Item 1.
Business
Bell Industries, Inc.’s operations include technology lifecycle and outsourced services; distribution of aftermarket products for recreational vehicles, motorcycles, snowmobiles and powerboats; and manufacturing of specialty electronic components. Bell employed approximately 775 people at December 31, 2003.
Technology Solutions
The technology lifecycle services business, the Tech.logix Group (“BTL” or “Technology Solutions”), (2003 sales of $90.8 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 provides information technology lifecycle services including planning, product sourcing, migration, support, and disposal services. Recurring support services, include help desk, depot, and on-site expertise for desktop and mobile devices, business software applications, and network infrastructures. BTL meets clients’ needs by combining a comprehensive offering of technology outsourcing services with its expertise in sourcing and deploying technology access devices, servers, storage equipment, printers, network products, and software.
BTL’s suppliers include Hewlett-Packard, IBM, Panasonic, Sun Microsystems, Cisco, Citrix, 3Com, Nortel Networks, and Veritas for technology hardware products; and Microsoft, Symantec, Lotus, Adobe Systems, and Novell for software. Three clients (two Fortune 500 companies and a Midwest healthcare provider) account for approximately 30% of BTL revenues for fiscal 2003.
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 services. In technology outsourcing 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.
Recreational Products
The Recreational Products Group (“RPG”) (2003 sales of $44.8 million) is a distributor of 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, ATV’s, 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 vehicle replacement parts and accessories in the upper Midwestern United States. RPG supplies over 8,000 recreational vehicle-related products, 11,000 marine items, 9,000 motorcycle and ATV items, and 5,000 snowmobile items. 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 4,500 customers, with no single customer accounting for over 5% of its annual sales.
RPG faces significant competition from national and regional distributors of after-market products for recreational vehicles, motorcycles, snowmobiles, and marine products. Significant competitors include Coast Distribution System and Stag-Parkway (recreational vehicles), Parts Unlimited and Tucker Rocky Distributing (motorcycles and snowmobiles), and Coast Distribution System and Land N’ Sea Distribution (marine).
Electronic Components
The J. W. Miller Division (“JWM” or “Electronic Components”) of Bell, located in Gardena, California (2003 sales of $6.3 million), manufactures and distributes over 6,000 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 and telecommunications equipment.
JWM’s products are sold through national, regional and international distributors directly and through manufacturer’s representatives located in North America, Europe and Asia. JWM’s customers include electronic distributors and manufacturers with its four largest customers representing 53% of its total 2003 sales. The majority of JWM’s sales are derived from customers located in North America.
JWM faces significant competition from national and international manufacturers including Vishay, Sumida, Coilcraft, and Delevan.
Item 2.
Item 2.
Properties
At December 31, 2003, the Company leased 15 facilities, containing approximately 295,000 square feet and owned one facility, containing approximately 20,000 square feet. The following table sets forth the facilities utilized by each of the Company’s business segments:
These properties are considered in good condition and suitable for their present use. Generally, the Company’s facilities are fully utilized although excess capacity exists from time to time.
Item 3.
Item 3.
Legal Proceedings
The Company is involved in litigation which is incidental to its current and discontinued businesses. The resolution of this litigation is not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Item 4.
Item 4.
Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of 2003.
Executive Officers of the Registrant
The Executive Officers of the Registrant are as follows:
(1)
Mr. Edwards was appointed President and Chief Executive Officer in February 1999. From January 1998 to February 1999, he served as Executive Vice President - Finance and Operations, and Chief Financial Officer. He also serves as Chairman of the Board of Directors.
(2)
Mr. Doll was appointed President of the BTL business unit in November 2003 and continues to serve as a Senior Vice President. Concurrent with this appointment, Mr. Doll’s Chief Financial Officer responsibilities were assumed by Mr. Edwards. From February 1999 to November 2003, Mr. Doll served as Chief Financial Officer. From April 1998 to February 1999, he served as Vice President, Finance.
(3)
Mr. Troy has served as Vice President since September 1997.
(4)
Mr. Rosen has served as Vice President and Corporate Controller since December 2000. Prior to December 2000, he was a senior manager with PricewaterhouseCoopers LLP.
PART II
Item 5.
Item 5.
Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Bell’s common stock is listed on the American Stock Exchange and the Pacific Stock Exchange under the symbol “BI”. The following table shows the high, low and closing market prices for the Company’s common stock during the eight most recent quarters.
