BI Bell Industries,

 

 

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 September 30, 2007

or

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)

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o                      Accelerated filer o                      Non-accelerated filer þ

     Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes o No þ

      As of the close of business on November 13, 2007, there were 8,650,224 outstanding shares of the Registrant’s Common Stock.

 

 

BELL INDUSTRIES, INC.
INDEX

		Page
Part I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Condensed Statements of Operations for the three and nine months ended September 30, 2007 and 2006 (unaudited)			3
Consolidated Condensed Balance Sheets as of September 30, 2007 (unaudited) and December 31, 2006			4
Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2007 and 2006 (unaudited)			5
Notes to Consolidated Condensed Financial Statements (unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk			23
Item 4. Controls and Procedures			23
PART II OTHER INFORMATION
Item 1. Legal Proceedings			23
Item 1A. Risk Factors			23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			23
Item 3. Defaults Upon Senior Securities			24
Item 4. Submission of Matters to a Vote of Security Holders			24
Item 5. Other Information			24
Item 6. Exhibits			24
SIGNATURES			25
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I — FINANCIAL INFORMATION

See Accompanying Notes to Consolidated Condensed Financial Statements.

BELL INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 — Accounting Principles

     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 10 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, 2006 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 (the “SEC”). 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, 2006.

Note 2 — Recent Accounting Pronouncements

     In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which permits an entity to measure certain financial assets and financial liabilities at fair value. The objective of SFAS No. 159 is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions. Under SFAS No. 159, entities that elect the fair value option (by instrument) will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option election is irrevocable, unless a new election date occurs. SFAS No. 159 establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity’s election on its earnings, but does not eliminate disclosure requirements of other accounting standards. Assets and liabilities that are measured at fair value must be displayed on the face of the balance sheet. This statement is effective for fiscal years beginning after November 15, 2007. The Company has not determined the effect, if any, the adoption of this statement will have on the Company’s consolidated financial position or results of operations.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. The Company has not determined the effect, if any, the adoption of this statement will have on the Company’s consolidated financial position or results of operations.

     In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN No. 48”), which establishes that the financial statement effects of a tax position taken or expected to be taken in a tax return are to be recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The impact of adoption of FIN No. 48 is disclosed in Note 17 to these financial statements.

     In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 Definition of Settlement in FASB Interpretation No. 48 (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have a material impact on our consolidated financial position or results of operations.

     In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 “Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements” (EITF 06-10). EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The implementation of this standard will not have a material impact on our consolidated financial position and results of operations.

     In June 2007, the FASB ratified EITF 06-11 “Accounting for the Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11). EITF 06-11 provides that tax benefits associated with dividends on share-based payment awards be recorded as a component of additional paid-in capital. EITF 06-11 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007. The implementation of this standard will not have a material impact on our consolidated financial position and results of operations.

Note 3 — SkyTel Acquisition

     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 $4.3 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.

     The following table summarizes the aggregate estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

     The amounts allocated to intangible assets are as follows (in thousands):

     The Company is continuing to evaluate the initial purchase price allocation and will adjust the allocations as additional information relative to the estimated integration costs of SkyTel and the fair market values of the assets and liabilities of the business become known.

     In connection with the acquisition, the Company assessed and formulated a plan related to the future integration of SkyTel into the Company. The Company accrued estimates for certain costs, related primarily to personnel reductions, tower lease terminations and facility closures, anticipated at the date of acquisition, in accordance with Emerging Issues Task Force Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” Adjustments to these estimates are made up to one year from the acquisition date as plans are finalized. To the extent these accruals are not utilized for the intended purpose, the excess is recorded as a reduction of the purchase price. Costs incurred in excess of the recorded accruals are expensed as incurred. The Company is still finalizing its integration plans with respect to its acquisition. Accrued liabilities associated with these integration activities are included in other accrued liabilities in the Consolidated Condensed Balance Sheet.

     The unaudited pro forma information for the periods set forth below gives effect to the SkyTel acquisition as if it had occurred on January 1, 2006. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have occurred had the acquisition been consummated at that time or of results in the future (in thousands, except per share amounts):

Note 4- Summary of Accounting Policies

     Note 1 to the Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2006 includes a summary of the accounting policies for the Company’s Technology Solutions and Recreational Products business segments. The accounting policies for each of those two segments have not changed from what was previously disclosed. A summary of the distinct accounting policies for SkyTel follows:

Accounts Receivable

     The Company extends trade credit to its customers for wireless services. Service to customers is generally suspended if payment has not been received within approximately 60 days of billing. Once service is suspended, accounts are subject to internal collection activities. Service to customers is generally disconnected if payment has not been received within approximately 90 days of billing. Once service is disconnected, accounts are subject to external collection activities. The Company records two allowances against its gross accounts receivable balance; an allowance for doubtful accounts and an allowance for service credits. Provisions for these allowances are recorded on a monthly basis and are included as a component of selling and administrative expense and a reduction of revenue, respectively. Estimates are used in determining the allowance for doubtful accounts and are based on historical collection experience, current and forecasted trends and a percentage of the accounts receivable aging categories. The allowance for service credits and related provisions is based on historical credit percentages, current credit and aging trends and actual credit experience.

Inventory

     Inventory is carried at the lower of cost or fair market value based on the weighted average cost method.

Property and Equipment

     Property and equipment are stated at cost and are depreciated using the straight-line method over the following estimated useful lives:

Paging network equipment		3-7 years
Furniture, fixtures and other		3-5 years

     The Company calculates depreciation on messaging devices deployed as rental units using the straight-line group life method over a period of one year.

