BELL INDUSTRIES INC /NEW/
PRE 14A, 1999-10-28
ELECTRONIC PARTS & EQUIPMENT, NEC
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<PAGE>   1

                            SCHEDULE 14A INFORMATION

                PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                               (AMENDMENT NO.   )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[X]  Preliminary Proxy Statement
[ ]  Confidential, for Use of the Commission Only (as permitted by
     Rule 14a-6(e)(2))
[ ]  Definitive Proxy Statement
[ ]  Definitive Additional Materials
[ ]  Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12

                                BELL INDUSTRIES
- --------------------------------------------------------------------------------
                (Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
    (Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X]  No fee required.

[ ]  Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

     (1)  Title of each class of securities to which transaction applies:

          ---------------------------------------------------------------------

     (2)  Aggregate number of securities to which transaction applies:

          ---------------------------------------------------------------------

     (3)  Per unit price or other underlying value of transaction computed
          pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
          filing fee is calculated and state how it was determined):

          ---------------------------------------------------------------------

     (4)  Proposed maximum aggregate value of transaction:

          ---------------------------------------------------------------------
     (5)  Total fee paid:

          ---------------------------------------------------------------------

[ ]  Fee paid previously with preliminary materials.

[ ]  Check box if any part of the fee is offset as provided by Exchange Act Rule
     0-11(a)(2) and identify the filing for which the offsetting fee was
     previously paid. Identify the previous filing by registration statement
     number, or the Form or Schedule and the date of its filing.

     (1)  Amount Previously Paid:

          ---------------------------------------------------------------------
     (2)  Form, Schedule or Registration Statement No.:

          ---------------------------------------------------------------------
     (3)  Filing Party:

          ---------------------------------------------------------------------
     (4)  Date Filed:

          ---------------------------------------------------------------------
<PAGE>   2

                              BELL INDUSTRIES LOGO
                       1960 EAST GRAND AVENUE, SUITE 560
                       EL SEGUNDO, CALIFORNIA 90245-4608

Dear Shareholder:

     This year's Annual Meeting of Shareholders will be held on Thursday,
December 30, 1999, at the Doubletree Club Hotel, 1985 East Grand Avenue, El
Segundo, California, 90245. Management hopes that you will come to the meeting
and give us an opportunity to meet you and discuss any questions you may have.

     The formal notice of meeting and the Proxy Statement follow. The only
formal action to be taken at the meeting is the election of the Board of
Directors for the ensuing year. I urge you to review the Proxy Statement
carefully and, at your earliest convenience, sign, date and mail the enclosed
proxy card so that your shares will be represented at the meeting. A prepaid
return envelope is provided for this purpose.

                                          Sincerely,

                                          TRACY A. EDWARDS
                                          President

November   , 1999
<PAGE>   3

                             BELL INDUSTRIES, INC.
                       1960 EAST GRAND AVENUE, SUITE 560
                       EL SEGUNDO, CALIFORNIA 90245-4608

                            ------------------------

                    NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

                               DECEMBER 30, 1999

     The Annual Meeting of Shareholders of Bell Industries, Inc., a California
corporation, will be held at the the Doubletree Club Hotel, 1985 East Grand
Avenue, El Segundo, California, 90245, on Thursday, December 30, 1999 at 11:00
A.M.

     The purpose of the meeting is to elect seven directors to hold office until
the next Annual Meeting of Shareholders and thereafter until their successors
are elected and to transact any other business that may properly come before the
meeting or any adjournments thereof.

     The Board of Directors has fixed the close of business on Friday, November
5, 1999 as the record date for the determination of shareholders entitled to
receive notice of, and to vote at, said meeting and any adjournment or
adjournments thereof.

                                          By Order of the Board of Directors

                                          JOHN J. COST
                                          Secretary

November   , 1999

     YOUR VOTE IS IMPORTANT. IF YOU DO NOT EXPECT TO ATTEND THE ANNUAL MEETING
OF SHAREHOLDERS, OR IF YOU DO PLAN TO ATTEND AND WISH TO VOTE BY PROXY, PLEASE
DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY CARD, FOR WHICH A RETURN,
STAMPED ENVELOPE IS PROVIDED. YOUR PROMPT RETURN OF THE PROXY CARD WILL HELP THE
COMPANY AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION TO ASSURE A QUORUM
AT THE MEETING.
<PAGE>   4

                                PROXY STATEMENT
                            ------------------------

                         ANNUAL MEETING OF SHAREHOLDERS
                            OF BELL INDUSTRIES, INC.

                               DECEMBER 30, 1999
                            ------------------------

                                  INTRODUCTION

     This Proxy Statement is being mailed on or about November   , 1999 to
shareholders of Bell Industries, Inc. (the "Company") in connection with the
solicitation of Proxies by the Company's Board of Directors for use at the
Company's Annual Meeting of Shareholders to be held on December 30, 1999, or any
adjournments thereof, for the purposes set forth herein and in the accompanying
Notice of Annual Meeting of Shareholders. Expenses relating to the proxy
statement, the proxy and the solicitation thereof will be paid by the Company.

     The persons named in the accompanying proxy have advised the Company that
they intend to vote the proxies received by them in their discretion for as many
director nominees as the votes represented by such proxies are entitled to elect
(see "Election of Directors"). Any shareholder may revoke his or her proxy at
any time prior to its use by filing with the Secretary of the Company a written
notice of revocation or a duly executed proxy bearing a later date.

     Only shareholders of record at the close of business on Friday, November 5,
1999, will be entitled to notice of, and to vote at, the meeting or any
adjournments thereof. At such record date, there were outstanding and entitled
to vote approximately             shares of common stock. Each of the foregoing
shares is entitled to one vote on all matters other than the election of
directors. In connection with the election of directors, each shareholder is
entitled to cumulate votes.

     A quorum must be present to take any action on a voting matter at the
meeting. The presence in person or represented by proxy of the persons entitled
to vote a majority of the shares constitutes a quorum. For purposes of
determining the number of shares present in person or represented by proxy on
voting matters, all votes cast "for," "against" or "abstain" are included.
"Broker non-votes," which occur when brokers or other nominees are prohibited
from exercising discretionary voting authority for beneficial owners who have
not provided voting instructions, are not counted for the purpose of determining
the number of shares present in person or represented by proxy on a voting
matter.

     For information concerning the possibility of a proxy contest with Steel
Partners II, L.P., the Company's largest shareholder, for control of the
Company's Board of Directors, see "Possible Proxy Contest".

                             ELECTION OF DIRECTORS

     In voting for directors of the Company, each shareholder has the right to
cumulate votes and give one candidate a number of votes equal to the number of
directors to be elected, multiplied by the number of votes to which the shares
are entitled, or to distribute the votes on the same principle among as many
candidates as the shareholder chooses. The candidates receiving the highest
number of votes, up to the number of directors to be elected, shall be elected.
For a shareholder to exercise cumulative voting rights, such shareholder must
give notice of intent to cumulate votes prior to the vote at the meeting.

     The Company's Board of Directors presently consists of seven directors. The
persons who are elected directors will hold office until the next Annual Meeting
of Shareholders scheduled to be held in May 2000 and
<PAGE>   5

thereafter until their successors are elected. All of the seven Board nominees
are currently directors of the Company. The names and principal occupations of
the Board's nominees for election as directors, and the respective numbers of
shares of voting stock of the Company beneficially owned, directly or
indirectly, by each nominee are set forth below.