As of March 15, 2004 there were approximately 1,000 record holders of common stock.
A summary of shareholder approved and non-shareholder approved stock plan information as of December 31, 2003 is included at the “Stock Plans” footnote within the Notes to the Consolidated Financial Statements.
Item 6.
Item 6.
Selected Financial Data
(1)
Includes before-tax charge for staff separation and facilities consolidation ($845) and a before-tax charge for settlement costs associated with an executive change-in-control contract ($650) in 2001, before-tax gain on the disposition of a real estate asset ($2,842) and before-tax charge for facilities consolidation and staff relocation costs, asset write-downs and a corporate identity program ($2,405) in 2000, before-tax gain on the disposition of certain real estate assets ($1,497) and a before-tax loss on the disposition of an electronics manufacturing business ($455) in 1999.
(2)
Certain other per share data presented for 1999 has not been adjusted to reflect cash distributions totaling $7.00 per share made in June 1999 ($5.70 per share) and December 1999 ($1.30 per share).
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
In addition to historical information, the following discussion and analysis of management contains forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements.
The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including the recoverability of assets, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. The Company bases its estimates on historical experience and on other relevant assumptions that are believed to be reasonable under the circumstances. The Company’s actual results may differ materially from these estimates.
Critical Accounting Policies
The Summary of Accounting Policies within the Notes to the Consolidated Financial Statements includes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. The following is a discussion of each of the Company’s critical accounting policies:
Revenue Recognition
Sales are recognized when products are shipped or when services are provided assuming no significant Company obligations remain and the collection of related receivables is probable. Revenue recognition on product sales is not subject to significant estimates as the Company has not experienced significant product returns.
Valuation of Receivables
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company performs ongoing credit evaluations of its customers. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Changes in the credit worthiness of customers, general economic conditions and other factors may impact the level of future write-offs.
Valuation of Inventory
The Company periodically reviews inventory items and overall stocking levels to ensure that adequate reserves exist for inventory deemed obsolete or excessive. In making this determination, the Company considers historical stocking levels, recent sales of similar items and forecasted demand for these items. Changes in factors such as customer demand, technology and other matters could affect the level of inventory obsolescence in the future.
Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF No. 00-21 provides guidance as to when deliverables must be divided into separate units of accounting. This guidance was effective for revenue arrangements entered into after June 30, 2003. The adoption of EITF No. 00-21 did not have a material effect on the Company’s financial position, results of operations or cash flows.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“SFAS 150”) that establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. On November 7, 2003, Financial Accounting Standards Board Staff Position 150-3 was issued, which indefinitely deferred the effective date of SFAS 150 for certain mandatory redeemable noncontrolling interests. The adoption of SFAS 150 had no effect on the Company’s consolidated financial position, results of operations or cash flows.
Contractual Obligations and Commercial Commitments
The following summarizes contractual obligations and commercial commitments as of December 31, 2003 (in thousands):
Results of Operations
Results of operations by business segment were as follows (in thousands):
The following summarizes comparative operating results data as a percentage of net revenues:
The following summarizes other comparative operating results data:
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Net revenues
Net revenues for the year ended December 31, 2003 increased 0.8% to $141.9 million from $140.8 million in 2002. Net revenues are further discussed in “Technology Solutions,” “Recreational Products,” and “Electronic Components,” below.
Operating income (loss)
Operating loss for the year ended December 31, 2003 decreased 22.9% to $2.7 million from $3.6 million in 2002. Operating results are further discussed in “Technology Solutions,” “Recreational Products,” and “Electronic Components,” below.
Corporate costs
Corporate costs for the year ended December 31, 2003 increased 7.7% to $2.9 million from $2.7 million in 2002. During 2002, corporate costs were reduced by miscellaneous income arising from insurance proceeds. Excluding such miscellaneous income, corporate costs were relatively consistent between the two years.
Interest, net
Net interest income for the year ended December 31, 2003 decreased 17.0% to $166,000 from $200,000 in 2002. The decrease in net interest income is primarily attributable to lower interest rates that were partially offset by higher average cash balances during 2003.
Cumulative effect of accounting change
During 2002, the Company recorded a pre-tax goodwill impairment loss of $2.1 million, $1.3 million after tax, following the adoption of Statement of Financial Accounting Standards No. 142 on January 1, 2002.
