UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
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For the quarterly period ended September 30, 2010
or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
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For the transition period from
to
Commission file number 1-11471
Bell Industries, Inc.
(Exact name of Registrant as specified in its charter)
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California
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95- 2039211
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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8888 Keystone Crossing, Suite 1700,
Indianapolis, Indiana
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46240
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code: (317) 704-6000
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
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
þ
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act
Rule 12b-2). Yes
o
No
þ
As of the close of business on November 12, 2010, there were 433,416 outstanding shares of the
Registrants Common Stock.
BELL INDUSTRIES, INC.
SEPTEMBER 30, 2010 QUARTERLY REPORT ON FORM 10-Q
INDEX
2
PART I FINANCIAL INFORMATION
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Item 1.
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Consolidated Financial Statements
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BELL INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data) (Unaudited)
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Three months ended
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Nine months ended
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September 30,
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September 30,
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2010
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2009
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2010
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2009
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Net revenues:
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Products
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$
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32,199
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$
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27,731
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$
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69,337
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$
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61,422
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Services
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8,042
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7,153
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20,814
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19,313
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Total net revenues
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40,241
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34,884
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90,151
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80,735
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Costs and expenses:
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Cost of products sold
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26,897
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23,009
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56,782
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50,183
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Cost of services provided
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5,249
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5,231
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14,744
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14,049
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Selling, general and administrative expenses
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5,985
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5,610
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16,825
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16,635
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Gain on sale of assets
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(9
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)
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(25
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Operating income (loss)
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2,119
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1,034
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1,825
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(132
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Interest expense
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309
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306
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862
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804
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Income
(loss) from operations before income taxes
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1,810
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728
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963
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(936
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Income tax provision (benefit)
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47
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(4
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47
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(11
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Net income (loss)
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$
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1,763
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$
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732
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$
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916
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$
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(925
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Share and per share data
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Basic:
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Net income (loss)
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$
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4.07
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$
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1.69
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$
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2.12
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$
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(2.14
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Weighted average common shares outstanding
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433
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433
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433
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433
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Diluted:
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Net income (loss)
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$
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0.51
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$
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0.24
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$
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0.27
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$
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(2.14
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Weighted average common shares outstanding
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3,455
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3,337
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3,396
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433
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See Accompanying Notes to Consolidated Condensed Financial Statements.
3
BELL INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
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September 30,
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December 31,
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2010
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2009
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(unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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792
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$
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2,608
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Accounts receivable, less allowance for doubtful accounts of $449
and $804, respectively
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18,143
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9,210
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Inventories, net
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7,185
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8,012
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Note receivable
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300
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Prepaid expenses and other current assets
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1,528
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846
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Total current assets
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27,648
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20,976
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Fixed assets, net of accumulated depreciation of $11,511 and
$11,430,
respectively
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700
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802
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Other assets
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758
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775
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Total assets
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$
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29,106
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$
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22,553
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LIABILITIES AND SHAREHOLDERS DEFICIT
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Current liabilities:
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Revolving credit facility
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$
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5,466
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$
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Accounts payable
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6,117
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5,382
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Accrued payroll
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1,901
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1,882
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Other accrued liabilities
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1,723
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2,440
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Total current liabilities
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15,207
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9,704
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Convertible note
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11,721
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11,345
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Other long-term liabilities
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3,323
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3,592
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Total liabilities
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30,251
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24,641
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Commitments and contingencies
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Shareholders deficit:
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Preferred stock:
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Authorized -
1,000,000 shares, outstanding - none
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Common stock:
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Authorized - 10,000,000 shares, outstanding - 433,416 shares
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35,592
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35,569
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Accumulated deficit
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(36,737
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(37,657
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Total shareholders deficit
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(1,145
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(2,088
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Total liabilities and shareholders deficit
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$
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29,106
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$
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22,553
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See Accompanying Notes to Consolidated Condensed Financial Statements.
4
BELL INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
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Nine months ended
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September 30,
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2010
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2009
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Cash flows from operating activities:
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Net income (loss)
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$
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916
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$
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(925
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Adjustments to reconcile net income (loss) to net cash used in operating activities for
continuing operations:
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Depreciation and amortization expense
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440
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686
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Gain on sale of assets
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(25
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Non-cash interest expense
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515
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590
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Stock-based compensation expense
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6
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37
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Provision for losses on accounts receivable, net
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(23
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124
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Provision for losses on inventories
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(77
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Changes in assets and liabilities:
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Accounts receivable
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(8,878
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(3,967
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Inventories
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904
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1,753
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Accounts payable
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541
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(1,419
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Accrued payroll
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20
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724
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Accrued liabilities and other
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(1,308
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(1,177
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Net cash used in operating activities for continuing operations
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(6,969
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(3,574
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Net cash used in operating activities for discontinued operations
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(253
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(159
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Net cash used in operating activities
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(7,222
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(3,733
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Cash flows from investing activities:
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Purchases of fixed assets and other
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(236
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(95
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Net cash used in investing activities for continuing operations
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(236
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)
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(95
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Net cash provided by investing activities for discontinued operations
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300
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3,093
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Net cash provided by investing activities
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64
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2,998
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Cash flows from financing activities:
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Net borrowings under revolving credit facility
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5,466
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Debt acquisition costs
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(113
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(176
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Net payments of floor plan payables
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(291
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)
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Principal payments on capital leases
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(11
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(98
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Net cash provided by financing activities for continuing operations
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5,342
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(565
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Net decrease in cash and cash equivalents
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(1,816
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(1,300
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Cash and cash equivalents at beginning of period
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2,608
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3,233
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Cash and cash equivalents at end of period
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$
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792
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$
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1,933
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See Accompanying Notes to Consolidated Condensed Financial Statements.
5
BELL INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 General
The accompanying consolidated condensed financial statements of Bell Industries, Inc. (the
Company) have been prepared in accordance with generally accepted accounting principles (GAAP)
and with the instructions to Form 10-Q and Article 8 of Regulation S-X. These financial statements
have not been audited by an independent registered public accounting firm, but include all
adjustments (consisting of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the consolidated financial condition, results of operations
and cash flows for such periods. However, these results are not necessarily indicative of results
for any other interim period or for the full year. The accompanying consolidated condensed balance
sheet as of December 31, 2009 has been derived from audited financial statements, but does not
include all disclosures required by GAAP.
Certain information and footnote disclosure normally included in financial statements prepared
in accordance with GAAP have been omitted pursuant to guidelines of the Securities and Exchange
Commission. Management believes that the disclosures included in the accompanying interim financial
statements and footnotes are adequate for a fair presentation, but the disclosures contained herein
should be read in conjunction with the consolidated financial statements and notes thereto included
in the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
Note 2 Acquisition and Sale of SkyTel Division
The Company had a division, SkyTel Corp., that provided wireless data and messaging services.
The Company no longer has any significant involvement with, and no longer generates cash flows
from, SkyTel Corp. operations. Therefore, the SkyTel division was reflected as discontinued
operations in the Consolidated Condensed Statements of Cash Flows for the nine months ended
September 30, 2010 and 2009 for some residual transactions.
