UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 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: June 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.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 35-1778566
--------------------------------------------------------------------------------
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
501 Airtech Parkway, Plainfield Indiana 46168
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(317) 707-2355
--------------------------------------------------------------------------------
(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 July 22, 2003:
8,025,982 shares
BRIGHTPOINT, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1
Consolidated Statements of Operations
Three and Six Months Ended June 30, 2003 and 2002............. 3
Consolidated Balance Sheets
June 30, 2003 and December 31, 2002........................... 4
Consolidated Statements of Cash Flows
Six Months Ended June 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................. 22
ITEM 3
Quantitative and Qualitative Disclosures About Market Risk............. 40
ITEM 4
Controls and Procedures................................................ 41
PART II. OTHER INFORMATION
ITEM 1
Legal Proceedings...................................................... 42
ITEM 6
Exhibits............................................................... 44
Reports on Form 8-K.................................................... 44
Signatures............................................................. 45
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenue $ 379,406 $ 302,521 $ 719,596 $ 597,628
Cost of revenue 357,028 288,067 678,421 566,944
--------- --------- --------- ---------
Gross profit 22,378 14,454 41,175 30,684
Selling, general and administrative expenses 16,733 19,348 32,844 37,885
Facility consolidation charge 181 - 4,461 -
--------- --------- --------- ---------
Operating income (loss) from continuing operations 5,464 (4,894) 3,870 (7,201)
Net interest expense 313 1,659 684 4,141
(Gain) loss on debt extinguishment - (12,522) 265 (12,522)
Net other expenses 209 548 955 677
--------- --------- --------- ---------
Income from continuing operations before income taxes 4,942 5,421 1,966 503
Income taxes 1,188 2,986 472 1,365
--------- --------- --------- ---------
Income (loss) from continuing operations 3,754 2,435 1,494 (862)
Discontinued operations:
Gain (loss) from discontinued operations 64 (8,586) (209) (12,870)
Gain on disposal of discontinued operations 499 927 184 1,303
--------- --------- --------- ---------
Total discontinued operations 563 (7,659) (25) (11,567)
Total income (loss) before cumulative effect of an
accounting change 4,317 (5,224) 1,469 (12,429)
Cumulative effect of a change in accounting principle,
net of tax - - - (40,748)
--------- --------- --------- ---------
Net income (loss) $ 4,317 $ (5,224) $ 1,469 $ (53,177)
========= ========= ========= =========
Basic per share:
Income (loss) from continuing operations $ 0.47 $ 0.30 $ 0.18 $ (0.11)
Discontinued operations 0.07 (0.95) 0.00 (1.45)
Cumulative effect of a change in accounting
principle, net of tax - - - (5.10)
--------- --------- --------- ---------
Net income (loss) $ 0.54 $ (0.65) $ 0.18 $ (6.66)
========= ========= ========= =========
Diluted per share:
Income (loss) from continuing operations $ 0.45 $ 0.30 $ 0.18 $ (0.11)
Discontinued operations 0.07 (0.95) - (1.45)
Cumulative effect of a change in accounting
principle, net of tax - - - (5.10)
--------- --------- --------- ---------
Net income (loss) $ 0.52 $ (0.65) $ 0.18 $ (6.66)
========= ========= ========= =========
Weighted average common shares outstanding:
Basic 8,024 7,990 8,024 7,986
========= ========= ========= =========
Diluted 8,254 7,990 8,235 7,986
========= ========= ========= =========
See accompanying notes
3
BRIGHTPOINT, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
JUNE 30, December 31,
2003 2002
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 61,252 $ 43,798
Pledged cash 16,907 14,734
Accounts receivable (less allowance for doubtful
accounts of $6,779 and $5,328, respectively) 110,767 111,771
Inventories 100,960 73,472
Contract financing receivable 11,597 16,960
Other current assets 15,851 12,867
--------- ---------
Total current assets 317,334 273,602
Property and equipment, net 30,684 35,696
Goodwill and other intangibles, net 17,201 14,153
Other assets 11,696 12,851
--------- ---------
Total assets $ 376,915 $ 336,302
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 179,879 $ 129,621
Accrued expenses 44,181 48,816
Unfunded portion of contract financing receivable 19,156 22,102
Convertible notes, short-term - 12,017
Notes payable, other 46 51
--------- ---------
Total current liabilities 243,262 212,607
--------- ---------
Lines of credit 13,418 10,052
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Common stock, $0.01 par value: 100,000 shares
authorized; 8,026 and 8,021 issued and
outstanding in 2003 and 2002, respectively 80 80
Additional paid-in capital 214,663 214,624
Retained earnings (deficit) (87,997) (89,466)
Accumulated other comprehensive loss (6,511) (11,595)
--------- ---------
Total stockholders' equity 120,235 113,643
--------- ---------
Total liabilities and stockholders' equity $ 376,915 $ 336,302
========= =========
See accompanying notes.
4
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Six Months Ended June 30
2003 2002
---------- -----------
OPERATING ACTIVITIES
Net income (loss) $ 1,469 $(53,177)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 6,618 6,416
Amortization of debt discount 33 2,571
Pledged cash requirements (2,173) (146)
Cumulative effect of a change in accounting principle, net of tax - 40,748
Loss (gain) on debt extinguishment 265 (12,522)
Discontinued operations 25 11,567
Facility consolidation charge 4,461 -
Changes in operating assets and liabilities, net of
effects from acquisitions and divestitures:
Accounts receivable 9,981 50,247
Inventories (23,542) 61,015
Other operating assets (1,294) (4,426)
Accounts payable and accrued expenses 23,284 (59,657)
Net cash provided (used) by discontinued operations 20 (2,279)
-------- --------
Net cash provided by operating activities 19,147 40,357
INVESTING ACTIVITIES
Capital expenditures (1,865) (6,486)
Cash effect of divestiture 1,328 (5,941)
Purchase acquisitions, net of cash acquired (1,949) (282)
Decrease in funded contract financing receivables, net 8,369 14,195
Decrease in other assets 649 379
-------- --------
Net cash provided by investing activities 6,532 1,865
FINANCING ACTIVITIES
Net proceeds (payments) on revolving credit facilities 1,417 (21,243)
Repurchase of convertible notes (11,980) (15,203)
Proceeds from common stock issuances under employee stock
option and purchase plans 39 89
-------- --------
Net cash used by financing activities (10,524) (36,357)
Effect of exchange rate changes on cash and cash
Equivalents 2,299 114
-------- --------
Net increase in cash and cash equivalents 17,454 5,979
Cash and cash equivalents at beginning of period 43,798 58,295
-------- --------
Cash and cash equivalents at end of period $ 61,252 $ 64,274
======== ========
See accompanying notes.
5
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 wholly-owned or controlled subsidiaries. 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 six months ended June
30, 2003 and the unaudited Consolidated Statement of Cash Flows for the six
months ended June 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 June 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 Company has not changed its significant accounting policies from those
disclosed in its Form 10-K/A for the year ended December 31, 2002, except for
the adoption of recently issued accounting pronouncements, as disclosed below.
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/A for the year ended December 31, 2002.
6
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
1. Basis of Presentation (continued)
Recently Issued Accounting Pronouncements
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 is effective for
the Company at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 does not have an impact on the Company's
financial statements.
In 2003, the Financial Accounting Standards Board 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 broad-based effective date of FIN 46 is
deferred for public companies until the end of periods ending after December 15,
2003. The Company does not believe the issuance of FIN No. 46 will have a
material impact on its financial position or results of operations.
