| BELL INDUSTRIES INC /NEW/ “Item 1A Risk Factors,” and in other reports or documents that we file from time to time with the United States Securities and Exchange Commission (the “SEC”) |
| All forward looking statements attributable to us or a person acting on our behalf are expressly qualified in their entirety by this cautionary statement |
| We are under no obligation to update any of the forward-looking statements after the date of this Annual Report to conform these statements to actual results or to changes in our expectations |
| As used herein, “we,” “us,” “our,” “Bell,” and the “Company” refer to Bell Industries, Inc |
| ’s operations include technology product sales and managed technology lifecycle services; sales of aftermarket products for recreational vehicles, motorcycles and ATVs, snowmobiles, and powerboats; and manufacturing and sales of specialty electronic components |
| Bell employed approximately 850 people at December 31, 2005 |
| logix Group (“BTL” or “Technology Solutions”), (2005 net revenues of dlra76dtta7 million) is a provider of integrated technology solutions for organizations in the Midwestern and Eastern United States |
| BTL is headquartered in Indianapolis, Indiana, and has offices and service facilities in the Midwest and Atlantic regions |
| BTL offers a comprehensive portfolio of technology products and managed lifecycle services, including planning, product sourcing, deployment and disposal, and support services |
| BTL’s planning services provide a comprehensive approach for achieving, sustaining and maximizing business success |
| BTL utilizes a project management process that is driven by an understanding of the client’s need, disciplined use of facts, data, and statistical analysis, and attention to managing, improving and implementing business processes |
| Planning services are typically provided as part of a more comprehensive delivery of a technology solution |
| BTL’s product sourcing services include the use of TechlogixSource, a branded web procurement system that provides state-of-the-art, integrated electronic sourcing for technology products |
| Product sales at BTL include desktop and laptop computers, access devices, servers, storage equipment, printers, network products, memory, monitors, consumables, and software |
| BTL purchases technology products for resale both directly from manufacturers and through distributors, all of which are considered to be BTL’s vendors |
| BTL’s primary distributor supplier is Ingram Micro Inc |
| Revenue from product sales is recognized when title and risk of loss are passed to the customer, which is considered to be at the time of shipment |
| An order or a signed agreement is required for each transaction |
| BTL’s deployment and disposal services include logistics support, software installation, system configuration, and disposal at the end of the technology lifecycle |
| Revenues for deployment and disposal services are recognized upon the completion of BTL’s contractual obligation, which is typically after the service has been rendered |
| BTL’s support services include help desk support, desk side support, technical maintenance services, and depot services |
| These services are delivered both on-site at client locations and from BTL’s leased facilities |
| BTL’s support services are typically rendered separate from product sales |
| Revenues from support services are primarily derived from recurring engagements |
| These services are typically under contract and are billed periodically, usually monthly, based on fixed fee arrangements, per incident or per resource charges, or on a cost plus basis |
| Revenue recognition from support services does not require significant management estimates |
| Two clients (two Fortune 500 companies) accounted for approximately 33prca of BTL revenues for fiscal 2005 |
| One of these clients, Philip Morris USA, accounted for approximately 10prca of the Company’s consolidated net revenues |
| There are a number of competitors in BTL’s market |
| BTL competes with national and multi-regional companies such as CompuCom Systems, Pomeroy Computer Resources, and Sarcom, as well as a number of local and regional firms providing technology products and deployment and disposal services |
| In technology support services, BTL may compete with large multi-national organizations such as IBM Global Services and Electronic Data Systems, as well as a number of small to mid-sized firms providing specialized services for certain market sectors |
| Many of BTL’s competitors have greater financial and marketing resources |
| 1 _________________________________________________________________ Recreational Products The Recreational Products Group (“RPG” or “Recreational Products”) (2005 net revenues of dlra45dtta9 million) sells replacement parts and accessories for recreational and other leisure-time vehicles |
| RPG supplies these products in the upper Midwestern United States to dealerships and retail stores selling recreational vehicles, snowmobiles, motorcycles and ATVs, and marine products |
| RPG also supplies these products to independent repair facilities |
| For all product groups, RPG operates distribution, sales and administration facilities in Eagan, Minnesota; Germantown, Wisconsin; and Grand Rapids, Michigan |
| RPG has significant market share in the distribution of recreational and other leisure-time vehicle replacement parts and accessories in the upper Midwestern United States |