Note 3 Fair Value of Financial Instruments
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic
820, Fair Value Measurements and Disclosures (ASC 820) establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. ASC 820 establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three
levels as follows:
Level 1
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Quoted prices (unadjusted) in active markets for identical
assets or liabilities that the Company has the ability to access
as of the measurement date. Financial assets and liabilities
utilizing Level 1 inputs include active exchange-traded
securities and exchange-based derivatives.
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Level 2
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Inputs other than quoted prices included within Level 1 that are
directly observable for the asset or liability or indirectly
observable through corroboration with observable market data.
Financial assets and liabilities utilizing Level 2 inputs
include fixed income securities, non-exchange-based derivatives,
mutual funds, and fair-value hedges.
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Level 3
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Unobservable inputs for the asset or liability only used when
there is little, if any, market activity for the asset or
liability at the measurement date. Financial assets and
liabilities utilizing Level 3 inputs include
infrequently-traded, non-exchange-based derivatives and
commingled investment funds, and are measured using present
value pricing models.
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In accordance with ASC 820, the Company determines the level in the fair value hierarchy
within which each fair value measurement falls, based on the lowest level input that is significant
to the fair value measurement in its entirety.
6
The following table presents the Companys financial asset (note receivable) and non-financial
liability (environmental liability, see Note 10) that are measured and recorded at fair value on
the Companys Consolidated Condensed Balance Sheets on a recurring basis and their level within the
fair value hierarchy during the nine months ended September 30, 2010:
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Fair Value Measurement Using Significant
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Unobservable Inputs (Level 3)
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Environmental
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(In thousands)
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Note Receivable
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Liability
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Fair Value at December 31, 2009
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$
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300
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$
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2,449
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Total realized gains or losses
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Changes in net asset or liability resulting from collections
or settlements
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(300
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)
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(280
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Transfers in and/or out of Level 3
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Fair Value at September 30, 2010
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$
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$
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2,169
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Gains and losses resulting from changes in the fair value of the liability for environmental
matters are reflected in the period realized in earnings and are reported in selling, general and
administrative expenses.
The carrying amounts for cash and cash equivalents, accounts receivable, inventories, prepaid
expenses and other assets, accounts payable, and other accruals approximate their fair values
because of their nature and respective duration. The fair value of the revolving credit facility
(see Note 5) is equal to its carrying value due to the variable nature of its interest rate. The
fair value of the Companys convertible note (see Note 5) is based on its book value since the note
is not publicly traded and it is not practicable to measure its fair value.
Note 4 Shipping and Handling Costs
Shipping and handling costs, consisting primarily of freight paid to carriers, Company-owned
delivery vehicle expenses and payroll related costs incurred in connection with storing, moving,
preparing, and delivering products totaled approximately $1.1 million and $0.9 million during the
three months ended September 30, 2010 and 2009, respectively and approximately $2.8 million and
$2.3 million during the nine months ended September 30, 2010 and 2009 respectively. These costs are
included within selling, general and administrative expenses in the Consolidated Condensed
Statements of Operations.
Note 5 Debt and Financing Obligations
The Company has the following debt and financing obligations:
Revolving Credit Facility
The Company entered into a credit agreement (the Credit Agreement) with Wells Fargo
Foothill, N.A. (now known as Wells Fargo Capital Finance, Inc. (WFCF), as administrative agent,
pursuant to which WFCF provided the Company with a revolving line of credit with a maximum credit
amount of $10 million (the Revolving Credit Facility). Advances under the Revolving Credit
Facility (the Advances) will be available to the Company, subject to restrictions based on the
borrowing base (as such term is defined in the Credit Agreement). The Advances may be used to
finance ongoing working capital, capital expenditures and general corporate needs of the Company.
Advances made under the Credit Agreement bear interest, in the case of base rate loans, at a rate
equal to the base rate, which is the greater of 3.5% or the rate of interest per annum announced
from time to time by WFCF as its prime rate in effect at its principal office in San Francisco,
California, plus a margin. In the case of LIBOR rate loans, amounts borrowed bear interest at a
rate equal to the greater of 3.0% or the LIBOR Rate (as defined in the Credit Agreement) plus a
margin. The Advances made under the Credit Agreement are repayable in full on March 31, 2011. The
Company may prepay the Advances (unless in connection with the prepayment in full of all of the
outstanding Advances) at any time without premium or penalty. If the Company prepays all of the
outstanding Advances and terminates all commitments under the Credit Agreement, the Company is
obligated to pay a prepayment premium as set forth in the Credit Agreement. The Credit Agreement
includes certain covenants related to profitability and capital expenditures. As of September 30,
2010, the Company is in compliance with all covenants of the Credit Agreement. In connection with
the Credit Agreement, the Company entered into a security agreement with WFCF, pursuant to which
the Company granted WFCF a security interest in and a lien against certain assets of the Company.
As of September 30, 2010, there was approximately $5.5 million outstanding under the Revolving
Credit Facility.
On February 11, 2010, the Company entered into Amendment Number Seven to the Credit Agreement
(the Seventh Amendment) with WFCF. The Seventh Amendment extended the expiration date on the
Revolving Credit Facility to March 31, 2011, revised the financial profitability and capital
expenditure covenants for the year ended December 31, 2010, and increased the total size of the
Revolving Credit Facility from $10.0 million to $12.5 million during the period from July 15, 2010
to and including September 14, 2010.
7
Convertible Note
On January 31, 2007, the Company entered into a purchase agreement with Newcastle Partners,
L.P. (Newcastle) pursuant to which the Company issued and sold in a private placement to
Newcastle a convertible subordinated payment-in-kind promissory note (the Convertible Note) in
the principal amount of $10.0 million. Through June 13, 2008, the outstanding principal balance and
accrued but unpaid interest on the Convertible Note was convertible at any time by Newcastle into
shares of common stock of the Company at a conversion price of $76.20 per share, subject to
adjustment. The Convertible Note accrued interest at 8%, subject to adjustment in certain
circumstances, which interest accreted as principal on the Convertible Note as of each quarterly
interest payment date beginning March 31, 2007. The Company also had the option (subject to the
consent of WFCF) to pay interest on the outstanding principal balance of the Convertible Note in
cash at a higher interest rate following the first anniversary if the weighted average market price
of the Companys common stock was greater than 200% of the conversion price ($152.40 per share).
The Convertible Note matures on January 31, 2017. In connection with the purchase of the
Convertible Note, the Company and Newcastle also entered into a registration rights agreement
pursuant to which Newcastle was granted demand and piggyback registration rights in respect of
shares of common stock that may be issued under the Convertible Note. In March 2007, the Company
granted Newcastle a second priority lien on certain assets of the Company in order to secure the
obligations under the Convertible Note.
