed in this Agreement in respect of sterling shall be inconsistent with any convention or practice in the London Interbank Market for the basis of accrual of interest or any other amount in respect of euro, such expressed basis shall be replaced by such convention or practice with effect from the date (if any) of conversion of sterling into euro in accordance with EMU legislation. 25.2 FAILURE TO SUPPLY QUOTATIONS In on any occasion a Reference Bank or a Lender fails to supply the Agent with a quotation required of it under any provision of this Agreement, the rate for which such quotation was required shall be determined from those quotations which are supplied to the Agent. 111 25.3 LOAN ACCOUNTS Each Lender shall maintain in accordance with its usual practice accounts evidencing the amounts from time to time lent by and owing to it under this Agreement. 25.4 CONTROL ACCOUNT The Agent shall maintain on its books a control account or accounts in which shall be recorded (i) the amount of any Loan or unpaid sum made or arising under this Agreement and each Lender's share in such Loan or unpaid sum, (ii) the amount of all principal, interest and other sums due or to become due from each Borrower to each of the Lenders under this Agreement and each Lender's share in each such amount and (iii) the amount of any sum received or recovered by the Agent under this Agreement and each Lender's share in such amount. 25.5 LENDERS' BOOKS AND RECORDS. Each Obligor agrees that the Agent's and the Lenders' books and records showing all amounts from time to time lent by and owing to any of them under this Agreement and the transactions pursuant to this Agreement and the other Finance Documents shall be admissible in any action or proceeding arising therefrom, and shall constitute prima facie proof thereof (in the absence of manifest error), irrespective of whether any such obligations are also evidenced by any other instrument. 25.6 MONTHLY STATEMENTS The Agent will provide to Ideal a monthly statement of Loans, payments and other transactions pursuant to this Agreement. Such statement shall be deemed correct, accurate, and binding on the Obligors and as an account stated (except for reversals and reapplications of payments made as provided in clause 20.7 and corrections of errors). 25.7 CERTIFICATES A certificate by the Agent or any other Finance Party as to any sum payable by it under this Agreement or any other Finance Document shall, in the absence of manifest error, be conclusive for the purposes of this Agreement and such Finance Documents and prima facie evidence in any legal action or proceedings arising out of or in connection with this Agreement or any other Finance Documents. 25.8 VALUE ADDED TAX All consideration (including interest and fees) payable under a Finance Document by the Borrower to a Beneficiary shall be deemed to be exclusive of any VAT. If VAT is chargeable, the Borrower shall pay to the Beneficiary (in addition to and at the same time as paying the consideration) an amount equal to the amount of that VAT. Where a Finance Document requires the Borrower to reimburse a Beneficiary for any costs or expenses, the Borrower 112 shall also at the same time pay and indemnify that Finance Party against all VAT incurred by that Finance Party in respect of the costs and expenses. 26 THE AGENT, THE ARRANGER, THE SECURITY TRUSTEE AND THE LENDERS 26.1 APPOINTMENT Each Lender, the Arranger and the Security Trustee hereby appoints the Agent to act as its agent in connection with this Agreement and the Agent and each of the Lenders hereby appoints the Security Trustee to act as its trustee under and in relation to the Security Documents pursuant to this Agreement and to hold the Trust Property as trustee for the Beneficiaries on the trusts and other terms contained in the Security Documents and each Beneficiary hereby irrevocably authorises the Agent and the Security Trustee to exercise such rights, powers and discretions as are specifically delegated to the Agent or, as the case may be, the Security Trustee by the terms of this Agreement and the Security Documents together with all such rights, powers and discretions as are reasonably incidental thereto provided that the Agent may not begin any legal action or proceeding in the name of a Lender without its consent. 26.2 ROLE OF THE ARRANGER Except as specifically provided in the Finance Documents, the Arranger has no obligations of any kind to any other party under or in connection with any Finance Document. 26.3 RELATIONSHIPS The Agent in its capacity as such is agent for the Security Trustee and the Lenders and shall not in any respect be the agent of any Borrower by virtue of this Agreement. Nothing in this Agreement shall constitute the Agent or the Arranger a trustee or fiduciary for the Security Trustee, any Lender, any Borrower or any other person. 26.4 RIGHTS OF THE AGENT AND THE SECURITY TRUSTEE Each of the Agent and the Security Trustee may: 26.4.1 assume that any representation made by any Obligor in connection with any of the Finance Documents is true, that no Event of Default has occurred and that no Obligor is in breach of or default under its obligations under any of the Finance Documents, in each such case unless it has actual knowledge or actual notice to the contrary; 26.4.2 assume that the Facility Office of each Lender is that set out under its name at the end of this Agreement or, in the case of a Transferee, at the end of the Transfer Certificate to which it is a party as Transferee or, in the case of a Lender which is an assignee or other successor of another Lender or former Lender, the office notified to the Agent by the assignee or other successor on or 113 before the date it becomes a Lender or, if the Agent has been notified by any Lender of any change to its Facility Office in accordance with the terms of this Agreement, that last notified to the Agent; 26.4.3 engage and pay for the advice or services of any lawyers, accountants, surveyors or other experts whose advice or services may to it seem necessary, expedient or desirable and rely upon any advice so obtained; 26.4.4 rely as to any matters of fact which might reasonably be expected to be within the knowledge of an Obligor upon a certificate signed by or on behalf of that Obligor; 26.4.5 rely upon any communication, certificate, legal opinion or other document believed by it to be genuine; 26.4.6 refrain from exercising any right, power or discretion vested in it as agent or, as the case may be, as trustee under any of the Finance Documents unless and until instructed by the Majority Lenders as to whether or not such right, power or discretion is to be exercised and, if it is to be exercised, as to the manner in which it should be exercised and shall in all cases be fully protected when acting, or refraining from acting, in accordance with instructions from the Majority Lenders; 26.4.7 refrain from acting in accordance with any instructions of the Majority Lenders to protect or enforce the rights of any person under any of the Finance Documents until it has been indemnified (or received confirmation that it will be so indemnified) and/or secured to its satisfaction against any and all costs, losses, expenses (including legal fees) and liabilities which it will or may expend or incur in complying with such instructions; 26.4.8 retain for its benefit and without liability to account any fee or other sum receivable by it for its own account; 26.4.9 accept deposits, lend money to, provide any advisory or other services to or engage in any kind of banking or other business with any Company Group and, in each case, may do so without liability to account. 26.5 OBLIGATIONS OF THE AGENT AND THE SECURITY TRUSTEE Each of the Agent and the Security Trustee shall: 26.5.1 promptly (or otherwise in accordance with the terms hereof) advise each Lender of the contents of any notice or document received by it from any Obligor under any of the Finance Documents in its capacity as Agent or, as the case may be, Security Trustee, except that details of any such communication relating to a particular Lender shall be advised to that Lender only; 114 26.5.2 promptly notify each Lender of the occurrence of any Event of Default or any default by any Obligor in the due performance of or compliance with its obligations under any of the Finance Documents of which the Agent or, as the case may be, the Security Trustee has actual knowledge or actual notice; 26.5.3 subject to the foregoing provisions of this clause 26, (in the case of the Agent) act as agent under this Agreement or (in the case of the Security Trustee) act as trustee for the Beneficiaries in accordance with any instructions given to it by the Majority Lenders or as this Agreement may require and shall be fully protected in so doing. Unless expressly provided otherwise in a Finance Document, any instructions given by the Majority Lenders shall be binding on each of the Beneficiaries; 26.5.4 if so instructed by the Majority Lenders, refrain from exercising any right, power or discretion vested in it in its capacity as Agent (under this Agreement) or in its capacity as Security Trustee (under the Finance Documents); 26.5.5 have only those duties, obligations and responsibilities, which it is hereby acknowledged in the case of the Agent are only of a mechanical and administrative nature, expressly specified in each of the Finance Documents to which it is a party. 26.6 EXONERATION None of the Agent, the Arranger or the Security Trustee nor any of their respective personnel or agents shall be: 26.6.1 responsible for the adequacy, accuracy, completeness or reasonableness of any representation, warranty, statement, projection, assumption or information in any information memorandum or similar document prepared in connection with any proposed syndication of the Facilities, any Finance Document or any notice or other document delivered under or in connection with any Finance Document; 26.6.2 responsible for the execution, delivery, validity, legality, adequacy, enforceability or admissibility in evidence of any Finance Document or any such notice or other document; 26.6.3 obliged to enquire as to the occurrence or continuation of a Default or Event of Default or the performance or compliance by any Obligor with its obligations under any Finance Documents; 26.6.4 bound to account to any person for any sum or the profit element of any sum received by it for its own account; 26.6.5 bound to disclose to any other person any information relating to any Obligor or any Group Company, if such disclosure would or 115 might in its opinion constitute a breach of any law or regulation or be otherwise actionable at the suit of any person. 26.7 CREDIT ASSESSMENT Each Lender confirms that it has itself been, and will continue to be, solely responsible for making its own independent investigation and appraisal of the business and operations, financial condition, prospects, creditworthiness, status and affairs of each Borrower, each other Obligor and each Group Company or any other person and has not relied, and will not at any time rely, on the Agent, the Security Trustee or any other Lender: 26.7.1 to check or enquire on its behalf into the adequacy, accuracy, completeness or reasonableness of any representation, warranty, statement, projection, assumption or information provided by any Obligor or any other person under or in connection with any Finance Document or the transactions contemplated in any Relevant Agreement (whether or not such information has been or is at any time hereafter circulated to it by the Agent or the Security Trustee including any contained in any information memorandum or similar document prepared in connection with any proposed syndication of the Facilities); or 26.7.2 to assess or keep under review on its behalf the business and operations, financial condition, prospects, creditworthiness, status or affairs of any Borrower, other Obligor or Group Company or any other person. 