Intangible Assets

     Intangible assets are carried at cost and amortized over their estimated useful lives. All of the Company’s intangible assets are subject to amortization.

     Licenses — SkyTel owns rights to domestic wireless licenses that provide its wireless operations with the exclusive right to utilize designated radio frequency spectrum to provide wireless communication services. Licenses are issued for a fixed time period, generally ten years, and are subject to renewal by the Federal Communications Commission (“FCC”). The licenses are amortized on a straight-line basis over a period of five years.

     Trademarks — The Company utilizes trademarks for SkyTel, SkyGuard and FleetHAWK. The trademarks are amortized on a straight line basis over a period of ten years.

     Patents — The Company owns the rights to patents on certain technology used in the provisioning of its wireless services. The patents are amortized on a straight line basis over a period of six to fourteen years depending on the lives of the underlying patents.

     Customer Relationships — Customer relationships are amortized over a period of five years on a straight line basis.

Revenue Recognition

     Revenue consists primarily of monthly service and device rental fees charged to customers on a monthly, quarterly, semi-annual or annual basis. Revenue also includes the sale of devices directly to customers and other companies that resell the Company’s services. The Company recognizes service revenue over the period the service is performed and revenue from product sales is recognized at the time of shipment. The Company has a variety of billing arrangements with its customers resulting in deferred revenue for advance billing and accounts receivable for in-arrears arrangements.

     SkyTel’s customers may subscribe to services for a monthly service fee which is generally based upon the type of service provided, the geographic area covered, the number of devices provided to the customer and the period of commitment. Equipment loss and maintenance protection may be added to services for an additional monthly fee. Equipment loss protection allows subscribers who rent devices to limit their cost of replacement upon loss or destruction of a messaging device. Maintenance services are offered to subscribers who own their devices.

Sales and Use Taxes

     Sales and use taxes imposed on the ultimate consumer are excluded from revenue where the Company is required by law or regulation to act as collection agent for the taxing jurisdiction.

Universal Service Fund

     The FCC also has a body of rules implementing the universal service provisions of the Telecommunications Act of 1996, including rules governing support to rural and non-rural high-cost areas, support for low income subscribers, and support for schools, libraries and rural health care. The Company passes through the cost to subscribers with the amount collected from customers recorded in revenue and the amount remitted recorded as expense.

Note 5 — Assets Held for Sale

     On June 15, 2007, the Company entered into two stock purchase agreements (the “Purchase Agreements”) with Sprint Nextel Corporation (“Sprint”). Pursuant to the Purchase Agreements, the Company agreed to sell the shares of stock (the “Shares”) held by the Company in two corporations that hold certain FCC licenses for the operation of Broadband Radio Service channels. The aggregate consideration payable to the Company for the Shares is approximately $13.5 million in cash. On the closing of the sale of the Shares, approximately, $940,000 of the cash consideration payable to the Company will be withheld by Sprint for eighteen months to fund certain reserves to secure the indemnification obligations. See Note 23 for the subsequent closing of the Purchase Agreements.

Note 6 — Sale of J.W. Miller Division

     On April 28, 2006, the Company completed the sale of substantially all of the assets of the Company’s J. W. Miller division to Bourns, Inc. pursuant to an Asset Purchase Agreement (the “JWM Agreement”). Pursuant to the JWM Agreement, the Company received $8.5 million in cash at the closing in April 2006 and approximately $0.2 million in July 2006 attributable to post closing adjustments. The sale resulted in a gain of approximately $6.1 million ($4.0 million net of tax). The results of the J. W. Miller division have been classified as discontinued operations in the accompanying financial statements. For the nine months ended September 30, 2006, the J.W. Miller division had sales of approximately $3.0 million.

Note 7 — Sale of Assets

     During February 2007, the Company completed the sale of a building. The carrying value of this property was not material as of December 31, 2006. The net proceeds from this sale totaled approximately $2.0 million, and the gain on disposition is included in gain on sale of assets in the Consolidated Condensed Statements of Operations.

     In August 2007 the Company entered into a transaction to exit a lease and sell certain assets related to its Springfield call center. The cash proceeds from the sale were $900,000 and resulted in a gain of $33,000.

Note 8 — 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.

Note 9 — 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 $1.5 million and $1.0 million during the three months ended September 30, 2007 and 2006, respectively and $3.9 million and $2.8 million during the nine months ended September 30, 2007 and 2006, respectively. These costs are included within selling, general and administrative expenses in the Consolidated Condensed Statements of Operations.

Note 10 — Floor Plan Arrangements

     The Company finances certain inventory purchases through floor plan arrangements with two finance companies. At September 30, 2007 and December 31, 2006, the Company had outstanding floor plan obligations of $2,609,000 and $213,000, respectively.

Note 11 — Accrued Liabilities

     The Company accrues for liabilities associated with disposed businesses, including amounts related to legal, environmental and contractual matters. In connection with these matters, the recorded liabilities include an estimate of legal fees to be incurred. These legal fees are charged against the recorded liability when incurred. Accrued liabilities include approximately $3.6 million and $4.2 million of amounts attributable to disposed businesses at September 30, 2007 and December 31, 2006, respectively.

Note 12 — Asset Retirement Obligations

     The Company adopted the provisions of SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”) as a result of the SkyTel acquisition. SFAS No. 143 requires the recognition of liabilities and corresponding assets for future obligations associated with the retirement of assets. The Company has network assets, principally transmitters and receivers that are located on leased locations. The underlying leases generally require the removal of equipment at the end of the lease term; therefore, a future obligation exists. The Company recognized long-term cumulative asset retirement obligations of $3.1 million as of January 31, 2007, which were recorded as a liability assumed in purchase accounting. The related tower assets were recorded at their appraised value as described in the SkyTel acquisition footnote (Note 3).