As this debt was convertible at the option of Newcastle at a beneficial conversion rate of
$76.20 per share (closing market price of the Companys common stock as of January 31, 2007 was
$89.80 per share), the embedded beneficial conversion feature was recorded as a debt discount with
the credit charged to shareholders deficit, net of tax, and amortized using the effective interest
method over the life of the debt in accordance with ASC Topic 470-20-25, Debt with Conversion and
Other Options (ASC 470-20-25).
On June 13, 2008, the Company and Newcastle entered into the Second Amended and Restated
Convertible Promissory Note (the Amended Convertible Note) with a principal amount of $11.1
million (which represented the original $10.0 million note plus payment-in-kind interest accreted
as additional principal and accrued interest through June 13, 2008). The Amended Convertible Note
reflects a reduction in the conversion price from $76.20 per share down to $4.00 per share (subject
to adjustment) and a reduction in the interest rate from 8% to 4% per annum. On or after January
31, 2010, the Company has the right to prepay the Amended Convertible Note at an amount equal to
105% of the outstanding principal so long as a weighted average market price of the Companys
common stock is greater than 200% of the conversion price ($8.00 per share). As a result of the
amendment, the remaining balance of the beneficial conversion feature related to the original
Convertible Note issued on January 31, 2007, net of income taxes, was written off resulting in a
loss on extinguishment of debt of approximately $1.1 million during the three months ended June 30,
2008. As the Amended Convertible Note is convertible at the option of Newcastle at a beneficial
conversion rate of $4.00 per share (closing market price of the Companys common stock as of June
13, 2008 was $4.20 per share), the embedded beneficial conversion feature was recorded as a debt
discount with the credit charged to shareholders deficit, net of tax, and amortized using the
effective interest method over the life of the debt in accordance with ASC 470-20-25.
On February 11, 2010, the Company entered into Amendment Number Two to the Amended Convertible
Note (the Second Amendment to Note). The Second Amendment to Note revised the financial
profitability covenants for each of the quarters during the year ended December 31, 2010 and
increased the limitation on the indebtedness covenant to $13.0 million.
A summary of the Amended Convertible Note activity for the nine months ended September 30,
2010 is as follows (in thousands):
|
|
|
|
|
Convertible note at December 31, 2009
|
|
$
|
11,345
|
|
Beneficial conversion feature
|
|
|
(21
|
)
|
Accretion of beneficial conversion feature
|
|
|
39
|
|
Accrued interest
|
|
|
358
|
|
|
|
|
|
Convertible note at September 30, 2010
|
|
$
|
11,721
|
|
|
|
|
|
Total interest expense recorded on the Convertible Note and the Amended Convertible Note,
including accretion of the beneficial conversion feature, totaled $133,000 and $132,000 during the
three months ended September 30, 2010 and 2009, respectively and $397,000 and $394,000 during the
nine months ended September 30, 2010 and 2009, respectively.
Capital Lease
Previously, the Company entered into capital leases related to technology systems and
vehicles, which were recorded as fixed assets in the Companys Consolidated Condensed Balance
Sheets. At September 30, 2010 and December 31, 2009, the leases were recorded in the Companys
Consolidated Condensed Balance Sheets at approximately $263,000, which includes the present value
of interest payments.
8
Note 6 Stock-Based Compensation
The Companys 2007 Stock Option Plan (the 2007 Plan) provides for the issuance of common
stock to be available for purchase by employees, consultants and non-employee directors of the
Company. Under the 2007 Plan, incentive and nonqualified stock options, stock appreciation rights
and restricted stock may be granted. Options outstanding have terms of between five and ten years,
vest over a period of up to four years and may be issued at a price equal to or greater than the
fair value of the shares on the date of grant.
The Company utilizes the Black-Scholes valuation model in determining the fair value of
stock-based grants. The resulting compensation expense is recognized over the requisite service
period, which is generally the option vesting term of up to four years. The Company recognized
stock-based compensation expense of $1,000 and $13,000 for the three months ended September 30,
2010 and 2009, respectively and expense of $6,000 and $37,000 for the nine months ended September
30, 2010 and 2009, respectively.
The following summarizes stock option share activity during the nine months ended September
30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Stock Option
|
|
|
Weighted Average
|
|
|
Contractual Term
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(in years)
|
|
|
Intrinsic Value
|
|
Outstanding at
December 31, 2009
|
|
|
22,500
|
|
|
$
|
91.73
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(7,250
|
)
|
|
|
88.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
September 30, 2010
|
|
|
15,250
|
|
|
$
|
93.27
|
|
|
|
2.1
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
September 30, 2010
|
|
|
15,100
|
|
|
$
|
86.42
|
|
|
|
2.1
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes non-vested stock options as of December 31, 2009 and changes
during the nine months ended September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Stock Option
|
|
|
Grant Date Fair
|
|
|
|
Shares
|
|
|
Value
|
|
Non-vested at December 31, 2009
|
|
|
3,850
|
|
|
$
|
23.00
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(2,450
|
)
|
|
|
20.03
|
|
Canceled or expired
|
|
|
(1,250
|
)
|
|
|
28.71
|
|
|
|
|
|
|
|
|
Non-vested at September 30, 2010
|
|
|
150
|
|
|
$
|
24.12
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the intrinsic value (the
difference between the Company closing stock price on September 30, 2010 and the exercise price,
multiplied by the number of in-the-money options) that would have been received by the option
holders had all option holders exercised their options on September 30, 2010. No stock options were
exercised during the nine months ended September 30, 2010. The total fair value of options vesting
during the nine months ended September 30, 2010 was approximately $49,000. As of September 30,
2010, total unrecognized stock-based compensation expense related to non-vested stock options was
approximately $1,000, which is expected to be recognized over a weighted average period of
approximately 0.2 years. As of September 30, 2010, there were 42,500 shares of common stock
available for issuance of future stock option grants under the 2007 Plan.
Under the Bell Industries Employees Stock Purchase Plan (the ESPP), 37,500 shares were
authorized for issuance to Company employees. Eligible employees may purchase Company stock at 85%
of market value through the ESPP at various
offering times during the year. During the third quarter of 2002, the Company suspended the
ESPP. At September 30, 2010, 20,973 shares were available for future issuance under the ESPP.
9
Note 7 Per Share Data
Basic earnings per share data are based upon the weighted average number of common shares
outstanding. Diluted earnings per share data are based upon the weighted average number of common
shares outstanding plus the number of common shares potentially issuable for dilutive securities
such as stock options and convertible debt. The weighted average number of common shares
outstanding for the three and nine months ended September 30, 2010 and 2009 is set forth in the
following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Basic weighted average shares outstanding
|
|
|
433
|
|
|
|
433
|
|
|
|
433
|
|
|
|
433
|
|
Potentially dilutive stock options and convertible debt
|
|
|
3,021
|
|
|
|
2,903
|
|
|
|
2,962
|
|
|
|
2,846
|
|
Anti-dilutive due to net loss in period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
3,455
|
|
|
|
3,337
|
|
|
|
3,396
|
|
|
|
433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of stock option shares not included in the table above because the impact would
have been anti-dilutive based on the exercise price totaled 15,250 and 22,500 for the three months
ended September 30, 2010 and 2009, respectively and 15,250 and 22,667 for the nine months ended
September 30, 2010 and 2009, respectively. The calculation of fully diluted earnings per share
includes the add back of $73,000 and $70,000 of interest expense related to the amended convertible
note during the three months ended September 30, 2010 and 2009, respectively.