26.8 THE AGENT AND THE SECURITY TRUSTEE AS LENDERS The Agent and the Security Trustee shall each have the same rights and powers with respect to its Commitment and Outstandings (if any) as any other Lender and may exercise those rights and powers as if it were not also acting as the Agent or, as the case may be, the Security Trustee. 26.9 INDEMNITY Each Lender agrees that it shall, from time to time on demand of the Agent and/or Security Trustee, indemnify the Agent and/or Security Trustee (to the extent not reimbursed by Ideal or any other Obligor and without prejudice to any liability of the Borrower under this Agreement) (i) in the proportion borne by its Outstandings to the aggregate of the Outstandings of all the Lenders; or (ii) if there are no Outstandings, in the proportion borne by its Commitment to the Total Commitments; or (iii) if there are no Outstandings and the Total Commitments have been cancelled at such time, in the proportion borne by its Commitment to the Total Commitments immediately before they were cancelled (in each case determined, and as at such time as may be specified, by the Agent), against all costs, claims, expenses (including legal fees) and liabilities which it may sustain or incur in connection with this Agreement or the performance of its obligations and responsibilities under this Agreement save to the extent that they are sustained or incurred by reason of the gross negligence or wilful misconduct of the Agent or the Security Trustee or any of 116 its personnel or agents and Ideal shall (or shall procure that an Obligor shall) forthwith reimburse each Lender for any payment made by it pursuant to this clause 26.9. 26.10 RESIGNATION 26.10.1 RESIGNATION: Each of the Agent and the Security Trustee may following consultation with Ideal and the Lenders resign its appointment under any of the Finance Documents at any time by giving not less than thirty days' notice in writing to that effect to each of the other parties to this Agreement provided that such resignation shall not become effective until a successor to the Agent or, as the case may be, the Security Trustee has been appointed and accepted its appointment in accordance with the following provisions of this clause 26.10 and, in the case of the Security Trustee, all necessary documents have been entered into to ensure that the benefit of the Security Documents is held by such successor. 26.10.2 APPOINTMENT OF SUCCESSOR: If the Agent or, as the case may be, the Security Trustee gives notice of its resignation the Majority Lenders may appoint a successor. If the Majority Lenders have not within sixty days after such notice of resignation appointed a successor to the Agent or, as the case may be, the Security Trustee (which shall, in either such case, be a reputable and experienced bank with an office in London) which shall have accepted such appointment, the retiring Agent or, as the case may be, Security Trustee shall have the right to appoint such a successor itself. 26.10.3 DISCHARGE: If a successor to the Agent or, as the case may be, Security Trustee is appointed under the provisions of this clause 26.10 then the retiring Agent or, as the case may be, retiring Security Trustee shall be discharged from any further obligations under the Finance Documents but shall remain entitled to the benefit of the provisions of this clause 26 and its successor and each of the other parties to this Agreement shall have the same rights and obligations amongst themselves as they would have had if such successor had been a party to this Agreement. 26.10.4 DISCLOSURE: The retiring Agent or, as the case may be, Security Trustee, shall make available to its successor such documents and records and provide such assistance as the successor may reasonably request for the purpose of performing its functions under the Finance Documents. Notwithstanding any provision in any Finance Document to the contrary, neither the Agent nor the Security Trustee shall be obliged to disclose to any person any confidential or other information if the disclosure would or might in its reasonable opinion constitute a breach of any law or fiduciary duty. 27 TRUSTEE PROVISIONS 27.1 DECLARATION OF TRUST The Security Trustee shall hold the Trust Property in trust for the benefit of the Beneficiaries on the terms and subject to the conditions set out in this Agreement and the terms of the other Finance Documents. Each Beneficiary hereby confirms its approval of the Finance Documents and any security 117 created or to be created pursuant thereto and hereby authorises, empowers and directs the Security Trustee (by itself or such person(s) as it may nominate) to execute and enforce the same as trustee (and whether or not expressly in the Beneficiaries' names) on its behalf. 27.2 PERPETUITY PERIOD The perpetuity period under the rule against perpetuities (if applicable) shall be the period of eighty years from the date of this Agreement. 27.3 SUMS RECEIVED BY THE SECURITY TRUSTEE Pending distribution under clause 27.4, the Security Trustee shall, if reasonably practicable, place any sum received, recovered or held by it in respect of the Trust Property in an interest bearing suspense account with a bank or financial institution in the name of or under the control of the Security Trustee. The interest paid on such account shall be credited to the relevant account. 27.4 APPLICATION OF SUMS RECEIVED Subject to the other provisions of this clause 27, the Security Trustee shall apply all amounts standing to the credit of any account referred to in clause 27.3 and any other amounts realised pursuant to the exercise of any rights or powers it might have pursuant to any of the Security Documents: 27.4.1 first, in the payment of any costs, charges and expenses of or incidental to the appointment of any Receiver pursuant to the Security Documents, the payment of his remuneration and the payment and discharge of any other Expenses incurred by or on behalf of the Receiver; 27.4.2 secondly, in or towards payment of any debts or claims which are by statute payable in preference to the Secured Obligations but only to the extent to which such debts or claims have such preference; 27.4.3 thirdly, in or towards payment and discharge pro rata of any Secured Obligations then due, owing or incurred to the Security Trustee, in its capacity as Security Trustee (and not in any other capacity) for its own account; and 27.4.4 fourthly, in payment to the Agent to be applied by the Agent in or towards payment and discharge of the balance of the Secured Obligations (if any) in accordance with the provisions of clause 20.10 provided that, when distributing sums in accordance with this clause 27.4, the Security Trustee will treat any contingent liability as an actual liability and distribute to the party entitled thereto accordingly. Any such party receiving sums in respect of a contingent liability shall place such sums on deposit with such bank (not being a bank entitled to exercise any right of set-off or combination or consolidation of accounts or having the benefit of 118 any encumbrance over such deposit) and on such terms as the Security Trustee may approve and, if such contingent liability shall fail to mature, shall return such sums (together with any interest earned thereon) to the Security Trustee for distribution in accordance with the terms of this clause 27.4. 27.5 SECURITY TRUSTEE'S SOLE RIGHT TO APPROPRIATE No Obligor shall have the right to appropriate any payment to, or other sum received, recovered or held by, the Security Trustee in or towards payment of any particular part of the Secured Obligations and the Security Trustee shall have the exclusive right to appropriate any such payment or other sum as provided in this clause 27. 27.6 TIMING OF DISTRIBUTION Distributions by the Security Trustee shall be made at such times as the Security Trustee in its absolute discretion determines to be as soon as is reasonably practicable, having regard to all relevant circumstances, and the Security Trustee shall have no liability whatsoever for any loss or damage which any Beneficiary might sustain as a consequence of the timing of any such distribution. 27.7 DATE FOR CALCULATION OF SECURED OBLIGATIONS For the purpose of any distribution by the Security Trustee, the Security Trustee may, by notice to the Beneficiaries, fix a date (being not earlier than the date of such notice) as at which the amount of the Secured Obligations are to be calculated. 27.8 CERTIFICATE FROM BENEFICIARY For the purposes of determining the amount of any payment to be made to any Beneficiary pursuant hereto the Security Trustee shall be entitled to call for and rely upon (and it is the intention of the parties that the Security Trustee shall rely upon) a certificate from the relevant Beneficiary of the amount and nature of any amount due, owing or incurred to the relevant Beneficiary at the date fixed by the Security Trustee for such purpose and as to such other matters as the Security Trustee may deem necessary or desirable to enable it to make a distribution. 27.9 MISTAKEN PAYMENTS If the Security Trustee makes any distribution contrary to any of the provisions of this clause 27 or any distribution made by it otherwise transpires to have been invalid or the Security Trustee and the person receiving such distribution agree that it should be refunded, the recipient shall, to the extent that no charge is thereby created, hold the proceeds of that distribution on trust to repay to the Security Trustee forthwith on demand. If the trust imposed by this clause 28.9 cannot be given effect to for whatever reason, including the possible creation thereby of a charge, the relevant recipient shall, if and when so requested by 119 the Security Trustee, pay an amount equal to the proceeds of that distribution required to be held on trust to the Security Trustee. 27.10 SUPPLEMENT TO TRUSTEE ACTS 1925 & 2000 By way of supplement to the Trustee Acts 1925 & 2000 it is expressly declared as follows: 27.10.1 EXPERTS: the Security Trustee may, in relation to the Security Documents, act or rely upon the opinion or advice of, or any information obtained from, any lawyer, valuer, surveyor, broker, auctioneer, accountant or other expert commissioned by the Security Trustee and shall not be responsible to anyone for any loss or damage occasioned by so acting or relying. Any such opinion, advice or information may be sent or obtained by letter, fax, e-mail or otherwise and the Security Trustee will not be liable to anyone for acting in good faith on any opinion, advice or information purporting to be conveyed by such means even if it contains some error or is not authentic or validly signed; 27.10.2 CERTIFICATE OF IDEAL: the Security Trustee may call for and may accept as sufficient evidence a certificate of Ideal signed by any director of Ideal to the effect that any particular dealing, transaction, step or thing is, in the opinion of such director, suitable or expedient or as to any other fact or matter upon which the Security Trustee may, in the exercise of any of its rights, powers or duties hereunder, require to be satisfied and the Security Trustee need not call for further evidence and will not be responsible to anyone for any loss or damage occasioned by acting on any such certificate; 27.10.3 INTERPRETATION OF SECURITY DOCUMENTS: the Security Trustee (as between itself and each of the Beneficiaries) shall have full power to determine in good faith all questions and doubts arising in relation to any of the provisions of the Security Documents and every such determination, whether made upon such a question actually raised or implied in the acts or proceedings of the Security Trustee, shall be conclusive and shall (save for manifest error) bind the Security Trustee and each Beneficiary; 27.10.4 TITLE: the Security Trustee shall accept without enquiry, requisition, objection or investigation such title as any Borrower (or, as the case may be, any Obligor) has to the Trust Property to the intent that the Security Trustee shall not in any way be responsible for its inability to exercise any of its rights or powers or duties hereunder or for any loss or damage thereby occasioned; 27.10.5 PERFECTION OF SECURITY: the Security Trustee shall not be liable for any failure, omission or defect in perfecting any security created or purported to be created by or pursuant to any of the Security Documents including (without prejudice to the generality of the foregoing): 120 (a) failure to obtain any licence, consent or other authority for the execution, delivery, validity, legality, adequacy, performance, enforceability or admissibility in evidence of any of the Security Documents or any other document; (b) failure to effect or procure registration of or otherwise protect any security created or purported to be created by or pursuant to any of the Security Documents or any other document by registering under any applicable registration laws in any territory, any notice, caution or other entry prescribed by or pursuant to the provisions of the said laws; (c) failure to take or require any of the Obligors to take any steps to render the security created or purported to be created by or pursuant to any of the Security Documents effective as regards any property outside England and Wales or to secure the creation of any ancillary charge under the laws of any territory concerned; or (d) failure to call for delivery of documents of title to or require transfers, legal mortgages, charges or other further assurances in relation to any of the Trust Property; 27.10.6 ACTS AND OMISSIONS: the Security Trustee shall not in fulfilling its duties and discharging its responsibilities as Security Trustee be liable or responsible for any loss or damage which may result from anything done or omitted to be done by it in accordance with the provisions of the Security Documents; 27.10.7 COMPLIANCE WITH LAWS: the Security Trustee may refrain from doing anything which would or might in its opinion be contrary to any law of any jurisdiction or any regulation or which would or might otherwise render it liable to any person and may do anything which is, in its absolute discretion, necessary to comply with any such law or regulation; 27.10.8 DEPOSIT OF SECURITY DOCUMENTS: the Security Trustee shall be at liberty to place all title deeds and other documents certifying, representing or constituting the title to any of the Trust Property for the time being in its hands in any safe deposit, safe or receptacle selected by the Security Trustee or with any bankers or banking company (including the Security Trustee or the Agent or any of the other Beneficiaries) or company whose business includes undertaking the safe custody of documents or solicitors or firm of solicitors, may pay all reasonable sums required to be paid on account of or in respect of such deposit and may make any such arrangements as it thinks fit for allowing any of the Obligors or their respective lawyers or auditors access to or possession of such title deeds and other documents when necessary or convenient and the Security Trustee shall not be responsible for any loss incurred in connection with any such deposit, access or possession; 121 27.10.9 USE OF NOMINEES: any investment of any part or all of the Trust Property may, at the discretion of the Security Trustee, be made or retained in the names of nominees; 27.10.10 DELEGATION: the Security Trustee may, whenever it thinks fit, delegate by power of attorney or otherwise to any person or persons, or fluctuating body of persons, all or any of the rights, powers, authorities and discretions vested in it by any of the Finance Documents and such delegation may be made upon such terms and subject to such conditions (including the power to sub-delegate) and subject to such regulations as it may think fit and it shall not be bound to supervise, or to be in any way responsible for any loss, liability, costs, charges or expenses incurred by reason of any misconduct or default on the part of, any such delegate or sub-delegate (other than as a result of its gross negligence or wilful misconduct); and 27.10.11 INSURANCE: without prejudice to any other provision of any of the Finance Documents, the Security Trustee shall not be under any obligation to insure any of the Trust Property or to require any other person to maintain any such insurance and shall not be responsible for any loss or damage which may be suffered by any person as a result of the lack of or inadequacy or insufficiency of any such insurance. 27.11 REGISTRATION AS JOINT PROPRIETOR Each of the Beneficiaries hereby confirms and agrees that it does not wish to be registered in accordance with Rule 146 of the Land Registration Rules 1925 as the joint proprietor of any mortgage or charge created pursuant to any Finance Document and accordingly authorises the Security Trustee to hold such mortgage or charge in its sole name as agent and trustee for the Beneficiaries and hereby requests the Land Registry to register the Security Trustee as the sole proprietor of any such mortgage or charge. 27.12 RELATIONSHIP WITH THE BENEFICIARIES The Security Trustee shall, for the purposes of the Finance Documents, be entitled to deal with each of the Beneficiaries by dealing exclusively with the Agent. 27.13 INDEMNITY PROVISIONS The Security Trustee and every attorney, agent or other person appointed by it under any of the Finance Documents may indemnify itself or himself out of the Trust Property against all claims, demands, liabilities, proceedings, costs, fees, charges, losses and expenses incurred by any of them in relation to or arising out of the taking or holding of the Trust Property, the exercise or purported exercise of the rights, trusts, powers and discretions vested in any of them or any other matter or thing done or omitted to be done in connection with any of the Finance Documents or pursuant to any law or regulation (otherwise than as a result of its gross negligence or wilful misconduct). Any 122 appointee referred to above may enjoy the benefit and enforce the terms of this clause 27.13 in accordance with the provisions of the Contracts (Rights of Third Parties) Act 1999. 27.14 APPOINTMENT OF ADDITIONAL SECURITY TRUSTEES The Security Trustee may at any time appoint any person (whether or not a trust corporation) to act either as a separate trustee or as a co-trustee jointly with it (i) if it considers such appointment to be in the interests of the Beneficiaries or (ii) for the purposes of conforming to any legal requirements, restrictions or conditions which the Security Trustee deems relevant for the purposes hereof and the Security Trustee shall give prior notice to the Obligors of any such appointment. Any person so appointed shall (subject to the provisions of the Finance Documents) have such powers, authorities and discretions and such duties and obligations as shall be conferred or imposed on such person by the instrument of appointment and shall have the same rights, powers, discretions and benefits under the Finance Documents as the Security Trustee. Save where the contrary is indicated or unless the context otherwise requires any reference in the Finance Documents to the Security Trustee shall be construed as a reference to the Security Trustee and each such separate trustee and co-trustee. The Security Trustee shall have power in like manner to remove any person so appointed. Such remuneration as the Security Trustee may pay to any person so appointed, and any costs, charges and expenses incurred by such person in performing its functions pursuant to such appointment, shall for the purposes hereof be treated as costs, charges and expenses incurred by the Security Trustee in performing its function as trustee hereunder. 28 ASSIGNMENTS AND TRANSFERS 28.1 BENEFIT OF AGREEMENT This Agreement shall be binding upon and enure to the benefit of each of the parties to it, any Transferee which becomes a party to it pursuant to a Transfer Certificate and each of their respective successors and assigns. 28.2 ASSIGNMENTS AND TRANSFERS BY AN OBLIGOR No Obligor shall be entitled to assign or transfer all or any of its rights or obligations under this Agreement. 28.3 ASSIGNMENTS AND TRANSFERS BY LENDERS 28.3.1 Any Lender may at any time with the prior consent of the Agent and after consultation with Ideal but without the prior consent of Ideal or any other party to this Agreement assign all or any of its rights under this Agreement to any bank or financial institution which is a Qualifying Lender or transfer in accordance with clause 28.4 all or any of its rights and obligations under this Agreement to any such Qualifying Lender. 28.3.2 If any Lender assigns all or any of its rights under this Agreement in accordance with clause 28.3.1 then, unless and until the assignee has agreed 123 with the Agent, the Security Trustee and the other Lenders that it shall be under the same obligations towards each of them as it would have been under if it had been a party to this Agreement, the Agent, the Security Trustee and the other Lenders shall not be obliged to recognise such assignee as having the rights against each of them which it would have had if it had been a party to this Agreement. 28.4 TRANSFER CERTIFICATE If any Lender wishes to transfer all or any of its rights and obligations under this Agreement in respect of the whole or any part of any Commitment in respect of the Revolving Facility and/or its Outstandings as contemplated in clause 28.3.1, then such transfer may be effected by the delivery to the Agent of a duly completed and duly executed Transfer Certificate but only if it relates to its Commitment and/or its Outstandings in respect of all the Facilities in which it is participating at that time. Subject to clause 28.5, the Agent shall, on receipt of such certificate, countersign it and subject to the terms of that Transfer Certificate and on the date specified in that Transfer Certificate: 28.4.1 each Obligor and the relevant Lender shall, to the extent provided in such Transfer Certificate, each be released from further obligations to each other under this Agreement and their respective rights against each other shall be cancelled (such rights and obligations being referred to in this clause 28 as "DISCHARGED RIGHTS AND OBLIGATIONS"); 28.4.2 each Obligor and the Transferee party to the relevant Transfer Certificate shall each assume obligations towards, and acquire rights from, each other which differ from the discharged rights and obligations only insofar as such Obligor and the Transferee have assumed and acquired the same in place of such Obligor and that Lender; 28.4.3 the Transferee and the other parties to this Agreement (other than the Obligor) shall acquire the same rights and assume the same obligations between themselves as they would have acquired and assumed had such Transferee been an original party to this Agreement as a Lender with the rights and obligations acquired or assumed by it as a result of such transfer (and, to that extent, the transferor Lender and such other parties shall each be released from further obligations to each other). 