Technology Solutions
Technology Solutions revenues for the year ended December 31, 2003 increased slightly to $90.8 million from $90.6 million in 2002. Services revenues for the year ended December 31, 2003 increased 56.4% to $34.9 million from $22.3 million in 2002 and rose to 38.5% of total Technology Solutions revenues during 2003 from 24.7% in 2002. Several new outsourcing engagements have contributed to the increase in services revenues during 2003. Services revenues for 2004 will be impacted due to the ending of an outsourcing engagement in March 2004 that generated approximately $6 million in revenues during 2003. Product revenues for the year ended December 31, 2003 decreased 18.2% to $55.8 million from $68.2 million. The decrease in product revenues is primarily attributable to decreased technology product deliveries, as business enterprises continued to defer information technology expenditures. Product revenues have also continued to be negatively impacted as major suppliers continued to market their products directly to end-user customers, rather than utilizing traditional distribution channels. The operating loss for the year ended December 31, 2003 decreased 3.1% to $2.1 million from $2.2 million in 2002. Operating results continue to be challenged due to the start-up and implementation costs of new engagements and a continued investment in expanded business development efforts. The costs associated with these efforts will continue to impact near term results, but are considered essential to the Company’s efforts in generating new business opportunities and expanding its market penetration.
Recreational Products
Recreational Products revenues for the year ended December 31, 2003 increased slightly to $44.8 million from $44.6 million in 2002, and operating income increased 61.3% to $1.3 million from $819,000. Strong marine product sales have been partially offset by generally weak sales in snow related products as a result of mild winter conditions in the Northern Midwest in early 2003. Reduced operating expenses, including lower
payroll costs, advertising expenses and catalog expenses, have contributed to the overall increase in operating income. Results for 2002 also included distribution center relocation costs.
Electronic Components
Electronic Components revenues for the year ended December 31, 2003 increased 13.2% to $6.3 million from $5.6 million in 2002, and operating income increased 92.0% to $939,000 from $489,000. Increased product demand contributed to the higher revenues in 2003. Increased revenues and shifts in product mix contributed to the improvement in operating income. In addition, in the prior year certain inventory reserves were increased in light of difficult market conditions at the time.
Cost of products sold
As a percentage of product revenues, cost of products sold for the year ended December 31, 2003 decreased to 81.5% from 82.8% in 2002. This decrease is primarily due to reductions in lower margin product sales at the Technology Solutions business unit.
Cost of services provided
As a percentage of services revenues, cost of services provided for the year ended December 31, 2003 increased to 81.4% from 76.4%. This increase is primarily due to higher payroll related costs incurred to integrate new clients and deliver services within the Technology Solutions business unit.
Selling and administrative expenses
As a percentage of sales, selling and administrative expenses for the year ended December 31, 2003 decreased slightly to 19.0% from 19.1% in 2002. This decrease is primarily attributable to reduced operating expenses at the Recreational Products business unit offset by higher travel, telecommunications and other related costs incurred to integrate new clients at the Technology Solutions business unit.
Income tax
For the year ended December 31, 2003, the Company’s effective income tax rate was a provision of approximately 46.9% compared to a benefit of approximately 39.5% in 2002. After consideration of relevant factors, including recent operating results and the prior utilization of all previously available tax benefit carry-back opportunities, the Company recorded a full valuation allowance against net deferred tax asset balances. The establishment of the valuation allowance, net of reversals of tax accruals no longer required, resulted in an income tax provision of $1.2 million for the year ended December 31, 2003. Before accounting changes, during the year ended December 31, 2002, the Company recognized income tax benefits of $1.3 million all of which were realized through carry-back opportunities.
Net loss
Net loss totaled $3.8 million for the year ended December 31, 2003, an increase of $0.5 million from the net loss in the prior year. The change in net loss resulted from improvements in operating results offset by the income tax effects described above.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net revenues
Net revenues for the year ended December 31, 2002 decreased 23.3% to $140.8 million from $183.6 million in 2001. Net revenues are further discussed in “Technology Solutions,” “Recreational Products,” and “Electronic Components” below.
Operating income (loss)
Operating loss for the year ended December 31, 2002 increased 63.2% to $3.6 million from $2.2 million in 2001. Operating results are further discussed in “Technology Solutions,” “Recreational Products,” and “Electronic Components” below.
Special items
Operating results for 2001 include pre-tax charges totaling $1.5 million composed of $845,000 of costs related to the strategic repositioning of BTL’s Midwest operations and $650,000 in settlement costs associated with a change-in-control contract. The $845,000 repositioning charge has been included in the operating results of Technology Solutions and is further discussed in “Technology Solutions” below.