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. However, its disclosure requirements
are effective for financial statements of interim or annual periods ending after
December 15, 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 liability is
recorded in the Company's financial statements. Although the guarantees relating
to lines of credit and long-term debt are excluded from the scope of FIN 45, the
nature of these guarantees and the amount outstanding are described in footnote
8 to the consolidated financial statements.
In some circumstances, the Company purchases inventory with payment terms
requiring letters of credit. As of June 30, 2003, the Company has issued $20.3
million in standby letters of credit. These standby letters of credit are
generally issued for a one-year term and are supported by
7
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
1. Basis of Presentation (continued)
Recently Issued Accounting Pronouncements (continued)
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 all of these suppliers, the suppliers may
draw on the standby letter of credit issued for them. The maximum future
payments under these letters of credit are $20.3 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 footnote 6. While we do not currently anticipate the funding of
these guarantees, the maximum potential amount of future payments under these
guarantees at June 30, 2003 is approximately $21.9 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 six months ended June 30, 2003, pursuant to their respective
indemnification agreements with Brightpoint, Inc. and the Company's Certificate
of Incorporation and By-laws, $1 thousand and $27 thousand 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, $88 thousand and $45 thousand in legal fees were
paid on behalf of John P. Delaney and Phillip A. Bounsall, respectively.
On April 30, 2003, the Financial Accounting Standards Board ("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 Company is currently evaluating the
effects, if any, that this standard will have on its results of operations and
financial position.
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 the first
8
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
1. Basis of Presentation (continued)
half of 2003 based upon its decision to consolidate its call center activities
and close its Richmond, California call center. See Note 2 to the Consolidated
Financial Statements.
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.
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 and the Convertible Notes described
in Note 8 to the Consolidated Financial Statements.
NET INCOME (LOSS) PER SHARE
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 six
months ended June 30, 2003 and 2002 (amounts in thousands, except per share
data):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
Income (loss) from continuing operations $ 3,754 $ 2,435 $ 1,494 $ (862)
Discontinued operations 563 (7,659) (25) (11,567)
Cumulative effect of a change in accounting
principle, net of tax - - - (40,748)
----------------------- -----------------------
9
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
Net income (loss) $ 4,317 $ (5,224) $ 1,469 $ (53,177)
======================= =======================
Basic:
Weighted average shares outstanding 8,024 7,990 8,024 7,986
Per share amount:
Income (loss) from continuing operations $ 0.47 $ 0.30 $ 0.18 $ (0.11)
Discontinued operations 0.07 (0.95) - (1.45)
Cumulative effect of a change in accounting
principle, net of tax - - - (5.10)
----------------------- -----------------------
Net income (loss) $ 0.54 $ (0.65) $ 0.18 $ (6.66)
======================= =======================
Diluted:
Weighted average shares outstanding 8,024 7,990 8,024 7,986
Net effect of dilutive stock options,
based on the treasury stock method
using average market price 230 - 211 -
----------------------- -----------------------
Total weighted average shares outstanding 8,254 7,990 8,235 7,986
======================= =======================
Per share amount:
Income (loss) from continuing operations $ 0.45 $ 0.30 $ 0.18 $ (0.11)
Discontinued operations 0.07 (0.95) - (1.45)
Cumulative effect of a change in accounting
principle, net of tax - - - (5.10)
----------------------- -----------------------
Net income (loss) $ 0.52 $ (0.65) $ 0.18 $ (6.66)
======================= =======================
10
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 Six months ended
June 30, June 30,
2003 2002 2003 2002
----------------------------------------------------
Net income (loss) as reported $ 4,317 $ (5,224) $ 1,469 $ (53,177)
Stock-based employee compensation 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 (291) (218) (558) (435)
----------------------------------------------------
Pro forma net income (loss) $ 4,026 $ (5,442) $ 911 $ (53,612)
====================================================
Basic earnings per share:
Net income (loss) as reported $ 0.54 $ (0.65) $ 0.18 $ (6.66)
Stock-based employee compensation 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 (0.04) (0.03) (0.07) (0.05)
----------------------------------------------------
Pro forma net income (loss) $ 0.50 $ (0.68) $ 0.11 $ (6.71)
====================================================
Diluted earnings per share:
Net income (loss) as reported $ 0.52 $ (0.65) $ 0.18 $ (6.66)
Stock-based employee compensation 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 (0.03) (0.03) (0.07) (0.05)
----------------------------------------------------
Pro forma net income (loss) $ 0.49 $ (0.68) $ 0.11 $ (6.71)
====================================================
11
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 six months ended June 30, 2003 and
2002 are as follows:
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
---------------------------------------------
Net income (loss) $ 4,317 $ (5,224) $ 1,469 $(53,177)
Unrealized loss on derivatives - - - (50)
Foreign currency translation amounts 3,167 1,924 5,084 1,231
---------------------------------------------
Comprehensive income (loss) $ 7,484 $ (3,300) $ 6,553 $(51,996)
=============================================
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 Company's 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 June 30, 2003, the Company had $2.9 million of
reserves related to the facility consolidation. Total cash outflows relating to
the charge were approximately $0.8 million through June 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 sublease are less than originally estimated, the
Company may incur additional expenses. The details of the charge are presented
below (in thousands):
12
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
2. Facility Consolidation Charge (continued)
Quarter Ended Quarter Ended Year-to-date
March 31, 2003 June 30, 2003 June 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
====== ====== =======
The reserve activity for facility consolidation as of June 30, 2003 as follows
(in thousands):
Lease Employee Other
Facility Consolidation Termination Fixed Termination Exit
Charge 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
------- ------- ------- ------- -------
3. Discontinued Operations
The Company adopted Statement of Financial Accounting Standards No. 144 (SFAS
No. 144) at the beginning of 2002. 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.
13
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
3. Discontinued Operations (continued)
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. 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 significant amounts of additional contingent consideration due to the
Company pursuant to the Sale and Purchase Agreement with Persequor Limited.
As of June 30, 2003, the actions called for by the 2001 Restructuring Plan 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 Six months ended
June 30, June 30,
2003 2002 2003 2002
-----------------------------------------------
Revenue $ - $ 39,559 $ 287 $ 95,582
===============================================
Net operating income (loss) $ 135 $ (4,760) $ 20 $ (9,243)
Restructuring Plan gains (losses) (900) (2,899) (1,373) (2,324)
Recovery of contingent receivable 1,328 - 1,328 -
-----------------------------------------------
Total discontinued operations $ 563 $ (7,659) $ (25) $(11,567)
===============================================
At June 30, 2003, the Company had approximately $0.7 million in restructuring
reserves related to the 2001 Restructuring Plan.
Net assets related to discontinued operations are classified in the Consolidated
Balance Sheet at June 30, 2003 as follows (in millions):
Total current assets $7.6
Other non-current assets 0.1
----
Total assets $7.7
====
Accounts payable $0.5
Accrued expenses and other liabilities 3.3
----
Total liabilities $3.8
====
14
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
4. 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. As a result of the initial transitional
impairment test, the Company recorded an impairment charge of approximately
$40.7 million during the first quarter of 2002, which is presented as a
cumulative effect of a change in accounting principle, net of tax, for the three
and six months ended June 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.
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 June 30, 2003, these
intangibles total $2.0 million, net of accumulated amortization of $1.1 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.
