UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2010


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to

Commission file number 1-11471

Bell Industries, Inc.

(Exact name of Registrant as specified in its charter)


California		95- 2039211

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

8888 Keystone Crossing, Suite 1700, Indianapolis, Indiana		46240

(Address of principal executive offices)		(Zip Code)

Registrant’s 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):


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
		(Do not check if a smaller reporting company)

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 August 13, 2010, there were 433,416 outstanding shares of the Registrant’s Common Stock.

BELL INDUSTRIES, INC.
JUNE 30, 2010 QUARTERLY REPORT ON FORM 10-Q
INDEX


	Page

PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Consolidated Condensed Statements of Operations for the six months ended June 30, 2010 and 2009 (unaudited)		3

Consolidated Condensed Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009		4

Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2010 and 2009 (unaudited)		5

Notes to Consolidated Condensed Financial Statements (unaudited)		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

Item 3. Quantitative and Qualitative Disclosures About Market Risk		18

Item 4. Controls and Procedures		18

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		19

Item 1A. Risk Factors		19

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		19

Item 3. Defaults Upon Senior Securities		19

Item 4. (Removed and Reserved)		19

Item 5. Other Information		19

Item 6. Exhibits		19

SIGNATURES		20

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION


Item 1.		Consolidated Financial Results

BELL INDUSTRIES, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share data) (Unaudited)


	Three months ended						Six months ended
	June 30,						June 30,
	2010			2009			2010			2009
Net revenues:
Products	$	23,589		$	21,190		$	37,138		$	33,691
Services		6,608			6,334			12,772			12,160

Total net revenues		30,197			27,524			49,910			45,851


Costs and expenses:
Cost of products sold		18,872			16,959			29,885			27,174
Cost of services provided		4,831			4,421			9,495			8,818
Selling, general and administrative expense		5,578			5,643			10,840			11,025
Gain on sale of assets		(15	)		—			(16	)		—

Operating income (loss)		931			501			(294	)		(1,166	)
Interest expense, net		309			290			553			498

Income (loss) from operations before benefit from income taxes		622			211			(847	)		(1,664	)
Benefit from income taxes		—			(5	)		—			(7	)

Net income (loss)	$	622		$	216		$	(847	)	$	(1,657	)


Share and per share data
Basic:
Net income (loss)	$	1.44		$	0.49		$	(1.96	)	$	(3.82	)
Weighted average common shares outstanding		433			433			433			433

Diluted:
Net income (loss)	$	0.18		$	0.06		$	(1.96	)	$	(3.82	)
Weighted average common shares outstanding		3,425			3,308			433			433

See Accompanying Notes to Consolidated Condensed Financial Statements.

BELL INDUSTRIES, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in thousands)


	June 30,			December 31,
	2010			2009
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	694		$	2,608
Accounts receivable, less allowance for doubtful accounts of $426 and $804, respectively		13,063			9,210
Inventories, net		7,878			8,012
Note receivable		—			300
Prepaid expenses and other current assets		1,584			846

Total current assets		23,219			20,976

Fixed assets, net of accumulated depreciation of $11,425 and $11,430, respectively		630			802
Other assets		798			775

Total assets	$	24,647		$	22,553


LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Revolving credit facility	$	2,635		$	—
Accounts payable		6,222			5,382
Accrued payroll		1,713			1,882
Other accrued liabilities		2,017			2,440

Total current liabilities		12,587			9,704
Convertible note		11,593			11,345
Other long-term liabilities		3,381			3,592

Total liabilities		27,561			24,641

Commitments and contingencies

Shareholders’ deficit:
Preferred stock:
Authorized — 1,000,000 shares, outstanding — none
Common stock:
Authorized — 10,000,000 shares, outstanding — 433,416 shares		35,585			35,569
Accumulated deficit		(38,499	)		(37,657	)

Total shareholders’ deficit		(2,914	)		(2,088	)

Total liabilities and shareholders’ deficit	$	24,647		$	22,553

See Accompanying Notes to Consolidated Condensed Financial Statements.