Corporate costs
Corporate costs for the year ended December 31, 2002 decreased 15.1% to $2.7 million from $3.1 million in 2001. The decrease is primarily attributable to reduced costs associated with the Company’s strategic change initiatives, miscellaneous income arising from insurance proceeds and reduced bonus awards during 2002 as compared to 2001.
Interest, net
Net interest income for the year ended December 31, 2002 decreased 56.5% to $200,000 from $460,000 in 2001. The decrease in net interest income is primarily attributable to lower interest rates and lower average cash balances during 2002.
Cumulative effect of accounting change
The Company recorded a pre-tax goodwill impairment loss of $2.1 million, $1.3 million after tax, following the adoption of Statement of Financial Accounting Standards No. 142 effective January 1, 2002.
Technology Solutions
Technology Solutions revenues for the year ended December 31, 2002 decreased 30.5% to $90.6 million from $130.4 million in 2001. Approximately half of the decrease in revenues is attributable to decreased technology product deliveries, as business enterprises have continued to defer information technology expenditures. Revenues have also been negatively impacted as major suppliers increasingly market their products directly to end-user customers, rather than utilizing traditional distribution channels. Product revenues for the year ended December 31, 2002 decreased 35.0% to $68.2 million from $105.0 million in 2001. Services revenues for the year ended December 31, 2002 decreased 12.0% to $22.3 million from $25.4 million in 2001. The decrease in services revenues is primarily attributable to a significant technology project in 2001 and no such similar project in 2002. The operating loss totaled $2.2 million for the year ended December 31, 2002 compared to a $938,000 loss in 2001, which includes the $845,000 special charge associated with this business unit in 2001. Components of the 2001 special charge included facilities consolidation costs and asset write-downs in connection with the opening of a technology center and separation costs. The results for 2002 have been adversely impacted by continued costs associated with building BTL’s technology outsourcing practices. This business unit also discontinued its application development service line, in response to weak market demand, that further contributed to the operating loss during 2002.
Recreational Products
Recreational Products revenues for the year ended December 31, 2002 decreased 3.1% to $44.6 million from $46.0 million in 2001, and operating income decreased 14.2% to $819,000 from $954,000. The decrease in revenues for 2002 is attributable to lower snow product sales during the first quarter as compared to the comparable period in 2001. Operating results were also impacted by the relocation of this business unit’s Minnesota distribution center to a new facility during the second half of 2002.
Electronic Components
Electronic Components revenues for the year ended December 31, 2002 decreased 22.2% to $5.6 million from $7.2 million in 2001, and operating income decreased 69.2% to $489,000 from $1.6 million. The decrease in revenues and operating income is attributable to weak demand for electronics components in the computer and telecommunications sectors, shifts in product mix, pricing pressures, and additions to inventory reserves arising from difficult market conditions.
Cost of products sold
As a percentage of product revenues, cost of products sold for the year ended December 31, 2002 decreased to 82.8% from 84.1% in 2001. The decrease is primarily due to reductions in lower margin product sales at the Technology Solutions business unit.
Cost of services provided
As a percentage of services revenues, cost of services provided for the year ended December 31, 2002 increased to 76.4% from 75.3% in 2001. This increase is primarily due to higher margins associated with a technology project in 2001.
Selling and administrative expenses
As a percentage of sales, selling and administrative expenses for the year ended December 31, 2002 increased to 19.1% from 16.3% in 2001. This increase is primarily due to the overall reduction in sales in 2002 and the existence of certain fixed costs.
Income tax
The Company’s effective income tax rate was a benefit of approximately 39.5% in both 2002 and 2001. Taxable losses during the year ended December 31, 2002 resulted in a federal tax refund of approximately $2.4 million as losses in this year have been carried back to previously profitable years.
Net loss
Net loss totaled $3.3 million for the year ended December 31, 2002, an increase of $2.3 million from the net loss in the prior year. The increase in net loss resulted from the factors described above, including the goodwill impairment charge of $1.3 million.