| Major product lines distributed by RPG include Dunlop tires (motorcycle tires), Carefree of Colorado (awnings for RV’s and campers), Reese Products (trailer hitches for all types of vehicles), and Johnson Fishing, Inc |
| (marine motors) |
| RPG has over 5cmam000 customers, with no single customer accounting for over 5prca of its annual sales |
| RPG faces significant competition from national and regional distributors of aftermarket products for recreational vehicles, motorcycles and ATVs, snowmobiles, and marine products |
| Significant competitors include Coast Distribution System and Stag-Parkway (recreational vehicles), Parts Unlimited and Tucker Rocky Distributing (motorcycles, ATVs and snowmobiles), and Coast Distribution System and Land N’ Sea Distribution (marine) |
| Electronic Components The J W Miller Division (“JWM” or “Electronic Components”) of the Company, located in Gardena, California (2005 net revenues of dlra8dtta4 million), manufactures and sells over 6cmam000 standard and custom magnetic products |
| JWM’s magnetic products include inductors, coils, chokes, and transformers, among others |
| These products are used extensively in all types of circuitry found in electronic applications including computer, medical, lighting, and telecommunications equipment |
| JWM’s products are sold to regional, national and international electronic distributors, and to original equipment manufacturers and contract manufacturers |
| JWM utilizes outside manufacturer’s representatives located in North America, Europe and Asia to sell its products |
| The majority of sales are derived from customers located in North America |
| JWM faces significant competition from national and international manufacturers including Vishay, Sumida, Coilcraft, and Delevan |
| Company Information The Company is incorporated under the laws of the State of California |
| The Company’s principal executive offices are located at 1960 E Grand Avenue, Suite 560, El Segundo, California, 90245 |
| The Company’s telephone number is (310) 563-2355 and its fax number is (310) 648-7280 |
| Availability of Reports and Other Information The Company’s website address is www |
| The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports available free of charge on its website (via a link to the SEC website) as soon as reasonably practicable after it files these reports with the SEC In addition, the SEC’s website address is www |
| The SEC makes available on this website, free of charge, reports, proxy and other information regarding issuers, such as us, that file electronically with the SEC In addition, the Company posts the following information on its website: • its corporate Code of Ethics for Directors, Officers and Employees, which qualifies as a “code of ethics” as defined by Item 406 of Regulation S-K of the Securities and Exchange Act of 1934; • charters for its Audit Committee, Nominating Committee and Compensation Committee |
| 2 _________________________________________________________________ All of the above information is also available in print upon request to the Company’s secretary at the address listed under the heading “Company Information” above |
| Item 1A Risk Factors In addition to other information contained in this report, we are subject to the following risks, which could materially adversely affect our business, financial condition and/or results of operations in the future |
| We have incurred net losses in each of the past five fiscal years |
| As of December 31, 2005 we had an accumulated deficit of approximately dlra12dtta5 million |
| If our future revenues in each of our business units do not meet our expectations, or if operating expenses exceed what we anticipate, our business, financial condition and results of operations could be materially and adversely affected |
| We face certain significant risks related to the currently pending Williams litigation and from other potential litigation that could materially adversely affect our financial condition and results of operations |
| We have been engaged in ongoing litigation in connection with our 1997 purchase of Milgray Electronics, Inc, a publicly traded New York corporation, which was named as a defendant by the plaintiff, Williams Electronics Games, Inc |
| (“Williams”), in an action alleging common law fraud and other infractions related to Williams’ purchase of electronic components at allegedly inflated prices from 1991 to 1996 |
| Although the outcome of this litigation cannot be predicted, an adverse verdict could have a materially adverse effect on us |
| The defense of this lawsuit has required a significant amount of our management’s time and attention and, even if we prevail in defending this lawsuit, we will incur additional legal and related expenses |
| The disruptive effect and expense of this litigation could adversely affect our business, financial condition, results of operations and/or cash flows |
| We also may become subject to other litigation in the future |
| Our previously owned businesses subject us to potential environmental liabilities, which could adversely affect our results of operations |
| We are subject to various federal, state and local environmental statutes, ordinances and regulations relating to disposal of certain toxic, volatile or otherwise hazardous substances and wastes used or generated in connection with previously owned businesses |
| Such laws may impose liability without regard to whether we knew of, or caused, the release of such hazardous substances |