28.5 ACCEPTANCE AND DELIVERY OF TRANSFER CERTIFICATES The Agent shall not be obliged to accept any Transfer Certificate received by it under this Agreement on any day on or after the receipt by it of a Utilisation Notice and prior to the making of the relative Loan or issue of the relevant Letter of Credit or Guarantee. Further, the Agent shall not be obliged to accept a Transfer Certificate unless the Lender delivering that Transfer Certificate has also delivered to the Agent and the Receivables Purchaser a duly signed and dated substitution certificate (as provided for in the funding agreement to be 124 entered into between the Lenders and the Receivables Purchaser) in connection with the Invoice Discounting Agreements in form and substance satisfactory to the Agent and the Receivables Purchaser pursuant to which it agrees, amongst other things, to participate through its Facility Office in all Prepayments and other payments to be made by the Receivables Purchaser under the applicable Invoice Discounting Agreement in the proportion which its Commitment bears to the Total Commitments immediately prior to the making of such Prepayments or other payment. Subject thereto the Agent shall promptly deliver a copy of any Transfer Certificate received by it to Ideal. 28.6 RELIANCE ON TRANSFER CERTIFICATES The Agent shall be fully entitled to rely on any Transfer Certificate delivered to it in accordance with the provisions of this clause 28 which is complete and regular on its face as regards its contents and purportedly signed on behalf of the Lender and the Transferee and shall have no liability or responsibility to any party as a consequence of placing reliance on and acting in accordance with any such Transfer Certificate. 28.7 REGISTER OF ASSIGNMENTS, TRANSFERS AND FEES 28.7.1 REGISTER: The Agent shall (on behalf of the Lenders) maintain at its address for the service of notices as specified in clause 31 a register in which the Agent shall, as soon as practicable following the date of this Agreement and thereafter on each business day following receipt by it of any Transfer Certificate duly completed in accordance with the provisions of this clause 28 or any certificate signed on behalf of each Lender assigning any of its rights hereunder and the person to whom such rights are to be assigned (provided the provisions of clause 28.3 have been complied with) and in each such case incorporating the administrative details of the Transferee or assignee, record (where appropriate in place of the corresponding details relating to the transferor or assigning Lender) the names, interests and administrative details from time to time of the Lenders having rights and/or obligations under this Agreement. The Agent shall make the register available for inspection by any party to this Agreement during normal banking hours upon receipt by the Agent of reasonable prior notice to that effect. 28.7.2 FEES: On the date upon which the transfer or assignment takes effect in accordance with the terms of this Agreement and, as the case may be, any Transfer Certificate or assignment documents, the Transferee named in the Transfer Certificate or the relevant assignee shall pay to the Agent for its own account a transfer fee of L2000. 28.8 CHANGE OF FACILITY OFFICE Any Lender may at any time change its Facility Office in relation to its Commitment and/or Outstandings by notifying the Agent of the address and fax details of such new office. 125 28.9 DISCLOSURE OF INFORMATION The Agent, the Security Trustee or any Lender may (on a confidential basis) disclose to any actual or potential assignee, Transferee, sub-participant or other person who may otherwise enter into or be proposing to enter into contractual relations with the Agent, the Security Trustee or such Lender (as the case may be) in relation to this Agreement such information about any Borrower, any other Obligor or any other person as it thinks fit. 28.10 INCREASED PAYMENTS FOLLOWING ASSIGNMENT OR TRANSFER If at the time of, or immediately after, any assignment or transfer by a Lender or any change in its Facility Office, circumstances are such that any Obligor would be obliged to pay to an assignee, Transferee (or, in the case of a change of Facility Office, the relevant Lender) under clause 10 or 11 any sum in excess of the sum (if any) which it would have been obliged to pay to that Lender under the relevant clause in the absence of that assignment, transfer or change, that Obligor shall not be obliged to pay that excess. 29 TERM AND TERMINATION 29.1 EXPIRY OF AGREEMENT This Agreement shall expire on the Termination Date unless earlier terminated in accordance with the terms of this Agreement. 29.2 RIGHTS TO TERMINATE Ideal may terminate this Agreement at any time prior to the Termination Date if: 29.2.1 it gives the Agent sixty (60) days prior written notice of termination; 29.2.2 it has paid and performed in full all its obligations hereunder on or prior to the effective date of termination; and 29.2.3 it pays the Agent, on or prior to the effective date of termination, and in addition to any other prepayment premium required hereunder and any amounts required by clauses 19.1 and 19.2: (a) 0.75% of the aggregate on such date of the Maximum Revolving Credit Line, if such termination is made on or prior to the first Anniversary Date; (b) 0.5% of the aggregate on such date of the Maximum Revolving Credit Line, if such termination is after the first Anniversary Date but on or prior to the second Anniversary Date; and (c) 0.25% of the aggregate on such date of the Maximum Revolving Credit Line, if such termination is at any time 126 after the second Anniversary Date but on or prior to the date falling two months before the third Anniversary Date. PROVIDED THAT no fee shall be payable under this Clause 29.2.3 if this Agreement is terminated by the Revolving Facility being refinanced through a securitisation arranged by Bank of America, National Association. 29.3 EFFECT OF TERMINATION Upon the effective date of termination of this Agreement for any reason whatsoever, the Loans, all unpaid accrued interest or fees and any other sum then payable under this Agreement shall become immediately due and payable, the Commitment and the Available Commitment of each Lender shall be reduced to nil and each relevant Borrower shall immediately arrange for the cancellation of each Guarantee or Letter of Credit then outstanding and shall deposit with the Security Trustee with respect thereto a Supporting Letter of Credit or cash in the same manner as contemplated in clause 6.14. Notwithstanding the termination of this Agreement, until all such sums are paid and performed in full, the Agent and the Lenders shall retain all their rights and remedies hereunder and under all other Finance Documents. 30 AMENDMENTS, WAIVERS AND REMEDIES 30.1 AMENDMENTS Subject to the proviso to this clause 30.1, the Agent may if authorised by the Majority Lenders in writing (or to the extent expressly authorised by the other provisions of this Agreement or any other document entered into pursuant to this Agreement) on behalf of the Lenders amend or vary the terms of or waive breaches of or defaults under, or otherwise excuse performance of any provision of, or grant consents under, this Agreement or any such other document. Any amendment, variation, waiver, release or consent authorised under this clause 30.1 and which is effected by the Agent must be in writing and may be given subject to such conditions as the person giving it may specify and shall be binding on all the parties to this Agreement and the Agent shall be under no liability in respect thereof provided that the consent of all the Lenders in writing shall be required in respect of: 30.1.1 any increase in the Total Commitments or change in the Termination Date; 30.1.2 any extension of the date for, or alteration in the amount or currency of, any payment of principal, interest, fee or other amounts payable under this Agreement; 30.1.3 any change in the rate at which interest is payable under this Agreement; 30.1.4 the definition of "MAJORITY LENDERS"; 127 30.1.5 any release or deferment of the granting or perfecting of an encumbrance or any of the Collateral except in connection with any permitted disposal of Equipment or any disposal permitted under clause 16.3.2) or any Security Interest or any guarantee or similar undertaking provided by any person; 30.1.6 this clause 30.1. 30.2 WAIVERS No failure to exercise, nor any delay in exercising, on the part of the Agent, the Security Trustee or any Lender, any right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy prevent any further or other exercise of such right or remedy or the exercise of any other right or remedy. The rights and remedies provided in this Agreement are cumulative and not exclusive of any rights or remedies provided by law. 31 PARTIAL INVALIDITY If, at any time, any provision of the Finance Documents is or becomes illegal, invalid or unenforceable in any respect under any law of any jurisdiction: 31.1 it shall be ineffective only to that extent, without invalidating the remainder of such Finance Document(s); and 31.2 neither the legality, validity or enforceability of such provision under the law of any other jurisdiction will in any way be affected or impaired thereby. 32 NOTICES 32.1 GENERAL Any demand, notice or other communication or document to be made or delivered under or in connection with the Finance Documents shall be made or delivered by fax or otherwise in writing and shall be treated as having been served if served in accordance with clause 32.2. Each demand, notice, communication or other document to be made on or delivered to any party to the Finance Documents may (unless that other person has by 10 business days' written notice to the other specified another address or fax number) be made or delivered to that other person at its registered office or the address or fax number (if any) set out under its name at the end of this Agreement or, in the case of a Transferee, at the end of the Transfer Certificate to which it is a party as Transferee or, in the case of a Lender which is an assignee or other successor of another Lender or former Lender, as notified to the Agent by the assignee or other successor on or before the date it became a Lender. 32.2 MODE OF SERVICE Any demand, notice, communication or other document to be made or delivered from or to an Obligor shall be delivered to, by or through the Agent. 128 Subject thereto, service of any demand, notice or other communication or document to be made or delivered under the Finance Documents may be made: 32.2.1 by leaving it at the address for service referred to in clause 32.1; 32.2.2 by sending it by pre-paid first class letter (or by airmail if to or from an address outside the United Kingdom) through the post to the address for service referred to in clause 32.1; or 32.2.3 by fax to the fax number of the recipient and so that any fax shall be deemed to be in writing and, if it bears the signature of the server or its authorised representative or agent, to have been signed by or on behalf of the server. 32.3 DEEMED SERVICE 32.3.1 Any notice or other communication or document from an Obligor (or Idea on its behalf) shall be irrevocable and shall not be effective until its actual receipt by the Agent. Any other notice, demand or other communication or document shall be served or treated as served at the following times: (a) in the case of service personally or in accordance with clause 32.2.1, at the time of such service; (b) in the case of service by post, at 9.00 am on the working day next following the day on which it was posted or, in the case of service to or from an address outside the United Kingdom, at 9.00 am on the fourth day following the day on which it was posted; and (c) in the case of service by fax, if sent before 9.00 am on a working day, at 11.00 am on the same day, if sent between 9.00 am and 5.30 pm on a working day, two hours after the time of such sending or, if sent after 5.30 pm on a working day or on a day other than a working day, at 9.00 am on the next following working day. 32.3.2 For the purposes of this clause 32 the term "WORKING DAY" shall mean a day (other than a Saturday or Sunday) upon which the recipient of any demand, notice, communication or other document is normally open for business in the country of its address for service referred to in clause 32.1 and references to any time of day shall be construed as references to the time of day on such working day in that country. 