Note 8 Income Taxes
The provision for income taxes for the three and nine months ended September 30, 2010 was
$47,000. The benefit from income taxes for the three and nine months ended September 30, 2009 was
$4,000 and $11,000, respectively. The tax provisions and benefits relate to state income taxes. As
of September 30, 2010 and 2009, the Company had no unrecognized tax benefits.
As of September 30, 2010, the Company continues to record a full valuation allowance against
net deferred tax asset balances. Tax years 2005 through 2009 remain open to examination by the
major taxing jurisdictions where the Company is subject to income tax.
Note 9 Shareholders Deficit
The changes to shareholders deficit during the nine months ended September 30, 2010 are as
follows (in thousands):
|
|
|
|
|
Shareholders deficit at December 31, 2009
|
|
$
|
(2,088
|
)
|
Net income
|
|
|
916
|
|
Stock based compensation
|
|
|
6
|
|
Beneficial conversion feature, net of tax
|
|
|
21
|
|
|
|
|
|
Shareholders deficit at September 30, 2010
|
|
$
|
(1,145
|
)
|
|
|
|
|
Note 10 Environmental Matters
Reserves for environmental matters primarily relate to the cost of monitoring and remediation
efforts, which commenced in 1993, at the site of a former leased facility of the Companys
Electronic Systems Division (ESD). The ESD operation was closed in late 1992. The project
involves a water table contamination remediation process, including monitoring and extraction
wells. The Company has fully cooperated with the California Regional Water Quality Control Board
(CRWQCB) to remediate groundwater contamination at the site. At this time, there are no
sanctions against the Company and one administrative order was received on March 29, 2010. The
order from the CRWQCB is for preparation of a plan for the installation of two additional
exploratory wells, and the Company has agreed on an initial work plan with the CRWQCB regarding the
order. The Company also has filed a
petition to reverse the order on the basis that our current network of wells are sufficient
for the remediation of any ground water table contamination the site for which Bell may arguably be
responsible.
At September 30, 2010 and December 31, 2009, estimated future remediation and related costs
for this matter totaled approximately $2.2 million and $2.5 million, respectively. At September 30,
2010, approximately $256,000 (estimated current portion) was included in accrued liabilities and
$1.9 million (estimated non-current portion) was included in other long term liabilities in the
Companys Consolidated Condensed Balance Sheets.
10
Note 11 Royalty Commitment
In August 2009, the Company entered into a license and distribution agreement with the
developer of a technology product that provides the Company with exclusive distribution rights to
such product in the United States. As part of this agreement, the Company will make royalty
payments based upon the revenue and profitability of the products sold and is committed to make
minimum monthly and annual royalty payments which can be applied against royalties due from future
product sales. The minimum annual royalty in the first year of the agreement is $378,000, which may
be reduced or eliminated under certain circumstances. As of September 30, 2010, the Company had no
prepaid royalty balance recorded on its balance sheet. The prepaid royalty balance recorded on the
balance sheet at September 30, 2009 was $126,000. The Company has the right to terminate the
agreement with one year advance notice. The developer of this technology has not performed certain
of its obligations under the agreement, therefore, royalty payments have been suspended since the
second quarter of 2010.
Note 12 Litigation
On June 29, 2009, the Company was named as a defendant in a civil complaint filed by Eon Corp.
IP Holdings, LLC in the United States District Court for the Eastern District of Texas. The suit
alleges that the Company, along with several other providers of paging, messaging, and/or telemetry
services, infringed upon certain patents during its ownership of Skytel. The Company believes that
the complaint against the Company is without merit and continues to defend its position. However,
if the Company receives an unfavorable outcome at trial, it could result in a liability that has a
material adverse effect on the Companys results of operations and financial position.
The Company is involved in certain other legal proceedings that are incidental to its current
and discontinued businesses. While the ultimate liability pursuant to these actions cannot
currently be determined, the Company believes that the resolution of these actions will not have a
material adverse effect on the Companys results of operations, cash flows or financial position.
Note 13 Business Segment Information
As of September 30, 2010, the Company operates two reportable business segments: Bell
Techlogix, a provider of integrated technology product and service solutions, and the Recreational
Products Group, a wholesale distributor of aftermarket parts and accessories for recreational
vehicles, boats, snowmobiles, motorcycles and ATVs. The Company also separately records expenses
related to the holding company that owns, and provides limited support to, the operating
businesses, which is referred to as Corporate in the Business Segment Results. The operating
businesses generally operate independent of each other. The Companys former segment, SkyTel, has
been reflected as a discontinued operation and, therefore, is not presented. Each operating segment
offers unique products and services and has separate management.
11
The following summarizes financial information for the Companys reportable segments (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bell Techlogix
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
21,354
|
|
|
$
|
17,532
|
|
|
$
|
37,403
|
|
|
$
|
32,868
|
|
Services
|
|
|
8,042
|
|
|
|
7,153
|
|
|
|
20,814
|
|
|
|
19,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Bell Techlogix
|
|
|
29,396
|
|
|
|
24,685
|
|
|
|
58,217
|
|
|
|
52,181
|
|
Recreational Products Group
|
|
|
10,845
|
|
|
|
10,199
|
|
|
|
31,934
|
|
|
|
28,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
40,241
|
|
|
$
|
34,884
|
|
|
$
|
90,151
|
|
|
$
|
80,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bell Techlogix
|
|
$
|
2,214
|
|
|
$
|
1,284
|
|
|
$
|
2,274
|
|
|
$
|
1,133
|
|
Recreational Product Group
|
|
|
683
|
|
|
|
615
|
|
|
|
1,947
|
|
|
|
1,445
|
|
Corporate
|
|
|
(787
|
)
|
|
|
(865
|
)
|
|
|
(2,421
|
)
|
|
|
(2,710
|
)
|
Gain on sale of assets
|
|
|
9
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
2,119
|
|
|
|
1,034
|
|
|
|
1,825
|
|
|
|
(132
|
)
|
Interest expense, net
|
|
|
309
|
|
|
|
306
|
|
|
|
862
|
|
|
|
804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
before income taxes
|
|
$
|
1,810
|
|
|
$
|
728
|
|
|
$
|
963
|
|
|
$
|
(936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bell Techlogix
|
|
$
|
78
|
|
|
$
|
145
|
|
|
$
|
269
|
|
|
$
|
470
|
|
Recreational Products Group
|
|
|
18
|
|
|
|
25
|
|
|
|
60
|
|
|
|
77
|
|
Corporate
|
|
|
35
|
|
|
|
42
|
|
|
|
111
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
131
|
|
|
$
|
212
|
|
|
$
|
440
|
|
|
$
|
686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bell Techlogix
|
|
$
|
165
|
|
|
$
|
9
|
|
|
$
|
208
|
|
|
$
|
42
|
|
Recreational Products Group
|
|
|
12
|
|
|
|
21
|
|
|
|
49
|
|
|
|
37
|
|
Corporate
|
|
|
1
|
|
|
|
6
|
|
|
|
4
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
178
|
|
|
$
|
36
|
|
|
$
|
261
|
|
|
$
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Bell Techlogix
|
|
$
|
16,024
|
|
|
$
|
8,023
|
|
Recreational Products Group
|
|
|
10,482
|
|
|
|
9,825
|
|
Corporate
|
|
|
2,595
|
|
|
|
4,385
|
|
Discontinued operations
|
|
|
5
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
$
|
29,106
|
|
|
$
|
22,553
|
|
|
|
|
|
|
|
|
Note 14 Related Party Transactions
Newcastle is a private investment firm and one of the Companys largest shareholders. Mr. Mark
E. Schwarz, the Chairman of the Companys Board of Directors, serves as the General Partner of
Newcastle, through an entity controlled by him. Mr. Clinton J. Coleman, a Vice President of
Newcastle and a member of the Companys Board of Directors, became the Companys Chief Executive
Officer in January 2010 prior to which he served as Interim Chief Executive Officer of the Company
since July 2007.