| Although we establish reserves for specifically identified potential environmental liabilities, which reserves we believe to be adequate, there may be potential undisclosed environmental liabilities or liability in excess of the amounts reserved |
| Compliance with these environmental laws could require us to incur substantial expenses |
| We rely on a limited number of hardware and software vendors to supply us with products in our technology solutions business and the loss of our ability to rely upon any of those vendors, or to obtain their products in the future would adversely affect our results of operations |
| Our technology solutions business is heavily dependent on our relationships with leading hardware and software vendors and on our status as an authorized service provider |
| Although we are currently authorized to service the products of many industry-leading hardware and software vendors, we may not be able to maintain our relationships, or attract new relationships, with the computer hardware and software vendors that may be necessary for our technology solutions business |
| Since we rely upon our vendor relationships as a marketing tool, any change in these relationships could adversely affect our results of operations while we seek to establish alternative relationships with other vendors |
| In general, our authorization agreements with vendors include termination provisions, some of which are immediate, and we cannot predict whether vendors will continue to authorize us as an approved service provider |
| In addition, we cannot predict whether those vendors will authorize us as an approved service provider for new products, which they may introduce |
| Any impairment of these vendor relationships, or the loss of authorization as an approved service provider, could adversely affect our ability to provide the products and services which our technology solutions business requires and harm our competitive position |
| In addition, significant product supply shortages have resulted from time to time because manufacturers have been unable to produce sufficient quantities of certain products to meet 3 _________________________________________________________________ demand |
| We expect to experience difficulty from time to time in obtaining an adequate supply of products from our major vendors, which may result in delays in completing sales |
| We may not be able to compete effectively with other companies in our business segments, which will cause our net sales and market share to decline and adversely affect our business, financial condition and results of operations |
| Our businesses are highly competitive and we face strong competition from competitors that are substantially larger and have considerably greater financial, technical and marketing resources than us |
| We believe that our prices and delivery terms are competitive; however, our competitors may offer more aggressive pricing than we do |
| We have experienced and expect to continue to experience intense competitive pricing pressures in our businesses, which could require us to reduce prices, with a corresponding adverse impact on our operating results |
| Additionally, as competition in the technology industry has intensified, certain of our key technology suppliers have heightened their direct marketing initiatives |
| These initiatives have resulted in some of our clients electing to purchase technology products directly from the manufacturer, rather than through us |
| While we expect these initiatives to continue, there could be a material adverse impact on our business if the shift of clients to purchase directly from manufacturers occurs more quickly than anticipated |
| Our technology solutions and electronic components businesses are dependent on a limited number of major customers and clients and the loss of any of these major customers and clients would materially and adversely affect our business, financial condition and results of operations |
| Sales of our products and services in our technology solutions and electronic components businesses have been and will continue to be concentrated in a small number of clients and customers |
| Two of our clients accounted for approximately 33prca of our total revenues for 2005 in our technology solutions business, with one client, Philip Morris USA, accounting for approximately 10prca of our total consolidated net revenues for the year |
| Similarly, six customers accounted for approximately 66prca of our total sales of electronic components in 2005 |
| In the event that any of these major customers or clients should cease to purchase products or services from us, or purchase significantly fewer products and services in the future, we could experience materially adverse effects on our business, financial condition and results of operations |
| During July 2005, Philip Morris USA indicated its intention to transition certain outsourcing services and product sales provided by the Company to a new vendor on or before the contract termination date of April 2006 |
| For the year ended December 31, 2005, services revenue from this portion of the engagement totaled approximately dlra7dtta5 million and product revenue amounted to approximately dlra3dtta7 million |
| During September 2005, written notification was received that terminates the enterprise service desk services portion of the engagement, effective April 1, 2006 |