32.4 PROOF OF SERVICE In proving service of any demand, notice, communication or other document served: 32.4.1 by post, it shall be sufficient to prove that such demand, notice, communication or other document was correctly addressed, full postage paid and posted; and 129 32.4.2 by fax, it shall be sufficient to prove that the fax was followed by such machine record as indicates that the entire fax was sent to the relevant number. 33 COUNTERPARTS Each Finance Document may be executed in any number of counterparts, and this has the same effect as if the signatures on the counterparts were on a single copy of the Finance Document. 34 DUTCH PARALLEL DEBT Without prejudice to the provisions of this Agreement and for the purpose of ensuring and preserving the validity and continuity of the security rights granted and to be granted by any of the Obligors under or pursuant to the Security Documents, each of the Beneficiaries hereby acknowledges and consents to BMEBV and to any other Obligor incorporated or established under the laws of the Netherlands (each, a "DUTCH OBLIGOR") that are at any time party to any Security Document, undertaking to pay to Bank of America, National Association, acting in its capacity as Security Trustee, amounts (i) equal to the amounts due from time to time by the Obligors to the Beneficiaries in respect of the Secured Obligations and (ii) due and payable at the same time as the corresponding amounts in respect of the Secured Obligations are or shall be due and payable (such payment undertaking and the obligations and liabilities resulting therefrom being, the "PARALLEL DEBT"). The Beneficiaries hereby agree that the Parallel Debt is a claim of Bank of America, National Association (in its capacity as Security Trustee) which is independent and separate from, and without prejudice to, the claims of Beneficiaries in respect of the Secured Obligations, and is not a claim which is held jointly with the Beneficiaries provided that, to the extent any amounts are paid to Bank of America, National Association under the Parallel Debt or that Bank of America, National Association otherwise receives monies in payment of the Parallel Debt, the total amount due and payable in respect of the Secured Obligations shall be decreased as if the said amounts were received directly in payment of the outstanding Secured Obligations. Bank of America, National Association, acting in its capacity as Security Trustee, hereby agrees to transfer to the Agent for the benefit of the Beneficiaries all proceeds that it receives or recovers from any Dutch Obligor in connection with any enforcement action taken under or pursuant to any Security Document. 35 LAW AND JURISDICTION 35.1 LAW This Agreement shall be governed by, and construed in accordance with, English law. 35.2 JURISDICTION 35.2.1 SUBMISSION: Each Obligor irrevocably agrees for the benefit of the other parties hereto that the courts of England shall have jurisdiction to hear and determine any suit, action or proceeding, and to settle any disputes, which may 130 arise out of or in connection with this Agreement and, for such purposes, irrevocably submits to the jurisdiction of such courts. 35.2.2 FORUM: Each Obligor irrevocably waives any objection which it might now or hereafter have to the courts referred to in clause 35.2.1 being nominated as the forum to hear and determine any suit, action or proceeding, and to settle any disputes, which may arise out of or in connection with this Agreement and agrees not to claim that any such court is not a convenient or appropriate forum. 35.2.3 SERVICE OF PROCESS: BMEH, BMEP and BMEBV each agree that the process by which any suit, action or proceeding is begun may be served on it by being delivered in connection with any suit, action or proceeding in England, to Ideal at its registered office for the time being. 35.2.4 OTHER COMPETENT JURISDICTIONS: The submission to the jurisdiction of the courts referred to in clause 35.2.1 shall not (and shall not be construed so as to) limit the right of the other parties hereto, or any of them, to take proceedings against any Obligor in any other court of competent jurisdiction nor shall the taking of proceedings in any one or more jurisdictions preclude the taking of proceedings in any other jurisdiction, whether concurrently or not. 35.2.5 CONSENT TO ENFORCEMENT: Each Obligor hereby consents generally in respect of any legal action or proceeding arising out of or in connection with this Agreement to the giving of any relief or the issue of any process in connection with such action or proceeding including, without limitation, the making, enforcement or execution against any property whatsoever (irrespective of its use or intended use) of any order or judgment which may be made or given in such action or proceeding. AS WITNESS the hands of the duly authorised representatives of the parties hereto the day and year first before written. 131 SCHEDULE 1 LENDERS AND COMMITMENTS With effect from the Effective Date:
LENDER COMMITMENT (L) ------ -------------- Bank of America, National Association 50,000,000 GE Commercial Finance Limited 12,000,000 Lloyds TSB Commercial Finance Limited 12,000,000 Enterprise Finance Europe (UK) Limited 6,000,000 TOTAL 80,000,000
132 SCHEDULE 2 CONDITIONS PRECEDENT A ORIGINAL DOCUMENTS TO BE COLLECTED BY THE AGENT 1 A certificate dated in the form appearing in Schedule 3 duly executed by each Obligor with all required enclosures. 2 The Debenture duly executed by each Obligor and all other documents to be delivered pursuant thereto and notice of the assignment of each of its Receivables Accounts and of the Policies (as therein defined) having been given to, and acknowledged by, the bank at which each such Receivables Account is to be maintained or, as appropriate, by the relevant broker or insurer with which or through whom such Policy is placed. 3 All share certificates in respect of shares held by each Obligor and charged pursuant to the Debenture together with instruments of transfer endorsed in blank as required by the terms of the Debenture. 4 Confirmation from Ideal that the terms of all contracts or arrangements under which Inventory is supplied to the Trading Companies on reservation of title terms have not been amended since completion of the review thereof by the Agent during the July/August 2002 audit. 5 Utilisation Notice in respect of the first Revolving Loan and any Swingline Loan in substantially the form set out in Schedule 4 duly executed by the relevant Borrower. 6 Policies of insurance, including credit insurance, acceptable to the Agent with the name of the Security Trustee endorsed as loss payee in respect of such policies as may be specified by the Agent and acknowledgements of assignment in satisfactory terms signed by underwriters of the insurance policies assigned by the Obligors pursuant to the Debenture. 7 In relation to each Obligor, details of each of its clearing accounts and each (if any) of its Receivables Accounts. 8 An opinion of Dutch counsel addressed to the Agent as to, among other matters, the entry into and performance by BMEP and BMEBV of the Finance Documents to which they are a party and legal, valid, binding and enforceable nature of their respective obligations thereunder. 9 The Pro-Forma Balance Sheet of BMEP. 10 The Latest Projections. 11 The Priority Agreement duly executed by the parties thereto. 12 A Warranty (in terms satisfactory to the Agent) by Ideal as to the value of the Inventory and the Accounts of the Trading Companies as at the Closing Date. 133 13 A report by Ideal showing, in relation to the Trading Companies, details of monthly ageings of accounts receivable, monthly ageings of accounts payable and details of all preferential creditors and of cash, if any, at bank as at 31 October 2002. 14 An undertaking issued by The Royal Bank of Scotland plc in favour of the Security Trustee agreeing, on the terms and conditions therein set out, to effect a daily cash sweep to the Security Trustee of all amounts standing to the credit of the account therein described. B EVIDENCE 1 Evidence as to the discharge of all indebtedness and financing facilities (other than Permitted Indebtedness) (including, without limitation, the discharge in full of the Existing Facilities) of and encumbrances (other than Permitted Encumbrances) over the assets of, any Group Company which may exist at the date of this Agreement including, without limitation, all encumbrances created by any Group Company in favour of National Westminster Bank Plc or The Royal Bank of Scotland Commercial Services Limited or any of their Affiliates other than the legal mortgage dated 31 October 2000 created by Bell Microproducts Limited over the Chessington Property in favour of the existing Chessington Mortgagee. 2 Ideal shall have paid (to the extent then payable) all fees payable on the date of this Agreement including all fees and expenses of the Agent's legal advisers in connection with any of the Finance Documents and the transactions contemplated thereby. 3 The Agent being satisfied that the ageing profile and turnover of Accounts and Inventory has not deteriorated as against their ageing profile and turnover at the time of the audit thereof by the Agent. 4 There shall have occurred no material adverse change in the business or financial condition of any Borrower, any Obligor or the Group (taken as a whole) or in the Collateral since the date of the Pro Forma Balance Sheet and the Group has met the financial performance projections contained in the Latest Projections, and the Agent has received a certificate of Ideal's chief executive officer to such effect. 5 After taking into account any Revolving Loans or Swingline Loans to be made on the Closing Date and any Letters of Credit or Guarantees issued or to be issued on the Closing Date and with all the obligations of the Borrowers being current there shall be remaining an Available Revolving Facility Amount of at least L5,000,000. 6 Evidence satisfactory to the Agent that there has been no change to the legal structure of Group since 1 June 2002 and that the Adjusted Tangible Net Worth of BMEP is not less than EUR18,467,000. 7 Evidence that Ideal has agreed to act as the agent of BMEP and BMEBV for the service of process in England. 134 SCHEDULE 3 FORM OF OBLIGOR'S CERTIFICATE From: [Obligor's name and address] To: Bank of America, National Association Business Capital, Portfolio Management 5 Canada Square London, E14 5AQ as Agent for and on behalf of the Lenders Attention: Carmen Bernardis CREDIT AGREEMENT DATED 2 DECEMBER 2002 AND MADE BETWEEN, AMONG OTHERS, IDEAL HARDWARE LIMITED AND BELL MICROPRODUCTS EUROPE EXPORT LIMITED AS ORIGINAL BORROWERS, BANK OF AMERICA, NATIONAL ASSOCIATION AS AGENT, ARRANGER, ISSUER, SWINGLINE LENDER AND SECURITY TRUSTEE AND THE LENDERS NAMED THEREIN (AS AMENDED FROM TIME TO TIME THE "CREDIT AGREEMENT"). This certificate is provided for the purposes of the Credit Agreement. Unless stated otherwise, terms defined in the Credit Agreement shall have the same meanings in this certificate. We [_____________], and [_____________], the secretary and a director respectively of the [relevant Obligor] hereby certify that: 1 The copy or copies delivered herewith: 1.1 of the memorandum and articles of association, certificate of incorporation and certificate(s) of incorporation on change of name (if any) of [relevant Obligor] marked "A"; 1.2 of a resolution of the board of directors of [relevant Obligor] approving the execution and delivery of the Finance Documents to which it is party and the performance of its obligations thereunder and authorising a named person or persons to sign such Finance Documents and any documents to be delivered by [relevant Obligor] pursuant thereto marked "B"; 1.3 marked "C", being copies of each law, decree, consent, licence, approval, registration or declaration as is, in the opinion of local counsel to the Agent, necessary to render the Finance Documents to which it is a party valid, legally binding and enforceable and to make each of them admissible in evidence in England and Wales and, if different, the [relevant Obligor's] jurisdiction of incorporation and any jurisdiction in which any of its assets may be situated and to enable [relevant Obligor] to perform its obligations under such Finance Documents; 135 1.4 [marked "D", being copies of each Environmental Licence held by [relevant Obligor];] 1.5 [marked "E", being copies of each policy of insurance maintained by each Borrower and each other [Obligor] [Group Company];]* 1.6 [marked "F" are copies of each of the Material Contracts as may be required by the Agent; and]* 1.7 [of the register of members and directors and secretary of [relevant Obligor] marked "G"], are in each such case true, complete and up to date copies of the originals. 2 The persons whose names are listed below have been authorised on behalf of the [relevant Obligor], and pursuant to the board resolution described above to execute the Finance Documents to which [relevant Obligor] is party and any documents or notices to be delivered by [relevant Obligor] pursuant thereto and the signatures set opposite their names are their true signatures:
NAME OF SIGNATORY SIGNATURE - ----------------- --------- - ------------------------- ------------------------ ------------------------- - ------------------------- ------------------------ ------------------------- - ------------------------- ------------------------ ------------------------- - ------------------------- ------------------------ -------------------------
- ------------------------------------- ---------------------------------------- Secretary Name: Date ------------------------------- -------------------- - ------------------------------------- ---------------------------------------- Director Name: Date ------------------------------- -------------------- [relevant Obligor] * Ideal's certificate only 136 SCHEDULE 4 FORM OF UTILISATION NOTICE From: [relevant Borrower] To: Bank of America, National Association Business Capital, Portfolio Management 5 Canada Square London, E14 5AQ as Agent for and on behalf of the Lenders Dear Sirs, 1 We refer to the agreement (as from time to time amended, varied, supplemented, novated or replaced, the "CREDIT AGREEMENT") dated 2 December 2002 and made between, among others, ourselves as Borrower, yourselves as the Agent, Arranger and Security Trustee and the Lenders therein referred to. Terms defined in the Credit Agreement have the same meanings in this notice. 2 We hereby give you irrevocable and unconditional notice that, pursuant to the Credit Agreement and on [date of proposed Loan/issue of Letter of Credit/issue of Guarantee], we wish to: 1.1 borrow a Swingline Loan [in the amount of L______] [in the Original Sterling Amount of L______] [in [specify agreed Foreign Currency]]; 1.2 borrow a [Reference Rate/LIBOR] Revolving Loan [in the amount of L______] [in the Original Sterling Amount of L______] [in [specify agreed Foreign Currency]] having an initial Interest Period of [__________] months; 1.3 [have a Letter of Credit issued in favour of [__________] for [L__________ /other currency amount] maturing not later than [______] and in respect of [specify details]]; 1.4 [have a Guarantee issued in favour of [__________] for [L________ /other currency amount] maturing not later than [__________] and in respect of [specify details]], [in each case] upon the terms and subject to the conditions contained in the Credit Agreement. 3 We confirm that, as at today's date, the representations set out in clauses 14.1 and 14.2 of the Credit Agreement are true and that no Default has occurred or is foreseen by us. 137 Yours faithfully, - ------------------------------------- for and on behalf of [RELEVANT BORROWER] 138 SCHEDULE 5 MANDATORY COST FORMULAE 1 The Mandatory Cost is an addition to the interest rate to compensate Lenders for the cost of compliance with (a) the requirements of the Bank of England and/or the Financial Services Authority (or, in either case, any other authority which replaces all or any of its functions) or (b) the requirements of the European Central Bank. 2 On the first day of each Interest Period (or as soon as possible thereafter) the Agent shall calculate, as a percentage rate, a rate (the "ADDITIONAL COST RATE") for each Lender, in accordance with the paragraphs set out below. The Mandatory Cost will be calculated by the Agent as a weighted average of the Lenders' Additional Cost Rates (weighted in proportion to the percentage participation of each Lender in the relevant Loan) and will be expressed as a percentage rate per annum. 3 The Additional Cost Rate for any Lender lending from a Facility Office in a participating member state will be the percentage notified by the Lender to the Agent. This percentage will be certified by that Lender in its notice to the Agent to be its reasonable determination of the cost (expressed as a percentage of that Lender's participation in all Loans made from that Facility Office) of complying with the minimum reserve requirements of the European Central Bank in respect of loans made from that Facility Office. 4 The Additional Cost Rate for any Lender lending from a Facility Office in the United Kingdom will be calculated by the Agent as follows: 1.1 in relation to a sterling Loan: AB + C (B - D)E X 0.01 ---------------------- per cent per annum 100 - (A + C) 1.2 in relation to a Loan in any currency other than sterling: E X 0.01 -------- per cent per annum 300 Where: A is the percentage of Eligible Liabilities (assuming these to be in excess of any stated minimum) which that Lender is from time to time required to maintain as an interest free cash ratio deposit with the Bank of England to comply with cash ratio requirements. B is the percentage rate of interest (excluding the Margin and the Mandatory Cost and, if the Loan is an unpaid sum, the additional rate of interest specified in clause 18.3) payable for the relevant Interest Period on the Loan. 139 C is the percentage (if any) of Eligible Liabilities which that Lender is required from time to time to maintain as interest bearing Special Deposits with the Bank of England. D is the percentage rate per annum payable by the Bank of England to the Agent on interest bearing Special Deposits. E is the rate of charge payable by that Lender to the Financial Services Authority pursuant to the Fees Regulations (but, for this purpose, ignoring any minimum fee required pursuant to the Fees Regulations) and expressed in pounds per L1,000,000 of the Fee Base of that Lender. 5 For the purposes of this Schedule: 1.1 "ELIGIBLE LIABILITIES" and "SPECIAL DEPOSITS" have the meanings given to them from time to time under or pursuant to the Bank of England Act 1998 or (as may be appropriate) by the Bank of England. 1.2 "FEES REGULATIONS" means the Banking Supervision (Fees) Regulations in force from time to time or such other law or regulation as may be in force from time to time in respect of the payment of fees for banking supervision; and 1.3 "FEE BASE" has the meaning given to it, and will be calculated in accordance with, the Fees Regulations. 6 In application of the above formulae, A, B, C and D will be included in the formulae as percentages (ie 5 per cent will be included in the formula as 5 and not as 0.05). A negative result obtained by subtracting D from B shall be taken as zero. The resulting figures shall be rounded to four decimal places. 7 Each Lender shall supply any information required by the Agent for the purpose of calculating its Additional Cost Rate. In particular, but without limitation, each Lender shall supply the following information in writing on or prior to the date on which it becomes a Lender: 1.1 its jurisdiction of incorporation and the jurisdiction of its Facility Office; and 1.2 any other information that the Agent may reasonably require for such purpose. Each Lender shall promptly notify the Agent in writing of any change to the information provided by it pursuant to this paragraph. 8 The percentages or rates of charge of each Lender for the purpose of A, C and E above shall be determined by the Agent based upon the information supplied to it pursuant to paragraph 7 above and on the assumption that, unless a Lender notifies the Agent to the contrary, each Lender's obligations in relation to cash ratio deposits, Special Deposits and the Fees Regulations are the same 140 as those of a typical bank from its jurisdiction of incorporation with a Facility Office in the same jurisdiction as its Facility Office. 9 The Agent shall have no liability to any person if such determination results in an Additional Cost Rate which over or under compensates any Lender and shall be entitled to assume that the information provided by any Lender pursuant to paragraphs 3 and 7 above is true and correct in all respects. 10 The Agent shall distribute the additional amounts received as a result of the Mandatory Cost to the Lenders on the basis of the Additional Cost Rate for each Lender based on the information provided by each Lender pursuant to paragraphs 3 and 7 above. 11 Any determination by the Agent pursuant to this Schedule is in relation to a formula, the Mandatory Cost, an Additional Cost Rate or any amount payable to a Lender shall, in the absence of manifest error, be conclusive and binding on all parties to this Agreement. 12 The Agent may from time to time, after consultation with Ideal and the Lenders, determine and notify all parties any amendments which are required to be made to this Schedule in order to comply with any change in law, regulation or any requirements form time to time imposed by the Bank of England, the Financial Services Authority or the European Central Bank (or, in any case, any other authority which replaces al or any of its functions) and any such determination shall, in the absence of manifest error, be conclusive and binding on all parties. 141 SCHEDULE 6 FORM OF TRANSFER CERTIFICATE To: Bank of America, National Association Business Capital, Portfolio Management 5 Canada Square London, E14 5AQ as Agent for the Beneficiaries TRANSFER CERTIFICATE relating to the agreement (as from time to time amended, varied, supplemented, novated or replaced, the "CREDIT AGREEMENT") dated 2 December 2002 and made between (1) IDEAL HARDWARE LIMITED and BELL MICROPRODUCTS EUROPE EXPORT LIMITED (as Original Borrowers), (2) BM EUROPE PARTNERS CV, (3) BELL MICROPRODUCTS EUROPE B.V., (4) BANK OF AMERICA NATIONAL ASSOCIATION (as Arranger, Issuer, Swingline Lender, Agent and Security Trustee) and (5) CERTAIN BANKS AND FINANCIAL INSTITUTIONS (as Lenders). Terms defined in the Agreement have the same meanings in this Transfer Certificate. 1 [Transferor] (the "LENDER") hereby confirms the accuracy of the summary of its participation in the Agreement set out in the Schedule below and requests [Transferee] (the "TRANSFEREE") to accept and procure the transfer to the Transferee of such part of such participation specified in the Schedule by counter-signing and delivering this Transfer Certificate to the Agent at its address for the service of notices specified in the Agreement. 2 The Transferee hereby requests the Agent to accept this Transfer Certificate as being delivered to the Agent pursuant to and for the purposes of clause 28.4 of the Agreement so as to take effect in accordance with the terms thereof on the business day following the date of receipt by it of this Transfer Certificate or (if later) on [specify date of transfer] subject only to the provisions of the Agreement. 