     The long-term cost associated with the original assessment is discounted at a credit adjusted risk free interest rate of 10% to calculate the present value of the asset retirement obligation. The Company believes that the $3.1 million and 10% interest rate used are reasonable at the present time and have been established based on an estimate of the removal and repair costs and assumptions regarding the number of tower leases to be terminated in future periods.

     The components of the changes in the asset retirement obligation balance since the SkyTel acquisition are as follows (in thousands):

     The asset retirement obligation is recorded as a component of other long term liabilities on the Consolidated Condensed Balance Sheet.

Note 13 — Capital Lease

     On August 9, 2007 the Company entered into a 24 month lease facility to finance the acquisition of wireless routers and related equipment associated with the SkyTel business. The lease is accounted for as a capital lease and is recorded on the Consolidated Condensed Balance Sheet at approximately $1.7 million (includes present value of interest payments).

Note 14 — Debt and Liquidity

     On January 31, 2007, the Company secured financing to complete the SkyTel acquisition by entering into (i) a credit agreement (the “Credit Agreement”) with Wells Fargo Foothill, Inc. (“WFF”), as administrative agent, pursuant to which WFF provided the Company with a revolving line of credit with a maximum credit amount of $30 million (the “Revolving Credit Facility”); and (ii) 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 million.

Revolving Credit Facility

     Pursuant to the Credit Agreement, the Company borrowed approximately $10.3 million in the form of an initial advance under the Revolving Credit Facility (the “Initial Advance”). The proceeds of the Initial Advance, together with existing cash on hand and the funds received pursuant to the sale of the Convertible Note, were used to finance the acquisition of SkyTel as well as related fees and expenses. Additional advances under the Revolving Credit Facility (collectively, the “Advances”) will be available to the Company, up to the aggregate $30 million credit limit, 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 rate of interest per annum announced from time to time by WFF as its prime rate in effect at it principal office in San Francisco, California, plus a 0.75% margin. In the case of LIBOR rate loans, amounts borrowed bear interest at a rate equal to the LIBOR Rate (as defined in the Credit Agreement) plus a 2.25% margin. The Advances made under the Credit Agreement are repayable in full on January 31, 2012. 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. In connection with the Credit Agreement, on January 31, 2007, the Company entered into a security agreement with WFF, pursuant to which the Company granted WFF a security interest in and a lien against certain assets of the Company. As of September 30, 2007, $11.4 million was outstanding at an annual interest rate of 8.5% under the Revolving Credit Facility.

     On August 13, 2007, the Company and its subsidiary entered into Amendment Number Two to Credit Agreement, Consent and Waiver (the “Second Amendment”), with WFF. The Second Amendment amended the Company’s Credit Agreement and provides the Company with an incremental $2 million of availability through the completion of the MDS sale. Also pursuant to the Second Amendment, the lenders provided their consent to complete the sales of Shares held by the Company in two corporations that hold certain FCC licenses for the operation of Broadband Radio Service channels to Sprint and waived the Company’s default of its compliance with a covenant in the Credit Facility requiring a certain level of profitability for the six month period ended June 30, 2007. The Second Amendment also amends the profitability covenants for the nine month period ended September 30, 2007 and the twelve month period ended December 31, 2007 and reduces the amount of the Credit Facility available by $6 million. The proceeds from the sales of Shares to Sprint were used to reduce the indebtedness outstanding under the Credit Facility when they were received October 15, 2007. As a result of the Second Amendment and the use of the proceeds from the sale of assets to pay down the Credit Facility, the entire balance outstanding at September 30, 2007 has been classified as a current liability.

Liquidity

     In addition to the sale of the Shares to Sprint and the Second Amendment described above, the Company continues to evaluate cost reduction opportunities and additional financing opportunities to ensure that it has adequate cash flow to meet its liquidity needs.

Convertible Note

     The outstanding principal balance and/or accrued but unpaid interest on the Convertible Note is convertible at any time by Newcastle into shares of common stock of the Company at a conversion price of $3.81 per share, subject to adjustment (the “Conversion Price”). The Convertible Note accrues interest at 8%, subject to adjustment in certain circumstances, which interest accretes as principal on the Convertible Note as of each quarterly interest payment date beginning March 31, 2007. The Company also has the option (subject to the consent of WFF) 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 is greater than 200% of the Conversion Price ($7.62 per share). The Convertible Note matures on January 31, 2017. The Company has the right to force conversion of 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 is greater than 150% of the Conversion Price ($5.72 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 in certain assets of the Company in order to secure the obligations under the Convertible Note.

     As this debt is convertible at the option of Newcastle at a beneficial conversion rate of $3.81 per share (closing market price of the Company’s common stock as of January 31, 2007 was $4.49 per share), the embedded beneficial conversion feature is 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 Emerging Issue Task Force No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments.” A summary of the initial recording of the debt and debt discount and activity through September 30, 2007 follows (in thousands):

Interest expense recorded on the Convertible Note, including amortization of beneficial conversion feature, totaled $243,000 and $640,000 during the three and nine month periods ended September 30, 2007.

Note 15 — Stock-Based Compensation

     In May 2007 the Company’s shareholders approved the 2007 Stock Option Plan (“2007 Plan”) which amends and succeeds the 2001 Stock Option Plan (“2001 Plan”). The 2007 plan provides for the issuance of common stock to be available for purchase by employees, consultants and by 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 fair value of the shares on the date of grant.