| Extensions through August 2006 have been finalized on the other contractual portions of the engagement with an April 2006 termination date |
| We anticipate a decrease in services revenue and product revenue totaling approximately dlra4dtta0 million and dlra2dtta0 million, respectively, during 2006 as compared to 2005 on these contractual portions of the engagement |
| We are currently discussing other service and product opportunities with Philip Morris USA, but there is no guarantee that these new opportunities will offset any of the decreases in revenues in 2006 or in future years |
| Our recreational products business is seasonal and is subject to fluctuations, based upon various economic and climatic conditions that could harm us |
| Sales of our recreational products are affected directly by the usage levels and purchases of recreational vehicles, snowmobiles, motorcycles and ATVs, and marine products |
| The purchase and, in particular, the usage of these types of vehicles, are affected by weather conditions |
| As a result, sales of our recreational products business are highly susceptible to unpredictable events, and ordinarily decline in the winter months resulting in losses during these periods of the year |
| Additionally, unusual weather conditions in a particular season, such as unusually cold weather in the spring or summer months, can cause period-to-period fluctuations in our sales of recreational products |
| The usage and purchases of recreational vehicles, snowmobiles, motorcycles and ATVs, and marine products are also affected by consumers’ level of discretionary income and their confidence about economic conditions and changes in interest rates and in the 4 _________________________________________________________________ availability and cost of gasoline |
| As a result, sales of our recreational products can fluctuate based upon unpredictable circumstances that are outside of our control |
| Our recreational products business relies heavily upon vendors with which we have no long-term relationships |
| We do not have long term supply contracts with our recreational products suppliers, which may adversely affect the terms on which we purchase products for resale or result in our inability to purchase products from one or more of such vendors in the future |
| These vendors may choose to distribute their products directly to aftermarket dealers or establish exclusive supply relationships with other distributors |
| Additionally, manufacturers of new recreational vehicles, snowmobiles, motorcycles and ATVs, and marine products may choose to incorporate optional equipment as standard equipment on their vehicles at the time of manufacture that are similar to products available for sale to dealers by distributors such as us |
| In addition to decreased sales, we would encounter increased competition in our markets, or may be unable to offer certain products to our customers, upon any such changes in our relationships with our recreational products vendors |
| If we are unable to recruit and retain key personnel necessary to operate our businesses, our ability to compete successfully will be adversely affected |
| We are heavily dependent on our current executive officers, management and technical personnel |
| The loss of any key employee or the inability to attract and retain qualified personnel could adversely affect our ability to execute our current business plans and successfully develop commercially viable products and services |
| Competition for qualified personnel is intense, and we might not be able to retain our existing key employees or attract and retain any additional personnel |
| In addition, our recent financial operating results may make it more difficult for us to attract and retain qualified personnel |
| If we are unable to develop innovative products and services in our technology solutions and electronic components businesses, demand for our products and services may decrease |
| Our future operating results in our technology solutions and electronic components businesses are dependent on our ability to continually develop, introduce and market new and innovative products, to modify existing products, to respond to technological change and to customize certain products to meet customer requirements |
| There are numerous risks inherent in this process, including the risks that we will be unable to anticipate the direction of technological change or that we will be unable to develop and market new products and applications in a timely fashion to satisfy customer demands |
| If this occurs, we could lose customers and experience adverse effects on our financial condition and results of operations |
| Our electronic components business is cyclical and demand may decline in the future, which could adversely affect us |
| Sales at our electronic components business have historically fluctuated with the performance of the electronic and semiconductor component industry |
| A decrease in demand within this industry could adversely affect our results of operations |
| Our technology solutions business could be adversely impacted by conditions affecting the information technology market |
| The demand for our technology products and services depends substantially upon the general demand for business-related computer hardware and software, which fluctuates based on numerous factors, including capital spending levels, the spending levels and growth of our current and prospective customers and general economic conditions |
