UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment 1)
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 2003
or
[ ] 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: 0-23494
BRIGHTPOINT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 35-1778566
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State or other jurisdiction of incorporation or organization (I.R.S. Employer Identification No.)
501 Airtech Parkway, Plainfield Indiana 46168
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(Address of principal executive offices) (Zip Code)
(317) 707-2355
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(Registrant's telephone number, including area code)
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. [X] Yes [ ] No
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
Number of shares of the registrant's common stock outstanding at October 24,
2003: 18,203,477 shares
BRIGHTPOINT, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2003 and 2002...... 3
Consolidated Balance Sheets
September 30, 2003 and December 31, 2002..................... 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2003 and 2002................ 5
Notes to Consolidated Financial Statements........................... 6
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 25
ITEM 3
Quantitative and Qualitative Disclosures About Market Risk........... 47
ITEM 4
Controls and Procedures.............................................. 48
PART II. OTHER INFORMATION
ITEM 1
Legal Proceedings.................................................... 49
ITEM 6
Exhibits............................................................. 50
Reports on Form 8-K.................................................. 50
Signatures........................................................... 51
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Revenue
Product distribution $ 476,824 $ 288,948 $ 1,089,302 $ 798,289
Integrated logistics services 56,882 47,813 164,000 136,100
------------ ------------ ------------ ------------
Total revenue 533,706 336,761 1,253,302 934,389
Cost of revenue
Product distribution 460,222 278,633 1,053,243 779,693
Integrated logistics services 46,429 38,161 131,829 104,045
------------ ------------ ------------ ------------
Total cost of revenue 506,651 316,794 1,185,072 883,738
Gross profit 27,055 19,967 68,230 50,651
Selling, general and administrative expenses 18,762 16,981 51,606 54,866
Facility consolidation charge - - 4,461 -
------------ ------------ ------------ ------------
Operating income (loss) from continuing operations 8,293 2,986 12,163 (4,215)
Net interest expense 255 1,234 939 5,375
Impairment loss on long-term investment - 8,305 - 8,305
(Gain) loss on debt extinguishment 100 (31,107) 365 (43,629)
Net other expenses 945 820 1,900 1,497
------------ ------------ ------------ ------------
Income from continuing operations before income taxes 6,993 23,734 8,959 24,237
Income taxes 1,947 12,613 2,419 13,978
------------ ------------ ------------ ------------
Income from continuing operations 5,046 11,121 6,540 10,259
Discontinued operations:
Loss from discontinued operations (170) (347) (379) (13,217)
Gain (loss) on disposal of discontinued operations (32) (1,280) 152 23
------------ ------------ ------------ ------------
Total discontinued operations (202) (1,627) (227) (13,194)
Total income (loss) before cumulative effect of an
accounting change 4,844 9,494 6,313 (2,935)
Cumulative effect of a change in accounting principle,
net of tax - - - (40,748)
------------ ------------ ------------ ------------
Net income (loss) $ 4,844 $ 9,494 $ 6,313 $ (43,683)
============ ============ ============ ============
Basic per share:
Income from continuing operations $ 0.28 $ 0.62 $ 0.36 $ 0.57
Discontinued operations (0.01) (0.09) (0.01) (0.73)
Cumulative effect of a change in accounting
principle, net of tax - - - (2.27)
------------ ------------ ------------ ------------
Net income (loss) $ 0.27 $ 0.53 $ 0.35 $ (2.43)
============ ============ ============ ============
Diluted per share:
Income from continuing operations $ 0.27 $ 0.62 $ 0.35 $ 0.57
Discontinued operations (0.01) (0.09) (0.01) (0.73)
Cumulative effect of a change in accounting
principle, net of tax - - - (2.27)
------------ ------------ ------------ ------------
Net income (loss) $ 0.26 $ 0.53 $ 0.34 $ (2.43)
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 18,074 18,009 18,060 17,982
============ ============ ============ ============
Diluted 18,932 18,009 18,734 17,982
============ ============ ============ ============
See accompanying notes.
Page 3 of 67
BRIGHTPOINT, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
SEPTEMBER 30, December 31,
2003 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 61,621 $ 43,798
Pledged cash 16,924 14,734
Accounts receivable (less allowance for doubtful
accounts of $6,499 and $5,328, respectively) 163,415 111,771
Inventories 105,431 73,472
Contract financing receivable 13,650 16,960
Other current assets 17,685 12,867
------------ -------------
Total current assets 378,726 273,602
Property and equipment, net 29,210 35,696
Goodwill and other intangibles, net 17,347 14,153
Other assets 11,835 12,851
------------ -------------
Total assets $ 437,118 $ 336,302
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 226,189 $ 129,621
Accrued expenses 58,712 48,816
Unfunded portion of contract financing receivable 19,361 22,102
Convertible notes, short-term - 12,017
Notes payable, other 40 51
------------ -------------
Total current liabilities 304,302 212,607
Lines of credit 5,647 10,052
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Common stock, $0.01 par value: 100,000 shares
authorized; 18,204 and 18,048 issued and
outstanding in 2003 and 2002, respectively 182 180
Additional paid-in capital 215,836 214,524
Retained earnings (deficit) (83,154) (89,466)
Accumulated other comprehensive loss (5,695) (11,595)
------------ -------------
Total stockholders' equity 127,169 113,643
------------ -------------
Total liabilities and stockholders' equity $ 437,118 $ 336,302
============ =============
See accompanying notes.
Page 4 of 67
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Nine Months Ended September 30,
2003 2002
---- ----
OPERATING ACTIVITIES
Net income (loss) $ 6,313 $ (43,683)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 9,692 9,917
Amortization of debt discount 33 3,568
Pledged cash requirements (2,190) 4,944
Cumulative effect of a change in accounting principle, net of tax - 40,748
Loss (gain) on debt extinguishment 365 (43,629)
Discontinued operations 227 13,195
Facility consolidation charge 4,461 -
Income tax benefits of exercise of stock options 111 -
Impairment loss on long-term investment - 8,305
Changes in operating assets and liabilities, net of
effects from acquisitions and divestitures:
Accounts receivable (41,647) 57,204
Inventories (29,285) 60,199
Other operating assets (4,342) (500)
Accounts payable and accrued expenses 85,426 (59,974)
Net cash provided (used) by discontinued operations 29 (7,674)
-------------- --------------
Net cash provided by operating activities 29,193 42,620
INVESTING ACTIVITIES
Capital expenditures (3,283) (7,318)
Cash effect of divestiture 1,328 (6,307)
Purchase acquisitions, net of cash acquired (1,972) (333)
Decrease in funded contract financing receivables, net 6,568 18,088
Decrease in other assets 562 433
-------------- --------------
Net cash provided by investing activities 3,203 4,563
FINANCING ACTIVITIES
Net payments on revolving credit facilities (6,474) (7,928)
Repurchase of convertible notes (11,980) (69,170)
Proceeds from common stock issuances under employee stock
option and purchase plans 1,204 157
-------------- --------------
Net cash used by financing activities (17,250) (76,941)
Effect of exchange rate changes on cash and cash
Equivalents 2,677 (721)
-------------- --------------
Net increase (decrease) in cash and cash equivalents 17,823 (30,479)
Cash and cash equivalents at beginning of period 43,798 58,295
-------------- --------------
Cash and cash equivalents at end of period $ 61,621 $ 27,816
============== ==============
See accompanying notes.
Page 5 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
1. Basis of Presentation
GENERAL
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X of the Securities Exchange Act of 1934.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. The preparation of financial statements requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results are likely to differ
from those estimates, but management does not believe such differences will
materially affect the Company's financial position or results of operations. In
the opinion of the Company, all adjustments considered necessary to present
fairly the Consolidated Financial Statements have been included.
The Consolidated Financial Statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. Significant intercompany
accounts and transactions have been eliminated in consolidation. Certain amounts
in the 2002 Consolidated Financial Statements have been reclassified to conform
to the 2003 presentation.
The Consolidated Balance Sheet at December 31, 2002 has been derived from the
audited Consolidated Financial Statements at that date, but does not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. The unaudited
Consolidated Statements of Operations for the three and nine months ended
September 30, 2003 and the unaudited Consolidated Statement of Cash Flows for
the nine months ended September 30, 2003 are not necessarily indicative of the
operating results or cash flows that may be expected for the entire year.
For the three months ended September 30, 2003, the Company did not experience
any significant seasonal factors. However, in periods which seasonality is
experienced, our interim results may not be indicative of annual results.
The carrying amounts at September 30, 2003 and December 31, 2002, of cash and
cash equivalents, pledged cash, accounts receivable, contract financing
receivable, other current assets, accounts payable, accrued expenses, unfunded
portion of contract financing receivable and certain of the Company's credit
facilities approximate their fair values because of the short maturity of those
instruments. The carrying amount of long-term debt at September 30, 2003 and
December 31, 2002 approximate the fair value as this debt is revolving and has a
variable interest rate that fluctuates with market rates.
The Company has not changed its significant accounting policies from those
disclosed in its Form 10-K for the year ended December 31, 2002, except for the
adoption of recently issued accounting pronouncements, as disclosed below.
Page 6 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
1. Basis of Presentation (continued)
GENERAL (CONTINUED)
For further information, reference is made to the audited Consolidated Financial
Statements and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2002.
EXPANDED REVENUE RECOGNITION POLICY
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). Under SAB
101 revenue is recognized when the title and risk of loss have passed to the
customer, there is persuasive evidence of an arrangement, delivery has occurred
or services have been rendered, the sales price is fixed or determinable, and
collectibility is reasonably assured.
For distribution revenue, which is recorded using the gross method, the criteria
of SAB 101 are generally met upon shipment to customers, including title
transfer, and, therefore, revenue is recognized at the time of shipment. In some
circumstances, the customer may take legal title and assume risk of loss upon
delivery and, therefore, revenue is recognized on the delivery date. In certain
countries, title is retained by the Company for collection purposes only, which
does not impact the timing of revenue recognition according to the provisions of
SAB 101. Sales are recorded net of discounts, rebates, returns, and allowances.
The Company does not have any material post-shipment obligations (e.g. customer
acceptance), warranties or other arrangements. A portion of the Company's sales
involves shipments of products directly from its suppliers to its customers. In
such circumstances, the Company negotiates the price with the supplier and the
customer, assumes responsibility for the delivery of the product and, at times,
takes the ownership risk while the product is in transit, pays the supplier
directly for the product shipped, establishes payment terms and bears credit
risk of collecting payment from its customers. Furthermore, in these
arrangements, the Company bears responsibility for accepting returns of products
from the customer. Under these arrangements, the Company serves as the principal
with the customer, as defined under Emerging Issues Task Force Issue No. 99-19
("EITF 99-19"), Reporting Revenue Gross as a Principal versus Net as an Agent,"
and therefore recognizes the sale and cost of sale of the product upon receiving
notification from the supplier that the product has shipped or in cases of FOB
destination, CIP destination, or similar terms, the Company recognizes the sales
upon confirmation of delivery to the customer at the named destination.
For integrated logistics service revenue, the criteria of SAB 101 are met when
the Company's integrated logistics services have been performed and, therefore,
revenue is recognized at that time. As a part of integrated logistics services
the Company may, in certain circumstances, manage and distribute wireless
equipment and prepaid recharge cards on behalf of various wireless network
operators and assumes little or no ownership risk for the product, other than
custodial risk of loss. Under these arrangements the Company has an agency
relationship in the transaction as defined by EITF 99-19 and recognizes only the
fee associated with serving as an agent. As part of the integrated logistics
services, the Company may provide contract financing services to wireless
network operators. In these arrangements, the service fee is
Page 7 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
1. Basis of Presentation (continued)
EXPANDED REVENUE RECOGNITION POLICY (CONTINUED)
recorded net and is recognized when products have been shipped. In other
integrated logistics services arrangements, the Company receives an activation
commission for acquiring subscribers on behalf of wireless network operators
through its independent dealer agents or through Company-owned stores. In the
event the activation occurs through an independent dealer/agent, a portion of
the commission is passed on to the dealer/agent. These arrangements may contain
provisions for additional residual commissions based on subscriber usage. These
agreements may also provide for the reduction or elimination of activation
commissions if subscribers deactivate service within stipulated periods. The
Company recognizes revenue for activation commissions upon activation of the
subscriber's service and residual commissions when earned. An allowance is
established for estimated wireless service deactivations as a reduction of
accounts receivable and revenues. In circumstances when the Company acts as the
obligor and determines the commission it will offer to independent
dealer/agents, the Company recognizes the full commission earned from the
wireless network operator using the gross method. In circumstances where the
Company is acting as an agent for wireless network operators as defined by EITF
99-19, the Company recognizes the revenue using the net method.
CONCENTRATIONS OF RISK
Financial instruments that potentially expose the Company to concentrations of
credit risk consist primarily of trade accounts receivable. These receivables
are generated from product distribution revenue and fee-based integrated
logistics services revenue. The Company performs periodic credit evaluations of
its customers and provides credit in the normal course of business to a large
number of its customers. However, consistent with industry practice, the Company
generally requires no collateral from its customers to secure trade accounts
receivable with the exception of secured letters of credit from certain
customers. The Company's Asia-Pacific division represents 55% of total revenue
for the nine months ended September 30, 2003. The loss or a significant
reduction in business activities in this division could have a material adverse
affect on the Company's revenue and results of operations. For the three months
ended September 30, 2003, one customer from the Asia-Pacific division, Reliance
Industries Limited, represented 14.7% of the Company's revenue. For the nine
months ended September 30, 2003, there were no customers that represented
greater than 10% of the Company's revenue.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 2003, Emerging Issues Task Force Issued No. 00-21 ("EITF 00-21"), Revenue
Arrangements with Multiple Deliveries. EITF 00-21 addresses certain aspects of
the accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. Specifically, this EITF 00-21 addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting. In applying this EITF 00-21, separate contracts
with the same entity or related parties that are entered into at or near the
same time are presumed to have been negotiated as a package and should,
therefore, be evaluated as a single arrangement in considering whether there are
one
Page 8 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
1. Basis of Presentation (continued)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
or more units of accounting. EITF 00-21 is effective for revenue arrangements
entered into in periods (including quarterly periods) beginning after June 15,
2003. The Company adopted this standard on a prospective basis. The adoption of
EITF 00-21 related to new agreements did not have an impact on the Company.
