Summary of BELL INDUSTRIES INC /NEW/

Item 2. Management's 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 Company's Annual Report on Form 10-K for the year ended December 31, 2008. 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, our 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 we make in this Quarterly Report are set forth below, are set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2008 and are set forth in other reports or documents that we file from time to time with the 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 Company's Annual Report on Form 10-K for the year ended December 31, 2008, the critical accounting policies which affect the more significant estimates and assumptions used in preparing the consolidated financial statements were identified. These policies have not changed from those previously disclosed.
Recent Accounting Pronouncements In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS 157, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. On February 12, 2008, the FASB approved FASB Staff Position ("FSP") FAS 157-2, Effective Date of FASB Statement No. 157. This FSP delayed the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company determined that its adoption of SFAS 157 had an immaterial impact on the Company's consolidated financial position and results of operations. See Note 3 of the Notes to Consolidated Condensed Financial Statements.
In April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. The FSP provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. The FSP also requires increased disclosures. This FSP is effective for interim and annual reporting periods ending after June 15, 2009 and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The Company plans to adopt this FSP in the second quarter of 2009; however, the Company does not expect the adoption to have a material effect on its results of operations or financial position.
In April 2009, the FASB issued FSP No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies that were previously only required in annual financial statements. This FSP is effective for interim reporting periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009, The Company plans to adopt this FSP in the second quarter of 2009.

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Results of Operations Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008 The Company has provided a summary of its consolidated operating results for the three months ended March 31, 2009, compared to the three months ended March 31, 2008, followed by an overview of its business segment performance below:
Net revenues
Net revenues were $18.3 million for the first quarter of 2009 as compared to $23.1 million for the first quarter of 2008, representing a decrease of $4.8 million or 20.6%. The decrease consisted of a $2.6 million decrease in net revenues in the Recreational Products Group segment and a $2.2 million decrease in net revenues in the Bell Techlogix segment. Gross profit
Gross profit, which represents net revenues less the cost of products sold and services provided, was $3.7 million, or 20.3% of net revenues, for the first quarter of 2009, compared to $5.4 million, or 23.3% of net revenues, for the first quarter of 2008. The decrease consisted of a $1.1 million decrease in gross profit in the Bell Techlogix segment and a $0.6 million decrease in gross profit in the Recreational Products Group segment. Selling, general and administrative expenses Selling, general and administrative ("SG&A") expenses were $5.4 million, or 29.4% of net revenues, for the first quarter of 2009, compared to $5.9 million, or 25.6% of net revenues, for the first quarter of 2008. The decrease in SG&A expenses of $0.5 million consisted of reductions in SG&A expenses of $0.2 million in the Corporate segment, $0.2 million in the Recreational Products Group segment and $0.1 million in the Bell Techlogix segment for the first quarter of 2009.
Interest and other, net
Net interest expense was $208,000 for the first quarter of 2009, compared to $139,000 for the first quarter of 2008. The increase in net interest expense was the result of the allocation, during the first quarter of 2008, of approximately 70% or $348,000 of the interest expense to discontinued operations. The net interest expense is primarily the result of the outstanding balances under the Revolving Credit Facility and the Amended Convertible Note. Income taxes
The benefit for income taxes for the three months ended March 31, 2009 totaled $2,000 compared to a provision for income taxes of $16,000 for the three months ended March 31, 2008. At March 31, 2009, 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 business in June 2008. Accordingly, the results of the SkyTel business have been classified as discontinued operations in the accompanying financial statements. For the three months ended March 31, 2009 and 2008, the SkyTel division had revenues of $0 and $20.1 million and income before income taxes of $0 and $1.5 million, respectively. 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 corporate overhead which supports the business lines. The Company's former segment, SkyTel, has been reflected as a discontinued operation and, therefore, is not presented.