3 The Transferee confirms that it has received from the Lender a copy of the Agreement together with such other documents and information as it has required in connection with this transaction and that it has not relied and will not hereafter rely on the Lender to check or enquire on its behalf into the adequacy, accuracy or completeness of any such documents or information or the reasonableness of any representation, warranty, statement, projection or assumption contained therein or into the legality, validity, effectiveness, enforceability or admissibility in evidence of any such documents or information and further agrees that it has not relied and will not hereafter rely on the Lender to assess or keep under review on its behalf the business/operations, financial condition, prospects, creditworthiness, status or affairs of any Borrower or any other Obligor. 4 The Transferee hereby undertakes with the Lender and each of the other parties to the Agreement that it will perform in accordance with their terms all 142 those obligations which by the terms of the Agreement will be assumed by it after delivery of this Transfer Certificate to the Agent and satisfaction of the conditions (if any) subject to which this Transfer Certificate is expressed to take effect. 5 The Lender makes no representation or warranty and assumes no responsibility with respect to the legality, validity, effectiveness, adequacy or enforceability of the Finance Documents or any document delivered pursuant thereto and assumes no responsibility for the financial condition of any of the Obligors or any other party to the Finance Documents or for the performance and observance by any of the Obligors or any other such party of any of its obligations under any of the Finance Documents or any document delivered pursuant thereto and any and all such conditions and warranties, whether express or implied by law or otherwise, are hereby excluded. 6 The Lender gives notice that nothing in this Transfer Certificate or in any of the Finance Documents (or any document delivered pursuant thereto) shall oblige the Lender (i) to accept a re-transfer from the Transferee of the whole or any part of its rights and obligations under the Agreement transferred pursuant to this Transfer Certificate or (ii) to support any losses directly or indirectly sustained or incurred by the Transferee by reason of the failure by any of the Obligors or any other party to the Finance Documents (or any document delivered pursuant thereto) to perform or comply with its obligations under any of the Finance Documents or any such document. The Transferee hereby acknowledges the absence of any such obligation as is referred to in (i) and (ii) above. 7 The Transferee confirms that its Facility Office and address for notices for the purposes of the Agreement are as set out in the Schedule. 8 The Transferee undertakes to pay to the Agent for its own account a transfer fee of L2,000 as provided in clause 28.7.2 of the Agreement. 9 This Transfer Certificate and the rights and obligations of the parties hereunder shall be governed by and construed in accordance with English law. AS WITNESS the hands of the authorised signatories of the parties hereto on the date appearing below. 143 THE SCHEDULE COMMITMENT PORTION TRANSFERRED LENDER'S PARTICIPATION IN LOANS REPAYMENT DATE PORTION TRANSFERRED [Lender] [Transferee] By: By: --------------------------------- ------------------------------------ Date: Date: ------------------------------- ---------------------------------- ADMINISTRATIVE DETAILS OF TRANSFEREE Facility Office: ---------------------------------------- ---------------------------------------- ---------------------------------------- Contact Name: ---------------------------------------- Account for payments: ---------------------------------------- Telephone: ---------------------------------------- Fax: ---------------------------------------- 144 SCHEDULE 7 THE DORMANT COMPANIES, THE CHARGING COMPANIES AND THE BABY BELLS PART 1 THE DORMANT COMPANIES
COMPANY COMPANY NUMBER - ------- -------------- Ideal Unisolve Limited 04002602 Bell Microproducts ApS N/A
PART 2 THE CHARGING COMPANIES
COMPANY COMPANY NUMBER - ------- -------------- Ideal Hardware Limited 03969946 Bell Microproducts Europe Export Limited 03711148 Bell Microproducts Europe BV N/A Bell Microproducts Limited 04079671 Unifund Limited 03942210 OpenPSL Holdings Limited 03591250 OpenPSL Limited 03574533 Open Computing Limited 2642536 Bell Microproducts B.V. (a company incorporated under 04041697 the laws of the Netherlands) Bell Microproducts S.a.r.l (a company incorporated 43474497500013 under the laws of France) Bell Microproducts AB (a company incorporated under SE556597-7385 the laws of Sweden) Bell Microproducts BVBA (a company incorporated under 0474128872 the laws of Belgium) Bell Microproducts S.r.l (a company 13456670150
145 incorporated under the laws of Italy) Bell Microproducts (US) Limited 5305904
PART 3 THE BABY BELLS
COMPANY COMPANY NUMBER - ------- -------------- Bell Microproducts BV 04041697 Bell Microproducts Sarl 43474497500013 Bell Microproducts GmbH HRB 40296 Bell Microproducts AB SE556597-7385 Bell Microproducts BVBA 0474128872 Bell Microproducts S.r.l. 13456670150
146 SCHEDULE 8 FORM OF ACCESSION NOTICE To: Bank of America, National Association Business Capital, Portfolio Management 5 Canada Square London, E14 5AQ as Agent for the Beneficiaries From: [Group Company] and [Ideal] Dated: ----------------- Dear Sirs CREDIT AGREEMENT DATED 2 DECEMBER 2002 AND MADE BETWEEN, AMONG OTHERS, IDEAL HARDWARE LIMITED AND BELL MICROPRODUCTS EUROPE EXPORT LIMITED (AS ORIGINAL BORROWERS), BANK OF AMERICA, NATIONAL ASSOCIATION AS (AGENT, ARRANGER, SWINGLINE LENDER, ISSUER AND SECURITY TRUSTEE) AND THE LENDERS NAMED THEREIN (AS AMENDED FROM TIME TO TIME, THE "CREDIT AGREEMENT"). 1 [Group Company] agrees to become an [Additional Borrower] [Unsecured Guarantor] and to be bound by the terms of the Credit Agreement as an [Additional Borrower] [Unsecured Guarantor] pursuant to clause 3 of the Credit Agreement. [Group Company] is a company duly incorporated under the laws of [name of relevant jurisdiction]. 2 [Group Company's] administrative details are as follows: Address: ---------------------- Fax No.: ---------------------- Attention: -------------------- 3 This letter is governed by English law. [This Accession Notice is entered into as a deed.] [Ideal] [relevant Group Company] 147 SCHEDULE 9 DOCUMENTS TO ACCOMPANY ACCESSION NOTICE OR SUPPLEMENTAL DEED 1 A copy, certified a true copy by a duly authorised officer of the proposed [Additional Borrower] [Unsecured Guarantor] [Charging Company], of the constitutive documents of such proposed [Additional Borrower] [Unsecured Guarantor] [Charging Company]. 2 A copy, certified a true copy by a duly authorised officer of the proposed [Additional Borrower] [Unsecured Guarantor] [Charging Company], of a board resolution of such proposed [Additional Borrower] [Unsecured Guarantor] [Charging Company] approving the execution and delivery of a [Accession Notice] [Supplemental Deed], the accession of such proposed [Additional Borrower] [Unsecured Guarantor] [Charging Company] to [this Agreement] [the Debenture] and the performance of its obligations under the Finance Documents and authorising a person or persons (specified by name or office) on behalf of such proposed [Additional Borrower] [Unsecured Guarantor] [Charging Company] to execute and deliver such [Accession Notice] [Supplemental Deed], any other Finance Document and any other documents to be delivered by such proposed [Additional Borrower] [Unsecured Guarantor] [Charging Company] pursuant hereto or thereto. 3 A certificate of a duly authorised officer of the proposed [Additional Borrower] [Unsecured Guarantor] [Charging Company] setting out the names and signatures of the person or persons mentioned in the resolution referred to in paragraph 2 above. 4 A certificate addressed to the Agent signed by two authorised signatories of the proposed [Additional Borrower] [Unsecured Guarantor] [Charging Company] stating that the execution by such proposed [Additional Borrower] [Unsecured Guarantor] [Charging Company] of the [Accession Notice] [Supplemental Deed] and the performance of such proposed [Additional Borrower] [Unsecured Guarantor] [Charging Company] of its obligations hereunder and thereunder are within its corporate powers, have been duly approved by all necessary corporate action and will not cause any limit or restriction on any of its powers (whether imposed by law, decree, rule, regulation, its constitutive documents or agreement or otherwise) or on the right or ability of its directors to execute such powers, to be exceeded or breached. 5 A copy of its latest audited financial statements. 6 Such legal opinion(s) of counsel to the Agent as the Agent may require, in a form satisfactory to the Agent. 7 [In connection with the acquisition of any company where such company or any of its Subsidiaries accedes as a Charging Company to the Debenture or otherwise executes a Security Document (such person thus becoming an "OBLIGOR"): 148 1.1 a certificate addressed to the Agent from the Auditors confirming in the context of section 155(2) Companies Act 1985 that: 1.1.1 in their opinion such Obligor had positive net assets as defined in section 154(2) Companies Act 1985; 1.1.2 they are not aware of anything to indicate that the decision of the directors of such Obligor not to make a provision in relation to the giving of financial assistance represented by the execution of each such Security Document to which it is a party has not been made on fair and reasonable grounds; and 1.1.3 the giving of such financial assistance by such Obligor would not cause those net assets to be reduced, 1.2 in each such case dated as at the date of the giving of such financial assistance; 1.3 a statutory declaration by all of the directors of such Obligor as required by Section 155(6) Companies Act 1985 in relation to such financial assistance, such statutory declaration to be in the prescribed form and having attached thereto the report addressed by the Auditors complying with the provisions of Section 156(4) Companies Act 1985; 1.4 a copy, certified by a duly authorised officer of such Obligor as being a true copy, of the resolution of its board of directors approving the matters and things required to be done by it pursuant to this paragraph 8 and in particular the giving of such financial assistance.]* 8 Such other documents or evidence relating to such proposed [Additional Borrower] [Unsecured Guarantor] [Charging Company] as the Agent may reasonably require. * This paragraph only applies where a company being acquired (or one or more of its Subsidiaries) is acceding to the Debenture or otherwise executing a Security Document to secure borrowings raised for its acquisition. 149 SCHEDULE 10 THE MATERIAL CONTRACTS
DESCRIPTION OF AGREEMENT DATE PARTIES - ------------------------ -------------- ----------------------- Microsoft EMEA Distribution Agreement 1 July 2002 (1) Ideal (2) Microsoft Ireland Operations Limited Microsoft OEM Distribution Agreement 1 October 2001 (1) Ideal (2) Microsoft Licensing Inc Compaq Direct Business Partner 1 March 1999 (1) Ideal Agreement with respective Compaq Commercial Terms Addendum for (2) Compaq Computer Distributors Limited Europe Authorized Distributor 1 January 2002 (1) Ideal Agreement (2) Seagate Removable Storage Solutions LLC Specialist Distributor Agreement [_] (1) Ideal (2) Fujitsu Siemens Computers Ltd Master Distribution Agreement 25 May 2000 (1) Ideal (2) International Business Machines Corporation International Distribution Agreement 3 March 2000 (1) Ideal (2) Network Associates International B.V.