In 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation
No. 46 ("FIN 46"), Consolidation of Variable Interest Entities. FIN 46 defines a
variable interest entity ("VIE") as a corporation, partnership, trust or any
other legal structure that does not have equity investors with a controlling
financial interest or has equity investors that do not provide sufficient
financial resources for the entity to support its activities. FIN 46 requires
consolidation of a VIE by the primary beneficiary of the assets, liabilities,
and results of activities effective for 2003. FIN 46 also requires certain
disclosures by all holders of a significant variable interest in a VIE that are
not the primary beneficiary. The adoption of FIN No. 46 did not have material
impact on the financial position or results of operations of the Company.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity ("SFAS No. 150"). SFAS No. 150 establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify certain financial instruments as a liability (or as an asset in some
circumstances). SFAS No. 150 was effective for the Company at the beginning of
the first interim period beginning after June 15, 2003. The adoption of SFAS No.
150 did not have material impact on the financial position or results of
operations of the Company.
In April, 2003, the FASB issued Statement of Financial Accounting Standards No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities
("SFAS No. 149"). SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under Statement 133 and is to be applied
prospectively to contracts entered into or modified after June 30, 2003. The
adoption of SFAS No. 149 did not have material impact on the financial position
or results of operations of the Company.
In 2002, the Financial Accounting Standards Board issued Interpretation No. 45
(FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires
guarantees to be recorded at fair value and requires a guarantor to make
significant new disclosure, even when the likelihood of making any payments
under the guarantee is remote. FIN 45's initial recognition and initial
measurement provisions are applicable on a prospective basis to the guarantees
issued or modified after December 31, 2002. The Company has issued certain
guarantees on behalf of its subsidiaries with regard to lines of credit and
long-term debt, for which the
Page 9 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
1. Basis of Presentation (continued)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
liability is recorded in the Company's financial statements. These guarantees
are excluded from the scope of FIN 45 because they are a parent's guarantee of a
consolidated subsidiary's debt to a third party. In some circumstances, the
Company purchases inventory with payment terms requiring standby letters of
credit. As of September 30, 2003, the Company has issued $24.0 million in
standby letters of credit. These standby letters of credit are generally issued
for a one-year term and are supported by either availability under the Company's
credit facilities or cash deposits. The underlying obligations for which these
letters of credit have been issued are recorded in the financial statements at
their full value. Should the Company fail to pay its obligation to one or more
of these suppliers, the suppliers may draw on the standby letter of credit
issued to them. The maximum future payments under these letters of credit are
$24.0 million.
Additionally, the Company has issued certain guarantees on behalf of its
subsidiaries with regard to accounts receivable transferred, the nature of which
is described in Note 6. While we do not currently anticipate the funding of
these guarantees, the maximum potential amount of future payments under these
guarantees at September 30, 2003 is approximately $26.5 million.
The Company's Certificate of Incorporation and By-laws provide for it to
indemnify its officers and directors to the extent permitted by law. In
connection therewith, the Company entered into indemnification agreements with
its executive officers and directors. In accordance with the terms of these
agreements, the Company reimbursed certain of our current and former executive
officers and intend to reimburse its officers and directors for their personal
legal expenses arising from certain pending litigation and regulatory matters.
During the nine months ended September 30, 2003, pursuant to their respective
indemnification agreements with Brightpoint, Inc. and the Company's Certificate
of Incorporation and By-laws, $1,428 and $26,606 in legal fees were paid on
behalf of John P. Delaney, the Company's former Chief Accounting Officer, and
Phillip A. Bounsall, the Company's former Chief Financial Officer, respectively.
For the same period in 2002, pursuant to their respective indemnification
agreements with Brightpoint, Inc. and the Company's Certificate of Incorporation
and By-laws, $92,743 and $44,502 in legal fees were paid on behalf of John P.
Delaney and Phillip A. Bounsall, respectively.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS
No.146). SFAS No. 146 nullifies Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS
No. 146 generally requires companies to recognize costs associated with exit
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan and is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company applied the provisions
of SFAS No. 146 during 2003 to the consolidation of its call center activities
in Richmond, California. See Note 2 to the Consolidated Financial Statements.
Page 10 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
1. Basis of Presentation (continued)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In April of 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections ("SFAS No. 145"). SFAS No. 145
rescinds both FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt ("FASB Statement No. 4"), and an amendment to that
Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking Fund Requirements ("FASB Statement No. 64"). FASB Statement No. 4
required that all gains and losses from the extinguishment of debt be aggregated
and, if material, be classified as an extraordinary item, net of the related
income tax effect. Upon the adoption of SFAS No. 145, all gains and losses on
the extinguishment of debt for periods presented in the financial statements
would be classified as extraordinary items only if they meet the criteria in APB
Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of
disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions (APB No. 30). The provisions of SFAS No. 145
related to the rescission of FASB Statement No. 4 and FASB Statement No. 64
shall be applied for fiscal years beginning after May 15, 2002. The Company
adopted SFAS No. 145 on January 1, 2003 and classified amounts previously
reported as extraordinary gains or losses on debt extinguishment as a separate
line item before Income from Continuing Operations for all periods presented.
The provisions of SFAS No. 145 related to the rescission of FASB Statement No.
44, the amendment of FASB Statement No. 13 and Technical Corrections became
effective as of May 15, 2002 and did not have a material impact on the Company.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is based on the weighted average number of
common shares outstanding during each period, and diluted net income (loss) per
share is based on the weighted average number of common shares and dilutive
common share equivalents outstanding during each period. The Company's common
share equivalents consist of stock options.
On July 29, 2003, the Board of Directors approved a three-for-two split of the
Company's outstanding common stock. The stock split was accomplished through a
50% stock dividend, providing stockholders with one additional share of common
stock for every two shares they held. The stock dividend was paid on August 25,
2003, to holders of record on August 11, 2003.
On September 15, 2003, the Board of Directors approved a three-for-two split of
the Company's outstanding common stock. The stock split was accomplished through
a 50% stock dividend, providing stockholders with one additional share of common
stock for every two shares they held. The stock dividend was paid on October 15,
2003, to holders of record on September 30, 2003.
The Board of Directors approved the above referenced stock splits primarily to
increase the liquidity of the stock by increasing the number of shares in the
market, to improve the affordability of the stock for investors and to provide
institutional investors an opportunity to purchase a larger number of shares
before
Page 11 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
they would become subject to the reporting obligations under Section 13(d) of
the Securities Exchange Act of 1934.
Page 12 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
1. Basis of Presentation (continued)
NET INCOME (LOSS) PER SHARE (CONTINUED)
The following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations for the three and
nine months ended September 30, 2003 and 2002 (amounts in thousands, except per
share data):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Income from continuing operations $ 5,046 $ 11,121 $ 6,540 $ 10,259
Discontinued operations (202) (1,627) (227) (13,194)
Cumulative effect of a change in accounting
principle, net of tax - - - (40,748)
------------- ------------- ------------- -----------
Net income (loss) $ 4,844 $ 9,494 $ 6,313 $ (43,683)
============= ============= ============= ===========
Basic:
Weighted average shares outstanding 18,074 18,009 18,060 17,982
============= ============= ============= ===========
Per share amount:
Income from continuing operations $ 0.28 $ 0.62 $ 0.36 $ 0.57
Discontinued operations (0.01) (0.09) (0.01) (0.73)
Cumulative effect of a change in accounting
principle, net of tax - - - (2.27)
------------- ------------- ------------- -----------
Net income (loss) $ 0.27 $ 0.53 $ 0.35 $ (2.43)
============= ============= ============= ===========
Diluted:
Weighted average shares outstanding 18,074 18,009 18,060 17,982
Net effect of dilutive stock options,
based on the treasury stock method
using average market price 858 - 674 9
------------- ------------- ------------- -----------
Total weighted average shares outstanding 18,932 18,009 18,734 17,991
============= ============= ============= ===========
Per share amount:
Income from continuing operations $ 0.27 $ 0.62 $ 0.35 $ 0.57
Discontinued operations (0.01) (0.09) (0.01) (0.73)
Cumulative effect of a change in accounting
principle, net of tax - - - (2.27)
------------- ------------- ------------- -----------
Net income (loss) $ 0.26 $ 0.53 $ 0.34 $ (2.43)
============= ============= ============= ===========
Page 13 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
1. Basis of Presentation (continued)
STOCK OPTIONS
The Company uses the intrinsic value method to account for stock options as
opposed to the fair value method. Under the intrinsic value method, no
compensation expense has been recognized for stock options granted to employees.
The table below presents a reconciliation of the Company's pro forma net income
(loss) giving effect to the estimated compensation expense related to stock
options that would have been reported if the Company utilized the fair value
method (in thousands, except per share data):
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) as reported $ 4,844 $ 9,494 $ 6,313 $ (43,683)
Stock-based employee compensation benefit (cost), net
of related tax effects, that would have been
included in the determination of net income (loss)
if the fair value method had been applied 205 (218) (470) (653)
---------- ----------- ---------- -----------
Pro forma net income (loss) $ 5,049 $ 9,276 $ 5,843 $ (44,336)
========== =========== ========== ===========
Basic earnings per share:
Net income (loss) as reported $ 0.27 $ 0.53 $ 0.35 $ (2.43)
Stock-based employee compensation benefit (cost), net
of related tax effects, that would have been
included in the determination of net income (loss)
if the fair value method had been applied 0.01 (0.01) (0.03) (0.04)
---------- ----------- ---------- -----------
Pro forma net income (loss) $ 0.28 $ 0.52 $ 0.32 $ (2.47)
========== =========== ========== ===========
Diluted earnings per share:
Net income (loss) as reported $ 0.26 $ 0.53 $ 0.34 $ (2.43)
Stock-based employee compensation benefit (cost), net
of related tax effects, that would have been
included in the determination of net income (loss)
if the fair value method had been applied 0.01 (0.01) (0.02) (0.04)
---------- ----------- ---------- -----------
Pro forma net income (loss) $ 0.27 $ 0.52 $ 0.32 $ (2.47)
========== =========== ========== ===========
Page 14 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
1. Basis of Presentation (continued)
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income (loss). Other comprehensive income (loss) includes
unrealized losses on derivative financial instruments and gains or losses
resulting from currency translations of foreign investments. The details of
comprehensive income (loss) for the three and nine months ended September 30,
2003 and 2002 are as follows:
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) $ 4,844 $ 9,494 $ 6,313 $ (43,683)
Unrealized loss on derivatives - - - (50)
Foreign currency translation amounts 816 (886) 5,900 345
---------- --------- ----------- -----------
Comprehensive income (loss) $ 5,660 $ 8,608 $ 12,213 $ (43,388)
========== ========= =========== ===========
2. Facility Consolidation Charge
During the first quarter of 2003, the Company began to consolidate its
Richmond, California call center operation into its Plainfield, Indiana
facility to reduce costs and increase productivity and profitability in its
Americas division. The Company completed the consolidation of the facility in
April of 2003, however, it continues to search for a sub-lessee of the
Richmond California premises. The facility consolidation affects the Americas
operating segment. During the first six months of 2003, the Company recorded
a pre-tax charge of $4.5 million which includes approximately $2.8 million
for the present value of estimated lease costs, net of an anticipated
sublease, non-cash losses on the disposal of assets of approximately $1.1
million and severance and other costs of approximately $0.6 million. At
September 30, 2003, the Company had $2.6 million of reserves related to the
facility consolidation. Total cash outflows relating to the charge were
approximately $1.0 million through September 30, 2003. At this time, the
Company does not expect to incur significant additional costs related to the
facility consolidation. However, if the Company is unsuccessful in finding a
sub-lessee or the terms of any such sub-lease are less than originally
estimated, the Company may incur additional expenses. The details of the
charge are presented below (in thousands):
Page 15 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
2. Facility Consolidation Charge (continued)
Quarter Ended Quarter Ended YEAR-TO-DATE
March 31, 2003 June 30, 2003 SEPTEMBER 30, 2003
-------------- ------------- ------------------
Cash items:
Lease termination costs $ 2,829 $ - $ 2,829
Employee termination costs 173 96 269
Other exit costs 176 85 261
--------- --------- ----------
Total cash items 3,178 181 3,359
--------- --------- ----------
Non-cash items:
Disposal of fixed assets 1,102 - 1,102
--------- --------- ----------
Total non-cash items 1,102 - 1,102
--------- --------- ----------
Total consolidation charge $ 4,280 $ 181 $ 4,461
========= ========= ==========
Reserve activity for the facility consolidation as of September 30, 2003 is as
follows (in thousands):
Lease Employee
Facility Consolidation Charge Termination Fixed Termination Other Exit
Reserve Costs Assets Costs Costs Total
------- ----- -------- ----- ----- -----
January 1, 2003 $ - $ - $ - $ - $ -
Provisions 2,829 1,102 173 176 4,280
Non-cash usage - (1,102) - - (1,102)
--------- --------- ---------- ---------- -----------
March 31, 2003 2,829 - 173 176 3,178
--------- --------- ---------- ---------- -----------
Provisions - - 96 85 181
Reclassification from accrued -
lease liability 289 - - 289
Cash usage (250) - (269) (232) 751)
Non-cash usage - - - - -
--------- --------- ---------- ---------- -----------
June 30, 2003 2,868 - - 29 2,897
--------- --------- ---------- ---------- -----------
Cash usage (252) - - (12) (264)
Non-cash usage - - - - -
--------- --------- ---------- ---------- -----------
SEPTEMBER 30, 2003 $ 2,616 $ - $ - $ 17 $ 2,633
========= ========= ========== ========== ===========
3. Impairment Loss on Long-Term Investment
During the third quarter of 2002 the Company recorded a non-cash impairment
charge of $8.3 million relating to its investment in the Chinatron Group
Holdings Limited ("Chinatron") Class B Preference Shares. Management was
responsible for estimating the value of the Chinatron Class B Preference
Shares. Based on the Company's estimates, which included external valuations,
the Company's total investment in Chinatron Class B Preference Shares has an
estimated fair market value of approximately $2 million.