<TABLE>
<CAPTION>
                                                     YEAR      SHARES BENEFICIALLY
                                                     FIRST         OWNED AS OF        PERCENT
       NAME AND PRINCIPAL OCCUPATION         AGE    ELECTED      OCTOBER 1, 1999      OF CLASS
       -----------------------------         ---    -------    -------------------    --------
<S>                                          <C>    <C>        <C>                    <C>
John J. Cost(2)(3)                            65     1971             17,506(5)         (4)
  Of Counsel
  Irell & Manella LLP, Attorneys
Anthony L. Craig(1)(2)                        54     1993             14,938(5)         (4)
  President, Tamandra, Inc.
Herbert S. Davidson(2)                        77     1997              1,000            (4)
  Director
Tracy A. Edwards                              42     1999             61,661(6)         (4)
  President and Chief Executive Officer
Milton Rosenberg(1)(2)(3)(4)                  77     1975             20,000(5)         (4)
  Private investor and consultant to high
  technology companies
Gordon Graham                                 65     1994             46,994(6)         (4)
  Co-Chairman, private investor and
  consultant to the Company
Theodore Williams(3)                          79     1969            360,154(6)        3.7%
  Co-Chairman
</TABLE>

- ---------------

(1) Member of Audit Committee.

(2) Member of Compensation Committee.

(3) Member of Nominating Committee.

(4) Less 1% of total outstanding shares.

(5) Includes 14,800 shares with respect to each of Messrs. Cost, Craig and
    Rosenberg, issuable pursuant to currently exercisable stock options issued
    under Bell's Non-employees Directors' Stock Option Plan.

(6) Includes 44,193 shares with respect to Mr. Edwards, 21,024 shares with
    respect to Mr. Graham and 27,000 shares with respect to Mr. Williams
    issuable pursuant to currently exercisable stock options.

     In December 1996 Mr. Graham was elected President and Chief Operating
Officer and from January 1, 1998 to February 1, 1999 Mr. Graham served as
President and Chief Executive Officer. For more than the past five years prior
to his election as President, Mr. Graham was employed by the Company in other
executive capacities.

     On February 1, 1999, Mr. Edwards was elected President and Chief Executive
Officer, and a director of the Company. From January 1998 until that time, Mr.
Edwards was the Executive Vice President of the Company and for more than five
years prior to January 1998, Mr. Edwards served as the Company's Vice President
and Chief Financial Officer.

     Mr. Cost was a partner in the law firm of Irell & Manella LLP, Los Angeles,
California, from 1969 through December 1994. Effective January 1, 1995, Mr. Cost
retired as a partner of that firm and now acts "of counsel." He was elected
Secretary of the Company in 1987. Irell & Manella LLP provides legal services to
the Company.

                                        2
<PAGE>   6

     Since July 1997, Mr. Craig has been the President and Chief Executive
Officer of Tamandra, Inc., a privately-held investment company. From February
1996 through July 1997, Mr. Craig was the President and Chief Executive Officer
of Global Knowledge Network, a privately-held company engaged in providing
learning services for information technology in over 40 countries. From November
1993 through January 1996, he was a Vice President of Digital Equipment
Corporation, a New York Stock Exchange company. Mr. Craig is currently a
director of Mitel Corp., a publicly-held semi-conductor company. Mr. Craig is
also a director of the Global Knowledge Network.

     From 1970 until December 31, 1997, Mr. Williams was Chairman of the Board
and Chief Executive Officer of the Company. He resigned as Chief Executive
Officer on December 31, 1997, but remained Chairman. On February 1, 1999, he
became Co-Chairman.

     Mr. Davidson became director upon the consummation of the acquisition of
Milgray Electronics in January 1997. For more than five years prior to that
time, Mr. Davidson was the President and Chief Executive Officer of Milgray
Electronics. In connection with the acquisition, Mr. Davidson received
approximately $55 million for his equity interest in Milgray on the same basis
per share as all other Milgray shareholders.

     Mr. Rosenberg has been self-employed as an investor in, and consultant to,
high technology companies for more than the past five years.

     If for any reason one or more of the nominees named above should not be
available as a candidate for director, an event that the Board of Directors does
not anticipate, the persons named in the enclosed proxy will vote for such other
candidate or candidates as may be nominated by the Board and discretionary
authority to do so is included in the Proxy. Also, in the event the election of
directors is by cumulative voting, the persons named in the enclosed proxy will
cumulate the votes represented by the proxies so as to elect the maximum number
of directors possible, which number may be less than seven.

     During 1998, directors who were employees received no additional
compensation for serving on the Board of Directors. Non-employee directors
received an annual retainer of $40,000, plus $1,000 for each attendance at a
meeting of the Board or a committee thereof which does not immediately precede
or follow a meeting of the Board. In June 1999, the Board eliminated the annual
retainer for directors effective January 1, 2000, except in the case of Mr.
Craig who will receive an annual retainer of $25,000. The Company had a
directors' retirement plan for non-employee directors. Under the plan, directors
having served at least ten years as a director after reaching the age of 65 are
entitled to receive an annual retirement benefit of $40,000. Such payments will
be made for the number of years equal to the number of years served as a
director or until his or her death; provided, that a surviving spouse is
entitled for a period of five years after death to continue to receive the same
benefits that such director would have been so entitled to receive. If a
director has reached age 60 and ceases to serve as a director at the request of
the Company, he will be entitled to the same retirement benefits as if he
retired at age 65. In the event of a change in control, a director leaving the
Board would be entitled to receive an immediate lump sum payment of the present
value of his accrued retirement benefit. In January 1996, the Company terminated
the directors' retirement plan except to the extent rights thereunder were
vested. The rights of Mr. Cost and Mr. Rosenberg were fully vested under the
plan. Messrs. Cost, Craig and Rosenberg are also entitled to receive stock
options under the Company's Non-employee Directors' Stock Option Plan. Under the
Plan, each non-employee director receives options for 10,000 shares upon his
election as a director and an option for 1,000 shares for each year thereafter
in which he is reelected. Pursuant to the Plan, Messrs. Cost, Craig and
Rosenberg each received options covering 10,000 shares in May 1996 when the Plan
was first adopted and options covering 1,000 shares in May 1997 and 1998.