Under the supervision of the Companys Board of Directors (other than Mr. Schwarz and Mr.
Coleman), members of management, with the assistance of counsel, negotiated the terms of
Newcastles Convertible Note and Amended Convertible Note directly with representatives of
Newcastle (see Note 5). After final negotiations concluded, the Companys Board of Directors,
excluding Mr. Schwarz and Mr. Coleman, approved the Newcastle transactions. Mr. Schwarz and Mr.
Coleman did not participate in any of the Board of Directors discussions regarding the Newcastle
transactions or the votes of the Board of Directors to approve the same.
12
|
|
|
Item 2.
|
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
The following discussion of financial condition and results of operations of the Company
should be read in conjunction with the consolidated condensed financial statements and notes
thereto included elsewhere in this Quarterly Report on Form 10-Q and the Companys Annual Report on
Form 10-K for the year ended December 31, 2009. This discussion and analysis includes
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act),
regarding, among other things, the Companys plans, strategies and prospects, both business and
financial. Forward-looking statements are inherently subject to risks, uncertainties and
assumptions. Many of the forward looking statements contained in this Quarterly Report may be
identified by the use of forward-looking words such as believe, expect, anticipate, should,
planned, will, may, and estimated, among others. Important factors that could cause actual
results to differ materially from the forward-looking statements that the Company makes in this
Quarterly Report are set forth below, are set forth in the Companys Annual Report on Form 10-K for
the year ended December 31, 2009 and are set forth in other reports or documents that the Company
files from time to time with the Securities and Exchange Commission (SEC). The Company undertakes
no obligation to publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by law.
Critical Accounting Policies
In the Companys Annual Report on Form 10-K for the year ended December 31, 2009, the critical
accounting policies were identified which affect the more significant estimates and assumptions
used in preparing the consolidated financial statements. These policies have not changed from those
previously disclosed.
Recent Accounting Pronouncements
In July 2009, the FASB established the FASB Accounting Standards Codification
(Codification) as the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements in accordance with
generally accepted accounting principles (GAAP) in the United States. This guidance was included
in the Codification under ASC Topic 105, Generally Accepted Accounting Principles. All prior
accounting standard documents were superseded by the Codification and any accounting literature not
included in the Codification is no longer authoritative. Rules and interpretive releases of the SEC
issued under the authority of federal securities laws will continue to be sources of authoritative
GAAP for SEC registrants. The Codification became effective for the Company beginning with the
third quarter of 2009. Therefore, beginning with the third quarter of 2009, all references made by
the Company in its consolidated condensed financial statements use the new Codification numbering
system. The Codification does not change or alter existing GAAP and, therefore, did not have a
material impact on the Companys consolidated condensed financial statements.
In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13 Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements a consensus of the FASB
Emerging Issues Task Force. This guidance applies to multiple-deliverable revenue arrangements that
are currently within the scope of ASC Topic 605-25. This guidance also (i) provides principles and
application guidance on whether multiple deliverables exist, how the arrangement should be
separated, and the consideration allocated, (ii) requires an entity to allocate revenue in an
arrangement using estimated selling prices of deliverables if a vendor does not have
vendor-specific objective evidence or third-party evidence of selling price, (iii) eliminates the
use of the residual method and (iv) requires an entity to allocate revenue using the relative
selling price method. The consensus significantly expands the disclosure requirements for
multiple-deliverable revenue arrangements. This guidance should be applied on a prospective basis
for revenue arrangements entered into or materially modified in fiscal years beginning on or after
June 15, 2010, with earlier application permitted. Alternatively, an entity can elect to adopt this
guidance on a retrospective basis. The Company has not yet determined the effect of the adoption of
this guidance on the Companys results of operations or financial position.
Results of Operations
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
The Company has provided a summary of its consolidated operating results for the three months
ended September 30, 2010, compared to the three months ended September 30, 2009, followed by an
overview of its business segment performance below:
Net revenues
Net revenues were $40.2 million for the third quarter of 2010 as compared to $34.9 million for
the third quarter of 2009, representing an increase of $5.3 million, or 15.4%. The increase
consisted of a $4.7 million and a $0.6 million increase in net revenues in the Bell Techlogix and
Recreational Products Group (RPG) segments, respectively. The Bell Techlogix increase consisted
of $3.8 million and $0.9 million increases in product and service net revenues, respectively.
13
Gross profit
Gross profit, which represents net revenues less the cost of products sold and services
provided, was $8.1 million, or 20.1% of net revenues, for the third quarter of 2010 compared to
$6.6 million, or 19.0% of net revenues, for the third quarter of 2009. The increase in gross profit
of $1.5 million was primarily the result of an increase in revenues in the Bell Techlogix segment
during the third quarter of 2010.
Selling, general and administrative expenses
Selling, general and administrative (SG&A) expenses were $6.0 million, or 14.9% of net
revenues, for the third quarter of 2010 compared to $5.6 million, or 16.1% of net revenues, for the
third quarter of 2009. The increase in SG&A expenses of $0.4 million consisted of increases of $0.3
million and $0.2 million in SG&A expenses in the Bell Techlogix and RPG segments, respectively
offset by a $0.1 million decrease in SG&A expenses in the Corporate segment during the third
quarter of 2010. SG&A expenses declined relative to net revenues due to increased utilization of
existing resources.
Interest and other, net
Net interest expense was $309,000 for the third quarter of 2010, compared to $306,000 for the
third quarter of 2009. The increase in net interest expense was primarily the result of the
outstanding balances under the Revolving Credit Facility and the Amended Convertible Note during
the third quarter of 2010 and the amortization of related bank fees incurred in connection with the
Seventh Amendment with WFCF entered into on February 11, 2010.