Page 16 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
4. Discontinued Operations
At the beginning of 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets ("SFAS No. 144"). In connection with the adoption of SFAS No. 144, the
results of operations and related disposal costs, gains and losses for business
units that the Company has eliminated or sold are classified in discontinued
operations, for all periods presented.
During the third quarter of 2002, the Company and certain of its subsidiaries
sold their respective ownership interests in Brightpoint Middle East FZE and its
subsidiary Fono Distribution Services LLC and Brightpoint Jordan Limited to
Persequor Limited, an entity controlled by the former Managing Director of the
Company's operations in the Middle East and certain members of his management
team. Pursuant to the transaction, the Company received two subordinated
promissory notes with face values of $1.2 million and $3.0 million that mature
in 2004 and 2006, respectively. The notes bear interest at 4% per annum and were
recorded at a discount to face value for an aggregate carrying amount of $3.1
million at September 30, 2003 and $3.4 million at December 31, 2002. In April
2003, the Company received an additional $1.3 million in contingent
consideration related to the transaction, which is shown as an adjustment to the
loss on the transaction within discontinued operations. There are no further
significant amounts of additional contingent consideration due to the Company
pursuant to the Sale and Purchase Agreement with Persequor Limited.
As of September 30, 2003, the actions called for by the 1999 and 2001
Restructuring Plans were substantially complete, however, the Company expects to
continue to record adjustments through discontinued operations as necessary.
Further details of discontinued operations are as follows (in thousands):
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Revenue $ - $ 22,379 $ 287 $ 117,961
======= ========= ======== =========
Loss from discontinued operations
Net operating loss $ (86) $ (461) $ (66) $ (9,499)
Restructuring plan charges (27) 114 126 (3,619)
Other (57) - (439) (100)
------- --------- -------- ---------
Total loss from discontinued operations (170) (347) (379) (13,217)
------- --------- -------- ---------
Gain (loss) on disposal of discontinued operations
Restructuring plan charges (27) 394 (1,071) 1,677
Other (5) 183 (105) (406)
Net loss on sale of Middle East operations - (1,857) - (1,248)
Recovery of contingent receivable - - 1,328 -
------- --------- -------- ---------
Total gain (loss) on disposal of discontinued operations (32) (1,280) 152 23
------- --------- -------- ---------
Total discontinued operations $ (202) $ (1,627) $ (227) $ (13,194)
======= ========= ======== =========
Page 17 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
4. Discontinued Operations (continued)
The Company recorded losses related to the 1999 and 2001 Restructuring Plans
during the three and nine months ended September 30, 2003 and 2002, are
presented below (in thousands):
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Cash charges (credits):
Employee termination costs $ 15 $ (18) $ 20 $ 223
Lease termination costs - (16) - 758
Other exit costs 14 81 (15) 999
---------- -------- ----------- --------
Total cash charges (credits) 29 47 5 1,980
---------- -------- ----------- --------
Non-cash charges (credits):
Loss on investment - - - 334
Impairment of accounts receivable and
inventories of restructured
operations (1) (161) 11 (709)
Impairment of fixed and other assets - - 72 2,434
Income tax effect of restructuring
actions - - (125) -
Write-off of cumulative foreign
currency translation
adjustments 27 (394) 982 (2,097)
---------- -------- ----------- --------
Total non-cash charges (credits) 25 (555) 940 (38)
---------- -------- ----------- --------
Total restructuring plan charges $ 54 $ (508) $ 945 $ 1,942
========== ======== =========== ========
Utilization of the 2001 Restructuring Plan charges discussed above is as
follows (in thousands):
Lease Employee
Termination Termination Other Exit
Costs Costs Costs Total
----- ----- ----- -----
December 31, 2002 $ 195 $ 100 $ 1,099 $ 1,394
Provisions - - 140 140
Cash usage (69) (25) (281) (375)
Non-cash usage - (75) (233) (308)
---------- ----------- --------- ----------
March 31, 2003 126 - 725 851
---------- ----------- --------- ----------
Provisions 6 - - 6
Cash usage (66) - (177) (243)
Non-cash usage - - 84 84
---------- ----------- --------- ----------
June 30, 2003 66 - 632 698
---------- ----------- --------- ----------
PROVISIONS - - - -
CASH USAGE (66) - (83) (149)
NON-CASH USAGE - - (20) -
---------- ----------- --------- ----------
SEPTEMBER 30, 2003 $ - $ - $ 529 $ 529
---------- ----------- --------- ----------
Page 18 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
4. Discontinued Operations (continued)
Net assets, including reserves, related to discontinued operations are
classified in the Consolidated Balance Sheets as follows (in thousands):
SEPTEMBER 30, December 31,
2003 2002
---- ----
Total current assets $ 1,442 $ 8,113
Other non-current assets 120 177
------------ ----------
Total assets $ 1,562 $ 8,290
============ ==========
Accounts payable $ 152 $ 898
Accrued expenses and other liabilities 2,821 5,141
------------ ----------
Total liabilities $ 2,973 $ 6,039
============ ==========
5. Cumulative Effect of a Change in Accounting Principle
As of January 1, 2002, the Company adopted SFAS No. 142. Pursuant to the
provisions of SFAS 142 the Company stopped amortizing goodwill as of January 1,
2002 and performs an impairment test on its goodwill at least annually. During
the second quarter of 2002, the Company completed the transitional impairment
test required under SFAS No. 142. During the first quarter of 2002, as a result
of the initial transitional impairment test, the Company recorded an impairment
charge of approximately $40.7 million, which is presented as a cumulative effect
of a change in accounting principle, net of tax, for the three and nine months
ended September 30, 2002. On October 1, 2002, the Company performed the required
annual impairment test on its remaining goodwill and incurred no significant
additional impairment charges. During the fourth quarter of 2003, the Company
will be performing the annual impairment test. The impairment, if any, will be
recorded in the fourth quarter of 2003.
In addition to performing the required transitional impairment test on the
Company's goodwill, SFAS No. 142 required the Company to reassess the expected
useful lives of existing intangible assets including patents, trademarks and
trade names for which the useful life is determinable. At September 30, 2003,
these intangibles total $1.9 million, net of accumulated amortization of $1.2
million and are currently being amortized as required by SFAS 142 over three to
five years at approximately $0.4 million per year. The Company incurred no
impairment charges as a result of SFAS No. 142 for intangibles with determinable
useful lives, which are subject to amortization.
Page 19 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
5. Cumulative Effect of a Change in Accounting Principle (continued)
The changes in the carrying amount of goodwill by operating segment for the nine
months ended September 30, 2003 are as follows (in thousands):
Europe Asia-Pacific TOTAL
------ ------------ -----
Balance at December 31, 2002 $ 12,778 $ 280 $ 13,058
Goodwill from acquisitions 315 595 910
Effects of foreign currency fluctuation 1,441 41 1,482
----------- ------------ -----------
Balance at September 30, 2003 $ 14,534 $ 916 $ 15,450
=========== ============ ===========
6. Accounts Receivable Transfers
During the nine months ended September 30, 2003 and 2002, the Company entered
into certain transactions or agreements with banks and other third-party
financing organizations in France, Ireland, Sweden, Australia and Mexico, with
respect to a portion of its accounts receivable in order to reduce the amount of
working capital required to fund such receivables. These transactions have been
treated as sales pursuant to current accounting principles generally accepted in
the United States and, accordingly, are accounted for as off-balance sheet
arrangements.
Net funds received from the sales of accounts receivable during the three months
ended September 30, 2003 and 2002 totaled $75.4 million and $55.0 million,
respectively. Fees, in the form of discounts, incurred in connection with these
sales totaled $0.3 million and $0.3 million during the three months ended
September 30, 2003 and 2002, respectively. Net funds received from the sales of
accounts receivable during the nine months ended September 30, 2003 and 2002
totaled $200.4 million and $150.0 million, respectively. Fees, in the form of
discounts, incurred in connection with these sales totaled $1.1 million and $1.5
million during the nine months ended September 30, 2003 and 2002, respectively.
These fees were recorded as losses on the sale of assets and are included as a
component of "Net other expenses" in the Consolidated Statements of Operations.
The Company is the collection agent on behalf of the bank or other third-party
financing organization for many of these arrangements and has no significant
retained interests or servicing liabilities related to accounts receivable that
it has sold. In certain circumstances, the Company may be required to repurchase
accounts receivable sold including, but not limited to, accounts receivable in
dispute or otherwise not collectible, accounts receivable in which credit
insurance is not maintained and a violation of, the expiration or early
termination of the agreement pursuant to which these arrangements are conducted.
The potential maximum future payments the Company may be required to repurchase
is equal to the outstanding amounts for the respective periods. In 2002, the
Company repurchased $150 thousand of receivables from banks or other third party
financing institution. In the first quarter of 2003, the Company repurchased
$900 thousand of accounts receivable sold related to its arrangement in Ireland.
This liability was accrued at December 31, 2002. Concurrently, the receivable
was written off to bad debt. The
Page 20 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
6. Accounts Receivable Transfers (continued)
Company does not believe any further significant repurchases will be required,
therefore, no liability has been recorded at September 30, 2003. These
agreements require the Company's subsidiaries to provide collateral in the form
of pledged assets and/or in certain situations the Company may provide a
guarantee of its subsidiaries obligations. Pursuant to these arrangements,
approximately $26.5 million and $30.1 million of trade accounts receivable were
sold to and held by banks and other third-party financing institutions at
September 30, 2003 and December 31, 2002, respectively.
7. Inventories
Inventories consist of wireless handsets, wireless data devices and accessories
and are stated at the lower of cost (first-in, first-out method) or market. At
each balance sheet date, the Company evaluates its ending inventory for excess
quantities and obsolescence, considering any stock balancing or rights of return
that it may have with certain suppliers. This evaluation includes analyses of
sales levels by product and projections of future demand. The Company writes off
inventories that are considered obsolete. Remaining inventory balances are
adjusted to approximate the lower of cost or market value. During the nine
months ended September 30, 2002, the Company made inventory valuation
adjustments of approximately $3.6 million to adjust inventories to their
estimated net realizable value or lower of cost or market. During the nine
months ended September 30, 2003, the Company had no significant inventory
valuation adjustments.
8. Acquisitions and Divestitures
See Note 4 to the Consolidated Financial Statements for discussions of the
Company's divestiture activities during 2002.
During the first quarter of 2003, one of the Company's subsidiaries in France
acquired certain net assets of three entities that provided activation and other
services to the wireless telecommunications industry in France. The purpose of
these acquisitions was to expand the Company's customer base and geographic
presence in France. These transactions were accounted for as purchases and,
accordingly, the Consolidated Financial Statements include the operating results
of these businesses from the effective dates of the acquisitions. The combined
purchase price consisted of $0.6 million in cash. As a result of these
acquisitions, the Company recorded goodwill and other intangible assets totaling
approximately $0.7 million.
Additionally, during the second quarter of 2003, the Company recorded $0.6
million of goodwill related to the payment of certain earn-out arrangements on
prior acquisitions in the Asia-Pacific division.
The impact of the acquisitions discussed above was not material in relation to
the Company's consolidated results of operations. Consequently, proforma
information is not presented.
Page 21 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
9. Lines of Credit and Long-term Debt
In the first quarter of 2003, the Company repurchased 21,803 of the 21,932 zero
coupon, subordinated, convertible notes (Convertible Notes) then outstanding.
The aggregate purchase price for all of these repurchases was $12 million ($549
per Convertible Note), which approximated their accreted value. As of March 31,
2003, the Company had repurchased all but 129 Convertible Notes outstanding with
an accreted value of approximately $0.07 million. On April 30, 2003, the Company
redeemed all of the remaining Convertible Notes. For further information,
reference is made to the audited Consolidated Financial Statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
On July 7, 2003, the Company amended the Credit Agreement between Brightpoint
North America, L.P., Wireless Fulfillment Services LLC, the other Credit Parties
and General Electric Capital Corporation. The amendment provides consent to join
Brightpoint Activation Services LLC and to become joinder of the Credit
Agreement as other Credit Parties.
In December of 2002, the Company's primary Australian operating subsidiaries,
Brightpoint Australia Pty Ltd and Advanced Portable Technologies Pty Limited,
entered into a revolving credit facility with GE Commercial Finance in
Australia. At September 30, 2003 and December 31, 2002, there was $5.6 million
and $10.1 million outstanding, respectively, under the facility at an interest
rate of approximately 7.8% at September 30, 2003 and December 31, 2002. At
September 30, 2003 there was approximately $15.7 million of unused availability
under the facility. Letters of credit in the amount of $3.5 million have been
issued under this facility.
Another of the Company's subsidiaries, Brightpoint Sweden AB, has a short-term
line of credit facility with SEB Finans AB. The facility has borrowing
availability of up to 15 million Swedish Krona (approximately $1.9 million U.S.
Dollars at September 30, 2003) and bears interest at 3.75%. The facility is
supported by a guarantee provided by the Company and a mortgage on Brightpoint
Sweden AB's assets. At September 30, 2003 and December 31, 2002, there were no
amounts outstanding under this facility.