     See "Possible Proxy Contest" for information concerning other possible
director nominees.
                                        3
<PAGE>   7

                       INFORMATION REGARDING SHAREHOLDERS

PRINCIPAL SECURITY HOLDERS

     As of September 30, 1999, Cede & Co., a nominee of securities depositories
for various segments of the financial industry, held approximately 8,909,756
shares representing 93% of the Company's outstanding common stock, none of which
was owned beneficially by such organization. Based upon reports filed through
September 30, 1999 with the Securities and Exchange Commission, the Company
believes that only those entities named below beneficially own 5% or more of the
Company's common stock:

<TABLE>
<CAPTION>
                    NAME AND ADDRESS                         AMOUNT AND NATURE       PERCENT
                  OF BENEFICIAL OWNER                     OF BENEFICIAL OWNERSHIP    OF CLASS
                  -------------------                     -----------------------    --------
<S>                                                       <C>                        <C>
Steel Partners II, L.P.                                          1,671,710             17.4%(1)
  150 East 52nd Street, 21st Floor                                (Direct)
  New York, New York 10022
Merrill Lynch & Co., Inc.                                          810,210              8.5%(2)
  World Financial Center, North Tower                             (Direct)
  250 Vesey Street
  New York, New York 10381
First Carolina Investors, Inc.                                     706,400              7.4%
  1130 East 3rd Street, Suite 410                                 (Direct)
  Charlotte, North Carolina 28204
The TCW Group, Inc.                                                566,992              5.9%(3)
  865 South Figueroa Street                                       (Direct)
  Los Angeles, California 90017
Dimensional Fund Advisors                                          498,071              5.2%
  1299 Ocean Avenue, 11th Floor                                   (Direct)
  Santa Monica, California 90401
</TABLE>

- ---------------
(1) According to the Schedule 13D filed by Steel Partners II, L.P. ("Steel") on
    January 11, 1999, the shares of the Company's common stock owned by Steel
    are also beneficially owned by Mr. Warren Lichtenstein by virtue of his
    position with Steel. In addition, according to such Schedule 13D, Steel, Mr.
    Lichtenstein, Sandera Partners, L.P. ("Sandera"), Newcastle Partners, L.P.
    ("Newcastle") and Mr. Mark S. Schwarz entered into a joint filing agreement
    pursuant to which, among other things, Mr. Lichtenstein and Mr. Schwarz
    formed a group to nominate four individuals to be elected directors of the
    Company's Board. In addition, Steel, Sandera, Newcastle, Mr. Lichtenstein
    and Mr. Schwarz agreed to the joint filing of statements on Schedule 13D
    with respect to their shares of the Company's common stock. According to
    their jointly filed Schedule 13D filed October 8, 1999, the joint filing
    agreement was terminated and Steel Partners acquired 200,000 shares of the
    Company's common stock from Catalyst GP, Ltd. (successor to Sandera).
    According to such Schedule 13D, the aggregate ownership of Steel Partners is
    approximately 17.4%. See "Miscellaneous -- Nomination by Shareholder" for
    further information concerning Steel Partners.

(2) According to the Schedule 13G filed by Merrill Lynch & Co., Inc., voting and
    dispositive power over 545,300 of such shares is shared with Merrill Lynch
    Special Value Fund, Inc.

(3) According to the Schedule 13G filed by the TCW Group, Inc., voting and
    dispositive power over such shares is shared with Mr. Robert Day.

                                        4
<PAGE>   8

SECURITY OWNERSHIP OF MANAGEMENT

     The following table shows the beneficial ownership of the Company's common
stock of those executive officers of the Company listed in the "Summary
Compensation Table" under EXECUTIVE COMPENSATION, who are not Board director
nominees, as well as the beneficial ownership of common stock of all Board
nominees for directors and executive officers of the Company as a group as of
October 1, 1999. Information regarding the stock ownership of Board director
nominees is contained in the prior table under ELECTION OF DIRECTORS.

<TABLE>
<CAPTION>
                                                             AMOUNT AND NATURE       PERCENT
                NAME OF BENEFICIAL OWNER                  OF BENEFICIAL OWNERSHIP    OF CLASS
                ------------------------                  -----------------------    --------
<S>                                                       <C>                        <C>
D.J. Hough                                                         57,005(2)          (1)
  Former Senior Vice President                               (Direct)
  and Chief Information Officer

Peter A. Resnick                                                      480(3)          (1)
  Former Vice President and                                  (Direct)
  Corporate Controller

Stephen A. Weeks                                                    2,809(4)          (1)
  Former Vice President and Treasurer                        (Direct)

All current directors and executive officers as a group           608,278(5)         6.3%
  (ten persons)
</TABLE>

- ---------------

(1) Less than 1% of the outstanding.

(2) Mr. Hough resigned effective April 30, 1999.

(3) Mr. Resnick resigned effective August 31, 1999.

(4) Mr. Weeks resigned effective May 7, 1999.

(5) Includes 157,377 shares issuable pursuant to currently exercisable stock
    options.

                                        5
<PAGE>   9

              COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN(A):
         BELL INDUSTRIES, INC., NYSE MARKET INDEX AND PEER GROUP INDEX

<TABLE>
<CAPTION>
                                                     BELL INDUSTRIES               PEER GROUP                 BROAD MARKET
                                                     ---------------               ----------                 ------------
<S>                                             <C>                         <C>                         <C>
1993                                                       100                         100                         100
1994                                                       122                          97                          98
1995                                                       141                         126                         127
1996                                                       141                         145                         153
1997                                                       109                         164                         201
1998                                                        90                         137                         239
</TABLE>

(A) Assumes $100 invested on December 31, 1993 and dividends reinvested.

(B) The Peer Group for the period ended December 31, 1998 consisted of the
    following electronic and industrial distribution companies:

<TABLE>
         <S>                         <C>
         Arrow Electronics, Inc.     Kent Electronics Corp.
         Avnet, Inc.                 Marshall Industries
         Bell Microproducts, Inc.    Nu-Horizons Electronics
         Jaco Electronics Inc.       Pioneer Standard Electronics
</TABLE>

(C) The Broad Market Index chosen was the New York Stock Exchange Market Index.

                                        6
<PAGE>   10

                             EXECUTIVE COMPENSATION

     The following table shows all cash compensation and certain other
compensation paid to (i) the chief executive officer and (ii) the other four
most highly compensated executive officers the ("Named Officers") for the three
years in the period ending December 31, 1998 for services rendered in all
capacities to the Company and its subsidiaries:

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                    LONG-TERM
                                                                                   COMPENSATION
                                                                                   ------------
                                                   ANNUAL COMPENSATION               OPTIONS
                                          -------------------------------------     (NUMBER OF
  NAME AND PRINCIPAL POSITION     YEAR      SALARY       BONUS(1)     OTHER(2)       SHARES)
  ---------------------------     ----    ----------    ----------    ---------    ------------
<S>                               <C>     <C>           <C>           <C>          <C>
Gordon Graham                     1998    $  600,000    $      -0-    $  60,000          -0-
Co-Chairman and former            1997       619,000        50,000       56,527       60,000
  Chief Executive Officer         1996       176,000        44,829       19,047        4,200
Tracy A. Edwards                  1998    $  300,000    $  200,000    $  31,885          -0-
  President and                   1997       250,000        50,000       27,627       54,800
  Chief Executive Officer(3)      1996       173,750        44,253       19,251        4,200
D.J. Hough                        1998    $  227,000    $  350,000    $  23,720          -0-
  Former Senior Vice President    1997       227,000        50,000       25,127        6,000
and
  Chief Information Officer(4)    1996       202,800        51,652       22,322          -0-
Peter A. Resnick                  1998    $  154,700    $  235,000    $  16,609          -0-
  Former Vice President and       1997       132,800        20,000       15,003          -0-
  Corporate Controller(5)         1996        75,100        15,893          -0-        3,600
Stephen A. Weeks                  1998    $  154,700    $  430,000    $  17,133          -0-
  Former Vice President and       1997       138,000        20,000       15,527        3,000
Treasurer(6)
                                  1996       105,000        26,743       12,747        2,400
</TABLE>

- ---------------

     Certain columns have not been included in this table because the
information called for therein is not applicable to the Company or the
individuals named above for the periods indicated.