Income taxes
The provision for income taxes was $47,000 for the third quarter of 2010 compared to a benefit
from income taxes of $4,000 for the third quarter of 2009. The provision and benefit from income
taxes for the three months ended September 30, 2010 and 2009, respectively, was primarily related
to state income tax. As of September 30, 2010, the Company continued to record a full valuation
allowance against net deferred tax asset balances.
Discontinued operations
In late 2007, the Company entered into letters of intent with two companies to sell its SkyTel
division in two separate transactions. The Company completed the sale of the SkyGuard and FleetHawk
product lines in February 2008 and the sale of the remainder of the SkyTel division in June 2008.
Accordingly, the results of the SkyTel division have been classified as discontinued operations in
the accompanying financial statements. For the three months ended September 30, 2010 and 2009, the
SkyTel division had no revenue or expense activity.
Business Segment Results
The Company operates two reportable business segments: Bell Techlogix, a provider of
integrated technology product and service solutions, and the Recreational Products Group, a
wholesale distributor of aftermarket parts and accessories for recreational vehicles, boats,
snowmobiles, motorcycles and ATVs. The Company also separately records expenses related to the
holding company that owns, and provides limited support to, the operating businesses, which is
referred to as Corporate in the Business Segment Results. The operating businesses generally
operate independent of each other. The Companys former segment, SkyTel, has been reflected as a
discontinued operation and, therefore, is not presented in this business segment results
discussion.
Bell Techlogix
Bell Techlogixs revenues of $29.4 million for the three months ended September 30, 2010
represented a 19.1% increase from the $24.7 million of revenues for the three months ended
September 30, 2009. Service revenues of $8.0 million for the three months ended September 30, 2010
represented an 11.1% increase from the $7.2 million of service revenues for the three months ended
September 30, 2009 due to growth in new and existing managed service engagements. Product revenues
of $21.4 million for the three months ended September 30, 2010 represented a 22.3% increase from
the $17.5 million of product revenues for the three months ended September 30, 2009, which was
primarily the result of an increase in and the timing of sales to education customers.
Bell Techlogixs operating income of $2.2 million for the three months ended September 30,
2010 represented a $931,000 improvement from the operating income of $1.3 million for the three
months ended September 30, 2009. This improvement was due to increases in gross profit of $871,000
and $344,000 in services and products, respectively offset by an increase in SG&A expenses of
$284,000 due primarily to an increase in employees.
14
Recreational Products Group
RPG revenues of $10.8 million for the three months ended September 30, 2010 represented a 5.9%
increase from the $10.2 million of revenues for the three months ended September 30, 2009. This
increase was primarily related to higher sales in the marine and RV product lines which can be
attributed primarily to increased in-season marine and RV product orders.
RPG operating income of $0.7 million for the three months ended September 30, 2010 represented
a $70,000 increase from the operating income of $0.6 million for the three months ended September
30, 2009. This increase was primarily due to the $0.6 million increase in net revenues.
Corporate
Corporate holding company costs of $0.8 million for the three months ended September 30, 2010
represented a 9.0% decrease from $0.9 million for the three months ended September 30, 2009. The
decrease in costs of $78,000 was primarily the result of headcount reductions and reductions in
related benefits and travel costs.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
The Company has provided a summary of its consolidated operating results for the nine months
ended September 30, 2010, compared to the nine months ended September 30, 2009, followed by an
overview of its business segment performance below:
Net revenues
Net revenues were $90.2 million for the nine months ended September 30, 2010 as compared to
$80.7 million for the nine months ended September 30, 2009, representing an increase of $9.5
million, or 11.7%. The increase consisted of a $6.1 million and a $3.4 million increase in net
revenues in the Bell Techlogix and RPG segments, respectively.
Gross profit
Gross profit, which represents net revenues less the cost of products sold and services
provided, was $18.6 million, or 20.7% of net revenues, for the nine months ended September 30, 2010
compared to $16.5 million, or 20.4% of net revenues, for the nine months ended September 30, 2009.
The increase in gross profit of $2.1 million was primarily the result of an increase in revenues in
the Bell Techlogix segment.
Selling, general and administrative expenses
Selling, general and administrative (SG&A) expenses were $16.8 million, or 18.7% of net
revenues, for the nine months ended September 30, 2010 compared to $16.6 million, or 20.6% of net
revenues, for the nine months ended September 30, 2009. The increase in SG&A expenses were
primarily related to a $0.4 million increase in SG&A expenses in the RPG segment offset by a $0.2
million decrease in the Corporate segment for the nine months ended September 30, 2010. SG&A
expenses declined relative to net revenues due to increased utilization of existing resources.
Interest and other, net
Net interest expense was $862,000 for the nine months ended September 30, 2010, compared to
$804,000 for the nine months ended September 30, 2009. The increase in net interest expense was
primarily the result of the increased outstanding balances under the Revolving Credit Facility and
the Amended Convertible Note and the amortization of related bank fees incurred in connection with
the Seventh Amendment with WFCF entered into on February 11, 2010.
Income taxes
The provision for income taxes was $47,000 for the nine months ended September 30, 2010
compared to a benefit from income taxes of $11,000 for the nine months ended September 30, 2009.
The provision and benefit from income taxes for the nine months ended September 30, 2010 and 2009,
respectively, was primarily related to state income tax. As of September 30, 2010, the Company
continued to record a full valuation allowance against net deferred tax asset balances.
Discontinued operations
In late 2007, the Company entered into letters of intent with two companies to sell its SkyTel
division in two separate transactions. The Company completed the sale of the SkyGuard and FleetHawk
product lines in February 2008 and the sale of the remainder of the SkyTel division in June 2008.
Accordingly, the results of the SkyTel division have been classified as discontinued operations in
the accompanying financial statements. For the nine months ended September 30, 2010 and 2009, the
SkyTel division had no revenue or expense activity.
15
Business Segment Results
Bell Techlogix
Bell Techlogixs revenues of $58.2 million for the nine months ended September 30 2010
represented an 11.6% increase from the $52.2 million of revenues for the nine months ended
September 30, 2009. Service revenues of $20.8 million for the nine months ended September 30, 2010
represented a 7.8% increase from the $19.3 million of service revenues for the nine months ended
September 30, 2009 due to growth in new and existing managed service engagements. Product revenues
of $37.4 million for the nine months ended September 30, 2010 represented a 13.8% increase from the
$32.9 million of product revenues for the nine months ended September 30, 2009, which was primarily
the result of increased sales to education customers.
Bell Techlogixs operating income of $2.3 million for the nine months ended September 30, 2010
represented a $1,142,000 improvement from the operating income of $1.1 million for the nine months
ended September 30, 2009. This improvement was due to increased gross profit resulting from the
increased revenues discussed above.
Recreational Products Group
RPG revenues of $31.9 million for the nine months ended September 30, 2010 represented an
11.5% increase from the $28.6 million of revenues for the nine months ended September 30, 2009.
This increase was primarily related to higher sales in the marine and RV product lines which can be
attributed primarily to increased in-season marine and RV product orders.