At September 30, 2003 and December 31, 2002, there was $5.6 million and $10.1
million outstanding under all credit agreements, respectively. Available
funding, net of the applicable required availability minimum at September 30,
2003 and December 31, 2002, was $42.4 million and $41.9 million, respectively.
At September 30, 2003 and December 31, 2002, the Company was in compliance with
the covenants in all of its credit agreements.
Page 22 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
10. Operating Segments
The Company operates in markets worldwide as three operating segments. These
operating segments represent the Company's three divisions: the Americas,
Asia-Pacific and Europe. These divisions all derive revenues from sales of
wireless devices with related accessories and fees for the performance of
integrated logistics services. The divisions are managed separately because of
the geographic locations in which they operate.
The Company evaluates the performance of, and allocates resources to, these
segments based on operating income (loss) from continuing operations and
includes allocated corporate selling, general and administrative expenses. A
summary of the Company's operations by segment is presented below (in
thousands):
2003 2002
---- ----
OPERATING Operating Income
REVENUES FROM INCOME FROM Revenues (Loss) from
EXTERNAL CONTINUING from Continuing
CUSTOMERS OPERATIONS External Customers Operations
--------- ---------- ------------------ ----------
THREE MONTHS ENDED SEPTEMBER 30:
The Americas $ 132,645 $ 2,464 $ 127,343 $ 1,187
Asia-Pacific 314,294 4,369 141,457 1,943
Europe 86,767 1,460 67,961 (144)
------------- ------------ ------------ ------------
$ 533,706 $ 8,293 $ 336,761 $ 2,986
============= ============ ============ ============
NINE MONTHS ENDED SEPTEMBER 30:
The Americas (1) $ 328,300 $ 937 $ 381,727 $ (4,215)
Asia-Pacific 694,019 9,435 372,954 4,454
Europe 230,983 1,791 179,708 (4,454)
------------- ------------ ------------ ------------
$ 1,253,302 $ 12,163 $ 934,389 $ (4,215)
============= ============ ============ ============
SEPTEMBER 30, December 31,
2003 2002
---- ----
TOTAL SEGMENT ASSETS:
The Americas (2) (3) $ 166,489 $ 173,371
Asia-Pacific (3) 180,291 84,920
Europe (3) 90,338 78,011
------------ ------------
$ 437,118 $ 336,302
============ ============
(1) Includes $4.5 million facility consolidation charge for the nine months
ended September 30, 2003, see Note 2 for additional detail.
(2) Includes assets of the Company's corporate operations.
(3) Includes assets held for sale or disposal of discontinued operations at
December 31, 2002.
Page 23 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
11. Contingencies and Legal Proceedings
In October 2003, the Company settled the action brought against it by Chanin
Capital Partners LLC ("Chanin") on November 25, 2002 in the United States
District Court for the Southern District of Indiana Civil Action No.
1:02-CV-1834-JDT-WTL. Pursuant to the settlement the Company paid Chanin
$725,000 and the action was dismissed with prejudice. Net of amounts accrued in
2002, an additional $100,000 was recorded as a loss on debt extinguishment.
In September 2003, the Company settled with the United States Securities and
Exchange Commission ("SEC") the previously disclosed investigation conducted by
the SEC. Pursuant to the settlement, the Company, without admitting or denying
any of the SEC's allegations, consented to the entry of an administrative order
to cease and desist from violations of the anti-fraud, books and records,
internal controls and periodic reporting provisions of the Securities Exchange
Act of 1934 and the anti-fraud provisions of the Securities Act of 1933. The
Company also paid a fine of $450,000 pursuant to an order entered in the United
States District Court for the Southern District of New York. The administrative
cease and desist order alleged that the Company, through the actions of John
Delaney, its former Controller and Chief Accounting Officer and Timothy
Harcharik, its former Director of Risk Management, committed fraud through the
purchase and use of a purported insurance policy to misrepresent the Company's
losses as insured losses. The Company restated its annual financial statements
for 1998, 1999, 2000 and the interim periods of 2001 on November 13, 2001 and
January 31, 2002 to account for payments made under the purported insurance
policy. Delaney and Phillip Bounsall, the Company's former Chief Financial
Officer, also reached settlements with the SEC. During the third quarter of 2003
the fine was recorded in net other expense.
In the ordinary course of conducting its business, the Company is from time to
time, also involved in certain legal proceedings. While the ultimate liability
pursuant to these actions cannot currently be determined, the Company believes
these legal proceedings will not have a material adverse effect on its financial
statements, including earnings and liquidity.
The Company's Certificate of Incorporation and By-laws provide for it to
indemnify its officers and directors to the extent permitted by law. In
connection therewith, the Company has entered into indemnification agreements
with its executive officers and directors. In accordance with the terms of these
agreements, the Company has reimbursed certain of its former and current
executive officers and intends to reimburse its officers and directors for their
personal legal expenses arising from certain litigation and regulatory matters.
The Company's subsidiary in South Africa, whose operations were discontinued
pursuant to the 2001 Restructuring Plan, has received an assessment from the
South Africa Revenue Service ("SARS") regarding value-added taxes the SARS
claims are due, relating to certain product sale and purchase transactions
entered into by the Company's subsidiary in South Africa from 2000 to 2002.
Although the Company's liability pursuant to this assessment by the SARS, if
any, cannot currently be determined, the
Page 24 of 67
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
11. Contingencies and Legal Proceedings (continued)
Company believes the range of the potential liability is between $0 and $1.2
million U.S. dollars (at current exchange rates) including penalties and
interest. The potential assessment is not estimable and, therefore, is not
reflected as a liability or recorded as an expense.
Page 25 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the accompanying
Consolidated Financial Statements and related notes. Our discussion and analysis
of our financial condition and results of operations are based upon our
Consolidated Financial Statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. Our critical
accounting policies, the policies we believe are most important to the
presentation of our financial statements and require the most difficult,
subjective and complex judgments are outlined in our Annual Report on Form 10-K
for the year ended December 31, 2002 and have not changed significantly. Certain
statements made in this report may contain forward-looking statements. For a
description of risks and uncertainties relating to such forward-looking
statements, see the cautionary statements contained in Exhibit 99.1 to this
report and our Annual Report on Form 10-K for the year ended December 31, 2002.
The operating results of the Company are influenced by a number of seasonal
factors, which may cause our revenue and operating results to fluctuate on a
quarterly basis. These fluctuations are the result of several factors,
including, but not limited to:
- promotions and subsidies by wireless network operators;
- the timing of local holidays and other events affecting consumer demand;
- the timing of the introduction of new products by our suppliers and
competitors;
- purchasing patterns of customers in different markets; and
- weather patterns.
For the three months ended September 30, 2003, we did not experience any
significant seasonal factors. However, in periods which seasonality is
experienced, interim results are not indicative of annual results.
Page 26 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OVERVIEW AND RECENT DEVELOPMENTS
Entry into India
During the third quarter of 2003, our Asia-Pacific division entered into India
to meet the needs of one of the fastest growing markets for wireless devices in
the world. This entry was a significant step in implementing our overall growth
strategy. We have established our headquarters in New Delhi, recruited key
members of the management team and other employees and entered into a supply
agreement with Nokia India Private Limited. Additionally, our Brightpoint Asia
Ltd subsidiary has entered into a handset supply agreement with Reliance
Industries Limited, a network operator in India.
Settlement with SEC
In September 2003, the Company settled with the SEC the previously disclosed
investigation conducted by the SEC. Pursuant to the settlement, the Company,
without admitting or denying any of the SEC's allegations, consented to the
entry of an administrative order to cease and desist from violations of the
anti-fraud, books and records, internal controls and periodic reporting
provisions of the Securities Exchange Act of 1934 and the anti-fraud provisions
of the Securities Act of 1933. The Company also paid a fine of $450,000 pursuant
to an order entered in the United States District Court for the Southern
District of New York. The administrative cease and desist order alleged that the
Company, through the actions of John Delaney, its former Controller and Chief
Accounting Officer and Timothy Harcharik, its former Director of Risk
Management, committed fraud through the purchase and use of a purported
insurance policy to misrepresent the Company's losses as insured losses. The
Company restated its annual financial statements for 1998, 1999, 2000 and the
interim periods of 2001 on November 13, 2001 and January 31, 2002 to account for
payments made under the purported insurance policy. Delaney and Phillip
Bounsall, the Company's former Chief Financial Officer, also reached settlements
with the SEC. During the third quarter of 2003 the fine was recorded in net
other expense.
Other Legal Settlement
In October 2003, the Company settled the action brought against it by Chanin
Capital Partners LLC ("Chanin") on November 25, 2002 in the United States
District Court for the Southern District of Indiana Civil Action No.
1:02-CV-1834-JDT-WTL. Pursuant to the settlement, the Company paid Chanin
$725,000 and the action was dismissed with prejudice. Net of amounts accrued in
2002, an additional $100,000 was recorded as a loss on debt extinguishment.
Stock Splits
On July 29, 2003, the Board of Directors approved a three-for-two split of its
outstanding common stock. The stock split was accomplished through a 50% stock
dividend, providing stockholders with one additional share of common stock for
every two shares they held. The stock dividend was paid on August 25, 2003, to
holders of record on August 11, 2003.
Page 27 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OVERVIEW AND RECENT DEVELOPMENTS (CONTINUED)
On September 15, 2003, the Board of Directors approved a three-for-two split of
its outstanding common stock. The stock split was accomplished through a 50%
stock dividend, providing stockholders with one additional share of common stock
for every two shares they held. The stock dividend was paid on October 15, 2003,
to holders of record on September 30, 2003. The accompanying Consolidated
Financial Statements and related notes reflect both stock splits.
RESULTS OF OPERATIONS
Revenue
Revenue for the three months ended:
Change from
-----------
SEPTEMBER 30, PERCENT September 30, Percent June 30, Percent Q3 2002 to Q2 2003 to
(in thousands) 2003 OF TOTAL 2002 of Total 2003 of Total Q3 2003 Q3 2003
---- -------- ---- -------- ---- -------- ------- -------
The Americas $132,645 25% $127,343 38% $100,828 26% 4% 32%
Asia-Pacific 314,294 59% 141,457 42% 203,319 54% 122% 55%
Europe 86,767 16% 67,961 20% 75,259 20% 28% 15%
-------- --- -------- --- -------- --- --- --
Total $533,706 100% $336,761 100% $379,406 100% 58% 41%
======== === ======== === ======== === === ==
Change from
-----------
SEPTEMBER 30, PERCENT September 30, Percent June 30, Percent Q3 2002 to Q2 2003 to
(in thousands) 2003 OF TOTAL 2002 of Total 2003 of Total Q3 2003 Q3 2003
---- -------- ---- -------- ---- -------- ------- -------
Product distribution (1) $476,824 89% $288,948 86% $324,290 85% 65% 47%
Integrated logistics services 56,882 11% 47,813 14% 55,116 15% 19% 3%
-------- --- -------- --- -------- --- -- --
Total $533,706 100% $336,761 100% $379,406 100% 58% 41%
======== === ======== === ======== === == ==
(1) Product distribution referred to in this Form 10-Q includes wireless devices
and related accessories.
Revenue was $534 million, which represented an increase of 58% from $337 million
in the third quarter of 2002. Total wireless devices handled by the Company were
approximately 6.0 million, an increase of 62% from approximately 3.7 million
handled in the third quarter of 2002. Revenue grew in all three divisions. The
growth was primarily attributable to continued strong market demand for our
products and services and our entry into India. Strengthening of foreign
currencies against the U.S. Dollar contributed 6 percentage points of the
overall revenue growth. All divisions experienced product supply constraints for
certain wireless handsets, of which the financial impact cannot be quantified.
Page 28 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Revenue (continued)
As compared to the third quarter of 2002, the Asia-Pacific division's revenue
grew by 122%. As compared to the third quarter of 2002, our revenues in the
countries in the Asia-Pacific division that were operating in 2002 grew by 60%
as demand for our products and services increased in response to aggressive
pricing from manufacturers and promotional activities by the network operators.
Revenue generated by our entry into India accounted for the remainder of the
division's revenue growth. The initiation of a supply contract for CDMA products
with Nokia and a handset supply agreement with Reliance Industries Limited were
key drivers of our new business in India. As compared to the second quarter of
2003, Asia-Pacific division's revenue grew 55% for the reasons stated above.
As compared to the third quarter of 2002, the Europe division experienced a 28%
growth in revenue of which 15 percentage points were caused by the strengthening
of European currencies relative to the U.S. Dollar. In local currency terms,
product distribution revenue grew by 15%, primarily driven by increased sales of
wireless devices with enhanced features and capabilities, which increased our
average selling prices of wireless devices. In local currency terms, integrated
logistics services revenue grew 9% over the third quarter of 2002, primarily
driven by increased sales of prepaid wireless airtime. As compared to the second
quarter of 2003, the Europe division experienced 15% growth in revenue,
primarily from a 27% increase in wireless devices handled and a 10% increase in
integrated logistics services. Currency fluctuations did not have a material
impact when compared to the second quarter of 2003.
As compared to the third quarter of 2002, the Americas division experienced a 4%
increase in revenue. While revenue growth was modest, total wireless devices
handled increased by 20%, which occurred mostly through fee-based integrated
logistics services. The Americas revenue growth in wireless devices was
partially offset by a $7 million decrease in accessories revenue. As compared to
the second quarter of 2003, revenue grew by 32%, driven by a 24% increase in
wireless devices sold due to a successful launch of new Nokia CDMA wireless
devices and a 12% increase in average selling prices. Additionally, wireless
devices handled through integrated logistics services increased by 14% and the
associated revenue increased by 15%.