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Bell Techlogix
Bell Techlogix's revenues of $11.0 million for the first quarter of 2009 represented a 16.8% decrease from the $13.2 million of revenues for the first quarter of 2008. Product revenues of $5.2 million for the first quarter of 2009 represented an 11.7% decrease from the $5.9 million of product revenues for the first quarter of 2008 due primarily to timing of some large product deployments. Service revenues of $5.8 million for the first quarter of 2009 represented a 20.8% decrease from the $7.4 million of service revenues for the first quarter of 2008, which was primarily the result of a significant non-recurring project in the first quarter of 2008 and the expiration of certain services contracts during 2008.
Bell Techlogix's operating loss of $0.6 million for the first quarter of 2009 represented a $1.0 million decrease from the operating income of $0.4 million for the first quarter of 2008. The decline in operating income can be attributed to the expiration of certain service contracts prior to the first quarter of 2009, a significant non-recurring services project in the first quarter of 2008, increases in sales and marketing costs in the first quarter of 2009 in an attempt to grow the commercial segment of the Bell Techlogix business and timing of product sales.
Recreational Products Group
Recreational Products Group ("RPG") revenues of $7.3 million for the first quarter of 2009 represented a 25.7% decrease from the $9.9 million of revenues for the first quarter of 2008. This decrease was primarily related to lower sales in the recreational vehicle and marine product lines attributed primarily to lower out of season purchases by dealers. As a result of the current economic uncertainty, many dealers have made strategic changes in buying habits to stock less product and order product from distributors as they need parts for repairs or as customers place orders.
RPG operating loss of $0.2 million for the first quarter of 2009 represented a $0.4 million decrease from the operating income of $0.2 million for the first quarter of 2008. The decline can be attributed entirely to the $2.5 million decline in revenues in the first quarter of 2009 versus the same period in 2008. The decline in revenues was partially offset by an increase in gross profit margins from 24.0% in the first quarter of 2008 to 24.2% in the first quarter of 2009 and a $0.2 million decrease in SG&A expenses as a result of reductions in headcount, freight and facility costs.
Corporate
Corporate overhead costs of $0.9 million for the first quarter of 2009 represented a 20.3% decease from $1.1 million for the first quarter of 2008. The decrease in costs of $0.2 million was primarily the result of payroll cost reductions since the end of the first quarter of 2008 and the related travel and benefits costs, reductions in telecommunications expenses and the favorable settlement of a disputed obligation.

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):

                                                    March 31       December 31
                                                      2009            2008
      Cash and cash equivalents                     $      39     $       3,233
      Working capital                               $  10,636     $      12,305
      Current ratio                                      1.76              1.98
      Long-term liabilities to capitalization (1)       116.4 %           101.7 %
      Shareholders' deficit per share               $   (4.88 )   $       (0.59 )
      Days' sales in receivables                           54                50

(1) Capitalization represents the sum of long-term debt and stockholders' deficit.

For the three months ended March 31, 2009, net cash used in operating activities totaled $4.7 million, consisting of $4.6 million used in operating activities for continuing operations and $0.1 million used in operating activities for discontinued operations (the Company's former SkyTel division). The net cash used in operating activities for continuing operations was primarily the result of the loss from continuing operations of $1.9 million and an increase in accounts receivable of $3.3 million related primarily to the Recreational Products Group selling products with extended payment terms, partially offset by non-cash expenses and other changes totaling $0.6 million. Net cash provided by investing activities totaled $0.4 million, consisting of $36,000 in cash used in investing activities for continuing operations related to purchases of fixed assets and $0.4 million in cash provided by investing activities for discontinued operations related to payments received during the first quarter of 2009 related to a note receivable. Cash flows provided by financing activities totaled $1.2 million, consisting of $1.6 million in borrowings on the Revolving Credit Facility, partially offset by $0.3 million in payments of floor plan payables and $0.1 million in payments of debt acquisition costs.