BELL INDUSTRIES, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)


	Six months ended
	June 30,
	2010			2009
Cash flows from operating activities:
Net loss	$	(847	)	$	(1,657	)
Adjustments to reconcile net loss to net cash used in operating activities for continuing operations:
Depreciation and amortization expense		309			474
Gain on sale of assets		(15	)		—
Non-cash interest expense		342			369
Stock-based compensation expense		6			24
Provision for losses on accounts receivable, net		(48	)		102
Provision for losses on inventory		(51	)		—
Changes in assets and liabilities:
Accounts receivable		(3,800	)		(4,694	)
Inventories		185			1,225
Accounts payable		840			(728	)
Accrued payroll		(169	)		115
Accrued liabilities and other		(1,191	)		(1,081	)

Net cash used in operating activities for continuing operations		(4,439	)		(5,851	)
Net cash used in operating activities for discontinued operations		(206	)		(7	)

Net cash used in operating activities		(4,645	)		(5,858	)

Cash flows from investing activities:
Purchase of fixed assets and other		(83	)		(59	)

Net cash used in investing activities for continuing operations		(83	)		(59	)
Net cash provided by investing activities for discontinued operations		300			2,793

Net cash provided by investing activities		217			2,734

Cash flows from financing activities:
Net borrowings under revolving credit facility		2,635			461
Debt acquisition costs		(113	)		(174	)
Net payments of floor plan payables		—			(291	)
Principal payments on capital leases		(8	)		(66	)

Net cash provided by financing activites for continuing operations		2,514			(70	)


Net decrease in cash and cash equivalents		(1,914	)		(3,194	)
Cash and cash equivalents at beginning of period		2,608			3,233

Cash and cash equivalents at end of period	$	694		$	39

See Accompanying Notes to Consolidated Condensed Financial Statements.

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 Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Note 2 — Acquisition and Sale of SkyTel Division

On January 31, 2007, the Company completed the acquisition of substantially all of the assets and the assumption of certain liabilities of SkyTel Corp. (“SkyTel”), an indirect subsidiary of Verizon Communications Inc. (“Verizon”), for a total purchase price of $23.0 million, plus a $7.4 million post closing adjustment paid to Verizon in April 2007 and approximately $4.2 million in deal costs. SkyTel, based in Clinton, Mississippi, is a provider of wireless data and messaging services including email, interactive two-way messaging, wireless telemetry services and traditional text and numeric paging to Fortune 1000 and government customers throughout the United States.

On October 15, 2007, the Company sold its shares of stock (the “Shares”) in two corporations that held certain FCC licenses for the operation of broadband radio service channels to Sprint Nextel Corporation. The aggregate consideration for the Shares was approximately $13.5 million in cash, with approximately $943,000, plus accrued interest deferred until April 2009 after closing (April 15, 2009) after certain indemnification obligations were met. The Company received $1,020,000 in April 2009 representing the deferred consideration plus $77,000 in accrued interest.

During the fourth quarter of 2007, the Company committed to a plan to sell the SkyTel division and entered into letters of intent with two parties to sell the SkyTel division in two separate transactions. On February 14, 2008, the Company completed the sale of the SkyGuard and FleetHawk product lines to SkyGuard, LLC for $7.0 million in cash. On June 13, 2008, the Company completed the sale of the remainder of the SkyTel business to Velocita Wireless, LLC (“Velocita”) for total consideration of $7.5 million, consisting of $3.0 million in cash at closing, a $3.0 million secured note payable thirty days after closing and a $1.5 million unsecured note originally payable on the one year anniversary of the closing. Subsequent to the closing, Velocita agreed to pay the Company a working capital adjustment of $1.5 million, payable in installments through June 15, 2009.

On May 12, 2009, the Company entered into a settlement agreement with Velocita and various of Velocita’s affiliated entities, which included an agreement to reduce the amount of the $1.5 million unsecured note due on June 13, 2009 to $1.35 million, with $250,000 paid on May 12, 2009, and the remaining $1.1 million balance payable in eleven monthly installments of $100,000 beginning on June 1, 2009. In exchange for the reduction in the principal amount of the unsecured note and the extended payment terms, the Company received corporate guarantees from Velocita’s affiliated entities on the remaining outstanding balance. As of June 30, 2010, the entire unsecured note balance has been paid in full. In addition, the unpaid balance of $1.1 million on the working capital adjustment note was paid in full on May 12, 2009. The proceeds were used to pay down outstanding balances on the Company’s revolving credit facility and to provide working capital for the Company’s continuing operations.

Upon the closing of the transactions, the Company no longer has any significant involvement with, and no longer generates cash flows from, the SkyTel operations. Therefore, the SkyTel division was reflected as discontinued operations in the Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2010 and 2009.

Note 3 — Fair Value of Financial Instruments

The Company partially adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) on January 1, 2008, delaying application for non-financial assets and non-financial liabilities as permitted until January 1, 2009. This guidance, as amended, 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 —

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.