Page 29 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Revenue (continued)
Revenue for the nine months ended:
SEPTEMBER 30, PERCENT OF September 30, Percent of
(in thousands) 2003 TOTAL 2002 Total Change
---- ----- ---- ----- ------
The Americas $ 328,300 26% $381,727 41% (14%)
Asia-Pacific 694,019 55% 372,954 40% 86%
Europe 230,983 19% 179,708 19% 28%
---------- --- -------- --- --
Total $1,253,302 100% $934,389 100% 34%
========== === ======== === ==
SEPTEMBER 30, PERCENT OF September 30, Percent of
(in thousands) 2003 TOTAL 2002 Total Change
---- ----- ---- ----- ------
Product distribution $1,089,302 87% $798,289 85% 36%
Integrated logistics services 164,000 13% 136,100 15% 20%
---------- --- -------- --- --
Total $1,253,302 100% $934,389 100% 34%
========== === ======== === ==
For the nine months ended September 30, 2003, revenue increased by 34% as
compared to the same period in 2002. Total wireless devices handled by the
Company were approximately 14.1 million, an increase of 28% from approximately
11.0 million handled in 2002.
The Asia-Pacific division experienced an 86% growth in revenue. Our revenues in
the countries in the Asia-Pacific division that were operating in 2002 grew by
73%, where all markets experienced increased demand for our products and
services despite experiencing a brief slow down in demand related to the effect
of Severe Acute Respiratory Syndrome (SARS) in the first half of 2003. Revenue
generated by our entry into India accounted for the remainder of the division's
revenue growth. As stated above, the initiation of a supply contract for CDMA
products with Nokia in India and a handset supply agreement with Reliance
Industries Limited were key drivers of our new business in India.
The Europe division experienced a 28% growth in revenue. Integrated logistic
services revenue grew by 30% driven by increased sales of prepaid wireless
airtime. Although wireless handset distribution units experienced a slight
decline, the strengthening of European currencies relative to the U.S. dollar
and an increase in average selling prices contributed to the revenue increase.
The Americas division experienced a 14% decline in revenue due to a sales mix
shift from product distribution revenue to fee-based logistics services revenue
and the lack of availability of certain CDMA-based wireless devices. The
financial impact of the lack of certain CDMA handsets cannot be quantified.
Total wireless devices handled grew by 9% over the prior year. Wireless devices
sold decreased by 11%, offset by an 18% increase in wireless devices handled
through fee-based integrated logistics services. As the wireless devices handled
through integrated logistics services increased, the average service fee per
unit decreased by 17%, causing revenue from integrated logistics services to be
relatively flat.
Page 30 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Gross Profit
Three Months Ended Nine Months Ended Percent Change
------------------ ----------------- --------------
SEPTEMBER 30, September 30, June 30, September 30, September 30, Q3 2002 to Q2 2003 to YTD 2002 to
(in thousands) 2003 2002 2003 2003 2002 Q3 2003 Q3 2003 YTD 2003
-------------- ---- ---- ---- ---- ---- ------- ------- --------
Product
distribution $ 16,602 $ 10,315 $ 12,215 $ 36,059 $ 18,596 61% 36% 94%
-------- -------- -------- -------- -------- -- -- --
Integrated logistics
services 10,453 9,652 10,163 32,171 32,055 8% 3% -
-------- -------- -------- -------- -------- -- -- --
Gross profit $ 27,055 $ 19,967 $ 22,378 $ 68,230 $ 50,651 35% 21% 35%
Gross margin 5.1% 5.9% 5.9% 5.4% 5.4%
-------- -------- -------- -------- --------
Gross profit for the third quarter of 2003 increased 35% when compared to the
third quarter of 2002 and increased 21% when compared to the second quarter of
2003, primarily as a result of increased revenues globally. Gross margin was
5.1% for the third quarter of 2003, as compared to 5.9% for the third quarter of
2002 and 5.9% for the second quarter of 2003. The decline in gross margin from
the third quarter of 2002 and the second quarter of 2003 is primarily the result
of lower gross margins on CDMA wireless devices sold in India and an overall
increase in distribution sales as a percentage of total revenue.
For the nine months ended September 30, 2003, gross profit increased $17.6
million, or 35%, as a result of increased volume in the Asia-Pacific division,
including our recent entry into India, the effect of strengthening foreign
currencies, improved product cost management and cost reduction actions.
Gross profit and gross margin from product distribution
As compared to the third quarter of 2002, gross profit from product distribution
for the third quarter of 2003 increased $6.3 million, or 61%. The increased
demand for wireless devices in the Asia-Pacific division and our entry into
India accounted for 41 percentage points of this increase. The remaining 20
percentage points are primarily due to the positive effects of previous cost
reduction actions in Europe and improved product cost management. During 2002,
inventory valuation adjustments were recorded for approximately $3.6 million, to
adjust inventories to estimated net realizable value or lower of cost or market.
The Company sold or physically destroyed this inventory during 2002 at no
material variance from the valuation adjustment. During the three months ended
September 30, 2003, the Company had no significant inventory valuation
adjustments. Gross margins declined due to increased sales of wireless devices
in the Asia-Pacific division, including our entry into India, where we sold
increased volumes of lower gross margin CDMA wireless devices, an overall
increase in distribution sales as a percentage of total revenue and a reduction
of supplier incentives in the Asia-Pacific division, offset by the effect of
strengthening foreign currencies and improvements in costs in the Europe
division.
As compared to the second quarter of 2003, gross profit from product
distribution increased $4.4 million, or 36%. This increase is primarily the
result of increased sales of wireless devices in the Asia-Pacific division,
including additional units sold into India, and increased sales in the Americas
division. The decrease in gross margin was due to the sale of lower margin CDMA
wireless devices to Reliance, partially offset by an increase in gross margin in
the Americas due to the sale of wireless devices with enhanced features and
capabilities, which generally have higher gross margins.
Page 31 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Gross Profit (continued)
Gross profit and gross margin from product distribution (continued) For the nine
months ended September 30, 2003, gross profit from product distribution
increased $17.5 million, or 94%, as compared to the same period in 2002,
primarily as a result of the reasons stated above. Gross profit for the nine
months ended September 30, 2002 was negatively impacted by charges in the
Americas division of $2.5 million for a purchase commitment related to an
obligation to purchase a certain volume of accessories, which was not attained
and the effect of recorded inventory valuation adjustments of approximately $3.6
million, to adjust inventories to their estimated net realizable value or lower
of cost or market during 2002. The gross margin for product distribution
increased due to improved inventory management in the Americas and Europe
division, the positive effects of previous cost reduction action, offset by
lower gross margins on CDMA wireless devices sold in India and a reduction of
supplier incentives in the Asia-Pacific division.
Gross profit and gross margin from integrated logistics services
As compared to the third quarter of 2002, gross profit from integrated logistics
services increased 8%. This increase is primarily from increased sales of
prepaid wireless airtime in the Europe division offset by an expiration of a
contract with a wireless network operator customer in the Europe division, which
contributed approximately $900 thousand of gross profit in the third quarter of
2002. Gross profit was not materially affected by the 30% increase in wireless
units handled in the Americas division due to a 17% decline in average service
fee per unit. Gross margin decreased primarily as a result of increased sales of
prepaid wireless airtime in the Europe division, which generate a relatively
lower gross margin.
As compared to the second quarter of 2003, gross profit from integrated
logistics services for the third quarter of 2003, increased 3%. Gross margin
remained steady.
For the nine months ended September 30, 2003, the gross profit remained steady
as compared to the same period in 2002. Increases in gross profit from increased
sales of prepaid wireless airtime in the Europe division were offset by a loss
of a wireless network operator customer in the Asia-Pacific division. Gross
margin decreased primarily as a result of increased sales of prepaid wireless
airtime in the Europe division, which generate a relatively lower gross margin
and the loss of a wireless network operator customer in the Asia-Pacific
division.
Page 32 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Selling, General and Administrative Expenses
Three Months Ended Nine Months Ended Percent Change
------------------ ----------------- --------------
SEPTEMBER 30, September 30, June 30, September 30, September 30, Q2 2002 to Q1 2003 to YTD 2002 to
(in thousands) 2003 2002 2003 2003 2002 Q2 2003 Q2 2003 YTD 2003
-----------------------------------------------------------------------------------------------------------------------------------
Selling, general and
administrative expenses $ 18,762 $ 16,981 $16,733 $ 51,606 $ 54,866 10% 12% (6%)
As a percent of revenue 3.5% 5.0% 4.4% 4.1% 5.9%
-----------------------------------------------------------------------------------------------------------------------------------
As compared to the third quarter of 2002, selling, general and administrative
("SG&A") expenses increased by 10%, or $1.8 million, and declined from 5.0% of
revenue to 3.5% of revenue. The decline as a percentage of revenue is a result
of the overall increase in revenue. The increase in SG&A expenses is primarily
due to costs associated with our entry into India, the expansion of our retail
and activation management activities in France and variable costs associated
with a 58% increase in revenue.
As compared to the second quarter of 2003, SG&A expenses increased by 12%, or
$2.0 million, and declined from 4.4% of revenue to 3.5% of revenue. The increase
in SG&A expenses is primarily due to our entry into India and variable costs
associated with a 41% increase in revenue, partially offset by a $900 thousand
legal expense recovery, which reduced the SG&A expenses in the second quarter of
2003 and no such recovery was obtained in the third quarter of 2003.
For the nine months ended September 30, 2003, SG&A expenses decreased by 6%, or
$3.3 million, and declined from 5.9% of revenue to 4.1% of revenue. The decrease
was primarily due to reduced spending in the Americas division of approximately
$4 million, the positive effect of cost reduction action taken in Europe of
approximately $1 million and a $900 thousand legal expense recovery, offset by
our entry into India and the expansion of our retail and activation management
activities in France. Additionally, SG&A expenses in 2002 included severance
payments of approximately $1.5 million.
Facility Consolidation Charge
During the first quarter of 2003, the Company began to consolidate its Richmond,
California call center operation into its Plainfield, Indiana facility to reduce
costs and increase productivity and profitability in its Americas division. The
Company completed the consolidation of the facility in April of 2003, however,
continues to search for a sub-lessee. The facility consolidation affects the
Americas operating segment. During the first six months of 2003, the Company
recorded a pre-tax charge of $4.5 million which includes approximately $2.8
million for the present value of estimated lease costs, net of an anticipated
sublease, non-cash losses on the disposal of assets of approximately $1.1
million and severance and other costs of approximately $0.6 million. At
September 30, 2003, the Company had $2.6 million of reserves related to the
facility consolidation. Total cash outflows relating to the charge were
approximately $1.0 million through September 30, 2003. At this time, the Company
does not expect to incur significant additional costs related to the facility
consolidation. If the Company is unsuccessful in finding a sub-lessee or the
terms are less than originally estimated, the Company may incur additional
expenses.
Page 33 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Operating Income (Loss) from Continuing Operations
Three Months Ended Nine Months Ended
------------------ -----------------
SEPTEMBER 30, September 30, June 30, September 30, September 30,
(in thousands) 2003 2002 2003 2003 2002
-----------------------------------------------------------------------------------------------------
Operating income (loss) from
continuing operations $ 8,293 $ 2,986 $5,464 $ 12,163 ($ 4,215)
As a percent of revenue 1.6% 0.9% 1.4% 1.0% (0.5%)
-----------------------------------------------------------------------------------------------------
Operating income from continuing operations for the third quarter of 2003 was
$8.3 million, an increase of $5.3 million, or 178%, from the third quarter of
2002. This increase was due to a 58% increase in revenue resulting from strong
demand for our products and services in all divisions and our entry into the
India market in the third quarter of 2003. The growth in revenue was partially
offset by a decrease in gross margin from 5.9% to 5.1%, which was driven
primarily by an incremental proportion of lower gross margin wireless handsets
sold in India, and by a 10% increase in SG&A expenses. The increase in SG&A
expenses was primarily caused by additional expenses related to our entry into
India, additional expenses related to the expansion of our retail and activation
management activities in France and variable cost increases in proportion with
the 58% revenue increase. Of the 178% increase in operating income from
continuing operations from the third quarter of 2002, the strengthening of
foreign currencies relative to the U.S. dollar accounted for 11 percentage
points.
As compared to the second quarter of 2003, operating income from continuing
operations increased by $2.8 million, or 52%. This increase was due to a 41%
increase in revenue resulting from strong demand for our products and services
in all divisions and our entry into the India market in the third quarter of
2003. The growth in revenue was partially offset by a decrease in gross margin
from 5.9% to 5.1%, which was driven primarily by an incremental proportion of
lower gross margin wireless handsets sold in India, and by a 12% increase in
SG&A expenses. The increase in SG&A expenses was primarily caused by additional
expenses related to our entry into India and variable cost increases in
proportion with the 41% revenue increase. Fluctuating foreign currencies had no
material effect.
For the nine months ended September 30, 2003, operating income from continuing
operations (including the facility consolidation charge) increased by $16.4
million as compared to the same period of 2002. This increase was a result of a
34% increase in revenue, a 35% increase in gross profit and a 6% reduction in
SG&A expenses. The revenue increase was attributable to an 86% increase in
revenue in the Asia Pacific division, where all markets experienced an increase
in demand for our products and services and which included additional revenue
from our entry into the India market in the third quarter of 2003, and a 28%
increase in revenue in the Europe division, which increased its sales of prepaid
wireless airtime and benefited from the strengthening of European currencies
relative to the U.S. dollar. Revenue growth during this period was partially
offset by a 14% decline in the Americas division, which experienced a shift in
sales mix from product distribution revenue to fee-based logistics services and
was unable to meet product demand in certain circumstances due to the lack of
certain CDMA-based wireless devices. The 35% increase in gross profit was
closely associated with a 34% increase in revenue. The 6% reduction in SG&A
expenses was the result of cost reduction action taken in 2002 and a $900
thousand legal expense
Page 34 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
recovery in the second quarter of 2003. The decrease in SG&A expenses was
partially offset by expenses associated with our entry into India and the
expansion of our retail and activation management activities in France.