(1) Includes bonuses accrued and earned for the period although paid in a later
    period. For example, executive bonuses earned in 1996 were not paid until
    February 1997. The 1998 special bonuses for Messrs. Edwards, Hough, Weeks
    and Resnick related to the sales of the Company's electronics distribution
    and graphics imaging businesses.

(2) Consists of amounts contributed by the Company on behalf of the named
    individual under the Company's Savings and Profit Sharing Plan and Executive
    Deferred Income and Pension Plan.

(3) On February 1, 1999, Mr. Edwards became the President and Chief Executive
    Officer of the Company.

(4) Mr. Hough resigned effective April 30, 1999.

(5) Mr. Resnick resigned effective August 31, 1999.

(6) Mr. Weeks resigned effective May 7, 1999.

                                        7
<PAGE>   11

STOCK OPTIONS

     No options were granted to the Chief Executive Officer and the Named
Executive Officers in 1998.

OPTION EXERCISES AND HOLDINGS

     The following table sets forth information with respect to the former chief
executive officer, the current chief executive officer and the Named Officers,
concerning the exercise of options during the twelve month period ended December
31, 1998 and unexercised options held as of December 31, 1998:

              AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                         FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
                                                                             NUMBER OF                     VALUE OF
                                                  VALUE REALIZED      UNEXERCISED OPTIONS AT        UNEXERCISED OPTIONS AT
                                                  (MARKET PRICE          DECEMBER 31, 1998           DECEMBER 31, 1998(1)
                               SHARES ACQUIRED   AT EXERCISE LESS   ---------------------------   ---------------------------
            NAME                 ON EXERCISE     EXERCISE PRICE)    EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
            ----               ---------------   ----------------   -----------   -------------   -----------   -------------
<S>                            <C>               <C>                <C>           <C>             <C>           <C>
Gordon Graham                         -0-             $  -0-           7,512         57,528          $-0-           $-0-
Tracy A. Edwards                    2,890              5,375          41,721         52,848           -0-            -0-
D.J. Hough                          2,890              5,375          42,275          5,400           -0-            -0-
Stephen A. Weeks                    1,445              2,688           3,402          5,968           -0-            -0-
Peter A. Resnick                      -0-                -0-             360          3,240           -0-            -0-
</TABLE>

- ---------------

(1) Based upon the closing price on the New York Stock Exchange on that date
    ($11.38).

     In January 1999, Mr. Edwards, the Company's President and Chief Executive
Officer, was granted an option covering 300,000 shares at an exercise price of
$11.13, which was the market price on the date of grant. Following the Company's
$5.70 cash distribution in June 1999, the exercise price was reduced to $5.43 in
accordance with the option agreement.

EMPLOYMENT AGREEMENTS

     In February 1999, the Company entered into an employment agreement with Mr.
Edwards, the Company's President and Chief Executive Officer. This agreement
provides for an annual salary of $315,000 plus a bonus dependent upon the
Company achieving performance goals to be established from time to time by the
Company's Compensation Committee. Further, for calendar 1999, Mr. Edwards is
entitled to a minimum bonus of $150,000. The agreement also provides that Mr.
Edwards would receive an amount equal to two times his annual salary in the
event he no longer serves as President and Chief Executive Officer and such
termination is by the Company without cause or by Mr. Edwards if there has
occurred a material change in his duties, a reduction in his compensation or a
"change of control" of the Company. "Change in control" is defined below.

     The Company has severance agreements with its executive officers. Severance
agreements currently in effect are with Messrs. Edwards, Ferry and Doll. Each of
these agreements provides, in essence, that should there be a "change in
control" (as defined) and the officer's employment is terminated either (i)
involuntarily, without just cause, or (ii) voluntarily, if the officer has
determined in good faith that his duties have been altered in a material respect
or there has been a reduction in his compensation or employee benefits, then
upon termination, the officer would be entitled to receive a severance payment.
A "change of control" of the Company is generally defined as (i) any
consolidation or merger of the Company, other than a merger of the Company in
which the holders of the Company's common stock immediately prior to the merger
have at least seventy-five percent (75%) ownership of the voting capital stock
of the surviving corporation immediately after the merger, (ii) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company, (iii)
the shareholders of the Company

                                        8
<PAGE>   12

approve any plan or proposal for the liquidation or dissolution of the Company,
(iv) any person shall become the beneficial owner of thirty percent (30%) or
more of the Company's outstanding common stock, or (v) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the entire Board of Directors shall cease for any reason (except death) to
constitute a majority thereof unless the election, or the nomination for
election by the Company's shareholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.

     The sale of the Company's electronics distribution business in January 1999
constituted a "change in control". After the sale of the Company's electronics
distribution business, Messrs. Hough's, Weeks' and Resnick's corporate functions
were no longer needed, their employment ceased and they received $642,000,
$141,000 and $284,000, respectively, as their severance payments. Additionally,
Messrs. Weeks and Resnick received payments of $60,000 in lieu of continued
employee benefits under their severance agreements.

     Mr. Edwards' severance agreement provides that if he is terminated under
circumstances giving rise to a severance payment, the amount of such payment
would be 295% of the "base amount" (generally equivalent to the highest twelve
months compensation during such person's last three years prior to termination).
In addition, under his severance agreement the Company agrees to pay Mr. Edwards
the amount of any excise tax on the payment of any of the above benefits which
constitutes an "excess parachute payment" under Section 4999 of the Internal
Revenue Code of 1986. The severance agreements with Messrs. Doll and Ferry
provide that if they are terminated under circumstances giving rise to a
severance payment, the amount of such payment would be the lesser of 150% of
their "base amount" and the maximum amount payable that would not constitute an
"excess parachute payment." In June 1999, Mr. Doll entered into a second
severance agreement having substantially the same terms except the payment
calculation would be 145% of the base amount.

     Mr. Graham had a severance agreement pursuant to which he received $950,000
in February 1999 when Mr. Edwards assumed the office of President and Chief
Executive Officer. Also, in February 1999, Mr. Graham entered into a three year
consulting agreement which provides for annual compensation of $250,000. These
payments may be accelerated upon the occurrence of another "change in control"
event. He receives no other payment for his services to the Company.

     In February 1999, the Company paid Mr. Williams, Bell's former Chairman of
the Board, President and Chief Executive Officer approximately $1,723,000 owing
him under his deferred compensation agreement ($1,446,000) and consulting
agreement ($277,000). He was also paid an additional $277,000 in lieu of
continued salary as Co-chairman of the Board. Mr. Williams will receive no
further monies for his services to the Company.

     The Company has entered into Indemnity Agreements with all directors and
all executive officers of the Company after having received shareholder approval
at the Company's 1986 Annual Meeting. The Indemnity Agreements provide for
indemnification of directors and officers in cases where indemnification might
not otherwise have been available.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     Mr. Cost who is also a member of the Compensation Committee is the
Secretary of the Company. He receives as compensation for his services as
Secretary, in lieu of the annual retainer for being a director, an amount equal
to the annual retainer.