     On June 15, 2007, the Company entered into a consulting agreement with an outside firm that assisted the Company in completing the SkyTel acquisition to provide ongoing services through December 31, 2008 (the “Consulting Agreement.”) As part of the Consulting Agreement, the Company granted a principal of the outside firm an option to purchase up to 150,000 shares of Company common stock from the 2007 Plan. The options have a per share exercise price equal to the Company’s market share price on the date of grant. The options vest over the period of the Consulting Agreement.

     Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) using the modified prospective transition method and, as a result did not retroactively adjust results from prior periods. Under this transition method, stock-based compensation expense for the year ended December 31, 2006 includes compensation expense for all stock options granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and expense related to all stock options granted on or subsequent to January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123 (revised 2004). Stock-based compensation income totaled $44,000 and expense totaled $120,000 for the three months ended September 30, 2007 and 2006, respectively and stock based compensation expense totaled $158,000 and 289,000 for the nine months ended September 30, 2007, respectively. During the three month period ending September 30, 2007 the Company recognized a gain of $93,000 related to an adjustment to stock based compensation expense for unvested awards that were forfeited during the period.

     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 weighted average fair value at the grant date for options issued during the nine months ended September 30, 2007 was $1.40 per option. The fair value of options at the date of grant was estimated using the following assumptions during the nine months ended September 30, 2007: (a) no dividend yield on the Company’s stock, (b) expected stock price volatility of approximately 45%, (c) a risk-free interest rate of approximately 4.95%, and (d) an expected option term of 4.29 years.

     The expected term of the options granted in 2007 is calculated using the simplified method as prescribed by Staff Accounting Bulletin No. 107. The expected term for each option grant represents the weighted average vesting term. For 2007, expected stock price volatility represent the three year historical annualized volatility calculated using weekly closing market prices for the Company’s common stock. The risk-free interest rate is based on the five year U.S. Treasury yield at the date of grant. The Company has not paid dividends in the past and does not currently anticipate paying any dividends in the near future.

     The following summarizes stock option activity during the nine months ended September 30, 2007:

     The following summarizes non-vested stock options as of December 31, 2006 and changes during the nine months ended September 30, 2007:

     The aggregate intrinsic value in the table above represents the intrinsic value (the difference between the Company closing stock price on September 30, 2007 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on September 30, 2007. The total intrinsic value of options exercised during the three and nine month periods ended September 30, 2007 was approximately $0 and $140,000. The total fair value of options vesting during the three month and nine month periods ended September 30, 2007 was approximately $26,000 and $131,000. As of September 30, 2007, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $610,000, which is expected to be recognized over a weighted average period of approximately 2.1 years. As of September 30, 2007, there were 680,000 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”), 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. During the third quarter of 2002, the Company suspended the ESPP. At September 30, 2007, 419,450 shares were available for future issuance under the ESPP.

Note 16 — 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 each of the three and nine month periods ended September 30, 2007 and 2006 is set forth in the following table (in thousands):

     For the three and nine month periods ended September 30, 2007, 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 315,000 and 913,000, respectively.

Note 17 — Income Taxes

     The Company adopted the provisions of FIN No. 48 on January 1, 2007. As a result of implementation, the Company recognized a $132,000 decrease in the liability for unrecognized tax benefits, which has been accounted for as a reduction in accumulated deficit. As of September 30, 2007 and January 1, 2007, the Company had $386,000 and $358,000 of unrecognized tax benefits, respectively, all of which would affect the Company’s effective tax rate if recognized. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Accrued interest related to uncertain tax positions as of September 30, 2007 and January 1, 2007 was $117,000 and $89,000, respectively. Tax years 2002 through 2006 remain open to examination by major taxing jurisdictions to which the Company is subject.

Note 18 — Shareholders’ Equity

     The changes to shareholders’ equity during the nine months ended September 30, 2007 are as follows (in thousands):

Note 19 — Environmental Matters

     Reserves for environmental matters primarily relate to the cost of monitoring and remediation efforts, which commenced in 1998, at the site of a former leased facility of the Company’s electronics circuit board manufacturing business (“ESD”). The ESD business was closed in the early 1990s. At September 30, 2007 and December 31, 2006, estimated future remediation and related costs for this matter totaled approximately $2.3 million and $2.9 million, respectively. At September 30, 2007, approximately $1.3 million (estimated current portion) is included in accrued liabilities and $1.0 million (estimated non-current portion) is included in other long term liabilities in the Consolidated Condensed Balance Sheets. At September 30, 2007 and December 31, 2006, the estimated future amounts to be recovered from insurance totaled $1.4 million and $2.2 million, respectively. At September 30, 2007, approximately $1.4 million (estimated current portion) is included in prepaid expenses and other.

Note 20 — Litigation

      Williams Electronic Games litigation: In May 1997, Williams Electronics Games, Inc. (“Williams”) filed a complaint in the United States District Court for the Northern District of Illinois (“US District Court”) against a former Williams employee and several other defendants alleging common law fraud and several other infractions related to Williams’ purchase of electronic components at purportedly inflated prices from various electronics distributors under purported kickback arrangements during the period from 1991 to 1996. In May 1998, Williams filed an amended complaint adding several new defendants, including Milgray Electronics, Inc., a publicly traded New York corporation (“Milgray”), which was acquired by Bell in a stock purchase completed in January 1997. The complaint sought an accounting and restitution representing alleged damages as a result of the infractions. Bell was not a party to the alleged infractions but has now been named a defendant because it is the successor in interest to Milgray. Bell has vigorously defended the case on several grounds and continues to assert that Milgray did not defraud Williams, and that Williams suffered no damages because the electronic components purchased by Williams were purchased at prevailing market prices.