Additionally, SG&A expenses in 2002 included severance payments of approximately
$1.5 million.
Page 35 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Income from Continuing Operations
Three Months Ended Nine Months Ended
------------------ -----------------
SEPTEMBER 30, September 30, June 30, September 30, September 30,
(In thousands) 2003 2002 2003 2003 2002
--------------------------------------------------------------------------------------------------------------
Income from continuing operations $ 5,046 $ 11,121 $3,754 $ 6,540 $ 10,259
As a percent of revenue 0.9% 3.3% 1.0% 0.5% 1.1%
--------------------------------------------------------------------------------------------------------------
Income from continuing operations was $5.0 million, a decrease of $6.1 million,
or 55%, from the third quarter of 2002. On a per diluted share basis, income
from continuing operations decreased from $0.62 in the third quarter of 2002 to
$0.27 in the third quarter of 2003. This decrease is attributable to a gain on
debt extinguishment of $31.1 million in 2002 that did not occur in the third
quarter of 2003, partially offset by an impairment loss on long-term investment
of $8.3 million incurred in the third quarter of 2002 that did not occur in the
third quarter of 2003, a $979 thousand reduction of interest expense and a $5.3
million increase in operating income from continuing operations. The reduction
of interest expense was a direct result of the reduction of debt levels. The
increase in operating income from continuing operations was due to a 58%
increase in revenue resulting from strong demand for our products and services
in all divisions and our entry into the India market in the third quarter of
2003. The growth in revenue was partially offset by a decrease in gross margin
from 5.9% to 5.1%, which was driven primarily by an incremental proportion of
lower gross margin wireless handsets sold in India, and by a 10% increase in
SG&A expenses. The increase in SG&A expenses was primarily caused by additional
expenses related to our entry into India, additional expenses related to the
expansion of our retail and activation management activities in France and
variable cost increases in proportion with the 58% revenue increase. Of the 178%
increase in operating income from continuing operations from the third quarter
of 2002, the strengthening of foreign currencies relative to the U.S. Dollar
accounted for 11 percentage points.
As compared to the second quarter of 2003, income from continuing operations
increased $1.3 million, or 34%. On a per diluted share basis, income from
continuing operations increased from $0.20 in the second quarter of 2003 to
$0.27 in the third quarter of 2003. This increase is due to a $2.8 million
increase in operating income from continuing operations, partially offset by a
$450 thousand fine paid in connection with the Company's previously announced
settlement with the SEC and other items of lesser significance. The increase in
operating income from continuing operations was due to a 41% increase in revenue
resulting from strong demand for our products and services in all divisions and
our entry into the India market in the third quarter of 2003. The growth in
revenue was partially offset by a decrease in gross margin from 5.9% to 5.1%,
which was driven primarily by an incremental proportion of lower gross margin
wireless handsets sold in India, and by a 12% increase in SG&A expenses. The
increase in SG&A expenses was primarily caused by additional expenses related to
our entry into India and variable cost increases in proportion with the 41%
revenue increase. Fluctuating foreign currencies had no material effect.
For the nine months ended September 30, 2003, income from continuing operations
(including the facility consolidation charge) was $6.5 million as compared to
$10.3 million for the same period in 2002. On a per diluted share basis, income
from continuing operations decreased from $0.57 for the nine months
Page 36 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
ended September 30, 2002 to $0.35 for the same period in 2003. The change in
income from continuing operations is primarily attributable to a $43.6 million
gain on debt extinguishment incurred in the nine months ended September 30,
2002, that did not occur in the same period in 2003, partially offset by an
impairment loss on long-term investment of $8.3 million in the third quarter of
2002 that did not occur in the same period in 2003, a $16.4 million improvement
in operating income from continuing operations and a $4.4 million reduction in
interest expense. The reduction of interest expense was the direct result of the
reduction in debt levels. The improvement in operating income from continuing
operations was the result of a 34% increase in revenue, a 35% increase in gross
profit and a 6% reduction in SG&A expenses. The revenue increase was
attributable to an 86% increase in revenue in the Asia Pacific division, where
all markets experienced an increase in demand for our products and services and
which included additional revenue from our entry into the India market in the
third quarter of 2003, and a 28% increase in revenue in the Europe division,
which increased its sales of prepaid wireless airtime and benefited from the
strengthening of European currencies relative to the U.S. dollar. Revenue growth
during this period was partially offset by a 14% decline in the Americas
division, which experienced a shift in sales mix from product distribution
revenue to fee-based logistics services and was unable to meet product demand in
certain circumstances due to the lack of certain CDMA-based wireless devices.
The 35% increase in gross profit was closely associated with a 34% increase in
revenue. The 6% reduction in SG&A expenses was the result of cost reduction
action taken in 2002 and a $900 thousand legal expense recovery in the second
quarter of 2003. The decrease in SG&A expenses was partially offset by expenses
associated with our entry into India and the expansion of our retail and
activation management activities in France. Additionally, SG&A expenses in 2002
included severance payments of approximately $1.5 million.
For the three months ended September 30, 2003, net other expenses were $0.9
million, an increase of $0.1 million from the third quarter of 2002 and an
increase of $0.7 million from the second quarter of 2003. The increased net
other expenses are attributable to the $450 thousand fine paid in the third
quarter of 2003 in connection with the Company's previously announced settlement
with the SEC and the recovery of $275 thousand related to the settlement of the
shareholder derivative lawsuit in the second quarter of 2003.
During the third quarter of 2002, the Company repurchased 162,706 of our
outstanding Convertible Notes with an accreted value of approximately $88
million. The Company recorded a $31.1 million gain on extinguishment of debt
($18.7 million, net of tax), which was previously reported as an extraordinary
gain and has subsequently been reclassified to continuing operations in
accordance with SFAS 145. For the three months ended September 30, 2003, loss on
debt extinguishment was $100 thousand and represented the final fees incurred in
connection with the repurchase of our Convertible Notes in 2002 and 2003.
During the third quarter of 2002, we recorded a non-cash impairment charge of
$8.3 million relating to our investment in the Chinatron Group Holdings Limited
("Chinatron") Class B Preference Shares. Management was responsible for
estimating the value of the Chinatron Class B Preference Shares. Based on our
estimates, which included external valuations, our total investment in Chinatron
Class B Preference Shares has an estimated fair market value of approximately $2
million.
RESULTS OF OPERATIONS (CONTINUED)
Page 37 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Discontinued Operations
During 2002, we took action to better position ourselves for long-term and more
consistent success by divesting or closing operations, which were not likely to
generate an acceptable return on invested capital. The action included; i) the
sale, through certain of our subsidiaries, of our interests in Brightpoint China
Limited to Chinatron, ii) the sale, through certain of our subsidiaries, of our
interests in Brightpoint Middle East FZE, its subsidiary Fono Distribution
Services LLC and Brightpoint Jordan Limited to Persequor Limited, iii) the sale,
through certain of our subsidiaries, of certain operating assets of Brightpoint
de Mexico. S.A. de C.V and our respective ownership interest in Servicios
Brightpoint de Mexico, S.A. de C.V. to Soluciones Inteligentes para el Mercado
Movil, S.A. de C.V. (SIMM), an entity which is wholly-owned and controlled by
Brightstar de Mexico S.A. de C.V, iv) closure of our Miami sales office and v)
the continued execution of our 2001 Restructuring Plan, which called for the
elimination of operations in Brazil, Jamaica, South Africa, Venezuela and
Zimbabwe and the consolidation of our operations and activities in Germany, the
Netherlands and Belgium, including regional management, into a new facility in
Germany. Losses incurred in the three and nine months ended September 30, 2002,
resulting from the above action totaled $1.6 million, or $0.09 per share, and
$13.2 million, or $0.73 per share, respectively. Losses incurred in the three
and nine months ended September 30, 2003 totaled $0.2 million, or $0.01 per
share.
Net Income
Net income for the third quarter of 2003 was $4.8 million, a decrease of $4.7
million, or 49%, from the third quarter of 2002. On a per diluted share basis,
net income decreased from $0.53 in the third quarter of 2002 to $0.26 in the
third quarter of 2003. This decrease is attributable to a gain on debt
extinguishment of $31.1 million in 2002 that did not occur in the third quarter
of 2003, partially offset by an impairment loss on long-term investment of $8.3
million incurred in the third quarter of 2002 that did not occur in the third
quarter of 2003, a $979 thousand reduction of interest expense, a $1.4 million
reduction in loss from discontinued operations and a $5.3 million increase in
operating income from continuing operations. The reduction of interest expense
was the direct result of the reduction of debt levels. The increase in operating
income from continuing operations was due to a 58% increase in revenue resulting
from strong demand for our products and services in all divisions and our entry
into the India market in the third quarter of 2003. The growth in revenue was
partially offset by a decrease in gross margin from 5.9% to 5.1%, which was
driven primarily by an incremental proportion of lower gross margin wireless
handsets sold in India, and by a 10% increase in SG&A expenses. The increase in
SG&A expenses was primarily caused by additional expenses related to our entry
into India, additional expenses related to the expansion of our retail and
activation management activities in France and variable cost increases in
proportion with the 58% revenue increase. Of the 178% increase in operating
income from continuing operations from the third quarter of 2002, the
strengthening of foreign currencies relative to the U.S. dollar accounted for 11
percentage points.
As compared to the second quarter of 2003, net income increased by $527
thousand, or 12%. On a per diluted share basis, net income increased from $0.23
in the second quarter of 2003 to $0.26 in the third quarter of 2003. This
increase is due to a $2.8 million increase in operating income from continuing
operations, partially offset by a $765 thousand reduction in discontinued
operations and a $450 thousand
Page 38 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
fine paid in connection with the Company's previously announced settlement with
the SEC and other items of lesser significance. The increase in operating income
from continuing operations was due a 41% increase in revenue resulting from
strong demand for our products and services in all divisions and our entry into
the India market in the third quarter of 2003. The growth in revenue was
partially offset by a decrease in gross margin from 5.9% to 5.1%, which was
primarily driven by an incremental proportion of lower gross margin wireless
handsets sold in India, and by a 12% increase in SG&A expenses. The increase in
SG&A expenses was primarily caused by additional expenses related to our entry
into India and variable cost increases in proportion with the 41% revenue
increase. Fluctuating foreign currencies had no material effect.
For the nine months ended September 30, 2003, net income (including the facility
consolidation charge) was $6.3 million compared to a net loss of $43.7 million
for the same period in 2002. On a per diluted share basis, net income increased
from a $2.43 net loss for the nine months ended September 30, 2002 to $0.34 net
income for the nine months ended September 30, 2003. The change in net income is
primarily attributable to a $40.7 million charge in the same period in 2002
relating to a cumulative effect of a change in accounting principle, net of tax,
that did not occur in the same period in 2003, an impairment loss on long-term
investment of $8.3 million in the third quarter of 2002 that did not occur in
the same period in 2003, a $16.4 million improvement in operating income from
continuing operations, a $4.4 million reduction in interest expense, a $13
million reduction in losses related to discontinued operations, partially offset
by a $43.6 million gain on debt extinguishment incurred in the nine months ended
September 30, 2002, that did not occur in the same period in 2003. The reduction
of interest expense was the direct result of the reduction of debt levels. The
improvement in operating income from continuing operations was the result of a
34% increase in revenue, a 35% increase in gross profit and a 6% reduction in
SG&A expenses. The revenue increase was attributable to an 86% increase in
revenue in the Asia Pacific division, where all markets experienced an increase
in demand for our products and services and which included additional revenue
from our entry into the India market in the third quarter of 2003, and a 28%
increase in revenue in the Europe division, which increased its sales of prepaid
wireless airtime and benefited from the strengthening of European currencies
relative to the U.S. dollar. Revenue growth during this period was partially
offset by a 14% decline in the Americas division, which experienced a shift in
sales mix from product distribution revenue to fee-based logistics services and
was unable to meet product demand in certain circumstances due to the lack of
certain CDMA-based wireless devices. The 35% increase in gross profit was
closely associated with a 34% increase in revenue. The 6% reduction in SG&A
expenses was the result of cost reduction action taken in 2002 and a $900
thousand legal expense recovery in the second quarter of 2003. The decrease in
SG&A expenses was partially offset by expenses associated with our entry into
India and the expansion of our retail and activation management activities in
France. Additionally, SG&A expenses in 2002 included severance payments of
approximately $1.5 million.
Page 39 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Return on Invested Capital
The Company uses return on average invested capital from operations ("ROIC") to
measure the effectiveness of its use of invested capital to generate profits.
ROIC for the quarters ending September 30, 2003 and 2002 and June 30, 2002 was
as follows:
Three Months Ended
------------------
SEPTEMBER 30, September 30, June 30,
2003 2002 2003
------------- ------------- ---------
Operating income after taxes:
Operating income $ 8,293 $ 2,986 $ 5,464
Plus: Facility consolidation charge - - 181
Less: Estimated income taxes (2,309) (545) (1,357)
--------- --------- ---------
Operating income after taxes $ 5,984 $ 2,441 $ 4,288
========= ========= =========
Invested capital:
Debt $ 5,687 $ 38,626 $ 13,464
Stockholders' equity 127,169 106,780 120,235
--------- --------- ---------
Invested capital $ 132,856 $ 145,406 $ 133,699
========= ========= =========
Average invested capital (2) $ 133,278 $ 178,242 $ 127,452
========= ========= =========
Annualized quarterly ROIC (3) 18.0% 5.5% 13.5%
========= ========= =========
1 Estimated income taxes were calculated by multiplying the sum of
operating income and the facility consolidation charge to an effective
tax rate.
2 Represents the simple average of the beginning and ending invested
capital amounts for the respective quarter.