The changes in the carrying amount of goodwill by operating segment for the six
months ended June 30, 2003 are as follows (in thousands):
Europe Asia-Pacific TOTAL
------- ------------ -------
Balance at December 31, 2002 $12,778 $ 280 $13,058
Goodwill from acquisitions 8 595 603
Effects of foreign currency fluctuation and other 1,518 32 1,550
------- ------- -------
Balance at June 30, 2003 $14,304 $ 907 $15,211
======= ======= =======
5. Accounts Receivable Transfers
During the six months ended June 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.
15
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
5. Accounts Receivable Transfers (continued)
Net funds received from the sales of accounts receivable during the six months
ended June 30, 2003 and 2002 totaled $124.5 million and $95.0 million,
respectively. Fees, in the form of discounts, incurred in connection with these
sales totaled $0.8 million and $1.1 million during the six months ended June 30,
2003 and 2002, respectively, and 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. The Company may be required to repurchase certain accounts
receivable sold in certain circumstances, 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. 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 $28.5 million and $30.1 million of trade
accounts receivable were sold to and held by banks and other third-party
financing institutions at June 30, 2003 and December 31, 2002, respectively.
6. Acquisitions and Divestitures
See Note 3 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 provide 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 the Company
recorded $0.6 million of goodwill related to certain earn-out arrangements on
prior acquisitions.
16
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
7. Lines of Credit and Long-term 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 June 30, 2003 and December 31, 2002, there were no amounts outstanding under
the Credit Agreement and available funding, net of the applicable required
availability minimum at June 30, 2003 and December 31, 2002, was $28.1 million
and $29.5 million, respectively.
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 (the Facility) with GE Commercial
Finance in Australia.. At June 30, 2003 and December 31, 2002, there was $13.4
million and $10.1 million outstanding, respectively, under the Facility at an
interest rate of approximately 7.7% at June 30, 2003 and 7.8% at December 31,
2002. At June 30, 2003 there was approximately $14.4 million of unused
availability under the 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 June 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 June 30, 2003 and December 31, 2002, there were no amounts
outstanding under this facility.
At June 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 $16.9 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
June 30, 2003. The related cash collateral has been reported under the heading
"Pledged cash" in the Consolidated Balance Sheet.
17
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
8. Operating Segments
The Company operates in markets worldwide and has 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 wireless devices, accessory programs and fees from the provision 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 including
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
REVENUES INCOME Revenues Income
FROM (LOSS) FROM from (Loss) from
EXTERNAL CONTINUING External Continuing
CUSTOMERS OPERATIONS Customers Operations
--------- ----------- --------- -----------
THREE MONTHS ENDED JUNE 30:
The Americas (1) $ 100,828 $ 1,979 $ 122,758 $ (4,900)
Asia-Pacific 203,319 3,409 119,788 1,371
Europe 75,259 76 59,975 (1,365)
--------- --------- --------- ---------
$ 379,406 $ 5,464 $ 302,521 $ (4,894)
========= ========= ========= =========
SIX MONTHS ENDED JUNE 30:
The Americas (1) $ 195,655 $ (1,527) $ 254,384 $ (5,400)
Asia-Pacific 379,724 5,064 231,496 2,502
Europe 144,217 333 111,748 (4,303)
--------- --------- --------- ---------
$ 719,596 $ 3,870 $ 597,628 $ (7,201)
========= ========= ========= =========
JUNE 30, December 31,
2003 2002
-------- -----------
TOTAL SEGMENT ASSETS:
The Americas (2) (3) $159,815 $173,371
Asia-Pacific (3) 136,904 84,920
Europe (3) 80,196 78,011
-------- --------
$376,915 $336,302
======== ========
(1) Includes $4.5 million facility consolidation charge for the six months
ended June 30, 2003, 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.
(2) Includes assets of the Company's corporate operations.
(3) Includes assets held for sale or disposal of discontinued operations at
June 30, 2003.
18
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
9. Contingencies and Legal Proceedings
The Company and several of its executive officers and directors were named as
defendants in two complaints filed in November and December 2001, in the United
States District Court for the Southern District of Indiana, entitled Weiss v.
Brightpoint, Inc., et. al., Cause No. IP01-1796-C-T/K; and Mueller v.
Brightpoint, Inc., et. al., Cause No. IP01-1922-C-M/S. In February 2002, the
Court consolidated the Weiss and Mueller actions and appointed John Kilcoyne as
lead plaintiff in this action which is now known as In re Brightpoint, Inc.
Securities Litigation. A consolidated amended complaint was filed in April 2002.
The amended complaint, among other things, added the Company's current
independent auditors as a defendant. The action is a purported class action
asserted on behalf of all purchasers of the Company's publicly traded securities
between January 29, 1999 and January 31, 2002.
On April 29, 2003, the parties to the litigation entered into a Stipulation of
Settlement. The settlement provides for the Company's insurer, under the
Company's directors and officers liability policy, to pay $5,050,000. These
funds will be used to make distributions to members of the class who timely file
a proof of claim, and to pay plaintiff's attorney's fees and expenses.
On May 1, 2003, the Court issued an order preliminarily approving the settlement
and providing for notice of the settlement to the class. On July 18, 2003, the
Court issued an order and judgment approving the settlement and dismissing the
action.
In February 2002, Nora Lee, filed a complaint in the Circuit Court, Marion
County, Indiana, Derivatively on Behalf of Nominal Defendant Brightpoint, Inc.,
vs. Robert J. Laikin, et. al. and Brightpoint, Inc. as a Nominal Defendant,
Cause No. 49C01-0202-CT-000399. The parties previously have filed a stipulation
agreeing to stay all proceedings in this derivative action pending a decision on
the motions to dismiss the amended complaint in the In Re: Brightpoint, Inc.
Securities Litigation action.
On April 30, 2003, a Stipulation of Settlement of this derivative action was
filed with the Court. The settlement provides that the Company acknowledges it
has made certain changes in its corporate governance policies and agrees to pay
up to $275,000 for plaintiff's attorney's fees and expenses, as may be awarded
by the Court. On May 2, 2003, the Court issued an order preliminarily approving
the settlement and providing for notice of settlement. On July 2, 2003, the
Court held a hearing for final approval of the settlement, and issued an order
approving the settlement and dismissing the action. It also awarded plaintiff's
attorneys' fees and expenses in the amount of $275,000, which were expensed in
the first quarter of 2003.
19
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
9. Contingencies and Legal Proceedings (continued)
A complaint was filed on November 23, 2001 against the Company and 87 other
defendants in the United States District Court for the District of Arizona,
entitled Lemelson Medical, Education and Research Foundation LP v. Federal
Express Corporation, et.al., Cause No. CIV01-2287-PHX-PGR. The plaintiff claims
the Company and other defendants have infringed 7 patents alleged to cover bar
code technology. The case seeks unspecified damages, treble damages and
injunctive relief. The Court has ordered the case stayed pending the decision in
a related case in which a number of bar code equipment manufacturers have sought
a declaration that the patents asserted are invalid and unenforceable. That
trial concluded in January 2003, but the decision may not be issued for several
months. The Company disputes these claims and intends to defend vigorously this
matter.