     The case proceeded to trial, which commenced and ended in March 2002, with a jury verdict resulting in Milgray having no liability to Williams. In July 2002, Williams appealed the jury verdict and, in April 2004, the United States Court of Appeals for the 7th Circuit (“US Appellate Court”) rendered its decision. The US Appellate Court concluded that jury instructions issued by the US District Court were in error and the case was ordered for retrial of Williams’ fraud and restitution claims. The case was remanded to the US District Court and a new judge was assigned. In September 2005, the US District Court entered its order declining to exercise supplemental jurisdiction over Williams’ claims and dismissing Williams’ case without prejudice. The US District Court noted in its order that Williams could pursue its claims in Illinois State Court. In October 2005, Williams filed a Notice of Appeal to the US Appellate Court from the judgment of dismissal entered by the US District Court. In March 2007, the US Appellate Court affirmed the judgment of the US District Court, and the action is now proceeding in Illinois State Court. Williams’ claim for compensatory damages is approximately $8.7 million, not including an additional claim for pre-judgment interest. While the Company cannot predict the outcome of this litigation, a final judgment favorable to Williams could have a material adverse effect on the Company’s results of operations, cash flows or financial position. Management intends to continue a vigorous defense.

      Other litigation: The Company is involved in other litigation, which is incidental to its current and discontinued businesses. The resolution of the other litigation is not expected to have a material adverse effect on the Company’s results of operations, cash flows or financial position.

Note 21 — Business Segment Information

     The Company operates in three reportable business segments: Technology Solutions, a provider of a comprehensive portfolio of customizable and scalable technology solutions ranging from managed technology services to reverse logistics and mobile/wireless solutions, Recreational Products, a wholesale distributor of aftermarket parts and accessories for the recreational vehicles and other leisure-related vehicle market (including marine, snowmobile, cycle and ATV) and, as of January 31, 2007, SkyTel, a nationwide provider of wireless data and messaging services, including email, interactive two-way messaging, wireless telemetry services, traditional text and numeric paging, and automated vehicle location.

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

     Certain reclassifications within the segments have been made to prior year to conform to current year presentation.

Note 22 — 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. Under the supervision of our Board of Directors (other than Mr. Schwarz), members of management, with the assistance of counsel, negotiated the terms of Newcastle’s purchase of the Convertible Note directly with representatives of Newcastle. After final negotiations concluded, the Company’s Board of Directors, excluding Mr. Schwarz, approved the Newcastle transaction. Mr. Schwarz did not participate in any of the Board of Directors’ discussions regarding the Newcastle transaction or the vote of the Board of Directors to approve the same.

     On July 13, 2007, Clinton J. Coleman also a Vice President of Newcastle was appointed Interim Chief Executive Officer of the Company.

Note 23 — Subsequent Event

     On October 15, 2007 the Company closed on the Purchase Agreements with Sprint and received proceeds of $12.5 million. The Purchase Agreements are described in Note 5.

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, and is qualified in its entirety by, the consolidated condensed financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q, the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, and within other filings with the SEC. This discussion and analysis includes “forward-looking statements” within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, regarding, among other things, our plans, strategies and prospects, both business and financial. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Many of the forward looking statements contained in this Quarterly Report may be identified by the use of forward-looking words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “will,” “may,” and “estimated,” among others. Important factors that could cause actual results to differ materially from the forward-looking statements that we make in this Quarterly Report are set forth below, are set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 and are set forth in other reports or documents that we file from time to time with the SEC. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Critical Accounting Policies

     In the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, 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 other than the following new policy associated with the amortization of intangible assets.

     Intangible assets resulting from the SkyTel acquisition were estimated by management based on the fair value of assets received and appraisals received from a third party. These include licenses, trademarks, patents and customer relationships. Intangible assets are amortized over the estimated useful ranging from five to fourteen years on a straight-line basis.

Recent Accounting Pronouncements

     In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which permits an entity to measure certain financial assets and financial liabilities at fair value. The objective of SFAS No. 159 is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions. Under SFAS No. 159, entities that elect the fair value option (by instrument) will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option election is irrevocable, unless a new election date occurs. SFAS No. 159 establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity’s election on its earnings, but does not eliminate disclosure requirements of other accounting standards. Assets and liabilities that are measured at fair value must be displayed on the face of the balance sheet. This statement is effective for fiscal years beginning after November 15, 2007. The Company has not determined the effect, if any, the adoption of this statement will have on the Company’s consolidated financial position or results of operations.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of this statement are to be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. The Company has not determined the effect, if any, the adoption of this statement will have on the Company’s consolidated financial position or results of operations.

     In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN No. 48”), which establishes that the financial statement effects of a tax position taken or expected to be taken in a tax return are to be recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The impact of adoption of FIN No. 48 is disclosed in Note 17 to these financial statements.

     In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 Definition of Settlement in FASB Interpretation No. 48 (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have a material impact on our consolidated financial position or results of operations.

     In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 “Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements” (EITF 06-10). EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The implementation of this standard will not have a material impact on our consolidated financial position and results of operations.

     In June 2007, the FASB ratified EITF 06-11 “Accounting for the Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11). EITF 06-11 provides that tax benefits associated with dividends on share-based payment awards be recorded as a component of additional paid-in capital. EITF 06-11 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007. The implementation of this standard will not have a material impact on our consolidated financial position and results of operations.

Results of Operations

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

     The Company has provided a summary of its consolidated operating results for the three months ended September 30, 2007 compared to the three months ended September 30, 2006 followed by an overview of its business segment performance below:

Net revenues

     Net revenues were $58.7 million for the third quarter of 2007 as compared to $36.7 million in the third quarter of 2006, representing an increase of $22.0 million or 59.9%. The increase is primarily the result of the acquisition of SkyTel on January 31, 2007, which had revenue of $22.2 million during the third quarter of 2007.