150 THE ORIGINAL BORROWERS SIGNED for and on behalf of ) IDEAL HARDWARE LIMITED ) by: ) ------------------------------- Address: Fountain Court Cox Lane Chessington Surrey KT9 1SJ Fax: 020 8286 5588 Attention: Nick Lee/Helen Hancock SIGNED for and on behalf of ) BELL MICROPRODUCTS EUROPE ) EXPORT LIMITED by: ) ------------------------------- Address: Fountain Court Cox Lane Chessington Surrey KT9 1SJ Fax: 020 8286 5588 Attention: Nick Lee/Helen Hancock THE DUTCH OBLIGORS SIGNED by its Managing Partner ) for and on behalf of ) BM EUROPE PARTNERS C.V. ) Address: c/o Fountain Court Cox Lane Chessington Surrey KT9 1SJ Fax: 020 8286 5588 Attention: Nick Lee/Helen Hancock 151 SIGNED for and on behalf of ) BELL MICROPRODUCTS ) EUROPE BV ) by: ) --------------------------------- Address: c/o Fountain Court Cox Lane Chessington Surrey KT9 1SJ Fax: 020 8286 5588 Attention: Nick Lee/Helen Hancock THE AGENT SIGNED for and on behalf of ) BANK OF AMERICA, NATIONAL ) ASSOCIATION by: ) --------------------------------- Address: 5 Canada Square London, E14 5AQ Fax: 020 7174 6400 Attention: Business Capital, Portfolio Management THE ARRANGER SIGNED for and on behalf of ) BANK OF AMERICA, NATIONAL ) ASSOCIATION by: ) --------------------------------- Address: 5 Canada Square London, E14 5AQ Fax: 020 7174 6400 Attention: Business Capital, Portfolio Management 152 THE SECURITY TRUSTEE SIGNED for and on behalf of ) BANK OF AMERICA, NATIONAL ) ASSOCIATION by: ) --------------------------------- Address: 5 Canada Square London, E14 5AQ Fax: 020 7174 6400 Attention: Business Capital, Portfolio Management THE SWINGLINE LENDER SIGNED for and on behalf of ) BANK OF AMERICA, NATIONAL ) ASSOCIATION by: ) --------------------------------- Address: 5 Canada Square London, E14 5AQ Fax: 020 7174 6400 Attention: Business Capital, Portfolio Management THE ISSUER SIGNED for and on behalf of ) BANK OF AMERICA, NATIONAL ) ASSOCIATION by: ) --------------------------------- Address: 5 Canada Square London, E14 5AQ Fax: 020 7174 6400 Attention: Business Capital, Portfolio Management 153 THE LENDERS SIGNED for and on behalf of ) BANK OF AMERICA, NATIONAL ) ASSOCIATION by: ) --------------------------------- Address: 5 Canada Square London, E14 5AQ Fax: 020 7174 6400 Attention: Business Capital, Portfolio Management 154 EX-10.34 3 c03257exv10w34.txt 2005 ANNUAL INCENTIVE PROGRAM EXHIBIT 10.34 [BELL MICROPRODUCTS LOGO] BELL MICROPRODUCTS, INC. MANAGEMENT INCENTIVE PLAN DESCRIPTION YEAR 2005 The Management Incentive Plan, ("Plan), is established to provide key management personnel with a financial incentive to meet and exceed financial and strategic objectives. The following is a description of the Plan. 1. PARTICIPATION: The Compensation Committee of the Board of Directors, ("Committee"), upon the recommendation of the Chief Executive Officer, is responsible to designate participants in the Plan, approve Plan goals and establish target incentives. 2. PERFORMANCE TARGETS: Performance goals are normally established at the beginning of the year based on the Annual Operation Plan, and consist of one or more of the following: a. Earnings Per Share, Net Income, Pretax Profit (PTP) or Operating Contribution. b. Return on Equity (ROE), or Return on Working Capital (ROWC) c. Individual Objectives (MBOs) Note: ROE is derived by dividing net income for accounting period by common shareholder equity. ROWC is derived by taking business unit pretax profit and dividing it into total working capital (A/R +Inventory -- AP). 3. PAYMENT OF INCENTIVES: a. Quarterly Advance Payments At the end of each fiscal quarter following the financial audit, financial performance for the quarter will be compared to the financial plan for the quarter and participants will be paid an advance of their annual incentive based on the payment schedule shown below in paragraph 3c below, except that there shall be no advance payments for achievement above 100% of plan. Incentives will be paid after quarter end financial results are finalized, and the Committee has approved the payments. The amount of target incentive assigned to each quarter is generally based on the amount of planned corporate profit for each quarter vs. the total year, and is as follows:
Q1 04 Q2 04 Q3 04 Q4 04 --------------------------- --------- --------- ---------- ---------- Quarterly Percentage 20% 20% 25% 35% --------------------------- --------- --------- ---------- ----------
b. Year End Payments After the financial audit and close of the year, financial performance for the year will be compared to the financial plan for the year to determine the amount of incentive the participant Management Incentive Plan Description Year 2005 Page 2 earned due to financial performance. In addition, the accomplishments of the participants individual MBOs to determine the amount of incentive earned for MBO accomplishment. The total incentive earned for the year, less the amount of quarterly advances will be paid following approval of the Committee. c. Payout of incentives for profit and ROE/ROWC goals is based on the following metric.
% Of Plan Achieved % Of Incentive Earned ------------------------------ --------------------------------- <80% 0% ------------------------------ --------------------------------- 80% 25% ------------------------------ --------------------------------- 90% 50% ------------------------------ --------------------------------- 100% 100% ------------------------------ --------------------------------- >100% Same % as overachievement ------------------------------ ---------------------------------
Use straight-line interpolation between metrics for calculations below 100% achievement d. Objectives (MBOs): Objectives must be in writing and approved at the beginning of the year by the Chief Executive Officer. The written objectives must include a statement of the objective, the delivery date, and the expected result (i.e., a definition of how the accomplishment is to be measured). If there is more than one objective, each will be weighted equally, unless the objective states otherwise. For 2005, the objectives must be linked to account base growth and penetration, increasing volume for strategic partners, adding strategic suppliers, leadership, and/or Because the actions taken to accomplish most objectives will generally span several quarters, and payment of the incentive is for accomplishment of the objective, not accomplishment of individual actions steps, payout will generally be on an annual basis. However, if in the judgment of the CEO it is clear that an objective is accomplished before year-end, the incentive attributable to that objective may be paid following the quarter during which it was accomplished. 4. The target incentive for Plan participants who become participants after the start of the fiscal year will be prorated for the period of time as a participant. 5. Participants must be employees of the company on the date incentives are paid to be eligible for the quarterly or year-end MIP payments. 6. The Company, in its sole discretion has the authority to change this plan at any time, including but not limited to increasing incentive payouts above target in the event of superior performance; in the event of significant over-achievement of goals, adjusting payouts to prevent unwarranted "windfalls", and make other changes in the Plan or Plan targets that are in the best interests of the Company. 7. In the event that the company raises new equity funds during the year, thereby eliminating interest charges, the financial plan may be adjusted accordingly. 8. In the event of an acquisition or divestiture, the Committee will make a determination as to the impact on the financial plan and may modify the Plan accordingly. 9. The Company, in its sole discretion has the authority to make incentive payments in cash, restricted stock units or a combination thereof. EX-21.1 4 c03257exv21w1.txt SUBSIDIARIES . . . EXHIBIT 21.1 LIST OF SUBSIDIARIES
Name Jurisdiction of Organization - ---- ---------------------------- Bell Microproducts Canada Inc. California Bell Microproducts Canada--Tenex Data ULC Nova Scotia Forefront Graphics US Inc. Ontario Bell Microproducts--Future Tech, Inc. California Don Bell Microproducts Chile, S.A. Chile Bell Microproducts do Brasil, Ltda. Brazil Bell Microproducts Mexico Shareholder, LLC Florida Bell Microproducts Mexico S.A. de C.V. Mexico Bell Microproducts Brazil Holdings, LLC Minnesota Net Storage Computers, Ltda Brazil Rorke Data, Inc. Minnesota Bell Microproducts Europe Inc. California Bell Microproducts Europe Holding B.V. Netherlands Bell Microproducts Europe Partners C.V. Netherlands Bell Microproducts Europe B.V. Netherlands Ideal Hardware Limited United Kingdom Bell Microproducts Europe Export Limited United Kingdom Unifund Limited United Kingdom Bell Microproducts (US) Limited United Kingdom OpenPSL United Kingdom OpenPSL Limited United Kingdom Open Computing Limited United Kingdom Bell Microproducts Solutions B.V. Netherlands Bell Microproducts Solutions N.V. Belgium Bell Microproducts Solutions GmbH Germany Bell Microproducts Solutions GmbH Austria Bell Microproducts B.V. Netherlands Rorke Data Italy s.r.l. Italy Bell Microproducts SARL France Bell Microproducts GmbH Germany Bell Microproducts s.r.l. Italy Bell Microproducts AB Sweden Bell Microproducts BVBA Belgium Bell Microproducts ApS Denmark Bell Microproducts SL Spain Bell Microproducts Limited United Kingdom Total Tec Systems, Inc. New Jersey Bell Microproducts Funding Corporation Delaware
EX-23.1 5 c03257exv23w1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 BELL MICROPRODUCTS INC. CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Numbers 333-39916, 333-45554, 333-62842, 333-85226, 333-107732, 333-108146, 333-116130, 333-117555, and 333-119634), on Form S-4 (Number 333-120527) and on Form S-8 (Numbers 33-66580, 33-83398, 33-95968, 333-10837, 333-41179, 333-58053, 333-51724, 333-72642, and 333-87048) of Bell Microproducts Inc. of our report dated March 16, 2005 relating to the financial statements, financial statement schedule, management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. We also consent to the reference to us under the heading "Selected Financial Data" in this Form 10-K PricewaterhouseCoopers LLP San Jose, California March 16, 2006 EX-31.1 6 c03257exv31w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 302 EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, W. Donald Bell, Chief Executive Officer, hereby certify that: 1. I have reviewed this report on Form 10-K of Bell Microproducts Inc.; 2 Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 16, 2006 /s/ W. Donald Bell ---------------------------------------- Chief Executive Officer EX-31.2 7 c03257exv31w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 302 EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, James E. Illson, Chief Financial Officer, hereby certify that: 1. I have reviewed this report on Form 10-K of Bell Microproducts Inc.; 2 Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 16, 2006 /s/ James E. Illson ---------------------------------------- Chief Financial Officer EX-32.1 8 c03257exv32w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 906 EXHIBIT 32.1 CERTIFICATION PURSUANT SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report of Bell Microproducts Inc. (the "Company") on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission (the "Report"), I, W. Donald Bell, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. March 16, 2006 /s/ W. Donald Bell ---------------------------------------- Chief Executive Officer EX-32.2 9 c03257exv32w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 906 EXHIBIT 32.2 CERTIFICATION PURSUANT SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report of Bell Microproducts Inc. (the "Company") on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission (the "Report"), I, James E. Illson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. March 16, 2006 /s/ James E. Illson ---------------------------------------- Chief Financial Officer 75 -----END PRIVACY-ENHANCED MESSAGE-----