A complaint was filed against the Company on November 25, 2002 in the United
States District Court for the Southern District of Indiana, entitled Chanin
Capital Partners LLC v. Brightpoint, Inc., Cause No. CV-1834-JDT. The plaintiff
claims the Company breached a services contract with defendant under which the
plaintiff alleges it was entitled to receive both a monthly advisory fee of
$125,000 and an additional fee, due under certain specified circumstances, of
$1.5 million less the amount of any previously-paid monthly advisory fees. The
plaintiff seeks compensatory damages in an amount including, but not limited to
$1.5 million, less advisory fees paid and payable, plus un-reimbursed reasonable
expenses, applicable pre-judgment and post-judgment statutory interest, and
reasonable costs of the action. In addition, the plaintiff claims that it is
entitled to recover $125,000 for a monthly advisory fee on a theory of account
stated. The Company disputes these claims and intends to defend this matter
vigorously.
The Company has responded to requests for information and subpoenas from the
Securities and Exchange Commission (SEC) in connection with an investigation of
certain matters including its accounting treatment of a certain contract entered
into with an insurance company. In addition, certain of the Company's officers,
directors and employees have provided testimony to the SEC.
The Company is from time to time, also involved in certain legal proceedings in
the ordinary course of conducting its business. 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
position.
20
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
9. Contingencies and Legal Proceedings (continued)
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 pending 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.
On April 30, 2003, the Company and certain other parties, including certain of
the Company's officers and directors, entered into a Release Agreement with the
Company's insurance carrier relating to claims made by the Company under its
directors and officers insurance policy to recover costs incurred by the
Company, including reimbursement for costs and expenses of certain of the
Company's current and former officers and directors, relating to the shareholder
litigation and investigative matters described above. Pursuant to the Release
Agreement the Company received $1.175 million in cash and agreed, among other
things, not to pursue certain claims. The settlement amount of $1.175 million
was recorded in the Consolidated Statement of Operations in the second quarter
of 2003.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW AND RECENT DEVELOPMENTS
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. The
preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of any contingent
assets and liabilities at the financial statement date and reported amounts of
revenue and expenses during the reporting period. On an on-going basis we review
our estimates and assumptions. Our estimates were based on our historical
experience and various other assumptions that we believe to be reasonable under
the circumstances. Actual results are likely to differ from those estimates
under different assumptions or conditions, but we do not believe such
differences will materially affect our financial position or results of
operations. 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/A 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/A
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 June 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.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Revenue
Revenue by Division (in thousands):
Three Months Ended
------------------------------------------------------------ Change from Change from
JUNE 30, PERCENT June 30, Percent March 31, Percent Q2 2002 to Q1 2003 to
2003 OF TOTAL 2002 of Total 2003 of Total Q2 2003 Q2 2003
---------------------------------------------------------------------------------------
The Americas $100,828 27% $122,758 41% $ 94,827 28% (18%) 6%
Asia-Pacific 203,319 53% 119,788 39% 176,405 52% 70% 15%
Europe 75,259 20% 59,975 20% 68,958 20% 25% 9%
---------------------------------------------------------------------------------------
Total $379,406 100% $302,521 100% $340,190 100% 25% 12%
=======================================================================================
Revenue was $379 million, an increase of 25% from $302 million in the second
quarter of 2002. The increase in revenue was primarily attributable to strong
market demand for our products in the Asia-Pacific region, strengthening of
foreign currencies against the U.S. dollar, which accounted for approximately 8
percentage points of the increase in revenue, and increased sales of prepaid
wireless airtime in our Europe Division. The increase in demand in the
Asia-Pacific region was primarily attributable to strong subscriber growth in
India and other developing markets, and increasing promotional activities by
network operators. As a result, wireless device sales in our Asia-Pacific
Division increased by approximately $79 million, or 72%, from the second quarter
of 2002. The sale of prepaid wireless airtime in our Europe Division increased
by approximately $8 million, or 70%, as compared to the second quarter of 2002
due to the continued expansion of our electronic recharge capabilities and
distribution points. These increases were offset by a decline in revenues in the
Americas Division due to a sales mix shift from product distribution revenue to
fee-based logistics services revenue which negatively impacted revenue by
approximately $8 million, a general decline in the volume of accessory units
handled and a decline of approximately 3% in the average selling prices of
wireless devices.
Total wireless devices handled by the Company were approximately 4.1 million, an
increase of 11% from approximately 3.7 million wireless devices handled in the
second quarter of 2002. As compared to the first quarter of 2003, revenue
increased by 12% from $340 million primarily due to increased demand in our
Asia-Pacific and Americas Divisions coupled with the strengthening of foreign
currencies against the U.S. dollar, which accounted for 3 percentage points of
the increase in revenue. The Americas Division handled 4% more wireless devices
than in the first quarter of 2003 and experienced a sales mix shift from
fee-based logistics services to product distribution revenue, which contributed
to the Company's 12% increase in revenue.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Despite a slow start in the Asia-Pacific Division in the second quarter
attributable to the effect of Severe Acute Respiratory Syndrome (SARS), demand
recovered in the second half of the quarter and all markets in the Asia-Pacific
Division experienced revenue growth. The Americas Division increased revenues
and wireless devices handled from the first quarter of 2003 by 6% and 4%,
respectively. Total wireless devices handled by the Company in the second
quarter increased by 5% from the first quarter of 2003.
Six Months Ended
------------------------------------------------
JUNE 30, PERCENT OF June 30, Percent of
2003 TOTAL 2002 Total Change
---------------------------------------------------------
The Americas $195,655 27% $254,384 43% (23%)
Asia-Pacific 379,724 53% 231,496 39% 64%
Europe 144,217 20% 111,748 18% 29%
---------------------------------------------------------
Total $719,596 100% $597,628 100% 20%
=========================================================
Revenue for the first half of 2003 increased by 20% compared to the comparable
prior period due to strong market demand for our products in the Asia-Pacific
region and the strengthening of foreign currencies against the U.S. dollar,
particularly in the European region. These increases were offset by a decline in
revenues in the Americas Division due to a sales mix shift from product
distribution revenue to fee-based logistics services revenue, the lack of
availability of certain CDMA-based wireless devices, a general decline in the
volume of accessory units handled and the loss of customers due to industry
consolidation.
Revenue by Service Line (in thousands):
Three Months Ended
--------------------------------------------------------------------
PERCENT Change from Change from
JUNE 30, OF June 30, Percent March 31, Percent Q2 2002 to Q1 2003 to
2003 TOTAL 2002 of Total 2003 of Total Q2 2003 Q2 2003
-----------------------------------------------------------------------------------------------
Sales of wireless devices $305,419 80% $239,540 79% $271,713 80% 28% 12%
Accessory programs 18,871 5% 24,326 8% 16,476 5% (22%) 15%
Integrated logistics services 55,116 15% 38,655 13% 52,001 15% 43% 6%
-----------------------------------------------------------------------------------------------
Total $379,406 100% $302,521 100% $340,190 100% 25% 12%
===============================================================================================
Compared to the second quarter of 2002, we experienced an increase in revenue
from wireless device sales in the second quarter of 2003 due primarily to
increased volumes in the Asia-Pacific division partially offset by decreased
wireless device distribution volumes in the Americas division due the factors
affecting divisional revenue discussed previously. When compared to the first
quarter of 2003, revenues from wireless device sales increased due to increased
demand in our Asia-Pacific and Americas Divisions coupled with the strengthening
of foreign currencies against the US dollar discussed previously. Compared to
the second quarter of 2002, we experienced decreased revenue from accessory
programs during the second quarter of 2003, particularly in the Americas
division, which experienced a sales mix shift from accessory program revenue to
integrated logistics services. Additionally, many wireless devices now
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
include accessories bundled with the product that would have previously been
sold separately. This has diminished overall demand for our accessory programs.