                                        9
<PAGE>   13

             COMPENSATION STRUCTURE AND COMMITTEE RESPONSIBILITIES

     The Company compensates its executive officers with two basic forms of
compensation: cash (salary and incentive bonus) and stock options. Bonuses
granted for the fiscal year ended December 31, 1996 were based upon the formula
described hereafter. The Company's earnings for 1997 and 1998 were not
sufficient to warrant the payment of bonuses under the predetermined formula for
incentive compensation based upon a minimum return on shareholders' equity,
although extraordinary bonuses were paid in 1998 in connection with the sale of
two major segments of the Company's business. Further in February 1996 and
January and December 1997, executives were awarded stock options under Bell's
stock option plans at an exercise price equal to the fair market value of the
underlying shares on the date of grant. No options were granted in calendar
1998. In January 1999, Mr. Edwards, the Company's President and Chief Executive
Officer, was granted an option covering 300,000 shares at an exercise price of
$11.13, which was the market price on the date of grant. Following the Company's
$5.70 cash distribution in June 1999, the exercise price was reduced to $5.43 in
accordance with the option agreement.

     The Company Compensation Committee currently consists of Messrs. Cost,
Craig, Davidson and Rosenberg. The duties of the Committee are to determine the
overall compensation policy for the Company's executive officers, including
specifically fixing the compensation of the chief executive officer.

     The following report is submitted by the Compensation Committee as it
relates to both cash compensation of, and stock options granted to, executive
officers of the Company. This report is not deemed "filed" with the Securities
and Exchange Commission and is therefore not intended to be incorporated by
reference in any other document filed by the Company with the Commission.

                      REPORT OF THE COMPENSATION COMMITTEE

     The Company's compensation philosophy is based upon the belief that the
Company's success is the result of the coordinated efforts of all employees
working towards common objectives. Its executive officer compensation program is
composed of base salary, annual incentive cash bonuses and long-term incentive
compensation in the form of stock options.

BASE SALARY

     The Committee attempts to set the base salary levels competitively with
those paid by others in the electronics and industrial distribution companies
comprising its Peer Group. Based upon its most recent survey (December 1996),
the Committee believes that the compensation levels paid to Company executives
are in the mid-range of compensation paid by its Peer Group. In determining
salaries, the Committee also takes into account individual experience and
performance, past salary history and specific issues particular to the Company.

ANNUAL INCENTIVE BONUS

     Prior to fiscal 1994, cash bonuses were considered annually and awarded
generally upon a subjective evaluation of the particular officer's performance
for the year and were dependent upon the overall financial achievement of the
Company during the year. For example, bonuses usually were not given in years
where the Company's growth was nominal. Thereafter, the Committee established an
incentive bonus program based upon the return on shareholders' equity and
awarded incentive bonuses for those periods in accordance with such programs.
For each period, no incentive bonus would be earned unless the Company's
earnings exceeded a predetermined percentage minimum return on shareholders'
equity as at the beginning of the period. If that

                                       10
<PAGE>   14

minimum return was achieved, each executive officer (including the Chief
Executive Officer) earned a bonus based upon the extent to which the Company's
actual earnings exceeded the minimum return on shareholders' equity. For the
year ended December 31, 1996, the Company's return on shareholders' equity was
approximately 12%, in excess of the predetermined minimum. The amount of a
particular officer's bonus was an arithmetic calculation based upon the actual
return on shareholders' equity and that officer's base salary. Since the amount
of any bonus was dependent upon the extent to which the Company's actual return
on shareholders' equity exceeded the predetermined minimum return, there was no
arithmetic limitation upon the amount of bonuses that could be earned. For the
fiscal years ended December 31, 1997 and 1998, the Company's return on
shareholders' equity did not equal or exceed the predetermined percentage
minimum; and therefore, no bonuses were earned under the formula plan. Although
the Company's earnings for 1997 were less than necessary to achieve the minimum
return on shareholders' equity previously established, the Committee awarded
discretionary cash bonuses to six corporate officers in the aggregate amount of
$206,667. For calendar 1998, certain officers were granted special cash bonuses
relating to the sale of the Company's electronics distribution and graphics
imaging businesses. For the current fiscal year, the Committee has established
an incentive program based upon the Company's pre-tax earnings.

LONG-TERM INCENTIVE PROGRAM

     Currently, the Company's long-term incentive program consists of the award
of stock options to executive officers and other key employees at current market
prices. The grant of options with exercise prices at prevailing market prices is
designed to align executive compensation and shareholder long-term interests by
creating a direct link between long-term executive compensation and shareholder
return as evidenced by increased stock market value.

     The Compensation Committee's current policy is to award significant amounts
of stock options to executive officers and other key employees. Exercise prices
are established equal to the fair market value of Bell's common stock on the
date of grant. Options are usually for a term of five (5) years and become
vested over a period of four (4) years dependent upon continued employment. The
number of stock options granted to executive officers is based upon an
evaluation of the particular officer's deemed ability to influence the long-
term growth and profitability of the Company. Stock options were granted to the
Company's executive officers in February 1996, January 1997 and December 1997
with exercise prices equal to fair market value at the time of grant.
Additionally, Mr. Edwards, Mr. Ferry and Mr. Doll were granted stock options
covering 300,000; 150,000; and 75,000 shares, respectively, in January 1999.

CHIEF EXECUTIVE OFFICER'S COMPENSATION

     Mr. Graham had been an Executive Officer of the Company for over ten years
and President and Chief Executive Officer since January 1998. For the 1998
fiscal year, Mr. Graham received a base salary of $600,000. On February 1, 1999,
Mr. Edwards assumed the office of President and Chief Executive Officer of the
Company. His compensation was previously described.
                                          Submitted By: John J. Cost (Chairman),
                                          Anthony Craig, Herbert Davidson, and
                                          Milton Rosenberg

                               OTHER COMPENSATION

SAVINGS AND PROFIT SHARING PLAN

     The Company established the Bell Industries' Employees' Savings and Profit
Sharing Plan (the "PSP") in 1973 under which both employees and the Company may
make contributions. The PSP will continue until

                                       11
<PAGE>   15

terminated by the Board of Directors. Employees must contribute at least 1% of
their annual compensation to participate in the PSP. The Company's contribution
to the PSP is determined by the Board of Directors in its discretion. For the
fiscal year ended December 31, 1998, the Company did not contribute to the PSP.

EXECUTIVE DEFERRED INCOME AND PENSION PLAN

     In July 1993, the Company adopted an Executive Deferred Income and Pension
Plan (the "EDP"). Under the EDP, each officer and such other highly compensated
employees as the Board may designate are eligible to participate. Each
participant may elect a percentage (not more than 10%) of his salary that he
wishes to defer. The Company matches the amount of the chosen deferral. Such
deferred sums bear an assumed interest at a rate equal to the Lehman Brothers
Long T-Bond index. In 1999, the Plan was amended eliminating the Company's
matching contribution.

     In the event of an unforeseen emergency, a participant may withdraw his
deferred salary plus accrued interest but no portion of the matching funds
contributed by the Company. In such an event, the participant would be
ineligible from participating in the EDP for a period of two years. After
reaching age 62 and retiring, a participant may elect to have his benefit paid
in a lump sum or payable over a period of 5 to 15 years.

     If a participant voluntarily resigns before age 62, he will be entitled to
receive at age 62 only a pro-rata portion of Company matching funds through the
date of his termination. That proration is based upon the period of EDP
participation; the participant being fully vested after 12 years. If a
participant dies while employed, his beneficiary would receive a lump sum
payment equal to all amounts that have accrued for his benefit through date of
death. If a participant's employment is terminated without cause or after a
change in control, he will receive the same benefit as he would have received if
his employment had been terminated due to death. If a participant is terminated
for cause, or if the Board determines within one year after termination that
cause existed at the time of termination, he will be entitled to receive in a
lump sum payment only the amount attributable to his deferred salary plus
accrued interest.

               COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS

     The Company's Board of Directors held seven meetings during calendar 1998.
Each director attended at least 80% of the meetings of the Board of Directors
and the committees on which he served.

     The Board of Directors also has standing committees: an Audit Committee, a
Compensation Committee and a Nominating Committee. The Company does not
currently have an acting Executive Committee. During fiscal 1998, the Audit
Committee consisted of Messrs. Cost, Davidson and Rosenberg and held two
meetings during the year. The Audit Committee now consists of Messrs. Craig and
Rosenberg. The Company was notified by The New York Stock Exchange ("NYSE") that
its policies do not permit employee-directors to serve on the audit committees
of NYSE listed issuers, such as the Company. Accordingly, Messrs. Cost and
Davidson, who were, respectively, the Company's Vice-Chairman of the Board and
the Secretary, resigned from the Audit Committee in 1999. The Audit Committee
reviews periodic financial statements of the Company, reviews the independent
accountants' scope of engagement, performance and fees, and reviews the adequacy
of the Company's financial control procedures. The Compensation Committee is
composed of Messrs. Cost, Craig, Davidson and Rosenberg and during calendar 1998
held three meetings. Its function is to fix compensation of the chief executive
officer and other key executives and to administer various benefit plans,
including the stock option plans, in which officers and employees may
participate. Messrs. Cost, Rosenberg and Williams are members of the Nominating
Committee which was established in March 1993. The Nominating Committee held no
meetings during calendar 1998. Its function is to recommend individuals to be
members of the Board of Directors. Messrs. Davidson and Rosenberg are not
standing for re-election as directors. The committee positions they occupy will
be filled by the Board of Directors in its discretion.
                                       12
<PAGE>   16

                           ANNUAL REPORT ON FORM 10-K

     The Company will provide, without charge, a copy of the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission for the
year ended December 31, 1998 upon the written request of any shareholder. This
request should be directed to Mr. Russell A. Doll, Vice President and Chief
Financial Officer, Bell Industries, Inc., 1960 East. Grand Avenue, Suite 560, El
Segundo, California 90245-4608.

                             SHAREHOLDER PROPOSALS

     If a shareholder wishes to have a proposal printed in the Proxy Statement
to be used in connection with the Company's next Annual Meeting of Shareholders,
tentatively scheduled for May 11, 2000, such a proposal must be received by the
Company at its Corporate Office prior to December 18, 1999.

            SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Based solely on a review of the forms submitted to Bell during and with
respect to the most recent fiscal year, there are no directors, officers,
beneficial owners of more than 10 percent of Bell's Common Stock or any other
person subject to section 16(a) of the Securities Exchange Act of 1934 that was
required to file, and failed to so file, reports required by such section.

                             POSSIBLE PROXY CONTEST

BACKGROUND

     In late 1998, Steel Partners II, L.P. ("Steel") began accumulating shares
of the Company's common stock and currently owns 1,671,710 shares (approximately
17.4% of the outstanding shares) based upon reports filed by Steel with the
Securities and Exchange Commission. In a letter dated January 8, 1999, Steel
informed the Company of its intention to nominate four individuals to the
Company's Board of Directors at the Company's 1999 Annual Meeting of
Shareholders, then scheduled to be held in June 1999. Further information
concerning the individuals to be nominated by Steel is found under the caption
"-- Nomination by Shareholder." By letter dated June 16, 1999, the Company's
Board of Directors offered to name two individuals of Steel's choice to be
included in the Company's slate for nominees as directors at that meeting in
recognition of Steel's stock ownership. The Company reaffirmed this offer on
October 26, 1999. Also in February, 1999, the Company adopted a Shareholders'
Rights Plan designed to assist the Board in negotiating with third parties who
attempt to take over the Company through open market purchases of the Company's
stock. The Shareholders' Rights Plan has the effect of causing substantive
economic dilution to any shareholder who acquires more than 18% of the Company's
Common Stock without the Board's consent.

     As has been previously reported, the Company sold its Graphics Imaging
Group in September 1998 and its Electronics Distribution Group in January 1999.
These two groups combined accounted for approximately 75% of revenues and total
assets for the Company's 1997 fiscal year. From the net proceeds of the sale of
its Electronics Distribution Group, the Company made a special cash distribution
of $5.70 per share in May 1999.

     Throughout 1999, the Company has pursued several strategic alternatives
with an objective of maximizing the value of the common stock. Lincoln Partners
LLP, the Company's investment banker, was employed to assist in this endeavor.
The alternatives reviewed included the sale of Bell stock to financial and
strategic buyers, the sale of the individual businesses to strategic buyers, and
the repurchase of certain outstanding equity through recapitalization of the
Company. At the time the Company was preparing its proxy material for
                                       13
<PAGE>   17

its planned June 1999 Annual Shareholders Meeting, Steel indicated that it might
be interested in acquiring the Company through a merger with WebFinancial
Corporation, a publicly traded company (NASDAQ: WEFN). Steel's general partner,
Warren Lichtenstein, owns 31.2% of WebFinancial (25.8% through Steel Partners)
and is also the Chairman of the Board of Directors and the chief executive
officer of that company. At the request of Steel, the Company agreed to postpone
the date of its 1999 Annual Meeting at which directors were to be elected until
the conclusion of negotiations regarding a possible merger.

     Concurrent with the discussions with Steel, the Company continued to
consider strategic alternatives. In July, the Company received an offer to buy
the outstanding shares of Bell stock at $4.75 per share from a party to which it
had previously given financial and other business information. The Board
rejected this offer as not adequate.

     During the summer of 1999, Steel conducted an extensive examination of the
Company's operations and financial condition with the full cooperation of
management. A draft agreement of merger was prepared by Steel and delivered to
the Company. Negotiations over the terms of that draft agreement were conducted
and, by mid-September, there was substantial agreement on the terms other than
price. That agreement provided that the shares of Bell would be purchased by
WebFinancial for cash in a yet to be agreed upon amount. During September, the
Company participated in number of meetings with financial institutions selected
by Steel with the purpose of aiding Steel and/or WebFinancial in obtaining the
financing that Steel deemed necessary in order to consummate the merger.

     In mid-September, 1999, Steel made an oral offer through the Company's
investment bankers of $5.30 per share. At a Board of Directors' meeting held
September 28, 1999 to specifically consider Steel's offer, management informed
the Board that certain projections of future performance given Steel and its
potential lending banks needed to be slightly revised downward due to the
deterioration of gross profit margins relating to product sales at its Systems
Integration Group. The Board believed that Steel should be informed of this fact
before it could act upon the $5.30 per share offer. Steel was so informed and
shortly thereafter reaffirmed its oral offer. The Company's Board met again on
October 4, 1999 and concluded that a price of $5.30 per share was inadequate.
This decision was conveyed to Steel. Steel then requested that the Board counter
with a price that they deemed adequate. Bell's Board met again on October 6,
1999. At this meeting, the Board concluded that a price of $6.00 would be
acceptable. That increased price was apparently unacceptable to Steel since in a
letter to the Company dated October 7, 1999 and made publicly available on
October 8, 1999 Steel stated ". . . we are extremely disappointed that the Bell
Industries Board of Directors has decided to "stay the course" and not proceed
with the negotiated transaction that we have been discussing and working on with
Bell for several months . . . " Since receipt of that letter, no meaningful
negotiations over price have taken place although, at the request of Steel, the
Company has furnished it with additional financial information and a
shareholder's list. During the period May 1 through October 22, 1999, the
Company's common stock traded on the New York Stock Exchange at a high of $6.00
per share (on September 14, 1999) to a low of $3.80 (on May 26, 1999). On
October 22, 1999, its closing price on the New York Stock Exchange was $4.81.