3 Calculated by dividing operating income after taxes by average invested
capital and multiplying the result by four (4) to state ROIC on an
annualized basis.
Page 40 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
Three Months Ended September 30, 2003
Net income $ 4,844
Net interest expense 255
Income taxes (includes income taxes included in Discontinued
Operations) 2,010
Depreciation and amortization 3,074
---------
EBITDA $ 10,183
=========
EBITDA is a non-GAAP financial measure. EBITDA provides management with an
indicator of how much cash the Company generates, excluding any changes in
working capital. Since the Company had experienced negative cash flow and high
debt in prior periods, this has become an important measurement for management.
Management also reviews and utilizes the entire statement of cash flows to
evaluate cash flow performance.
Page 41 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Supplemental Non-GAAP Presentation Of Items Included In The Determination Of
Income From Continuing Operations and Net Income
Three Months Ended
------------------
(Amounts in thousands, except per share data) September 30, September 30, June 30,
(Unaudited) 2003 2002 2003
------------- ------------- --------
Amounts net of tax:
Facility consolidation charge $ - $ - $ 137
Impairment loss on long-term investment - 8,305 -
(Gain) loss on debt extinguishment 60 (18,664) -
Diluted per share amounts net of tax:
Facility consolidation charge $ - $ - $ 0.01
Impairment loss on long-term investment - 0.46 -
Gain on debt extinguishment - (1.04) -
Nine Months Ended
-----------------
(Amounts in thousands, except per share data) September 30, September 30,
(Unaudited) 2003 2002
------------- -------------
Amounts net of tax:
Facility consolidation charge $ 3,368 $ -
Impairment loss on long-term investment - 8,305
(Gain) loss on debt extinguishment 218 (26,177)
Cumulative effect of a change in accounting principle - 40,748
Analysis of estimated effect on diluted per share amounts (net of tax):
Facility consolidation charge $ 0.18 $ -
Impairment loss on long-term investment - 0.46
(Gain) loss on debt extinguishment 0.01 (1.46)
Cumulative effect of a change in accounting principle - 2.27
In addition to the GAAP results provided throughout this press release, the
Company has provided the table above setting forth certain items that are
included in our GAAP results. This non-GAAP presentation of certain material
items does not replace the presentation of the Company's GAAP financial results.
The items shown in the supplemental table above are items, previously excluded
by the Company, in presenting certain non-GAAP financial measures in earlier
earnings press releases and Form 10-Q's. The Company has provided this
supplemental non-GAAP information because it believes that it may provide
investors with information necessary to perform meaningful comparisons of the
Company's continuing operations for the periods presented in this Form 10-Q.
Additionally, the Company has the ability to make a determination of the
probable tax consequences of these events, which an investor may not. The
consequences of income taxes on items excluded in our non-GAAP presentation have
varied materially in the past from the Company's average effective tax rate.
Page 42 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
(Amounts in thousands) September 30, 2003 December 31, 2002
---------------------------------------------------------------------------------------------------
Cash and cash equivalents (includes pledged cash) $ 78,545 $ 58,532
Working capital $ 74,424 $ 60,995
Current ratio 1.25: 1 1.29 : 1
---------------------------------------------------------------------------------------------------
We have historically satisfied our working capital requirements principally
through cash flow from operations, vendor financing, bank borrowings and the
issuance of equity and debt securities. The increase in working capital at
September 30, 2003 compared to December 31, 2002 is comprised primarily of the
effect of increased accounts receivable, increased inventory levels and
favorable vendor payment terms. We believe that cash flow from operations and
available bank borrowings will be sufficient to continue funding our short-term
capital requirements. However, significant changes in our business model,
significant operating losses or expansion of our operations in the future may
require us to seek additional and alternative sources of capital. Consequently,
there can be no assurance that we will be able to obtain any additional funding
on terms acceptable to us or at all.
Net cash provided by operating activities
For the nine months ended September 30, 2003, net cash provided by operating
activities was $29.2 million, as compared to $42.6 million for the same period
in 2002. During 2003, as a result of the demand for working capital required to
support the increased revenues net cash provided by operating activities
declined $13.4 million as compared to the same period in 2002.
Cash Conversion Cycle Days
September 30, December 31, September 30,
2003 2002 2002
---- ---- ----
Average days sales outstanding 26 28 30
Average days inventory on-hand 20 22 20
Average days payable outstanding (42) (39) (32)
--- --- ---
Cash Conversion Cycle Days 4 11 18
=== === ===
The reduction in cash conversion cycle days was primarily the result of the
extension of vendor payment terms and payments and our efforts to reduce
accounts receivable. A cash conversion cycle of 4 days may not be sustainable.
Details of our methodology for calculating cash conversion cycle days are
included in our Annual Report on Form 10-K for the year ended December 31, 2002.
Unrestricted cash and cash equivalents at September 30, 2003 increased by
approximately $17.8 million when compared to December 31, 2002 and pledged cash
increased by approximately $2.2 million at September 30, 2003 when compared to
December 31, 2002. The increase in unrestricted cash is primarily the result of
cash generated from operating activities of approximately $29 million, offset
primarily by payments on credit facilities and repurchases of bonds of
approximately $18 million and capital expenditures of $3.3 million. In the
ordinary course of business, the Company may receive large customer
Page 43 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
payments, at any given time, and may make large supplier payments, at any given
time. The timing of these types of payments, in conjunction with the timing of
certain operating expenses, such as monthly real estate lease payments and
payroll disbursements can cause our cash balance to fluctuate throughout the
quarter. The increase in pledged cash is primarily the result of increasing
certain cash-secured letters of credit in the Asia-Pacific division.
Financial instruments that potentially expose the Company to concentrations of
credit risk consist primarily of trade accounts receivable. These receivables
are generated from product distribution revenue and fee-based integrated
logistics services revenue. The Company performs periodic credit evaluations of
its customers and provides credit in the normal course of business to a large
number of its customers. However, consistent with industry practice, the Company
generally requires no collateral from its customers to secure trade accounts
receivable with the exception of secured letters of credit from certain
customers. The Company's Asia-Pacific division represents 55% of total revenue
for the nine months ended September 30, 2003. The loss or a significant
reduction in business activities in this division could have a material adverse
affect on the Company's revenue and results of operations. For the three months
ended September 30, 2003, one customer from the Asia-Pacific division, Reliance
Industries Limited, represented 14.7% of the Company's revenue. For the nine
months ended September 30, 2003, there were no customers that represented
greater than 10% of the Company's revenue.
The increase in accounts receivable during the nine months ended September 30,
2003, was primarily attributable to the increased revenues generated from the
Asia-Pacific and Europe divisions, offset by successful acceleration of our
accounts receivable collection cycle and sales or financing transactions of
certain accounts receivable to banks and other financing organizations in the
Europe division. These transactions have been treated as sales pursuant to
current accounting principles generally accepted in the United States and,
accordingly, are accounted for as off-balance sheet arrangements. Net funds
received from the sales of accounts receivable during the nine months ended
September 30, 2003 and 2002 totaled $200.4 million and $150.0 million,
respectively. Additionally, in the second quarter of 2003, in exchange for
payment of accounts receivable we accepted a secured interest bearing note
receivable from a customer totaling approximately $3.3 million, due in December
2003 which is included on the Consolidated Balance Sheet in "Other current
assets". The customer has been making interest payments on this note receivable
and has made a partial principal payment of approximately $340 thousand.
The Company is the collection agent on behalf of the bank or other third-party
financing organization for many of these arrangements and has no significant
retained interests or servicing liabilities related to accounts receivable that
it has sold. In certain circumstances, the Company may be required to repurchase
accounts receivable sold including, but not limited to, accounts receivable in
dispute or otherwise not collectible, accounts receivable in which credit
insurance is not maintained and a violation of, the expiration or early
termination of the agreement pursuant to which these arrangements are conducted.
The potential maximum future payments the Company may be required to repurchase
is equal to the outstanding amounts for the respective periods. In 2002, the
Company repurchased $150 thousand of receivables from banks or other third party
financing institution. In the first quarter of 2003, the Company repurchased
$900 thousand of accounts receivable sold related to its arrangement in Ireland.
This liability
Page 44 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
was accrued at December 31, 2002. Concurrently, the receivable was written off
to bad debt. The Company does not believe any further significant repurchases
will be required, therefore, no liability has been recorded at September 30,
2003. These agreements require the Company's subsidiaries to provide collateral
in the form of pledged assets and/or in certain situations the Company may
provide a guarantee of its subsidiaries obligations. Pursuant to these
arrangements, approximately $26.5 million and $30.1 million of trade accounts
receivable were sold to and held by banks and other third-party financing
institutions at September 30, 2003 and December 31, 2002, respectively.
The collection of our accounts receivable and our ability to accelerate our
collection cycle through the sale of accounts receivable is affected by several
factors, including, but not limited to, our credit granting policies,
contractual provisions, our customers and our overall credit rating as
determined by various credit rating agencies, industry and economic conditions,
the ability of the customer to provide security, collateral or guarantees
relative to credit granted by us, the customer's and our recent operating
results, financial position and cash flows and our ability to obtain credit
insurance on amounts that we are owed. Adverse changes in any of these factors,
certain of which may not be wholly in our control, could create delays in
collecting or an inability to collect our accounts receivable which could have a
material adverse effect on our financial position, cash flows and results of
operations.
Additionally, our accounts receivable are concentrated with network operators,
agent dealers and retailers operating in the wireless telecommunications and
data industry. Delays in collection or the uncollectibility of accounts
receivable could have an adverse effect on our liquidity and working capital
position. We intend to offer open account terms to additional customers, that
subjects us to further credit risks, particularly in the event that receivables
are concentrated in particular geographic markets or with particular customers.
We seek to minimize losses on credit sales by closely monitoring our customers'
credit worthiness and by obtaining, where available, credit insurance or
security on open account sales to certain customers.
At September 30, 2003, our allowance for doubtful accounts was $6.5 million
compared to $5.3 million at December 31, 2002, which we believe is adequate for
the size and nature of our receivables at those dates. For the nine months ended
September 30, 2003, bad debt expense as a percent of revenues was less than
1.0%. However, in connection with our 1999 and 2001 restructuring plans, we have
incurred significant accounts receivable impairments because we ceased doing
business in certain markets, significantly reducing our ability to collect the
related receivables.
The increase in inventories during the nine months ended September 30, 2003 are
due primarily to increased revenue volume in the Europe and Asia-Pacific
divisions, offset by early payment terms taken with suppliers. However, as a
result of increased revenues and improved inventory management, our days of
inventory on hand has declined from 22 days at December 31, 2002 to 20 days at
September 30, 2003.
Page 45 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
We offer financing of inventory and receivables to certain network operator
customers and their agents and manufacturer customers under contractual
arrangements. Under these contracts we manage and finance inventories and
receivables for these customers resulting in a contract financing receivable.
Contract financing receivables decreased to $13.7 million at September 30, 2003
from $17.0 million at December 31, 2002. In addition, we have vendor payables of
$19.4 million and $22.1 million at September 30, 2003 and December 31, 2002,
respectively, that represent the unfunded portion of these contract financing
receivables. The disproportionate change in unfunded contract financing
receivables to contract financing receivables is related to temporary timing
differences of cash payments for certain contract financing of inventory
purchases. These receivables included $3.0 million and $5.8 million of wireless
products located at our facilities at September 30, 2003 and December 31, 2002
respectively. In addition, we have commitments under these contracts to provide
inventory financing for these customers pursuant to various limitations defined
in the applicable service agreements.
The increase in accounts payable at September 30, 2003 of $96.6 million, when
compared to December 31, 2002, is due primarily to increased vendor payables in
our Asia-Pacific division relating to certain inventory purchases in connection
with the launch of our India operations. We rely on our suppliers to provide
trade credit financing and favorable payment terms to adequately fund our
on-going operations and product purchases. The payment terms received from our
suppliers is dependent on several factors, including, but not limited to, our
payment history with the supplier, the suppliers credit granting policies,
contractual provisions, our overall credit rating as determined by various
credit rating agencies, our recent operating results, financial position and
cash flows and the supplier's ability to obtain credit insurance on amounts that
we owe them. Adverse changes in any of these factors, certain of which may not
be wholly in our control, could have a material adverse effect on our
operations.
Net cash provided by investing activities
For the nine months ended September 30, 2003, net cash provided by investing
activities was $3.2 million compared to $4.6 million in the same period of 2002.
The decrease is due primarily to the reduction of contract financing of
inventory and receivables offered to certain network operator customers and
their agents and manufacturer customers under contractual arrangements.
At September 30, 2003, net property and equipment decreased $6.5 million from
December 31, 2002, due primarily to depreciation expense and the write-off of
certain fixed assets in connection with the consolidation of our Richmond,
California call center to our facility in Plainfield, Indiana as discussed
previously. For the nine months ended September 30, 2003, capital expenditures
totaled $3.3 million as compared to $7.3 million in the same period of 2002.
The increase in goodwill and other intangibles of $3.2 million at September 30,
2003, as compared to December 31, 2002, is primarily the result of certain small
purchase acquisitions in France during the first quarter of 2003 and the effects
of the translation of foreign currency denominated goodwill and other
intangibles as foreign currencies strengthened against the U.S. dollar during
the nine months ended September 30, 2003. See Note 8 to the Consolidated
Financial Statements for further discussion regarding our acquisition
activities.
Page 46 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Net cash used by financing activities
For the nine months ended September 30, 2003, net cash used by financing
activities decreased by $59.7 million, compared to the same period in 2002, as a
result of reduced debt.
On July 7, 2003, the Company amended the Credit Agreement between Brightpoint
North America, L.P., Wireless Fulfillment Services LLC, the other Credit Parties
and General Electric Capital Corporation. The amendment provides consent to join
Brightpoint Activation Services LLC and to become joinder of the Agreement as
other Credit Parties.