Changes in Financial Condition
Liquidity and Capital Resources
Selected financial data is set forth in the following table (dollars in thousands, except per share amounts):
Net cash provided by operating activities was $2.9 million for the year ended December 31, 2003 compared with $1.9 million in 2002. The cash flow from operating activities in 2003 reflects an increase in accounts payable and accrued payroll and the collection of a $2.4 million federal tax refund, partially offset by an increase in accounts receivable. The increase in accounts payable was primarily due to a $1.5 million increase in December 2003 inventory purchases at the Technology Solutions business unit as compared to December 2002. This inventory was sold prior to December 31, 2003. The increases in accounts receivable and accrued payroll were primarily attributable to the increase in sales at the Technology Solutions business unit during the fourth quarter of 2003 as compared to the prior year and an increase in accrued payroll costs at year-end for employees hired on new services engagements. The cash flow from operating activities in 2002 reflects cash collected on accounts receivable partially offset by payment of accounts payable and accrued liabilities and an increase in income tax receivable. The decrease in accounts receivable was primarily due to the $5.1 million decline in revenues during the fourth quarter of 2002 as compared to 2001. Accounts payable was also lower at the end of 2002 as a result of reduced inventory purchases in light of the reduced sales levels. The increase in income tax receivable totaling $1.7 million represents the increase in 2002 federal tax refund over the refund received related to the 2001 tax year.
Net cash used in investing activities totaled $789,000 for the year ended December 31, 2003 compared to $1.5 million in 2002. Investing activities included the addition of fixed assets as well as expenditures for a relocated distribution center in 2002.
Net cash used in financing activities totaled $819,000 for the year ended December 31, 2002. This total included funds utilized to purchase shares of common stock under the Company’s 2001 Stock Repurchase Program, offset by proceeds from stock issued under the Company’s Employees’ Stock Purchase Plan.
Despite recent operating losses, the Company believes that sufficient cash resources exist for 2004 to support requirements for its operations and commitments through available cash and cash generated by operations. The Company has a line of credit for general corporate purposes in the amount of $10.0 million, expiring in May 2004. No amounts were borrowed under the line during 2003 or 2002. The Company is currently able to borrow up to $2.5 million of the $10.0 million credit line, subject to certain requirements, including maintaining minimum cash and cash equivalents on deposit of at least $3.5 million. Management does not currently anticipate the need to borrow under the line of credit and is evaluating its options in regards to renewing or terminating the facility.
The Company does not have any material off-balance sheet arrangements.
Trends and Uncertainties
The challenging technology market conditions and costs associated with building our technology outsourcing practices have impacted results during 2003 and are expected to continue to impact near term financial performance. Operating results continue to be challenged due to the start-up and implementation
costs of new engagements and a continued investment in expanded business development efforts. The success of BTL’s business is dependent to a significant extent on the ability to generate services business with new and existing clients. We believe that continued focus on developing new business opportunities and expanding market penetration are key steps towards long term growth. Because of the challenges in selling technology lifecycle and outsourced services to new clients in the current difficult technology environment, there can be no assurance that such efforts will be successful. The success of these efforts is critical in returning the Company to profitability.
Item 7A.
Item 7A.
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.
Item 8.
Item 8.
Financial Statements and Supplementary Data
The financial data included in the financial statement schedule should be read in conjunction with the consolidated financial statements. All other schedules have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Shareholders of Bell Industries, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Bell Industries, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in the notes to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
February 17, 2004
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
See Accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
See Accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Dollars in thousands)
See Accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
See Accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Accounting Policies
Principles of consolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany transactions have been eliminated.
Cash and cash equivalents - The Company considers all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents.
Revenue recognition and receivables - The Company’s operations include technology lifecycle services (“Technology Solutions”); distribution of aftermarket products for recreational vehicles, motorcycles, snowmobiles and powerboats (“Recreational Products”); and specialty components manufacturing and distribution for the computer and electronics markets (“Electronic Components”). Sales are recognized and trade receivables are recorded when products are shipped or when services are provided assuming no significant Company obligations remain and collection of related receivables is probable. Concentrations of credit risk with respect to trade receivables are generally limited due to the large number and general dispersion of trade accounts, which constitute the Company’s customer base. During 2003 and 2002, the Company had one Technology Solutions customer that accounted for approximately 10% and 12% of net sales, respectively. At December 31, 2003 and 2002, the Company had one Technology Solutions customer that accounted for approximately 14% and 15% of accounts receivable, respectively. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company estimates reserves for potential credit losses and such losses have been within these estimates.
Inventories - Inventories, consisting primarily of finished goods, are stated at the lower of cost (determined using weighted average and first-in, first-out methods) or market (net realizable value).