RPG operating income of $1.9 million for the nine months ended September 30, 2010 represented
a $504,000 increase from the operating income of $1.4 million for the nine months ended September
30, 2009. This increase was primarily due to the $3.3 million increase in net revenues discussed
above.
Corporate
Corporate holding company costs of $2.4 million for the nine months ended September 30, 2010
represented an 11.1% decrease from $2.7 million for the nine months ended September 30, 2009. The
decrease in costs of $289,000 was primarily the result of headcount reductions and reductions in
related benefits and travel costs.
Changes in Financial Condition
Liquidity and Capital Resources
Selected financial data are set forth in the following tables (dollars in thousands, except
per share amounts):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Cash and cash equivalents
|
|
$
|
792
|
|
|
$
|
2,608
|
|
Net working capital
|
|
$
|
12,441
|
|
|
$
|
11,272
|
|
Current ratio
|
|
|
1.82
|
|
|
|
2.16
|
|
Long term liabilities to
capitalization (1)
|
|
|
108.2
|
%
|
|
|
116.3
|
%
|
Shareholders deficit per share
|
|
$
|
(2.64
|
)
|
|
$
|
(4.82
|
)
|
Days sales in receivables
|
|
|
42
|
|
|
|
45
|
|
|
|
|
(1)
|
|
Capitalization represents the sum of long-term liabilities and shareholders equity.
|
For the nine months ended September 30, 2010, net cash used in operating activities
totaled $7.2 million, consisting of $6.9 million used in operating activities for continuing
operations and $253,000 used in operating activities for discontinued operations (the Companys
former SkyTel division). The net cash used in operating activities for continuing operations
consisted of net income of $0.9 million, an increase in accounts receivable of $8.9 million, a
decrease in inventory of $0.9 million and a decrease in accounts payable and accrued liabilities of
$0.7 million offset by non-cash expenses of $0.8 million. The net cash used in operating
activities was primarily due to the typical seasonal increase in business activity throughout the
first three quarters of the year for both the RPG and Bell Techlogix businesses. Net cash provided
by investing activities totaled $64,000, consisting of $300,000 in cash provided by investing
activities for discontinued operations from final proceeds received related to the Skytel note
receivable offset by $236,000 in cash used in investing activities for continuing operations
related to purchases of fixed assets. Net cash provided by financing activities totaled $5.4
million, consisting of $5.5 million net borrowings on the Revolving Credit
Facility, partially offset by $0.1 million in payments of debt acquisition costs.
16
For the nine months ended September 30, 2009, net cash used in operating activities totaled
$3.7 million, consisting of a net loss of $0.9 million, an increase in accounts receivable of $4.0
million and a decrease in accounts payable and accrued liabilities of $1.9 million, partially
offset by non-cash expenses of $1.4 million and a decrease in inventory of $1.8 million. The net
cash used in operating activities was primarily due to the typical seasonal increase in business
activity throughout the first three quarters of the year for both the RPG and Bell Techlogix
businesses. Net cash provided by investing activities totaled $3.0 million, consisting of $3.1
million in cash provided by investing activities for discontinued operations (the Companys former
SkyTel division) from payments received during the first half of 2009 on notes receivable related
to the various SkyTel sale transactions, offset by $0.1 million in cash used in investing
activities for continuing operations related to purchases of fixed assets. Net cash used in
financing activities totaled $0.6 million, consisting of $0.3 million in payments of floor plan
payables, $0.2 million in payments of debt acquisition costs and $0.1 million in capital lease
payments.
Revolving Credit Facility with WFCF
As of September 30, 2010, the Company had $5.5 million in borrowings outstanding under its
Revolving Credit Facility with Wells Fargo Capital Finance, Inc. (WFCF). The Company has utilized
and will continue utilizing the Revolving Credit Facility periodically to fund working capital
needs. The Revolving Credit Facility is secured by a lien on substantially all of the Companys
assets.
Additional advances under the Revolving Credit Facility (collectively, the Advances) will be
available to the Company, up to the aggregate credit limit of $10.0 million, except during the
period from July 15, 2010 to and including September 14, 2010 at which time the aggregate credit
limit will be $12.5 million, subject to restrictions based on the borrowing base. The Advances may
be used to finance ongoing working capital, capital expenditures and general corporate needs.
Advances made under the Revolving Credit Facility bear interest, in the case of base rate loans, at
a rate equal to the base rate, which is the greater of 3.5% or the rate of interest per annum
announced from time to time by WFCF as its prime rate, plus a margin. In the case of LIBOR rate
loans, amounts borrowed bear interest at a rate equal to the greater of 3.0% or the LIBOR Rate (as
defined in the Credit Agreement) plus a margin. The Advances made under the Credit Agreement are
repayable in full on March 31, 2011. The Company may prepay the Advances (unless in connection
with the prepayment in full of all of the outstanding Advances) at any time without premium or
penalty. If the Company prepays all of the outstanding Advances and terminates all commitments, it
is obligated to pay a prepayment premium.
On February 11, 2010, the Company entered into the Seventh Amendment with WFCF. The Seventh
Amendment extended the expiration date on the Revolving Credit Facility to March 31, 2011, revised
the financial profitability and capital expenditure covenants for the year ended December 31, 2010,
and increased the total size of the Revolving Credit Facility from $10.0 million to $12.5 million
during the period from July 15, 2010 to and including September 14, 2010. At September 30, 2010,
an aggregate credit limit of $10.0 million is available.
Convertible Note Held By Newcastle
On January 31, 2007, the Company issued to Newcastle a Convertible Note with a principal
amount of $10.0 million in order to complete the financing of its acquisition of SkyTel. The
Convertible Note was amended and restated on June 13, 2008. The Amended Convertible Note is secured
by a second priority lien on substantially all of the Companys assets. The outstanding principal
balance and/or accrued but unpaid interest on the Amended Convertible Note is convertible at any
time by Newcastle into shares of the Companys common stock at a conversion price of $4.00 per
share (the Conversion Price), subject to adjustment. The Amended Convertible Note accrues
interest at 4% per annum, subject to adjustment in certain circumstances, which interest accretes
as principal on the Amended Convertible Note as of each quarterly interest payment date. In
connection with the execution of the Amended Convertible Note, and subject to certain conditions,
the Company has agreed to appoint such number of director designees of Newcastle such that
Newcastles designees constitute 50% of the then outstanding current members of the Companys board
of directors (or, if the number of members of the board of directors is an odd integer, such number
of Newcastle designees equal to the lowest integer that is greater than 50% of the then outstanding
members). The Company also has the option (subject to the consent of WFCF) to pay interest on the
outstanding principal balance of the Amended Convertible Note in cash at a higher interest rate
(8%) if the weighted average market price of its common stock is greater than 200% of the
Conversion Price ($8.00). The Amended Convertible Note matures on January 31, 2017. The Company has
the right to prepay the Amended Convertible Note at an amount equal to 105% of outstanding
principal after January 31, 2010 so long as a weighted average market price of its common stock is
greater than 200% of the Conversion Price ($8.00). As of September 30, 2010, the outstanding
principal balance and accrued but unpaid interest on the Convertible Note was $11.7 million.