Also, technological advancements in wireless devices, including extended battery
life, have reduced overall demand for certain accessory products. When compared
to the first quarter of 2003, accessory sales increased by 15% primarily
attributable to camera wireless device sales in our Europe Division. When
compared to the second quarter of 2002 and the first quarter of 2003, the
increase in integrated logistics services revenues reflects increased revenue
from our services related to prepaid wireless airtime in Sweden and Norway and
the addition of new logistics services customers in the United States.
SIX MONTHS ENDED
--------------------------------------------------------
JUNE 30, PERCENT OF June 30, Percent of
2003 TOTAL 2002 Total Change
----------------------------------------------------------------------
Sales of wireless devices $577,131 80% $466,637 78% 24%
Accessory programs 35,347 5% 54,768 9% (35%)
Integrated logistics services 107,118 15% 76,223 13% 41%
----------------------------------------------------------------------
Total $719,596 100% $597,628 100% 20%
======================================================================
Revenues from wireless device sales increased in the first half of the year when
compared to the prior year due to increased demand in our Asia-Pacific Division
offset by a sales-mix shift from product distribution revenue to fee-based
logistics services in our Americas division during 2003, as discussed
previously. The decrease in accessory program revenue in the first six months of
2003 when compared to the first six months of 2002 was primarily in the Americas
division, which experienced a sales mix shift from accessory program revenue to
integrated logistics services. Additionally, many wireless devices now include
accessories bundled with the product that would have previously been sold
separately. This has diminished overall demand for our accessory programs.
Logistics services revenue in the first six months increased when compared to
the first six months of 2002 primarily reflecting increased revenue from our
services related to prepaid wireless airtime in Sweden and Norway and the
addition of new logistics services customers in the United States.
Gross Profit
Three Months Ended Six Months Ended Percent Change
------------------------------------- ----------------------- -------------------------------------
JUNE 30, June 30, March 31, June 30, June 30, Q2 2002 to Q1 2003 to YTD 2002 to
(In thousands) 2003 2002 2003 2003 2002 Q2 2003 Q2 2003 YTD 2003
---------------------------------------------------------------------------------------------------------------------------------
Gross profit $ 22,378 $ 14,454 $ 18,797 $ 41,175 $ 30,684 55% 19% 34%
Gross margin 5.9% 4.8% 5.5% 5.7% 5.1%
---------------------------------------------------------------------------------------------------------------------------------
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Gross profit for the second quarter of 2003, increased 55% when compared to the
second quarter of 2002 and increased 19% when compared to the first quarter of
2003. Gross margin was 5.9% for the second quarter of 2003, as compared to 4.8%
for the second quarter of 2002, and compared to gross margins of 5.5% for the
first quarter of 2003. The increase is primarily the result of improved gross
margin performance in the Americas (improvement of 450 basis points) and Europe
Divisions (improvement of 55 basis points), which in the second quarter of 2002
experienced inventory related charges and general pricing pressure. The
Asia-Pacific Division experienced a decline in gross margin of approximately 70
basis points in comparison to the second quarter in 2002, due to pricing action
taken to reduce excess inventory levels caused by weakened demand earlier in the
second quarter of 2003 due to SARS and a reduction of supplier incentives in the
second half of 2003.
The improvement in gross margin from the first quarter is primarily due to the
earning of supplier incentives through higher volume purchases and sell-through
and early payment discounts taken on supplier invoices. We accrue manufacturer
incentives and rebates based on the terms of the specific vendor program and
sales of qualifying products. For the six months ended June 30, 2003, the
increase in both gross profit and gross margin when compared to the six months
ended June 30, 2002 were due to the improvement in margins in the Americas
Division as set forth above, prior year inventory write-downs in Germany, and
earning supplier incentives through higher volume purchases and sell-through and
early payments of supplier invoices.
Selling, General and Administrative Expenses
Three Months Ended Six Months Ended Percent Change
---------------------------------- ---------------------- -------------------------------------
JUNE 30, June 30, March 31, June 30, June 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 $ 16,733 $ 19,348 $ 16,111 $ 32,844 $ 37,885 (14%) 4% (13%)
As a percent of revenue 4.4% 6.4% 4.7% 4.6% 6.3%
-----------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative ("SG&A") expenses were $16.7 million, a
decrease of 14% from $19.3 million in the second quarter of 2002. As a
percentage of revenue, SG&A expenses were 4.4% compared to 6.4% in the second
quarter of 2002, with the improvement attributable to the increase in revenue
and an improvement in SG&A expenses in absolute dollars. The improvement in SG&A
expenses in absolute dollars is the result of cost reduction efforts made in
2002 and the benefit of a $900 thousand legal expense recovery. Additionally, in
the second quarter of 2002, SG&A expenses included $1.5 million in employee
severance costs. As compared to the first quarter of 2003, SG&A expenses
increased by 4%, or $622 thousand. This is due to the growth in revenue and
profitability which has increased certain variable costs such as compensation
and bad debt expense, and expenses relating to the recently launched India
operations, partially offset by the $900 thousand legal expense recovery
discussed above. For the
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Selling, General and Administrative Expenses (continued)
six months ended June 30, 2003, SG&A expenses declined by 13% from the
comparable prior period. The reduction is primarily attributable to cost
reduction efforts taken in 2002, the benefit of the $900 thousand legal expense
recovery set forth above, and a general reduction in legal fees. In addition,
SG&A expenses the first half of 2002 included $1.5 million in employee severance
costs.
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 Company's 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 June 30, 2003, the Company had $2.9 million of
reserves related to the facility consolidation. Total cash outflows relating to
the charge were approximately $0.8 million through June 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 sublease are less than originally estimated, the
Company may incur additional expenses. See Note 2 to the Consolidated Financial
Statements for further discussion.
Operating Income (Loss) from Continuing Operations
Three Months Ended Six Months Ended
---------------------------------- ----------------------
JUNE 30, June 30, March 31, June 30, June 30,
(In thousands) 2003 2002 2003 2003 2002
------------------------------------------------------------------------------------------------------
Operating income (loss) from
continuing operations $ 5,464 $ (4,894) $ (1,594) $ 3,870 $ (7,201)
As a percent of revenue 1.4% (1.6%) (0.5%) 0.5% (1.2%)
------------------------------------------------------------------------------------------------------
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Operating income from continuing operations (including the facility
consolidation charge) for the second quarter of 2003 was $5.5 million, an
improvement of $10.4 million from the second quarter of 2002 and an increase of
$7.1 million from the first quarter of 2003. The operating income (loss) from
continuing operations for the six months ended June 30, 2003 as compared to the
same period of 2002, increased by $11.1 million. This increase is caused by the
increase in revenue, the increase in gross margin and the decrease in selling,
general and administrative expenses as a percent of revenue.
Income (Loss) from Continuing Operations
Three Months Ended Six Months Ended
---------------------------------- ----------------------
JUNE 30, June 30, March 31, June 30, June 30,
(In thousands) 2003 2002 2003 2003 2002
------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations $ 3,754 $ 2,435 $ (2,260) $ 1,494 $ (862)
As a percent of revenue 1.0% 0.8% (0.7%) 0.2% (0.1%)
------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations for each period presented was primarily
attributable to the factors discussed above in the analyses of revenue, gross
margin, SG&A and the facility consolidation charge. In addition, net interest
expense for the second quarter of 2003 decreased $1.3 million from the second
quarter of 2002 and was relatively flat to the first quarter of 2003. Net
interest expense decreased $3.5 million in the first half of 2003 compared to
the first half of 2002. These reductions are the direct result of the
Convertible Note repurchases discussed above and the reduction of other debt.