Level 2 —

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.

Level 3 —

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.

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.

The following table presents the Company’s financial asset (note receivable) and non-financial liability (environmental liability, see Note 10) that are measured and recorded at fair value on the Company’s Consolidated Condensed Balance Sheets on a recurring basis and their level within the fair value hierarchy during the six months ended June 30, 2010:


	Fair Value Measurement Using Significant
	Unobservable Inputs (Level 3)
				Environmental
(In thousands)	Note Receivable			Liability
Fair Value at December 31, 2009	$	300		$	2,449
Total realized gains or losses		—			—
Changes in net asset or liability resulting from collections or settlements		(300	)		(166	)
Transfers in and/or out of Level 3		—			—

Fair Value at June 30, 2010	$	—		$	2,283

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 Company’s 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 $1.2 million and $.9 million during the three months ended June 30, 2010 and 2009, respectively and approximately $1.8 million and $1.5 million during the six months ended June 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. 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 June 30, 2010, there was $2.6 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.

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 pay-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 Company’s common stock was greater than 200% of the conversion price ($152.40 per share). The Convertible Note matures on January 31, 2017. The Company had the right to prepay the Convertible Note at an amount equal to 105% of outstanding principal following the third anniversary of the issuance of the Convertible Note so long as a weighted average market price of the Company’s common stock was greater than 150% of the conversion price ($114.40 per share). 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 Company’s 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’ equity, 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 Company’s 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 Company’s 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’ equity, 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 six months ended June 30, 2010 is as follows (in thousands):


Convertible note at December 31, 2009	$	11,345
Beneficial conversion feature		(15	)
Accretion of beneficial conversion feature		27
Accrued interest		236

Convertible note at June 30, 2010	$	11,593

Total interest expense recorded on the Convertible Note and the Amended Convertible Note, including accretion of the beneficial conversion feature, totaled $132,000 and $132,000 during the three months ended June 30, 2010 and 2009, respectively and $263,000 and $262,000 during the six months ended June 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 Company’s Consolidated Condensed Balance Sheets. At June 30, 2010 and December 31, 2009, the leases were recorded in the Company’s Consolidated Condensed Balance Sheets at approximately $263,000, which includes the present value of interest payments.

Note 6 — Stock-Based Compensation

The Company’s 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 income of $1,000 and expense of $12,000 for the three months ended June 30, 2010 and 2009, respectively and expense of $6,000 and $24,000 for the six months ended June 30, 2010 and 2009, respectively.

The following summarizes stock option share activity during the six months ended June 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 June 30, 2010		15,250		$	93.27		2.4	$	—

Exercisable at June 30, 2010		15,100		$	86.42		2.3	$	—

The following summarizes non-vested stock options as of December 31, 2009 and changes during the six months ended June 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 June 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 June 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 June 30, 2010. No stock options were exercised during the six months ended June 30, 2010. The total fair value of options vesting during the six months ended June 30, 2010 was approximately $49,000. As of June 30, 2010, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $2,000, which is expected to be recognized over a weighted average period of approximately 0.4 years. As of June 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 June 30, 2010, 20,973 shares were available for future issuance under the ESPP.

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 six months ended June 30, 2010 and 2009 is set forth in the following table (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010			2009
Basic weighted average shares outstanding		433		433		433			433
Potentially dilutive stock options and convertible debt		2,992		2,874		2,962			2,846
Anti-dilutive due to net loss in period		—		—		(2,962	)		(2,846	)

Diluted weighted average shares outstanding		3,425		3,308		433			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 June 30, 2010 and 2009, respectively and 16,250 and 22,500 for the six months ended June 30, 2010 and 2009, respectively. The calculation of fully diluted earnings per share includes the add back of $72,000 and $69,000 of interest expense related to the amended convertible note during the three months ended June 30, 2010 and 2009, respectively.

Note 8 — Income Taxes

The benefit from income taxes for the six months ended June 30, 2010 and 2009 was $0 and $7,000, respectively. As of June 30, 2010 and 2009, the Company had no unrecognized tax benefits.

As of June 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 six months ended June 30, 2010 are as follows (in thousands):


Shareholders’ deficit at December 31, 2009	$	(2,088	)
Net loss		(847	)
Stock based compensation		6
Beneficial conversion feature, net of tax		15

Shareholders’ deficit at June 30, 2010	$	(2,914	)

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 Company’s 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 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 June 30, 2010 and December 31, 2009, estimated future remediation and related costs for this matter totaled approximately $2.3 million and $2.5 million, respectively. At June 30, 2010, approximately $369,000 (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 Company’s Consolidated Condensed Balance Sheets.