Gross profit

     Gross profit was $13.8 million, or 23.6% of net revenues, in the third quarter of 2007, compared to $6.0 million, or 16.3% of net revenues, in the third quarter of 2006. The increases are primarily the result of the acquisition of SkyTel on January 31, 2007, which had gross profit of $6.9 million, or 31.2% of net revenues during the third quarter of 2007 and an increase in gross profit in the Technology Solutions segment of $0.9 million during the third quarter of 2007.

Selling, general and administrative expenses

     Selling, general and administrative expenses (“SG&A”) were $14.9 million, or 25.4% of net revenues, in the third quarter of 2007, compared to $8.8 million, or 24.0% of net revenues, in the third quarter of 2006. The increases are primarily the result of the acquisition of SkyTel on January 31, 2007, which had SG&A of $7.4 million, or 33.4% of net revenues in the third quarter of 2007, partially offset by reductions in SG&A of $0.6 million in the Technology Solutions segment, $0.6 million in the Corporate segment and $0.1 million in the Recreational Products segment.

Interest and other, net

     Net interest expense was $672,000 in the third quarter of 2007 compared to net interest income of $166,000 in the third quarter of 2006. The increase in net interest expense is the result of the outstanding balances under the revolving credit facility and convertible note. The debt was issued to provide the majority of the funding for the acquisition of SkyTel on January 31, 2007. The interest income earned in 2006 was attributable to earnings on cash and cash equivalents held during the period.

Income taxes

     Income tax expense was $8,000 in the third quarter of 2007 compared to an income tax benefit of $843,000 in third quarter of 2006. The income tax expense in the third quarter of 2007 primarily relates to state income taxes. The income tax benefit in the third quarter of 2006 includes a benefit totaling $865,000 related to the discontinued operations of the J.W. Miller division, partially offset by a provision for state income taxes of $22,000. As of September 30, 2007, the Company continues to record a full valuation allowance against net deferred tax asset balances.

Business Segment Results

     The Company operates in three reportable business segments: Technology Solutions, a provider of a comprehensive portfolio of customizable and scalable technology solutions ranging from managed technology services to reverse logistics and mobile/wireless solutions, Recreational Products, a wholesale distributor of aftermarket parts and accessories for the recreational vehicles and other leisure-related vehicle market (including marine, snowmobile, cycle and ATV) and, as of January 31, 2007, SkyTel, a nationwide provider of wireless data and messaging services, including email, interactive two-way messaging, wireless telemetry services and traditional text and numeric paging. The company also separately records expenses related to corporate overhead which supports the business lines. Note 21 to Consolidated Condensed Financial Statements includes a tabular summary of results of operations by business segment for the three and nine month periods ended September 30, 2007 and 2006.

Technology Solutions : Technology Solutions revenues of $24.6 million for the three months ended September 30, 2007 represented a 0.8% increase from the $24.4 million in the third quarter of 2006. Product revenues of $17.8 million for the three months ended September 30, 2007 represented a 8.5% increase from the $16.4 million in the third quarter of 2006. The product revenue increase in the third quarter of 2007 is primarily attributable to higher sales of software licenses. Service revenues of $6.8 million for the three months ended September 30, 2007 represented a 15.0% decrease from the $8.0 million in the third quarter of 2006. The service revenue decline in the third quarter of 2007 is primarily attributable to the ceasing of a customer relationship management engagement at the Company’s Springfield call center in mid-July 2007 that commenced in the summer of 2006 and the loss of revenues related to the termination of an unprofitable repair depot project at the end of 2006.

     Technology Solutions segment operating loss totaled $140,000 for the three months ended September 30, 2007 compared to an operating loss of $1.6 million in the third quarter of 2006. The reduction in the operating losses in the third quarter of 2007 is primarily the result of a $1.5 million loss in the third quarter of 2006 related to the start-up of the Springfield call center. During the

third quarter of 2007, the Springfield call center was closed after its only customer, SunRocket, ceased operations. The Company recorded bad debt expense of $0.3 million to record a full reserve on a billing to SunRocket in July 2007. In conjunction with the closure of the Springfield call center, the Company assigned the facility lease to another company and sold certain of the Springfield call center’s assets for $900,000 in cash. The sale of the assets resulted in a gain of $33,000.

SkyTel: SkyTel’s revenues for the three months ended September 30, 2007 totaled $22.2 million. SkyTel’s segment operating loss for the three months ended September 30, 2007 was $495,000. Depreciation, amortization, and accretion expense for the three months ended September 30, 2007 totaled $1.2 million.

Recreational Products : Recreational Products revenues of $11.8 million for the three months ended September 30, 2007 represented a 4.1% decrease from the $12.3 million in the third quarter of 2006.

     Recreational Products segment operating income totaled $575,000 for the three months ended September 30, 2007 compared to $479,000 in the third quarter of 2006. The increase in operating income is primarily attributable to an increase in gross margin from 25.4% in the third quarter of 2006 to 26.3% in the third quarter of 2007 and a $122,000 decrease in selling, general and administrative expenses in the third quarter of 2007. The increase in gross margin is primarily the result of product mix and pricing. The decrease in selling, general and administrative expenses is due to lower salary and lease expenses.