Net other expenses for the second quarter of 2003 were $0.2 million, a decrease
of $0.3 million from the second quarter of 2002 and a decrease of $0.5 million
from the first quarter of 2003. The decrease is due in part to our recovery of
$0.3 million in connection with the settlement of the shareholder derivative
lawsuit. For the first six months of 2003, net other expense was $1.0 million,
relatively flat compared to $0.7 million in the first half of 2002. This is due
in part to the recovery of expenses discussed previously. Income from continuing
operations per diluted share was $0.45 for the second quarter of 2003 compared
to a $0.30 in the second quarter of 2002 and a loss from continuing operations
per diluted share of $0.28 in the first quarter of 2003. For the six months
ended June 30, 2003 and 2002 income (loss) from continuing operations per
diluted share was $0.18 and $(0.11), respectively.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Pro Forma Income (Loss) from Continuing Operations
In addition to the GAAP results provided throughout this document, we have
provided non-GAAP measurements, which present operating results on a pro forma
basis excluding certain specified items. Details of the excluded items are
presented in the table below. The non-GAAP measures do not replace the
presentation of our GAAP financial results. We have provided this supplemental
non-GAAP information because it provides meaningful comparisons of our
continuing operations for the periods presented in this document. These measures
are not in accordance with, or an alternative for, generally accepted accounting
principles and may be different from pro forma measures used by other companies.
Management uses these non-GAAP measures internally because they provide feedback
of the ongoing part of the business where management dedicates the majority of
its attention and these non-GAAP measures provide a means where management can
track its progress relative to its operating plans and prior periods. The
transactions excluded in these non-GAAP measures either pertain to certain
events relating to non-operating assets or liabilities or to certain other
events that are significantly material so that exclusion of the events would, we
in management's belief, significantly enhance a reader's ability to compare the
unaffected parts of our business. We have found that investors have an interest
in understanding the entire business, as well as, the ongoing part of the
business. We believe that both GAAP and our non-GAAP measures provide an
understanding in both areas. Additionally, we have 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 measures have varied materially in the past from our average effective
tax rate.
More specifically, operating income excluding a facilities consolidation charge
(non-GAAP) provides both management and investors with a view of the ongoing
part of the business that was unaffected by the excluded event. The intent of
the facilities consolidation was to reduce operating costs in the future and
this non-GAAP measure provides both management and investors with comparative
results to measure the effectiveness of the event on the ongoing part of the
business in future periods. Income from continuing operations excluding the
facilities consolidation charge, net of tax, and gains or losses on debt
extinguishment, net of tax, in prior periods (non-GAAP) provide both management
and investors a comparative view of the ongoing part of the business in the
current period relative to prior periods. This comparison distinguishes
non-operating material transactions resulting from Convertible Notes, which were
repurchased in full in 2003. We do not currently have any debt obligations of a
similar nature or magnitude. As compared to the current period, in prior
periods, GAAP required these material events to be treated as extraordinary
items. Management and investors, we believe, had previously developed a
meaningful understanding of the ongoing part of the business without the effect
of these
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Pro Forma Income (Loss) from Continuing Operations
material non-operating events. Pro forma operating income from continuing
operations before depreciation and amortization excludes expenses associated
with our capital investments, outstanding borrowings, and income taxes, which
management also considers when evaluating the profitability of our operations.
However, management evaluates capital investments through its effect on free
cash flows. In addition, management uses these measures for reviewing the
financial results of the Company and budget planning purposes. We believe that
investors are also interested in the business' ability to contribute to the
Company's cash flow. Management also reviews and utilizes the entire statement
of cash flows to evaluate cash flow performance.
Three Months Ended Six Months Ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
------- ---------------------------------------
Operating income (loss) from continuing operations -
GAAP presentation $ 5,464 $(4,894) $ 3,870 $(7,201)
Facility consolidation charge 181 - 4,461 -
------- --------------------------------------
Operating income (loss) from continuing operations -
Pro Forma presentation $ 5,645 $(4,894) $ 8,331 $(7,201)
======= ======================================
Income (loss) from continuing operations - GAAP
presentation $ 3,754 $ 2,435 $ 1,494 $ (862)
Facility consolidation charge, net of tax 137 - 3,368 -
(Gain) loss on debt extinguishment, net of tax - (7,513) 158 (7,513)
------- --------------------------------------
Income (loss) from continuing operations - Pro Forma
presentation $ 3,891 $(5,078) $ 5,020 $(8,375)
======= ======================================
Per Share Amounts (diluted):
Income (loss) from continuing operations - GAAP
presentation $ 0.45 $ 0.30 $ 0.18 $ (0.11)
Facility consolidation charge, net of tax 0.02 - 0.41 -
Gain) loss on debt extinguishment, net of tax - (0.94) 0.02 (0.94)
------- --------------------------------------
Income (loss) from continuing operations - Pro Forma
presentation $ 0.47 $ (0.64) $ 0.61 $ (1.05)
======= ======================================
Other Amounts:
Operating income (loss) from continuing operations -
GAAP presentation $ 5,464 $(4,894) $ 3,870 $(7,201)
Facility consolidation charge 181 - 4,461 -
Depreciation and amortization 3,231 2,782 6,618 6,416
------- --------------------------------------
Pro forma operating income from continuing
operations before depreciation and amortization $ 8,876 $(2,112) $14,949 $ (785)
======= ======================================
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 in which potential returns
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
second quarter 2002, resulting from the above actions totaled $7.7 million
($0.95 per share). Net gains totaled $0.6 million ($0.07 per share) in the
second quarter of 2003, primarily due to the receipt of $1.3 million in
contingent consideration relating to the divestiture of the Company's Middle
East operations in the third quarter of 2002 offset by unrealized foreign
currency translation losses caused by the strengthening of foreign currencies
relative to the U.S. dollar. See Note 3 to the Consolidated Financial Statements
for further discussion.
Cumulative Effect of a Change in Accounting Principle
During the second quarter of 2002, we completed the goodwill and other
intangible asset impairment testing required by the adoption of SFAS 142.
Consequently, we recorded in the first quarter of 2002 an impairment charge
totaling $40.7 million relating to this change in accounting principle.
Approximately $8.5 million of this charge related to the sale of Brightpoint
China Limited to Chinatron Group Holdings Limited which was previously
classified in discontinued operations in our June 30, 2002 financial statements
and has now been reclassified to the cumulative effect of an accounting change
as a part of the adoption of SFAS 142. See Note 4 to the Consolidated Financial
Statements for further discussion.