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 $3.4 million in 2003, $3.3 million in 2002 and $3.7 million in 2001. These costs are included, net of amounts billed to customers, within selling and administrative expenses in the Consolidated Statement of Operations. Amounts billed to customers totaled approximately $550,000 in 2003, $550,000 in 2002 and $800,000 in 2001.
Vendor rebates - The Company receives volume incentives from certain vendors related to sales activity of certain products that are recognized when deemed earned.
Fixed assets, depreciation and amortization - All fixed assets are recorded at cost and depreciated using the straight-line method based upon estimated useful lives of 10 years for building improvements, 3 to 5 years for computer equipment and software and 3 to 7 years for furniture, fixtures and other. Leasehold improvements are amortized over the shorter of their estimated service lives or the term of the lease.
Goodwill and other intangible assets - In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Upon adoption of SFAS No. 142, goodwill is tested at least annually and whenever events or circumstances occur indicating that goodwill might be impaired. Amortization of goodwill, including goodwill recorded in past business combinations, ceases. During the quarter ended June 30, 2002, the Company completed both steps of the transitional impairment tests, as required by SFAS No. 142, and recorded a pre-tax goodwill impairment loss of $2.1 million, $1.3 million after tax, representing the total goodwill balance as of January 1, 2002 (date of adoption). The goodwill resulted from Technology Solutions acquisitions in previous years. The fair value of the Technology Solutions reporting unit was determined using the discounted cash flow approach as allowed by SFAS No. 142. Goodwill amortization recorded during the year ended December 31, 2001 was $113,000 or $0.01 per share.
Long-lived assets - In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”, the Company assesses potential impairments to its long-lived assets when events or changes in circumstances indicate that the carrying amount may not be fully recoverable. If required, an impairment loss is recognized as the difference between the carrying value and the fair value of the assets.
Income taxes - Provision is made for the tax effects of temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. In estimating deferred tax balances, the Company considers all expected future events other than enactments of changes in the tax law or rates. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.
Accrued liabilities - The Company’s accrued liabilities include approximately $4.9 million and $5.4 million of amounts attributable to disposed businesses at December 31, 2003 and 2002, respectively. These amounts relate to certain legal, environmental and contractual matters specifically identifiable to these disposed businesses.
Stock option plans - The Company measures and records compensation expense relating to stock options as the excess, if any, between the market value of shares on the date of option grant and the expected proceeds upon exercise. Such expense is accrued ratably over the period to be benefited. The Company has adopted the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to disclose the impact of compensation cost on earnings as determined under the fair value method prescribed by SFAS No. 123.
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 warrants.
Use of estimates - Certain amounts and disclosures included in the consolidated financial statements required the use of management estimates which could differ from actual results.
Reclassifications - Certain amounts shown in the prior years’ consolidated financial statements have been reclassified to conform to the current year presentation.
New pronouncements - In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF No. 00-21 provides guidance as to when deliverables must be divided into separate units of accounting. This guidance was effective for revenue arrangements entered into after June 30, 2003. The adoption of EITF No. 00-21 did not have a material effect on the Company’s financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” that establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. On November 7, 2003, Financial Accounting Standards Board Staff Position 150-3 was issued, which indefinitely deferred the effective date of SFAS 150 for certain mandatory redeemable noncontrolling interests. The adoption of SFAS 150 had no effect on our consolidated financial position, results of operations or cash flows.
Special Items
Repositioning and settlement costs - During 2001, the Company recorded special pre-tax charges totaling $1.5 million. The charges consisted of $845,000 for costs related to strategic repositioning of the Company’s operations and $650,000 in settlement costs associated with an executive change-in-control contract. Components of the repositioning charge included facilities consolidation costs and asset write-downs
in connection with the opening of a new technology center and separation costs. Substantially all costs relating to these charges, other than a lump sum payment made in January 2002 relating to the change-in-control contract, were paid during 2001.
Floor Plan Arrangements
The Company finances certain inventory purchases in its Technology Solutions business unit through floor plan arrangements with two finance companies. The amount of aggregate outstanding floor plan obligations ranged between $2.0 million and $5.6 million during 2003 and $3.1 million and $5.5 million during 2002, and were secured by certain of the Company’s inventory and accounts receivable. Additionally, the finance companies maintain intercreditor agreements with the Company’s primary lender. The outstanding amounts are payable in 30 to 45 days. The arrangements are generally subsidized by computer products manufacturers and are interest free if amounts are paid within the specified terms. The Company paid minimal interest under floor plan arrangements for the periods presented. At December 31, 2003 and 2002, the Company had outstanding floor plan obligations of $4.1 million and $3.1 million, respectively, which are classified within accounts payable.