     In light of this history, the Company believes that Steel may engage in a
solicitation of proxies for its slate of nominees for directors to be elected at
the 1999 Annual Meeting of Shareholders. See "Nomination by Shareholder."

                                       14
<PAGE>   18

NOMINATION BY SHAREHOLDER

     By letter (the "Letter") to the Company dated January 8, 1999, Steel
notified the Company of its intention to nominate four individuals to the
Company's Board of Directors at the Annual Meeting referred to in this Proxy
Statement. The four individuals are: Warren G. Lichtenstein, Robert Frankfurt,
Steven Wolosky and Mark E. Schwarz (the "Individuals"). Certain information
about such Individuals, taken substantially verbatim from the Letter, is set
forth below. References to "the date hereof" below refer to the date of the
Letter.

             Warren G. Lichtenstein (33) is one of the Individuals. Mr.
        Lichtenstein has been the Chairman of the Board, Secretary and
        the Managing Member of Steel Partners, L.L.C. ("Steel LLC"), the
        general partner of Steel Partners II, L.P. since January 1,
        1996. Prior to such time, Mr. Lichtenstein was the Chairman and
        a director of Steel Partners, Ltd. ("Former General Partner"),
        the general partner of Steel Partners Associates, L.P.
        ("Associates"), which was the general partner of Steel Partners
        II, L.P. since 1993 and prior to January 1, 1996. Mr.
        Lichtenstein is a director of the following publicly held
        companies: Aydin Corporation, Gateway Industries, Inc., Rose's
        Holdings, Inc., PLM International, Inc. and Saratoga Beverage
        Group, Inc. As of the date hereof, Mr. Lichtenstein beneficially
        owned at least 961,010 shares of the Common Stock of the
        Company, all of which were beneficially owned by Steel Partners
        II, L.P. The business address of Mr. Lichtenstein is 150 E. 52nd
        Street, 21st Floor, New York, New York 10022. For information
        regarding Mr. Lichtenstein's purchases and sales of shares of
        the Common Stock of the Company during the past two years, see
        Appendix A to the Schedule 13D filed by Steel Partners II, L.P.

             In late 1995, Steel Partners II, L.P. commenced a proxy
        solicitation to replace the incumbent directors of Medical
        Imaging Centers of America, Inc. ("MICA"). Thereafter, MICA
        initiated an action against Steel Partners II, L.P., Warren
        Lichtenstein, and others in the United States District Court for
        the Southern District of California, Medical Imaging Centers of
        America, Inc. v. Lichtenstein, et al., Case No. 96-0039B. On
        February 29, 1996, the Court issued an Order granting, in part,
        MICA's motion for a preliminary injunction on the grounds that
        plaintiff had demonstrated a probability of success on the
        merits of its assertion that defendants had violated Section 13
        of the Securities Exchange Act of 1934. Under the Court's
        preliminary injunction, defendants in the action were enjoined
        from voting certain of their shares at MICA's annual meeting of
        shareholders, except pursuant to a formula under which they
        would be voted in the same proportion as other votes cast at the
        meeting. The Court declined to adjourn the annual meeting of
        shareholders. At the meeting, Steel Partners II, L.P. received
        sufficient votes to elect its Individuals to the Board of MICA,
        after giving effect to the Court's preliminary injunction. The
        parties thereafter settled their differences pursuant to an
        agreement under which MICA agreed to initiate an auction process
        which, if not concluded within a certain time period, would end
        and thereafter the designees of Steel Partners II, L.P. would
        assume control of the Board of MICA. MICA was ultimately sold
        for $11.75 per share, as contrasted with the price of $8.25 per
        share, representing the closing price on the day prior to the
        initiation of Steel Partners II, L.P.'s proxy solicitation.

             Robert Frankfurt (33) is one of the Individuals. Mr.
        Frankfurt graduated from the Wharton School of Business in 1987
        with a B.S. in Economics. Mr. Frankfurt began his career as a
        financial analyst in the mergers and acquisitions department of
        Bear, Stearns & Co., Inc. In 1989, Mr. Frankfurt joined Hambro
        Bank America as an associate focused on
                                       15
<PAGE>   19

        micro-cap and cross-border merger and acquisition transactions.
        In 1992, Mr. Frankfurt began consulting with various entities on
        proposed international and domestic transactions including a
        number of acquisition projects for Steel LLC. After completing
        his MBA at the Anderson Graduate School of Management at UCLA,
        where he was a Venture Capital Fellow, Mr. Frankfurt joined the
        Former General Partner in 1995 and became a non-managing member
        of Steel LLC in 1996. As of the date hereof Mr. Frankfurt does
        not beneficially own shares of the Common Stock of the Company.
        The business address of Mr. Frankfurt is 150 E. 52nd Street,
        21st Floor, New York, New York 10022.

             Mark E. Schwarz (38) is one of the Individuals. Mr. Schwarz
        has been Vice President of Sandera Capital, L.L.C. ("Sandera
        L.L.C."), a private investment firm, since 1995, and Manager
        since 1996. Prior to such time Mr. Schwarz was a securities
        analyst and portfolio manager for SCM Advisors, L.L.C. a
        registered investment advisor, from 1993 to 1996. Mr. Schwarz
        has also been the sole general partner of Newcastle Partners,
        L.P. ("Newcastle"), a private investment firm, since 1993. Mr.
        Schwarz is also a director of Aydin Corporation, a NYSE listed
        company. As of the date hereof, Mr. Schwarz beneficially owned
        103,000 shares of the Common Stock of the Company. The business
        address of Mr. Schwarz is c/o Sandera Partners, L.P., 1601 Elm
        Street, Suite 4000, Dallas, Texas 75201. For information
        regarding Mr. Schwarz's purchases and sales of shares of the
        Common Stock of the Company during the past two years, see
        Appendix A to the Schedule 13D filed by Sandera Capital L.L.C.
        jointly with the other Individuals.

             Steven Wolosky (43) is one of the Individuals. For more
        than the past five years, Mr. Wolosky has been a partner of
        Olshan Grundman Frome Rosenzweig and Wolosky LLP, counsel to
        Steel Partners II, L.P. Mr. Wolosky is also Assistant Secretary
        of WHX Corporation, a NYSE listed company and a director of
        Uniflex, Inc., an AMEX listed company. As of the date hereof,
        Mr. Wolosky did not beneficially own any shares of the Common
        Stock of the Company. Mr. Wolosky has not purchased or sold any
        shares of the Common Stock of the Company in the past two years.
        Mr. Wolosky's principal business address is 505 Park Avenue, New
        York, New York 10022.