Net Income (Loss)
As a result of the factors, charges and gains discussed above, our net income
for the three months ending June 30, 2003 was $4.3 million compared to a net
loss of $5.2 million for the three months ending June 30, 2002. Our net income
for the six months ending June 30, 2003 was $1.5 million compared to a net loss
of $53.2 million for the six months ending June 30, 2002.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
(In thousands) June 30, 2003 December 31, 2002
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents (includes pledged cash) $ 78,159 $ 58,532
Working capital $ 74,072 $ 60,995
Current ratio 1.30 : 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 June
30, 2003 compared to December 31, 2002 is comprised primarily of the effect of
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
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 was $19.1 million for the six months
ending June 30, 2003, as compared to cash provided by operating activities of
$40.4 million in the six months ending June 30, 2002. The decrease in 2003 was
primarily the result of increased revenues resulting in a larger investment in
working capital. Average days sales outstanding in accounts receivable were
approximately 24 days at June 30, 2003, compared to approximately 28 days at
December 31, 2002 and approximately 34 days at June 30, 2002. Average days
inventory on-hand were 28 days at June 30, 2003, compared to approximately 22
days at December 31, 2002 and 24 days at June 30, 2002. Average days of accounts
payable outstanding were approximately 48 days at June 30, 2003, compared to
approximately 39 days at December 31, 2002 and approximately 42 days at June 30,
2002. These changes combined to create a decrease in cash conversion cycle days
to 4 days at June 30, 2003 from 11 days at December 31, 2002. This reduction 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/A for the year ended
December 31, 2002.
Unrestricted cash and cash equivalents at June 30, 2003 increased by
approximately $17.4 million when compared to December 31, 2002 and pledged cash
increased by approximately $2.2 million at June 30, 2003 when compared to
December 31, 2002. The increase in unrestricted cash is primarily the result of
cash generated from operating activities. In the ordinary course of business,
the Company may receive large customer 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 additional certain cash-secured letters of credit in the
Asia-Pacific Division.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The slight reduction in accounts receivable during the six months ended June 30,
2003 was attributable to the successful acceleration of our accounts receivable
collection cycle and sales or financing transactions of certain accounts
receivable to banks and other financing organizations in Ireland, Sweden, and
France. These transactions qualify 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 six months ended June 30, 2003 and 2002
totaled $124.5 million and $95.0 million, respectively. Additionally, in
exchange for payment of accounts receivable we accepted a note receivable from a
customer totaling approximately $3.3 million, due in December 2003. This note
receivable is included in other current assets.
We are the collection agent on behalf of the financing organization for many of
these arrangements. We have no significant retained interests or servicing
liabilities related to accounts receivable that we have sold, although, we may
be required to repurchase certain accounts receivable in certain circumstances
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. These agreements require our
subsidiaries to provide collateral in the form of pledged assets and/or in
certain situations a guarantee of our subsidiaries obligations may be given by
us. Pursuant to these arrangements, approximately $28.5 million and $30.1
million of trade accounts receivable were sold to and held by banks and other
third-party financing institutions at June 30, 2003 and December 31, 2002,
respectively. For more information on our accounts receivable transfers, see
Note 5 to the Consolidated Financial Statements. 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.
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
At June 30, 2003, our allowance for doubtful accounts was $6.8 million compared
to $5.3 million at December 31, 2002, which we believe was adequate for the size
and nature of our receivables at those dates. Bad debt expense as a percent of
revenues was less than 1.0% for the six months ending June 30, 2003. However, we
have incurred significant accounts receivable impairments in connection with our
1999 and 2001 restructuring plans because we ceased doing business in certain
markets, significantly reducing our ability to collect the related receivables.
Also, our accounts receivable are concentrated with network operators, agent
dealers and retailers operating in the wireless telecommunications and data
industry and delays in collection or the uncollectibility of accounts receivable
could have an adverse effect on our liquidity and working capital position. We
believe that during 2001 and 2002 many participants in the wireless
telecommunications and data industry, including certain of our customers,
experienced operating results that were below previous expectations, decreases
in overall credit ratings and increasing costs to obtain capital. We believe
this trend may continue into 2003 and could have an adverse effect on our
financial position and results of operations. We intend to offer open account
terms to additional customers, which 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.
The increase in inventories and corresponding increase in days inventory on-hand
during the six months ended June 30, 2003 are due primarily to an increase in
June 30, 2003 inventory levels in our Asia-Pacific region. With regards to
inventory levels in the United States, in December of 2002, we entered into an
amendment to our distribution agreement with a significant vendor in the United
States that, among other provisions, changed certain purchasing and invoicing
processes to create a just-in-time inventory arrangement that has allowed us to
reduce the amount of inventories. This arrangement has expired and could impact
our inventory levels and liquidity.
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 $11.6 million at June 30, 2003 from
$17.0 million at December 31, 2002. In addition, we have vendor payables of
$19.2 million and $22.1 million at June 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 $2.2 million and $5.8 million of wireless
products located at our facilities at June 30, 2003 and December 31, 2002
respectively. In addition, we have commitments under
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
these contracts to provide inventory financing for these customers pursuant to
various limitations defined in the applicable service agreements. See Note 6 to
the Consolidated Financial Statements.
The increase in accounts payable at June 30, 2003 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.
At June 30, 2003, net property and equipment decreased 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. Capital
expenditures totaled $1.9 million for the six months ended June 30, 2003 as
compared to $6.5 million in the six months ended June 30, 2002.
The slight increase in goodwill and other intangibles at June 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 six months
ended June 30, 2003. See Note 7 to the Consolidated Financial Statements for
further discussion regarding our acquisition activities.
Net cash provided by investing activities for the six months ending June 30,
2003 was $6.5 million compared to net cash provided by investing activities of
$1.9 in the same period of 2002. The increase is due primarily to the reduction
capital expenditures.
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 joiner of the Agreement as
other Credit Parties.
35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 June 30, 2003 and December 31, 2002, there were no amounts outstanding under
the Revolver and available funding, net of the applicable required availability
minimum at June 30, 2003 and December 31, 2002, was $28.1 million and $29.5
million, respectively.
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 (the Facility) with GE Commercial
Finance in Australia. At June 30, 2003 and December 31, 2002, there was $13.4
million and $10.1 million outstanding, respectively, under the Facility at an
interest rate of approximately 7.7% at June 30, 2003 and 7.8% at December 31,
2002. At June 30, 2003 there was approximately $14.4 million of unused
availability under the 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 June 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 June 30, 2003 and December 31, 2002, there were no amounts
outstanding under this facility.
At June 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 $16.9 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
June 30, 2003. The related cash collateral has been reported under the heading
"Pledged cash" in the Consolidated Balance Sheet.
Net cash used by financing activities during the six months ending June 30, 2003
decreased compared to the same period in 2002 as a result of reduced debt.
36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 is effective for
the Company at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 does not have an impact on the Company's
financial statements.
In 2003, the Financial Accounting Standards Board 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 broad-based effective date of FIN 46 is
deferred for public companies until the end of periods ending after December 15,
2003. The Company does not believe the issuance of FIN No. 46 will have a
material impact on its financial position or results of operations.
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. However, its disclosure requirements
are effective for financial statements of interim or annual periods ending after
December 15, 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 liability is
recorded in the Company's financial statements. Although the guarantees relating
to lines of credit and long-term debt are excluded from the scope of FIN 45, the
nature of these guarantees and the amount outstanding are described in footnote
8 to the consolidated financial statements.
37
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In some circumstances, the Company purchases inventory with payment terms
requiring letters of credit. As of June 30, 2003, the Company has issued $20.3
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 all of these suppliers, the suppliers may draw on the
standby letter of credit issued for them. The maximum future payments under
these letters of credit are $20.3 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 footnote 6. While we do not currently anticipate the funding of
these guarantees, the maximum potential amount of future payments under these
guarantees at June 30, 2003 is approximately $21.9 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 six months ended June 30, 2003, pursuant to their respective
indemnification agreements with Brightpoint, Inc. and the Company's Certificate
of Incorporation and By-laws, $1 thousand and $27 thousand 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, $88 thousand and $45 thousand in legal fees were
paid on behalf of John P. Delaney and Phillip A. Bounsall, respectively.