Corporate: Corporate overhead costs totaled $1.1 million for the three months ended September 30, 2007 versus $1.6 million in the third quarter of 2006. The decrease is primarily the result of reductions in salaries and wages and travel related costs.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

The Company has provided a summary of its consolidated operating results for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 followed by an overview of its business segment performance below:

Net revenues

     Net revenues were $160.8 million for the nine months ended September 30, 2007 compared to $92.8 million for the nine months ended September 30, 2006, representing an increase of $68.0 million or 73.3%. The increase is primarily the result of the acquisition of SkyTel on January 31, 2007, which had revenues of $62.3 million for the eight months SkyTel was included in the Company’s 2007 results and an increase in revenues in the Technology Solutions segment of $6.6 million during the nine months ended September 30, 2007, which is partially offset by a decline in revenues in the Recreational Products segment of $928,000 for the nine months ended September 30, 2007.

Gross profit

     Gross profit was $41.0 million, or 25.5% of net revenues, for the nine months ended September 30, 2007, compared to $17.2 million, or 18.5% of net revenues, for the nine months ended September 30, 2006. The increases are primarily the result of the acquisition of SkyTel on January 31, 2007, which had gross profit of $20.8 million or 33.3% of net revenues for the eight months SkyTel was included in the Company’s 2007 results, and an increase in gross profit in the Technology Solutions segment of $3.6 million during the nine months ended June 30, 2007, partially offset by declines in gross profit dollars and as a percentage of net revenues in the Recreational Products segment during the nine months ended September 30, 2007.

Selling, general and administrative expenses

     Selling, general and administrative expenses were $49.4 million, or 30.7% of net revenues, for the nine months ended September 30, 2007, compared to $22.9 million, or 24.6% of net revenues, for the nine months ended September 30, 2006. The increases are primarily the result of the acquisition of SkyTel on January 31, 2007, which had SG&A of $20.6 million, or 33.0% of net revenues, for the eight months SkyTel was included in the Company’s 2007 results, and increases in SG&A of $4.7 million in the Technology Solutions segment, $0.9 million in the Corporate segment and $0.3 million in the Recreational Products segment for the nine months ended September 30, 2007.

Interest and other, net

     Net interest expense was $1.7 million for the nine months ended September 30, 2007 compared to net interest income of $375,000 for the nine months ended September 30, 2006. The increase in net interest expense is the result of the outstanding balances under the revolving credit facility and convertible note. This debt was issued to provide the majority of the funding for the acquisition of SkyTel on January 31, 2007. The interest income earned in 2006 was attributable to earnings on cash and cash equivalents held during the period. The gain on sale of assets of $2.0 million for the nine months ended September 30, 2007 related to the sale of a company owned facility in the first quarter of 2007.

Income taxes

     Income tax expense was $40,000 for the nine months ended September 30, 2007 compared to an income tax benefit of $1.7 million for the nine months ended September 30, 2006. The income tax expense in 2007 primarily relates to state income taxes. The income tax benefit for the nine months ended September 30, 2006 includes a benefit totaling $1.8 million related to the discontinued operations of the J.W. Miller division, partially offset by a provision for state income taxes of $68,000.

Discontinued operations

     In April 2006, the Company sold its J. W. Miller division. Accordingly, the results of the J. W. Miller division have been classified as discontinued operations in the accompanying financial statements. For the nine months ended September 30, 2006, the Company recorded a gain on the sale of discontinued operations, net of tax, of $4.4 million and had income from discontinued operations, net of taxes, of $492,000.

Business Segment Results

Technology Solutions : Technology Solutions revenues of $62.0 million for the nine months ended September 30, 2007 represented an 11.9% increase from the $55.4 million for the nine months ended September 30, 2006. Product revenues of $36.2 million for the nine months ended September 30, 2007 represented a 12.4% increase from the $32.6 million for the nine months ended September 30, 2006, which is primarily the result of higher sales of software licenses. Service revenues of $25.8 million for the nine months ended September 30, 2007 represented a 16.3% increase from the $22.8 million for the nine months ended September 30, 2006. The service revenue increase is primarily attributable to an increase of $4.6 million in revenue for the nine month period ended September 30, 2007 related to a customer relationship management engagement at the Company’s Springfield call center that commenced in the summer of 2006, partially offset by the loss of revenues related to the termination of an unprofitable repair depot project at the end of 2006.

     Technology Solutions segment operating loss totaled $4.0 million for the nine months ended September 30, 2007 compared to $2.8 million for the nine months ended September 30, 2006. The increase in operating losses for the nine months ended September 30, 2007 is primarily the result of bad debt expense of $2.7 million related to recording a full reserve on a receivable from a Springfield call center customer, SunRocket, which ceased operations in July 2007.

SkyTel: SkyTel’s results are included in the Company’s results from January 31, 2007, the date the acquisition was completed. SkyTel’s revenues for the eight months ended September 30, 2007 totaled $62.3 million. SkyTel’s segment operating income for the eight months ended September 30, 2007 totaled $218,000. Depreciation, amortization, and accretion expense for the eight months ended September 30, 2007 totaled $3.2 million.

Recreational Products : Recreational Products revenues of $36.5 million for the nine months ended September 30, 2007 represented a 2.5% decrease from the $37.4 million for the nine months ended September 30, 2006.

     Recreational Products segment operating income totaled $790,000 for the nine months ended September 30, 2007 compared to $1.7 million for the nine months ended September 30, 2006. The decrease in operating income is primarily attributable to the decrease in revenue, a decrease in gross margin from 25.4% for the nine months ended September 30, 2006 to 24.5% for the nine months ended September 30, 2007 and a $333,000 increase in SG&A expenses. The decline in gross margin is primarily the result of unfavorable market conditions due to high fuel prices, unfavorable product mix with a higher volume of low margin marine electronics product sales and a lower volume of high margin snowmobile and recreational vehicle product sales. The increase in selling, general and administrative expenses is the result of costs associated with increased selling and administrative staff, increased freight costs and costs associated with the move to a new distribution facility in Milwaukee, Wisconsin.