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For the three months ended March 31, 2008, net cash used in operating activities totaled $4.3 million, consisting of $4.4 million used in operating activities for continuing operations and $30,000 provided by operating activities for discontinued operations. The net cash used in operating activities for continuing operations was primarily the result of an increase in accounts receivable of $2.4 million, related primarily to the Recreational Products Group selling products with extended payment terms, and a decrease in accounts payable and accrued liabilities of $2.6 million, partially offset by a decrease in inventory of $0.7 million. Net cash provided by investing activities totaled $6.7 million, consisting of $0.1 million provided by investing activities for continuing operations related to proceeds from a life insurance policy of $0.5 million, partially offset by purchases of fixed assets, and $6.6 million provided by investing activities for discontinued operations. The $6.6 million in cash provided by investing activities for discontinued operations represented $7.0 million in proceeds from the sale of the SkyGuard and FleetHawk products lines to SkyGuard, LLC in February 2008, partially offset by $0.4 million related to deal costs. Cash flows used in financing activities totaled $1.8 million, consisting of $1.6 million used in financing activities for continuing operations, including $1.3 million to pay down the revolving line of credit and $0.3 million in payments of floor plan payables, and $0.2 million used in financing activities for discontinued operations related to payments of capital lease obligations.
Revolving Credit Facility with Wells Fargo Foothill As of March 31, 2009, we had $1.6 million outstanding under our Revolving Credit Facility with Wells Fargo Foothill, N.A. ("WFF"). The Company anticipates utilizing the Revolving Credit Facility periodically during 2009 to fund working capital needs. The Revolving Credit Facility is secured by a lien on substantially all of the Company's assets.
Additional advances under the Revolving Credit Facility (collectively, the "Advances") will be available to the Company, up to the aggregate $10 million credit limit, subject to restrictions based on the borrowing base. The Advances may be used to finance ongoing working capital, capital expenditures and general corporate needs of the Company. 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 WFF 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, 2010. 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, the Company is obligated to pay a prepayment premium.
On March 12, 2009, the Company entered into Amendment Number Five to Credit Agreement and Joinder Agreement with WFF. The Fifth Amendment added the Company's newly formed subsidiary, Bell Techlogix, Inc., as a party to the Revolving Credit Facility and made immaterial conforming and updating amendments.
On March 25, 2009, the Company entered into Amendment Number Six to Credit Agreement with WFF. The Sixth Amendment modified the block on the amount of the Revolving Credit Facility available during 2009 to amounts ranging from $3.5 million to $6.0 million, revised the expiration date of the Revolving Credit Facility to March 31, 2010, established a minimum prime rate of 3.5% and a minimum LIBOR rate of 3.0%, increased the margin on both prime rate and LIBOR rate loans to percentages ranging from 4.0% to 4.5% and revised the financial profitability and capital expenditure covenants for the year ended December 31, 2009.
Convertible Note Held By Newcastle
On January 31, 2007, the Company issued to Newcastle a convertible subordinated pay-in-kind promissory note with a principal amount of $10.0 million (the "Convertible Note") in order to complete the financing of the Company's acquisition of SkyTel. The Convertible Note was amended and restated on June 13, 2008 (the "Amended Convertible Note"). The Amended Convertible Note is secured by a second priority lien on substantially all of the Company's 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 our 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 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 Newcastle's designees constitute 50% of the then outstanding current members of the Company's 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 WFF) to pay interest on the outstanding principal balance of the Amended Convertible Note in cash at a higher interest rate (8%) following January 31, 2009 if the weighted average market price of the Company's common stock is greater than 200% of the Conversion Price ($8.00 per share). 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 the weighted average market price of the Company's common stock is greater than 200% of the Conversion Price ($8.00). As of March 31, 2009, the outstanding principal balance and accrued but unpaid interest on the Amended Convertible Note was $11.5 million.

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On March 25, 2009, we entered into Amendment Number One to the Amended Convertible Note. This amendment revised the financial profitability covenants for each of the quarters during the year ended December 31, 2009. The Company believes that sufficient cash resources exist for the foreseeable future to support its operations and commitments through cash generated by operations, collection of the final amounts due from the sale of the SkyTel business and advances under the Revolving Credit Facility with WFF. Management continues to evaluate its options in regard to obtaining additional financing to support future growth.
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 WFF, advances bear interest based on WFF's prime rate plus a margin or at LIBOR Rate plus a margin. Based on the Company's average outstanding variable rate debt during the quarter ended March 31, 2009, a 1% increase in the variable rate would increase annual interest expense by approximately $5,000.
Item 4. Controls and Procedures
The Company's management, with the participation of its Interim Chief Executive Officer and its President and Chief Financial 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 March 31, 2009. Based on this evaluation, the Company's Interim Chief Executive Officer and President and Chief Financial Officer concluded that, as of March 31, 2009, the Company's disclosure controls and procedures were effective. The Company's 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 Interim Chief Executive Officer and President and Chief Financial 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 SEC's rules and forms.
No change in the Company's 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 March 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.