On February 11, 2010, the Company entered into the Second Amendment to Note, which revised the
financial profitability covenants for each of the quarters during the year ended December 31, 2010
and increased the limitation on the indebtedness covenant to $13.0 million.
17
The Company believes that sufficient cash resources exist for the foreseeable future to
support its operations and commitments through cash generated by operations and advances under the
Revolving Credit Facility with WFCF. Management continues to evaluate its options in regard to the
Revolving Credit Facility and alternative sources of financing.
Off-Balance Sheet Arrangements
The Company does not have any material off-balance sheet arrangements.
|
|
|
Item 3.
|
|
Quantitative and Qualitative Disclosures About Market Risk
|
The Company has no investments in market risk-sensitive investments for either trading
purposes or purposes other than trading purposes. The Company is exposed to market risk from
changes in interest rates on variable rate debt. Under the Credit Agreement with WFCF, advances
bear interest based on WFCFs prime rate plus a margin or the LIBOR Rate plus a margin. Based on
the Companys average outstanding variable rate debt during the nine months ended September 30,
2010, a 1% increase in the variable rate would increase annual interest expense by approximately
$25,000.
|
|
|
Item 4.
|
|
Controls and Procedures
|
The Companys management, with the participation of its Chief Executive Officer, evaluated the
effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of September 30, 2010. Based on this evaluation, the Companys
Chief Executive Officer concluded that, as of September 30, 2010, the Companys disclosure controls
and procedures were effective. The Companys disclosure controls and procedures are (1) designed to
ensure that material information relating to the Company, including its consolidated subsidiaries,
is made known to its Chief Executive Officer by others within those entities, particularly during
the period in which this report was being prepared, and (2) intended to provide reasonable
assurance that information required to be disclosed by the Company in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms.
No change in the Companys internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended September 30,
2010 that has materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting.
18
PART II OTHER INFORMATION
|
|
|
Item 1.
|
|
Legal Proceedings
|
On June 29, 2009, the Company was named as a defendant in a civil complaint filed by Eon Corp.
IP Holdings, LLC in the United States District Court for the Eastern District of Texas. The suit
alleges that the Company, along with several other providers of paging, messaging, and/or telemetry
services, infringed upon certain patents during its ownership of SkyTel. The Company believes that
the complaint against the Company is without merit and continues to defend its position. However,
if the Company receives an unfavorable outcome at trial, it could result in a liability that has a
material adverse effect on its results of operations and financial condition.
The Company is involved in certain other legal proceedings that are incidental to its current
and discontinued businesses. While the ultimate liability pursuant to these actions cannot
currently be determined, the Company believes that the resolution of these actions will not have a
material adverse effect on the Companys results of operations, cash flows or financial position.
There have been no material changes in the risk factors disclosed in Part I, Item 1A. Risk
Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2009. In
addition to the other information set forth in this report, you should carefully consider the
factors discussed in the Companys Annual Report on Form 10-K, which could materially affect the
Companys business, financial condition or future results. The risks described in the Companys
Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and
uncertainties not currently known to the Company or that it currently deems to be immaterial also
may materially and adversely affect its business, financial condition and/or operating results. You
should carefully consider the risks described in the Companys Annual Report on Form 10-K before
deciding to invest in the Companys common stock. In assessing these risks, you should also refer
to the other information in this Quarterly Report on Form 10-Q and within the Companys Annual
Report on Form 10-K for the year ended December 31, 2009, including the Companys financial
statements and the related notes. Various statements in this Quarterly Report on Form 10-Q
constitute forward-looking statements.
|
|
|
Item 2.
|
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
None
|
|
|
Item 3.
|
|
Defaults Upon Senior Securities
|
None
|
|
|
Item 4.
|
|
(Removed and Reserved)
|
|
|
|
Item 5.
|
|
Other Information
|
None
|
|
|
|
|
|
10.n.
|
|
|
Amendment Number Seven to Credit Agreement, dated February 11, 2010,
between the Registrant and Wells Fargo Capital Finance, Inc.
(formerly Wells Fargo Foothill, N.A.) (incorporated by reference to
Exhibit 10.1 of the Registrants Current Report on Form 8-K dated
February 18, 2010)
|
|
10.s.
|
|
|
Amendment Number Two to the Second Amended and Restated Convertible
Promissory Note, dated February 11, 2010, between the Registrant and
BI Holdings, L.P., the successor payee to Newcastle Partners, L.P.
(incorporated by reference to Exhibit 10.2 of the Registrants
Current Report on Form 8-K dated February 18, 2010)
|
|
31.1
|
|
|
Certification of Clinton J. Coleman, Chief Executive Officer of
Registrant pursuant to Rule 13a-14 adopted under the Securities
Exchange Act of 1934, as amended, and Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
|
|
Certification of Mark A. Begle, Controller of Registrant pursuant to
Rule 13a-14 adopted under the Securities Exchange Act of 1934, as
amended, and Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
|
|
Certification of Clinton J. Coleman, Chief Executive Officer of
Registrant furnished pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32.2
|
|
|
Certification of Mark A. Begle, Controller of Registrant furnished
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
|
19
SIGNATURES
Pursuant to the requirements 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.
|
|
|
|
|
|
BELL INDUSTRIES, INC.
|
|
Dated: November 12, 2010
|
By:
|
/s/
Clinton J. Coleman
|
|
|
|
Clinton J. Coleman
|
|
|
|
Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
Dated: November 12, 2010
|
By:
|
/s/
Mark A. Begle
|
|
|
|
Mark A. Begle
|
|
|
|
Controller
(Principal Financial Officer)
|
|
20
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
|
|
|
|
10.n.
|
|
|
Amendment Number Seven to Credit Agreement, dated February
11, 2010, between the Registrant and Wells Fargo Capital
Finance, Inc. (formerly Wells Fargo Foothill, N.A.)
(incorporated by reference to Exhibit 10.1 of the
Registrants Current Report on Form 8-K dated February 18,
2010)
|
|
10.s.
|
|
|
Amendment Number Two to the Second Amended and Restated
Convertible Promissory Note, dated February 11, 2010,
between the Registrant and BI Holdings, L.P., the
successor payee to Newcastle Partners, L.P. (incorporated
by reference to Exhibit 10.2 of the Registrants Current
Report on Form 8-K dated February 18, 2010)
|
|
31.1
|
|
|
Certification of Clinton J. Coleman, Chief Executive
Officer of Registrant pursuant to Rule 13a-14 adopted
under the Securities Exchange Act of 1934, as amended, and
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
|
|
Certification of Mark A. Begle, Controller of Registrant
pursuant to Rule 13a-14 adopted under the Securities
Exchange Act of 1934, as amended, and Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32.1
|
|
|
Certification of Clinton J. Coleman, Chief Executive
Officer of Registrant furnished pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
32.2
|
|
|
Certification of Mark A. Begle, Controller of Registrant
furnished pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
21
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