             The general partner of Steel Partners II, L.P. is Steel
        LLC, a Delaware limited liability company. The principal
        business of Steel Partners II, L.P. is investing in the
        securities of micro-cap companies. The principal business
        address of Steel Partners II, L.P. and Steel LLC is 150 East
        52nd Street, 21st Floor, New York, New York 10022. Warren G.
        Lichtenstein is Chairman of the Board, Secretary and the
        Managing Member of Steel LLC. Robert Frankfurt is an employee
        and non-managing member of Steel LLC and an employee of Steel
        Partners II, L.P. As of the date hereof, Steel Partners II, L.P.
        is the beneficial owner of at least 961,010 shares of the Common
        Stock of the Company. Steel LLC does not beneficially own any
        shares of the Common Stock of the Company on the date hereof,
        except by virtue of its role in Steel Partners II, L.P. For
        information regarding Steel Partners II, L.P. purchases and
        sales of shares of the Common Stock of the Company during the
        past two years, see Appendix A to its Schedule 13D.

             Mr. Wolosky is Senior Partner of Olshan Grundman Frome
        Rosenzweig and Wolosky LLP, counsel to Steel Partners II, L.P.
        Mr. Wolosky does not beneficially own shares of Common Stock of
        the Company.

             Sandera L.L.C. is the general partner of Sandera Capital
        Management, L.P. ("SCM"), a Texas limited partnership. SCM is
        the general partner of Sandera Partners,

                                       16
<PAGE>   20

        L.P. ("Sandera"), a Texas limited partnership. The principal
        business of Sandera L.L.C., SCM, Sandera and Newcastle is the
        purchase, sale, exchange, acquisition and holding of investment
        securities. The principal business address of Sandera L.L.C.,
        SCM and Sandera is 1601 Elm Street, Suite 4000, Dallas, Texas
        75201. The principal business address of Newcastle is 4020
        Windsor Avenue, Dallas, Texas 75201. Mark E. Schwarz is the Vice
        President and manager of Sandera L.L.C. and the sole general
        partner of Newcastle. As of the date hereof, Sandera was the
        beneficial owner of 100,000 shares of Common Stock of the
        Company and Newcastle was the beneficial owner of 3,000 shares
        of Common Stock of the Company. Sandera L.L.C. does not
        beneficially own any shares of the Common Stock of the Company
        on the date hereof, except by virtue of its role in Sandera. For
        information regarding the purchases and sales of shares of the
        Common Stock of the Company during the past two years by Sandera
        and Newcastle, see Appendix A to the Schedule 13D of Sander and
        the other Individuals.

             The Individuals, if elected, would serve as directors for
        the term expiring in 2000 or until the due election and
        qualification of their successors. Steel Partners II, L.P. has
        no reason to believe any of the Individuals will be disqualified
        or unable or unwilling to serve if elected. Except as described
        herein, neither Steel Partners II, L.P., Sandera Partners, L.P.,
        Newcastle Partners, L.P. nor any of the Individuals (i) has
        engaged in or has a direct or indirect interest in any
        transaction or series of transactions since the beginning of the
        Company's last fiscal year or in any currently proposed
        transaction, to which the Company or any of its subsidiaries is
        a party where the amount involved was in excess of $60,000, (ii)
        is the beneficial or record owner of any securities of the
        Company or any parent or subsidiary thereof, (iii) is the record
        owner of any securities of the Company of which it may not be
        deemed to be the beneficial owner, (iv) has been within the past
        year, a party to any contract, arrangement or understanding with
        any person with respect to any securities of the Company, (v)
        has any arrangements or understandings with any Individuals
        pursuant to which such Individual was selected as a nominee and
        there exist no such agreements or understandings between any
        Individual and any other person, or (vi) has any agreement or
        understanding with respect to future employment by the Company
        or any arrangement or understanding with respect to any future
        transactions to which the Company will or may be a party.

                                     * * *

     The Company makes no recommendation about the background, qualifications,
character, intentions or ability of any of the foregoing Individuals to serve as
director, or whether any shareholder should vote for or against any of them at
the Annual Meeting, in the event any of them are nominated at such meeting.

                                 MISCELLANEOUS

     PricewaterhouseCoopers LLP has been the Company's independent accountants
for a number of years and has been selected to continue in such capacity for the
current fiscal year. It is anticipated that a representative from
PricewaterhouseCoopers LLP will attend the Annual Meeting of Shareholders, will
be available to answer questions, and will be afforded the opportunity to make
any statements the representative desires to make.

     The Board of Directors knows of no other matters that are likely to come
before the meeting. If any such matters should properly come before the meeting,
however, it is intended that the persons named in the accompanying form of proxy
will vote such proxy in accordance with their best judgment on such matters. The
                                       17
<PAGE>   21

Company's Bylaws require that, for other business to be properly brought before
an annual meeting by a shareholder, the Company must have received written
notice thereof not less than 60 nor more than 90 days prior to the annual
meeting (or, if less than 70 days notice or other public disclosure of the date
of the annual meeting is given, not later than 10 days after the earlier of the
date notice was mailed or public disclosure of the date was made). The notice
must set forth (a) a brief description of the business proposed to be brought
before the annual meeting, (b) the shareholder's name and address, (c) the
number of shares beneficially owned by such shareholder as of the date of the
shareholder's Notice, and (d) any financial interest of such shareholder in the
proposal. Similar information is required with respect to any other shareholder,
known by the shareholder giving notice, supporting the proposal. Further, if the
proposal includes the nomination of a person to become a director which person
was not set forth in a proxy statement submitted to all shareholders pursuant to
the federal proxy rules, such proposal shall contain all the information
specified by such rules.

                                          By Order of the Board of Directors

                                          John J. Cost
                                          Secretary

November   , 1999

                                       18
<PAGE>   22
PROXY                                                                      PROXY

                             BELL INDUSTRIES, INC.

                       1960 EAST GRAND AVENUE, SUITE 560
                       EL SEGUNDO, CALIFORNIA 90245-4608

          THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

     The undersigned hereby appoints Tracy A. Edwards and John J. Cost and each
of them, as Proxies, each with the power to appoint his substitute, and hereby
authorizes each of them to represent and to vote as designated below, all the
shares of common stock of Bell Industries, Inc. held of record by the
undersigned on November 5, 1999, at the Annual Meeting of Shareholders to be
held on December 30, 1999 or any adjournment or postponement thereof.

           PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
                          USING THE ENCLOSED ENVELOPE.

                 (Continued and to be signed on reverse side.)

- --------------------------------------------------------------------------------

                        *     FOLD AND DETACH HERE      *
<PAGE>   23
                             BELL INDUSTRIES, INC.

   PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. [X]


The Board of Directors recommends a vote FOR the election as Directors of the
nominees listed below.

1. ELECTION OF DIRECTORS:                     FOR  WITHHOLD  FOR ALL
   Nominees: J. Cost, A Craig, H. Davidson,   ALL    ALL     Except nominee(s)
   T. Edwards, M. Rosenberg, G. Graham,                      written below
   T. Williams                                [ ]    [ ]       [ ]

___________________________________________

In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.

This proxy when properly executed will be voted in the manner directed herein
by the undersigned shareholder. If no direction is made, the proxy will be
voted for the election of all nominees as directors.

Please sign exactly as name appears below.

When shares are held by joint tenants, both should sign. When signing as
attorney, executor, administrator, trustee or guardian, please give full title
as such. If a corporation, please sign in full corporate name by President or
other authorized officer. If a partnership, please sign in partnership name by
authorized person.


_____________________________
          Signature

_____________________________
 Signature (if held jointly)

Dated:_______________________

- --------------------------------------------------------------------------------
                            - FOLD AND DETACH HERE -



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