Corporate: Corporate overhead costs of $5.4 million for the nine month period ending September 30, 2007 represented a 20.0% increase from $4.5 million in 2006. The increase is the result of several factors including costs associated with the move of the corporate headquarters from Los Angeles to Indianapolis and additional corporate staff to support the larger organization after the completion of the SkyTel acquisition.

     On January 31, 2007, the Company secured financing to complete the SkyTel acquisition by entering into (i) a credit agreement with Wells Fargo Foothill, Inc. (“WFF”), as administrative agent, pursuant to which WFF provided the Company with a revolving credit facility with a maximum credit amount of $30 million (the “Revolving Credit Facility”); and (ii) a purchase agreement with Newcastle Partners, L.P. (“Newcastle”) pursuant to which the Company issued and sold in a private placement to Newcastle a convertible subordinated payment-in-kind note (the “Convertible Note”) in the principal amount of $10 million.

     On August 13, 2007, the Company and its subsidiary entered into Amendment Number Two to Credit Agreement, Consent and Waiver (the “Second Amendment”), with WFF. The Second Amendment amended the Company’s Credit Agreement dated January 31, 2007 (the “Credit Facility”) and provided the Company with an incremental $2 million of availability through the closing of the sale of the Shares to Sprint. The Second Amendment also amends the profitability covenants for the nine month period ended September 30, 2007 and the twelve month period ended December 31, 2007 and reduced the amount of the Credit Facility available for borrowing upon completion of the sales of Shares to Sprint. On October 15, 2007, the sales of the Shares to Sprint closed and the Company received $12.5 million in cash.

     During the nine months ended September 30, 2007, net cash provided by operating activities was $8.4 million, primarily the result of an increase in accounts payable of $6.5 million, primarily at SkyTel as very little accounts payable was assumed as part of the SkyTel acquisition on January 31, 2007, a decrease in accounts receivable of $1.8 million, driven by focused collection efforts and timing of payments, and a decrease in inventory of $1.6 million, driven by inventory reductions in the Recreational Products segment. Net cash used in investing activities was $34.9 million, primarily the result of the acquisition of SkyTel and purchase of fixed assets, partially offset by $2.0 million in cash proceeds from the sale of a building during the first quarter of 2007 and the $0.9 million in cash proceeds from the sale of assets at the Springfield call center in the third quarter of 2007. Net cash provided by financing activities totaled $23.0 million, primarily the result of the proceeds received from the Revolving Credit Facility and the Convertible Note in conjunction with the acquisition of SkyTel. The Company also financed the purchase of certain products sold by the Technology Solutions division during the third quarter of 2007 with floor planning facilities available to the Company.

     During the nine months ended September 30, 2006, net cash used by operating activities totaled $512,000 which is primarily the result of a loss from continuing operations of $3.5 million and cash used in discontinued operations of $1.5 million partially offset by depreciation and amortization of $1.6 million and a net decrease in working capital of $2.6 million due to a decrease in inventory and an increase in accounts payable partially offset by an increase in accounts receivable. Net cash provided by investing activities of $5.9 million is primarily the result of the proceeds received from the sale of the J.W. Miller business partially offset by purchases of fixed assets.

     As of September 30, 2007, the total debt outstanding was $21.9 million, consisting of $11.4 million outstanding under the Revolving Credit Facility and $10.5 million outstanding on the Convertible Note, prior to the accounting for the beneficial conversion feature and the Company had $5.2 million available for future borrowings under the Revolving Credit Facility.

     The Company’s ability to maintain an adequate amount of borrowing availability under its Revolving Credit Facility depends upon its ability to comply with the terms and conditions of the loan agreement and its ability to generate cash flows from operations. The Company is subject to certain financial covenants as a part of the Revolving Credit Facility including (i) achieving certain levels of earnings before taxes, interest, depreciation and amortization (“EBITDA”), as defined by the loan agreement with WFF; and (ii) complying with limitations on capital expenditures.

     The Company believes that sufficient cash resources exist for the foreseeable future to support its operations and commitments through cash generated from operations, proceeds from the sale of the Shares to Sprint, proceeds from other potential asset sales and advances under the Revolving Credit Facility. Management continues to evaluate its options in regard to obtaining additional financing to support ongoing operations.

Consolidated Balance Sheet

     The increase in certain accounts on the consolidated balance sheet is driven by the SkyTel acquisition described in Note 3 to the consolidated financial statements.

Off-Balance Sheet Arrangements

     The Company does not have any material off-balance sheet arrangements.

Contractual Obligations and Commercial Commitments

     Approximately $15 million in lease commitments were assumed in connection with the SkyTel acquisition. SkyTel has operating leases related to locations on radio towers and building rooftops for placing network equipment in service. The leases have terms

ranging from one month to six years. During 2007, the Company entered into a five year facility lease with an aggregate commitment of $2.5 million related to the SkyTel operations. On August 2, 2007, the Company reached an agreement with a third party to assume a lease in Springfield, Missouri that had a remaining lease term of 29 months and a commitment of approximately $3.0 million. In August 2007 the Company entered into a 24 month lease facility to finance the acquisition of wireless routers and related equipment associated with the SkyTel business. The lease is accounted for as a capital lease and is recorded on the Consolidated Condensed Balance Sheet at approximately $1.7 million (includes present value of interest payments). Other than the leases described in this paragraph, there have been no material changes to the Company’s contractual obligations and commercial commitments as previously disclosed in the Company’s Annual Report on From 10-K for the year ended December 31, 2006.

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.

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