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 June 30, 2010, the Company had a prepaid royalty balance of $96,000. 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 were suspended during the three months ended June 30, 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 Company’s 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 Company’s results of operations, cash flows or financial position.

Note 13 — Business Segment Information

As of June 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 Company’s 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.

The following summarizes financial information for the Company’s reportable segments (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Net revenues:
Bell Techlogix
Products	$	10,974		$	10,182		$	16,049		$	15,336
Services		6,608			6,334			12,772			12,160

Total Bell Techlogix		17,582			16,516			28,821			27,496
Recreational Products Group		12,615			11,008			21,089			18,355

Total net revenues	$	30,197		$	27,524		$	49,910		$	45,851


Operating income (loss):
Bell Techlogix	$	467		$	438		$	60		$	(151	)
Recreational Product Group		1,224			1,002			1,264			830
Corporate		(775	)		(939	)		(1,634	)		(1,845	)
Gain on sale of assets		(15	)		—			(16	)		—

Total operating income (loss)		931			501			(294	)		(1,166	)
Interest expense, net		309			290			553			498

Income (loss) from operations before benefit from income taxes	$	622		$	211		$	(847	)	$	(1,664	)


Depreciation and amortization:
Bell Techlogix	$	80		$	160		$	191		$	325
Recreational Products Group		20			26			42			52
Corporate		37			48			76			97

	$	137		$	234		$	309		$	474


Capital expenditures:
Bell Techlogix	$	37		$	14		$	43		$	33
Recreational Products Group		13			8			37			16
Corporate		1			1			3			10

	$	51		$	23		$	83		$	59


	June 30,		December 31,
	2010		2009
Total assets:
Bell Techlogix	$	9,764	$	8,023
Recreational Products Group		12,597		9,825
Corporate		2,281		4,385
Discontinued operations		5		320

	$	24,647	$	22,553

Note 14 — Related Party Transactions

Newcastle is a private investment firm and one of the Company’s largest shareholders. Mr. Mark E. Schwarz, the Chairman of the Company’s 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 Company’s Board of Directors, became the Company’s 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 Company’s Board of Directors (other than Mr. Schwarz and Mr. Coleman), members of management, with the assistance of counsel, negotiated the terms of Newcastle’s Convertible Note and Amended Convertible Note directly with representatives of Newcastle (see Note 5). After final negotiations concluded, the Company’s 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.


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, 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s results of operations or financial position.

Results of Operations

Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009

The Company has provided a summary of its consolidated operating results for the three months ended June 30, 2010, compared to the three months ended June 30, 2009, followed by an overview of its business segment performance below:

Net revenues

Net revenues were $30.2 million for the second quarter of 2010 as compared to $27.5 million for the second quarter of 2009, representing an increase of $2.7 million, or 9.7%. The increase consisted of a $1.6 million and a $1.1 million increase in net revenues in the Recreational Products Group (“RPG”) and Bell Techlogix segments, respectively.

Gross profit

Gross profit, which represents net revenues less the cost of products sold and services provided, was $6.5 million, or 21.5% of net revenues, for the second quarter of 2010 compared to $6.1 million, or 22.3% of net revenues, for the second quarter of 2009. The increase in gross profit of $0.4 million was primarily the result of an increase in revenues in the RPG segment during the second quarter of 2010.

Selling, general and administrative expenses

Selling, general and administrative (“SG&A”) expenses were $5.6 million, or 18.5% of net revenues, for the second quarter of 2010 compared to $5.6 million, or 20.5% of net revenues, for the second quarter of 2009. The overall unchanged SG&A expenses consisted of a $0.2 million increase in SG&A expenses in the RPG segment offset by a $0.1 million decrease in SG&A expenses in the Bell Techlogix segment and a $0.1 million decrease in the Corporate segment during the second quarter of 2010.

Interest and other, net

Net interest expense was $309,000 for the second quarter of 2010, compared to $290,000 for the second 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 second 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 benefit from income taxes was $0 for the second quarter of 2010 compared to a benefit from income taxes of $5,000 for the second quarter of 2009. The benefit from income taxes for the three months ended June 30, 2009 was primarily related to state income tax. As of June 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 June 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 Company’s former segment, SkyTel, has been reflected as a discontinued operation and, therefore, is not presented in this business segment results discussion.