Borrowings and Liquidity
Under a credit agreement dated April 1999, as amended, with its primary lender, the Company has a line of credit in the amount of $10.0 million to finance short term cash flow and working capital requirements. The credit agreement expires in May 2004 and provides for interest at either the bank’s reference rate or LIBOR plus 1.75%. The line of credit is subject to an annual commitment fee of .5% on the unused line of credit. Available borrowing capacity is subject to a borrowing base calculation based on a percentage of the Company’s available accounts receivable and inventories. The Company is subject to certain restrictive covenants including minimum interest coverage, minimum tangible net worth and a maximum leverage ratio. Outstanding borrowings are secured by the assets of the Company, except those assets that secure borrowings under floor plan arrangements. At December 31, 2003 and 2002, the Company had no outstanding borrowings under the credit agreement. The Company currently is able to borrow up to $2.5 million of the $10.0 million credit line, subject to certain requirements, including maintaining minimum cash and cash equivalents on deposit of at least $3.5 million.
Despite recent operating losses, the Company believes that sufficient cash resources exist for 2004 to support requirements for its operations and commitments through available cash and cash generated by operations. Management does not currently anticipate the need to borrow under the line of credit and is evaluating its options in regards to renewing or terminating the facility.
Stock Repurchase Program
In July 2001, the Board of Directors authorized a stock repurchase program (the “2001 Program”) of up to 1,000,000 shares of the Company’s outstanding common stock. The common stock can be repurchased in the open market at varying prices depending on market conditions and other factors. During 2002, the Company repurchased 556,721 shares of common stock at an average price of $1.57 per share under the 2001 Program.
Stock Plans
The Company maintains certain stock option plans which provide for the issuance of common stock to be available for purchase by employees and by non-employee directors of the Company. Under the stock option plans, both incentive and nonqualified stock options, stock appreciation rights and restricted stock may be granted. Options outstanding under the plans have terms of five or ten years, vest over a period of up to four years and were issued at market value on the date of grant.
The following summaries activity under the plans:
The following summarizes stock options outstanding as of December 31, 2003:
At December 31, 2002 and 2001, 590,946 and 348,079 options were exercisable at weighted average exercise prices of $3.95 and $4.61, respectively.
The following summarizes shareholder approved and non-shareholder approved plan information as of December 31, 2003:
Under the Bell Industries Employees’ Stock Purchase Plan (the “ESPP”) 750,000 shares were authorized for issuance to Bell employees. Eligible employees may purchase Bell stock at 85% of market value through the ESPP at various offering times during the year. Under the ESPP, the Company issued 33,737 and 61,802 shares during 2002 and 2001, respectively. The weighted average fair value per share of the purchase rights granted in 2002 and 2001 were $.66 and $.62, respectively. During the third quarter of 2002, the Company suspended the ESPP. At December 31, 2003, 419,450 shares were available for future issuance under the ESPP.
The Black-Scholes model was utilized for estimating the fair value of stock-based grants using an assumed volatility of approximately 60% for all years presented and an expected four year life for stock options, and an assumed volatility of approximately 60% for all years presented and an expected four month life for the ESPP. The assumed risk free interest rate was approximately 4.0% in 2003, 4.0% in 2002 and 5.0% in 2001 for the stock option plans and approximately 2.5% in 2002 and 3.5% in 2001 for the ESPP. Stock-based compensation costs determined under the fair value method would have increased net loss by $.2 million ($.02 per share) in 2003, $.4 million ($.05 per share) in 2002 and $.4 million ($.05 per share) in 2001.
Income Taxes
The income tax provision (benefit) charged (credited) before cumulative effect of accounting change was as follows (in thousands):
The following is a reconciliation of the federal statutory tax rate to the effective tax rate:
Deferred tax balances were composed of the following (in thousands):
After consideration of relevant factors, including recent operating results and the prior utilization of all previously available tax carry-back opportunities, the Company recorded a full valuation allowance against net deferred tax asset balances in the fourth quarter of 2003.
Net current deferred tax assets, included with prepaid expenses and other, and net non-current deferred tax assets, included with other assets, totaled $1.6 million and $791,000, respectively, at December 31, 2002.
As of December 31, 2003, the Company has a Federal net operating loss carry forward of $3.0 million which expires in 2023.