In the first quarter of 2003, the Company repurchased 21,803 of the 21,932 zero
coupon, subordinated, convertible notes (Convertible Notes) then outstanding.
The aggregate purchase price for all of these repurchases was $12 million ($549
per Convertible Note), which approximated their accreted value. As of March 31,
2003, the Company had repurchased all but 129 Convertible Notes outstanding with
an accreted value of approximately $0.07 million. On April 30, 2003, the Company
redeemed all of the remaining Convertible Notes.
At September 30, 2003 and December 31, 2002, there was $5.6 million and $10.1
million outstanding under all credit agreements, respectively. Available
funding, net of the applicable required availability minimum at September 30,
2003 and December 31, 2002, was $42.4 million and $41.9 million, respectively.
At September 30, 2003 and December 31, 2002, the Company was in compliance with
the covenants in its credit agreements.
Cash-secured letters of credits of approximately $15.2 million supporting the
Company's Brightpoint Asia Limited and Brightpoint Philippines operations were
issued by financial institutions on behalf of the Company and are outstanding at
September 30, 2003. The related cash collateral has been reported under the
heading "Pledged cash" in the Consolidated Balance Sheet.
Page 47 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 2003, Emerging Issues Task Force (EITF) Issued No. 00-21, Revenue
Arrangements with Multiple Deliveries. EITF 00-21 addresses certain aspects of
the accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. Specifically, EITF 00-21 addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting. In applying EITF 00-21, separate contracts with the
same entity or related parties that are entered into at or near the same time
are presumed to have been negotiated as a package and should, therefore, be
evaluated as a single arrangement in considering whether there are one or more
units of accounting. EITF 00-21 is effective for revenue arrangements entered
into in periods (including quarterly periods) beginning after June 15, 2003. The
Company adopted this standard on a prospective basis. The adoption of EITF 00-21
related to new agreements did not have an impact on the Company.
In 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation
No. 46 ("FIN 46"), Consolidation of Variable Interest Entities. FIN 46 defines a
variable interest entity ("VIE") as a corporation, partnership, trust or any
other legal structure that does not have equity investors with a controlling
financial interest or has equity investors that do not provide sufficient
financial resources for the entity to support its activities. FIN 46 requires
consolidation of a VIE by the primary beneficiary of the assets, liabilities,
and results of activities effective for 2003. FIN 46 also requires certain
disclosures by all holders of a significant variable interest in a VIE that are
not the primary beneficiary. The adoption of FIN No. 46 did not have material
impact on the financial position or results of operations of the Company.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity ("SFAS No. 150"). SFAS No. 150 establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify certain financial instruments as a liability (or as an asset in some
circumstances). SFAS No. 150 was effective for the Company at the beginning of
the first interim period beginning after June 15, 2003. The adoption of SFAS No.
150 did not have material impact on the financial position or results of
operations of the Company.
On April 30, 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities ("SFAS No. 149"). SFAS No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under Statement 133 and is to be
applied prospectively to contracts entered into or modified after June 30, 2003.
The adoption of SFAS No. 149 did not have material impact on the financial
position or results of operations of the Company. In 2002, the Financial
Accounting Standards Board issued Interpretation No. 45 (FIN 45), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 requires guarantees to be recorded
at fair value and requires a guarantor to make significant new disclosure, even
when the likelihood of making any payments under the guarantee is remote. FIN
45's initial recognition and initial measurement provisions are applicable on a
prospective basis to the guarantees issued or modified after December 31, 2002.
The Company has issued certain
Page 48 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
guarantees on behalf of its subsidiaries with regard to lines of credit and
long-term debt, for which the liability is recorded in the Company's financial
statements. These guarantees are excluded from the scope of FIN 45 because they
are a parent's guarantee of a consolidated subsidiary's debt to a third party.
In some circumstances, the Company purchases inventory with payment terms
requiring letters of credit. As of September 30, 2003, the Company has issued
$24.0 million in standby letters of credit. These standby letters of credit are
generally issued for a one-year term and are supported by either availability
under the Company's credit facilities or cash deposits. The underlying
obligations for which these letters of credit have been issued are recorded in
the financial statements at their full value. Should the Company fail to pay its
obligation to one or more of these suppliers, the suppliers may draw on the
standby letter of credit issued to them. The maximum future payments under these
letters of credit are $24.0 million.
Additionally, the Company has issued certain guarantees on behalf of its
subsidiaries with regard to accounts receivable transferred, the nature of which
is described in Note 6. While we do not currently anticipate the funding of
these guarantees, the maximum potential amount of future payments under these
guarantees at September 30, 2003 is approximately $26.5 million.
Our Certificate of Incorporation and By-laws provide for us to indemnify our
officers and directors to the extent permitted by law. In connection therewith,
we have entered into indemnification agreements with our executive officers and
directors. In accordance with the terms of these agreements we have reimbursed
certain of our current and former executive officers and intend to reimburse our
officers and directors for their personal legal expenses arising from certain
pending litigation and regulatory matters. During the nine months ended
September 30, 2003, pursuant to their respective indemnification agreements with
Brightpoint, Inc. and the Company's Certificate of Incorporation and By-laws,
$1,428 and $26,606 in legal fees were paid on behalf of John P. Delaney, the
Company's former Chief Accounting Officer, and Phillip A. Bounsall, the
Company's former Chief Financial Officer, respectively. For the same period in
2002, pursuant to their respective indemnification agreements with Brightpoint,
Inc. and the Company's Certificate of Incorporation and By-laws, $92,743 and
$44,502 in legal fees were paid on behalf of John P. Delaney and Phillip A.
Bounsall, respectively.
In June of 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS
No.146). SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).
SFAS No. 146 generally requires companies to recognize costs associated with
exit activities when they are incurred rather than at the date of a commitment
to an exit or disposal plan and is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company applied the
provisions of SFAS No. 146 during 2003 to the consolidation of its call center
activities in Richmond, California. See Note 2 to the Consolidated Financial
Statements.
Page 49 of 67
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In April of 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections ("SFAS No. 145"). SFAS No. 145
rescinds both FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt ("FASB Statement No. 4"), and an amendment to that
Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking Fund Requirements ("FASB Statement No. 64"). FASB Statement No. 4
required that all gains and losses from the extinguishment of debt be aggregated
and, if material, be classified as an extraordinary item, net of the related
income tax effect. Upon the adoption of SFAS No. 145, all gains and losses on
the extinguishment of debt for periods presented in the financial statements
would be classified as extraordinary items only if they meet the criteria in APB
Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of
disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions (APB No. 30). The provisions of SFAS No. 145
related to the rescission of FASB Statement No. 4 and FASB Statement No. 64
shall be applied for fiscal years beginning after May 15, 2002.
The Company adopted SFAS No. 145 on January 1, 2003 and classified amounts
previously reported as extraordinary gains or losses on debt extinguishment as a
separate line item before Income from Continuing Operations for all periods
presented. The provisions of SFAS No. 145 related to the rescission of FASB
Statement No. 44, the amendment of FASB Statement No. 13 and Technical
Corrections became effective as of May 15, 2002 and did not have a material
impact on the Company.
Page 50 of 67
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE AND FOREIGN CURRENCY EXCHANGE RATE RISKS
We are exposed to financial market risks, including changes in interest rates
and foreign currency exchange rates. To mitigate interest rate risks, we have
historically utilized interest rate swaps to convert certain portions of our
variable rate debt to fixed interest rates. To mitigate foreign currency
exchange rate risks, we periodically utilize derivative financial instruments
under the Foreign Currency Risk Management Policy approved by our Board of
Directors. We do not use derivative instruments for speculative or trading
purposes.
We are exposed to changes in interest rates on our variable interest rate
revolving lines of credit. A 10% increase in short-term borrowing rates during
the three months ended September 30, 2003, would have resulted in only a nominal
increase in interest expense. We did not have any interest rate swaps
outstanding at September 30, 2003.
A portion of our revenue and expenses are transacted in markets worldwide and
are denominated in currencies other than the U.S. Dollar. Accordingly, our
future results could be adversely affected by a variety of factors, including
changes in specific countries' political, economic or regulatory conditions and
trade protection measures.
We are exposed to adverse movements in foreign currency exchange rates. These
exposures may change over time as business practices evolve and could have a
material impact on our financial results in the future. Our primary exposure
relates to transactions in which the currency collected from customers is
different from the currency utilized to purchase the product sold in Europe and
the Asia/Pacific region. Our foreign currency risk management program is
designed to reduce but not eliminate unanticipated fluctuations in earnings,
cash flows and the value of foreign investments caused by volatility in currency
exchange rates by hedging, where believed to be cost-effective, significant
exposures with foreign currency exchange contracts, options and foreign currency
borrowings. Our hedging programs reduce, but do not eliminate, the impact of
foreign currency exchange rate movements. An adverse change (defined as a 10%
strengthening or weakening of the U.S. Dollar) in all exchange rates would not
have had a material impact on our results of operations for September 30, 2003.
At September 30, 2003, there were no cash flow or net investment hedges open.
Our sensitivity analysis of foreign currency exchange rate movements does not
factor in a potential change in volumes or local currency prices of our products
sold or services provided. Actual results may differ materially from those
discussed above.
Page 51 of 67
ITEM 4. CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of its management,
including its principal executive officer and principal financial officer,
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures as of the end of the period covered by this report.
Based on this evaluation, the principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective in reaching a reasonable level of assurance that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934 ("Exchange Act") is
recorded, processed, summarized and reported within the time period specified in
the Securities and Exchange Commission's rules and forms.
The principal executive officer and principal financial officer also conducted
an evaluation of the Company's internal control over financial reporting (as
defined in Exchange Act Rule 13a-15(f)) ("Internal Control") to determine
whether any changes in Internal Control occurred during the quarter that have
materially affected or which are reasonably likely to materially affect Internal
Control. Based on that evaluation, there has been no such change during the
quarter covered by this report.
Page 52 of 67
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 2003, the Company settled the action brought against it by Chanin
Capital Partners LLC ("Chanin") on November 25, 2002 in the United States
District Court for the Southern District of Indiana Civil Action No.
1:02-CV-1834-JDT-WTL. Pursuant to the settlement the Company paid Chanin
$725,000 and the action was dismissed with prejudice. Net of amounts accrued in
2002, an additional $100,000 was recorded as a loss on debt extinguishment.
In September 2003, the Company settled with the SEC the previously disclosed
investigation conducted by the SEC. Pursuant to the settlement, the Company,
without admitting or denying any of the SEC's allegations, consented to the
entry of an administrative order to cease and desist from violations of the
anti-fraud, books and records, internal controls and periodic reporting
provisions of the Securities Exchange Act of 1934 and the anti-fraud provisions
of the Securities Act of 1933. The Company also paid a fine of $450,000 pursuant
to an order entered in the United States District Court for the Southern
District of New York. The administrative cease and desist order alleged that the
Company, through the actions of John Delaney, its former Controller and Chief
Accounting Officer and Timothy Harcharik, its former Director of Risk
Management, committed fraud through the purchase and use of a purported
insurance policy to misrepresent the Company's losses as insured losses. The
Company restated its annual financial statements for 1998, 1999, 2000 and the
interim periods of 2001 on November 13, 2001 and January 31, 2002 to account for
payments made under the purported insurance policy. Delaney and Phillip
Bounsall, the Company's former Chief Financial Officer, also reached settlements
with the SEC. During the third quarter of 2003 the fine was recorded in net
other expense.
In the ordinary course of conducting its business, the Company is from time to
time, also involved in certain legal proceedings. While the ultimate liability
pursuant to these actions cannot currently be determined, the Company believes
these legal proceedings will not have a material adverse effect on its financial
statements, including earnings and liquidity.
The Company's Certificate of Incorporation and By-laws provide for it to
indemnify its officers and directors to the extent permitted by law. In
connection therewith, the Company has entered into indemnification agreements
with its executive officers and directors. In accordance with the terms of these
agreements, the Company has reimbursed certain of its former and current
executive officers and intends to reimburse its officers and directors for their
personal legal expenses arising from certain litigation and regulatory matters.
The Company's subsidiary in South Africa, whose operations were discontinued
pursuant to the 2001 Restructuring Plan, has received an assessment from the
South Africa Revenue Service ("SARS") regarding value-added taxes the SARS
claims are due, relating to certain product sale and purchase transactions
entered into by the Company's subsidiary in South Africa from 2000 to 2002.
Although the Company's liability pursuant to this assessment by the SARS, if
any, cannot currently be determined, the Company believes the range of the
potential liability is between $0 and $1.2 million U.S. dollars (at current
exchange rates) including penalties and interest. The potential assessment is
not estimable and, therefore, is not reflected as a liability or recorded as an
expense.
Page 53 of 67
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits
The list of exhibits is hereby incorporated by reference to the Exhibit
Index on page 52 of this report.
(b) Reports on Form 8-K
(i) On September 11, 2003, we filed a Form 8-K under Item 5 "Other
Events and Regulation FD Disclosure". The Company reported its
settlement with the Securities and Exchange Commission of the
previously disclosed investigation by the Commission relating
to the Company's accounting treatment of a certain purported
insurance policy.
Page 54 of 67
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
Brightpoint, Inc.
--------------------------------------
(Registrant)
Date: March 8, 2004 /s/ Frank Terence
--------------------------------------
Frank Terence
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: March 8, 2004 /s/ Lisa M. Kelley
--------------------------------------
Lisa M. Kelley
Sr. Vice President,
Chief Accounting Officer and Corporate
Controller
(Principal Accounting Officer)
Page 55 of 67
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.40 Indemnification Agreement between the Company and Frank
Terence dated July 29, 2003
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, implementing
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934 implementing
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 906 of the
Sarbanes-Oxley Act of 2002
99.1 Cautionary Statements
Page 56 of 67