Bell Techlogix

Bell Techlogix’s revenues of $17.6 million for the three months ended June 30 2010 represented a 6.5% increase from the $16.5 million of revenues for the three months ended June 30, 2009. Service revenues of $6.6 million for the three months ended June 30, 2010 represented a 4.3% increase from the $6.3 million of service revenues for the three months ended June 30, 2009 due to growth in new and existing managed service engagements. Product revenues of $11.0 million for the three months ended June 30, 2010 represented a 7.8% increase from the $10.2 million of product revenues for the six months ended June 30, 2009, which was primarily the result of the timing of projects for education customers.

Bell Techlogix’s operating income of $467,000 for the three months ended June 30, 2010 represented a $29,000 improvement from the operating income of $438,000 for the three months ended June 30, 2009. This improvement was due to a decrease of $129,000 in SG&A expenses due primarily to reductions in employee costs and depreciation.

Recreational Products Group

RPG revenues of $12.6 million for the three months ended June 30, 2010 represented a 14.6% increase from the $11.0 million of revenues for the three months ended June 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 $1.2 million for the three months ended June 30, 2010 represented a $222,000 increase from the operating income of $1.0 million for the three months ended June 30, 2009. This increase was primarily due to the $1.6 million increase in net revenues.

Corporate

Corporate holding company costs of $0.8 million for the three months ended June 30, 2010 represented a 17.5% decrease from $0.9 million for the three months ended June 30, 2009. The decrease in costs of $164,000 was primarily the result of headcount reductions and reductions in related benefits and travel costs.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

The Company has provided a summary of its consolidated operating results for the six months ended June 30, 2010, compared to the six months ended June 30, 2009, followed by an overview of its business segment performance below:

Net revenues

Net revenues were $49.9 million for the six months ended June 30, 2010 as compared to $45.9 million for the six months ended June 30, 2009, representing an increase of $4.0 million, or 8.9%. The increase consisted of a $2.7 million and a $1.3 million increase in net revenues in the RPG and Bell Techlogix segments, respectively.

Gross profit

Gross profit, which represents net revenues less the cost of products sold and services provided, was $10.5 million, or 21.1% of net revenues, for the six months ended June 30, 2010 compared to $9.9 million, or 21.5% of net revenues, for the six months ended June 30, 2009. The increase in gross profit of $0.6 million was primarily the result of an increase in revenues in the RPG segment.

Selling, general and administrative expenses

Selling, general and administrative (“SG&A”) expenses were $10.8 million, or 21.7% of net revenues, for the six months ended June 30, 2010 compared to $11.0 million, or 24.0% of net revenues, for the six months ended June 30, 2009. The decrease in SG&A expenses consisted of a $0.3 million decrease in SG&A expenses in the Bell Techlogix segment and a $0.2 million decrease in the Corporate segment offset by a $0.3 million increase in SG&A expenses in the RPG segment for the six months ended June 30, 2010.

Interest and other, net

Net interest expense was $553,000 for the six months ended June 30, 2010, compared to $498,000 for the six months ended June 30, 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 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 benefit from income taxes was $0 for the six months ended June 30, 2010 compared to a benefit from income taxes of $7,000 for the six months ended June 30, 2009. The benefit from income taxes for the six months ended June 30, 2009 was primarily related to state income tax. As of June 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 six months ended June 30, 2010 and 2009, the SkyTel division had no revenue or expense activity.

Business Segment Results

Bell Techlogix

Bell Techlogix’s revenues of $28.8 million for the six months ended June 30 2010 represented a 4.8% increase from the $27.5 million of revenues for the six months ended June 30, 2009. Service revenues of $12.8 million for the six months ended June 30, 2010 represented a 5.0% increase from the $12.2 million of service revenues for the six months ended June 30, 2009 due to growth in new and existing managed service engagements. Product revenues of $16.0 million for the six months ended June 30, 2010 represented a 4.6% increase from the $15.3 million of product revenues for the six months ended June 30, 2009, which was primarily the result of the timing of projects for education customers.

Bell Techlogix’s operating income of $60,000 for the six months ended June 30, 2010 represented a $211,000 improvement from the operating loss of $151,000 for the six months ended June 30, 2009. This improvement was due to a decrease of $307,000 in SG&A expenses due primarily to reductions in salaries and wages.