Employee Benefit and Deferred Compensation Plans
The Company has a qualified, trusteed, savings and profit sharing plan for eligible employees. The Company’s matching contributions and discretionary contributions to the plan, as determined by the Board of Directors, were $59,000 in 2003, $112,000 in 2002 and $150,000 in 2001.
The Company has deferred compensation plans available for certain officers and other key employees. Expense associated with the deferred compensation element of these plans was $207,000 in 2003, $134,000 in 2002 and $110,000 in 2001.
The Company provides postretirement medical coverage for qualifying employees who were employed prior to January 1, 1998. The estimated liability for postretirement medical benefits, included in deferred compensation and other long term liabilities, totaled $868,000 and $987,000 at December 31, 2003 and 2002, respectively. Annual costs for active and potentially eligible employees were not significant during any of the years presented.
Commitments and Contingencies
At December 31, 2003, the Company had operating leases on certain of its facilities and equipment expiring in various years through 2008. Under certain operating leases, the Company is required to pay property taxes and insurance. Rent expense under operating leases was $2.2 million in 2003, $2.0 million in 2002 and $2.1 million in 2001.
Minimum annual rentals on operating leases for the five years subsequent to 2003 are as follows (in thousands):
The Company has an outstanding letter of credit totaling $20,000 at December 31, 2003 that renews annually.
The Company is involved in litigation which is incidental to its current and discontinued businesses. The resolution of this litigation is not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Business Segment and Related Information
The Company has three reportable business segments: Technology Solutions, a provider of integrated technology solutions; Recreational Products, a distributor of replacement parts and accessories for recreational and other leisure-time vehicles; and Electronic Components, a specialty manufacturer and distributor of standard and custom magnetic products. Each operating segment offers unique products and services and has separate management. The accounting policies of the segments are the same as described in the Summary of Accounting Policies.
The following is summarized financial information for the Company’s reportable segments (in thousands):
QUARTERLY RESULTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
Item 9A.
Controls and Procedures
Our management, with the participation of our principal executive and financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2003. Based on this evaluation, the Company’s principal executive and financial officer concluded that, as of December 31, 2003, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our principal executive and financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit 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 our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART III
Item 10.
Item 10.
Directors and Executive Officers of the Registrant
(a) Directors: The information required by Item 10 with respect to Directors will appear in the Proxy Statement for the 2004 Annual Meeting of Shareholders and is hereby incorporated by reference.
(b) Executive Officers: The information required by Item 10 with respect to Executive Officers appears in Part I of this Annual Report on Form 10-K.
(c) Code of Ethics: Our code of Ethics, as required by Item 406 of Regulation S-K under the Securities Act of 1933, as amended, is available, without charge, upon written request sent to Bell Industries, Inc., Attention Secretary, at the address set forth on the cover page of this Annual Report on Form 10-K.
Item 11.
Item 11.
Executive Compensation
The information required by Item 11 will appear in the Proxy Statement for the 2004 Annual Meeting of Shareholders and is hereby incorporated by reference.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 will appear in the Proxy Statement for the 2004 Annual Meeting of Shareholders and is hereby incorporated by reference.
Item 13.
Item 13.
Certain Relationships and Related Transactions
The information required by Item 13 will appear in the Proxy Statement for the 2004 Annual Meeting of Shareholders and is hereby incorporated by reference.
Item 14.
Item 14.
Principal Accounting Fees and Services
The information required by Item 14 will appear in the Proxy Statement for the 2004 Annual Meeting of Shareholders and is hereby incorporated by reference.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a)1. Financial Statements:
The Consolidated Financial Statements and Report of Independent Accountants dated February 7, 2004 are included under Item 8 of this Annual Report on Form 10-K.
2. Financial Statement Schedule:
The Financial Statement Schedule listed in the Index to Financial Statements included under Item 8 is filed as part of this Annual Report on Form 10-K.
3. Exhibits:
(b) Reports on Form 8-K:
a) On February 24, 2004, the Company filed a current Report on Form 8-K related to its issuance of a press release describing selected financial results of the Company for the quarter and year ended December 31, 2003.
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BELL INDUSTRIES, INC.
By
/s/ TRACY A. EDWARDS
Tracy A. Edwards
President and Chief Executive Officer
Date: March 26, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 26, 2004 by the following persons on behalf of the Registrant and in the capacities indicated.
EXHIBIT INDEX
(*) Incorporated by reference.