| Fluctuations in the demand for our products and services could have a material adverse effect on our business, results of operations and financial condition |
| In the past, adverse economic conditions decreased demand for our products and negatively impacted our financial results |
| Future economic projections for the information technology sector are uncertain |
| If an uncertain information technology spending environment persists, it could negatively impact our business, results of operations and financial condition |
| 5 _________________________________________________________________ If we fail to maintain effective internal controls over financial reporting and disclosure controls and procedures in the future, we may not be able to accurately report our financial results or prevent fraud, which would have an adverse affect on our business |
| Effective internal controls over financial reporting and disclosure controls and procedures are necessary for us to provide reliable financial information and effectively prevent fraud |
| If we cannot provide reliable financial reports or prevent fraud, it could have an adverse affect on our business |
| We have in the past discovered and may in the future discover areas of our internal control over financial reporting that need improvement |
| During 2005 we had a material error relating to our 2004 and 2003 annual consolidated financial statements, the interim consolidated condensed financial statements for all interim periods in 2004, and the first three interim periods in 2005 which required a restatement of our financial statements for those periods |
| Although we have implemented controls to properly prepare and review our financial statements, we cannot be certain that these measures will ensure that we will maintain adequate controls over our financial reporting process in the future |
| In light of this error, we evaluated our internal control over financial reporting and our disclosure controls and procedures and concluded that we had a material weakness in the controls over the preparation, review, presentation and disclosure of amounts included within our Consolidated Balance Sheet and Consolidated Statement of Cash Flows |
| Specifically, cash flows from the our floor plan arrangements were not appropriately classified as cash flows from financing activities in the Consolidated Statement of Cash flows in accordance with generally accepted accounting principles |
| Further, these floor plan liabilities were not properly segregated from accounts payable in the Consolidated Balance Sheet as required under generally accepted accounting principles |
| A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected |
| We are in the process of beginning a review and analysis of our internal control over financial reporting for Sarbanes-Oxley compliance |
| As part of that process we may discover additional control deficiencies in our internal control over financial reporting or our disclosure controls and procedures that we believe require remediation |
| If we discover additional deficiencies, we will make efforts to remediate these deficiencies; however, there is no assurance that we will be successful either in identifying deficiencies or in their remediation |
| Any failure to successfully remediate the material weakness in internal control over financial discussed above or to maintain effective controls in the future could adversely affect our business or cause us to fail to meet our reporting obligations |
| We may need to implement additional finance and accounting systems, procedures and controls to satisfy new reporting requirements |
| Compliance with Section 404 of the Sarbanes-Oxley Act and other requirements may significantly increase our costs and require additional management time and resources |
| Changes in stock option accounting rules may adversely impact our reported operating results |
| In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) Nodtta 123 (revised 2004) “Share-Based Payment |
| ” SFAS Nodtta 123 (revised 2004) revises SFAS Nodtta 123 and APB Nodtta 25 and related interpretations |
| Effective January 1, 2006, SFAS Nodtta 123 (revised 2004) requires compensation cost relating to all share-based payments to employees to be recognized in the financial statements based on their fair values |
| The pro forma disclosures previously permitted under SFAS Nodtta 123 will no longer be an alternative to financial statement recognition |
| Based on the outstanding stock options not vested as of December 31, 2005, the adoption of SFAS Nodtta 123 (revised 2004) is not expected to have a material impact on the Company’s consolidated financial position or results of operations |
| Although the adoption of this statement is not expected to have a material impact, the impact in future periods may be significant based on the number of stock options granted as we will be required to expense the fair value of our stock options rather than disclosing the impact on our consolidated results of operations within our footnotes |
| 6 _________________________________________________________________ Future changes in financial accounting standards or practices affect our reported results of operations |
| A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective |
| New accounting pronouncements and varying interpretations or accounting pronouncements have occurred and may occur in the future |
| Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct business |