Recreational Products Group

RPG revenues of $21.1 million for the six months ended June 30, 2010 represented a 14.9% increase from the $18.4 million of revenues for the six months ended June 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 $1.3 million for the six months ended June 30, 2010 represented a $435,000 increase from the operating income of $830,000 for the six months ended June 30, 2009. This increase was primarily due to the $2.7 million increase in net revenues.

Corporate

Corporate holding company costs of $1.64 million for the six months ended June 30, 2010 represented an 11.4% decrease from $1.85 million for the six months ended June 30, 2009. The decrease in costs of $211,000 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):


	June 30,			December 31,
	2010			2009
Cash and cash equivalents	$	694		$	2,608
Net working capital	$	10,632		$	11,272
Current ratio		1.84			2.16
Long term liabilities to capitalization (1)		124.2	%		116.3	%
Shareholders’ deficit per share	$	(6.73	)	$	(4.82	)
Days’ sales in receivables		46			45


(1)		Capitalization represents the sum of long-term liabilities and shareholders’ equity.

For the six months ended June 30, 2010, net cash used in operating activities totaled $4.6 million, consisting of $4.4 million used in operating activities for continuing operations and $206,000 used in operating activities for discontinued operations (the Company’s former SkyTel division). The net cash used in operating activities for continuing operations consisted of a loss of $0.8 million, an increase in accounts receivable of $3.8 million, a decrease in inventory of $0.2 million and a decrease in accounts payable and accrued liabilities of $0.5 million offset by non-cash expenses of $0.5 million. The net cash used in operating activities was primarily due to the typical seasonal increase in business activity throughout the first half of the year for both the RPG and Bell Techlogix businesses. Net cash provided by investing activities totaled $0.2 million, consisting of $0.3 million in cash provided by investing activities for discontinued operations from proceeds received related to the Skytel note receivable offset by $83,000 in cash used in investing activities for continuing operations related to purchases of fixed assets. Net cash provided by financing activities totaled $2.5 million, consisting of $2.6 million net borrowings on the Revolving Credit Facility, partially offset by $0.1 million in payments of debt acquisition costs.

For the six months ended June 30, 2009, net cash used in operating activities totaled $5.9 million, consisting of a net loss of $1.7 million, an increase in accounts receivable of $4.7 million and a decrease in accounts payable and accrued liabilities of $1.7 million, partially offset by non-cash expenses of $1.0 million and a decrease in inventory of $1.2 million. The net cash used in operating activities was primarily due to the typical seasonal increase in business activity throughout the first half of the year for both the RPG and Bell Techlogix businesses. Net cash provided by investing activities totaled $2.7 million, consisting of $2.8 million in cash provided by investing activities for discontinued operations (the Company’s former SkyTel division) from payments received during the first half of 2009 on notes receivable related to the various SkyTel sale transactions, offset by $59,000 in cash used in investing activities for continuing operations related to purchases of fixed assets. Net cash used in financing activities totaled $70,000, 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, partially offset by $0.5 million in borrowings on the Revolving Credit Facility.

Revolving Credit Facility with WFCF

As of June 30, 2010, the Company had $2.6 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 Company’s 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.

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 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 the Company’s 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 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 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 June 30, 2010, the outstanding principal balance and accrued but unpaid interest on the Convertible Note was $11.6 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

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 WFCF’s prime rate plus a margin or the LIBOR Rate plus a margin. Based on the Company’s average outstanding variable rate debt during the six months ended June 30, 2010, a 1% increase in the variable rate would increase annual interest expense by approximately $23,000.


Item 4.		*Controls and Procedures*

The Company’s 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 June 30, 2010. Based on this evaluation, the Company’s Chief Executive Officer concluded that, as of June 30, 2010, 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 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 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 June 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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.


Item 1A.		*Risk Factors*

There have been no material changes in the risk factors disclosed in Part I, “Item 1A. Risk Factors” in the Company’s 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 Company’s Annual Report on Form 10-K, which could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s 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 Company’s Annual Report on Form 10-K before deciding to invest in the Company’s 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2009, including the Company’s 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


Item 6.		*Exhibits*


	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 Registrant’s 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 Registrant’s 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.

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: August 13, 2010	By:	/s/ Clinton J. Coleman
		Clinton J. Coleman
		Chief Executive Officer (Principal Executive Officer)

Dated: August 13, 2010	By:	/s/ Mark A. Begle
		Mark A. Begle
		Controller (Principal Financial Officer)

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 Registrant’s 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 Registrant’s 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.

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

BELL INDUSTRIES INC /NEW/ 10-Q