On April 30, 2003, the Financial Accounting Standards Board ("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 Company is currently evaluating the
effects, if any, that this standard will have on its results of operations and
financial position.
38
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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 the first half of 2003 based upon its decision
to consolidate its call center activities and close its Richmond, California
call center. See Note 2 to the Consolidated Financial Statements.
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.
39
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 June 30, 2003, would have resulted in only a nominal
increase in interest expense. We did not have any interest rate swaps
outstanding at June 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.
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 June 30, 2003. At June 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.
40
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of our management,
including the Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), of the effectiveness of our disclosure controls and procedures. Based
on that evaluation, the CEO and CFO have concluded that our disclosure controls
and procedures are effective to ensure that information required to be disclosed
by us in reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. Subsequent to
the date of their evaluation, there were no significant changes in our internal
controls or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and several of its executive officers and directors were named as
defendants in two complaints filed in November and December 2001, in the United
States District Court for the Southern District of Indiana, entitled Weiss v.
Brightpoint, Inc., et. al., Cause No. IP01-1796-C-T/K; and Mueller v.
Brightpoint, Inc., et. al., Cause No. IP01-1922-C-M/S. In February 2002, the
Court consolidated the Weiss and Mueller actions and appointed John Kilcoyne as
lead plaintiff in this action which is now known as In re Brightpoint, Inc.
Securities Litigation. A consolidated amended complaint was filed in April 2002.
The amended complaint, among other things, added the Company's current
independent auditors as a defendant. The action is a purported class action
asserted on behalf of all purchasers of the Company's publicly traded securities
between January 29, 1999 and January 31, 2002.
On April 29, 2003, the parties to the litigation entered into a Stipulation of
Settlement. The settlement provides for the Company's insurer, under the
Company's directors and officers liability policy, to pay $5,050,000. These
funds will be used to make distributions to members of the class who timely file
a proof of claim, and to pay plaintiff's attorney's fees and expenses.
On May 1, 2003, the Court issued an order preliminarily approving the settlement
and providing for notice of the settlement to the class. On July 18, 2003, the
Court issued an order and judgment approving the settlement and dismissing the
action.
In February 2002, Nora Lee, filed a complaint in the Circuit Court, Marion
County, Indiana, Derivatively on Behalf of Nominal Defendant Brightpoint, Inc.,
vs. Robert J. Laikin, et. al. and Brightpoint, Inc. as a Nominal Defendant,
Cause No. 49C01-0202-CT-000399. The parties previously have filed a stipulation
agreeing to stay all proceedings in this derivative action pending a decision on
the motions to dismiss the amended complaint in the In Re: Brightpoint, Inc.
Securities Litigation action.
41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (continued)
On April 30, 2003, a Stipulation of Settlement of this derivative action was
filed with the Court. The settlement provides that the Company acknowledges it
has made certain changes in its corporate governance policies and agrees to pay
up to $275,000 for plaintiff's attorney's fees and expenses, as may be awarded
by the Court. On May 2, 2003, the Court issued an order preliminarily approving
the settlement and providing for notice of settlement. On July 2, 2003, the
Court held a hearing for final approval of the settlement, and issued an order
approving the settlement and dismissing the action. It also awarded plaintiff's
attorneys' fees and expenses in the amount of $275,000, which was recorded in
the Consolidated Statement of Operations in the first quarter of 2003. This
amount was recovered in the second quarter of 2003.
A complaint was filed on November 23, 2001 against the Company and 87 other
defendants in the United States District Court for the District of Arizona,
entitled Lemelson Medical, Education and Research Foundation LP v. Federal
Express Corporation, et.al., Cause No. CIV01-2287-PHX-PGR. The plaintiff claims
the Company and other defendants have infringed 7 patents alleged to cover bar
code technology. The case seeks unspecified damages, treble damages and
injunctive relief. The Court has ordered the case stayed pending the decision in
a related case in which a number of bar code equipment manufacturers have sought
a declaration that the patents asserted are invalid and unenforceable. That
trial concluded in January 2003, but the decision may not be issued for several
months. The Company disputes these claims and intends to defend vigorously this
matter.
A complaint was filed against the Company on November 25, 2002 in the United
States District Court for the Southern District of Indiana, entitled Chanin
Capital Partners LLC v. Brightpoint, Inc., Cause No. CV-1834-JDT. The plaintiff
claims the Company breached a services contract with defendant under which the
plaintiff alleges it was entitled to receive both a monthly advisory fee of
$125,000 and an additional fee, due under certain specified circumstances, of
$1.5 million less the amount of any previously-paid monthly advisory fees. The
plaintiff seeks compensatory damages in an amount including, but not limited to
$1.5 million, less advisory fees paid and payable, plus un-reimbursed reasonable
expenses, applicable pre-judgment and post-judgment statutory interest, and
reasonable costs of the action. In addition, the plaintiff claims that it is
entitled to recover $125,000 for a monthly advisory fee on a theory of account
stated. The Company disputes these claims and intends to defend this matter
vigorously.
The Company has responded to requests for information and subpoenas from the
Securities and Exchange Commission (SEC) in connection with an investigation of
certain matters including its accounting treatment of a certain contract entered
into with an insurance company. In addition, certain of the Company's officers,
directors and employees have provided testimony to the SEC.
42
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (continued)
The Company is from time to time, also involved in certain legal proceedings in
the ordinary course of conducting its business. 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
position.
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 pending 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.
On April 30, 2003, the Company and certain other parties, including certain of
the Company's officers and directors, entered into a Release Agreement with the
Company's insurance carrier relating to claims made by the Company under its
directors and officers insurance policy to recover costs incurred by the
Company, including reimbursement for costs and expenses of certain of the
Company's current and former officers and directors, relating to the shareholder
litigation and investigative matters described in Note 9 to the Consolidated
Financial Statements. Pursuant to the Release Agreement the Company received
$1.175 million in cash and agreed, among other things, not to pursue certain
claims. The settlement amount of $1.175 million was recorded in the Consolidated
Statement of Operations in the second quarter of 2003.
43
PART II. OTHER INFORMATION
Item 6. Exhibits
(a) Exhibits
The list of exhibits is hereby incorporated by reference to the
Exhibit Index on page 38 of this report.
(b) Reports on Form 8-K
(i) On May 1, 2003 we furnished a Form 8-K in satisfaction of
Item 12 "Disclosure of Results of Operations and Financial
Condition" of Form 8-K and is being presented under Item 9
"Regulation FD Disclosure" pursuant to the interim
guidance of the Securities and Exchange Commission for the
first quarter results.
(ii) On April 30, 2003, we furnished a Form 8-K under Item 9
"Regulation FD Disclosure". In the Release the Company
reported its settlement of both the In re Brightpoint,
Inc. Securities Litigation class action and the Nora Lee
derivative action.
(iii) On April 3, 2003, we furnished a Form 8-K under Item 5
"Other Events and Regulation FD Disclosure". The Company
confirmed that it currently has no intentions to pursue a
secondary offering or placement of its securities.
44
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: November 25, 2003 /s/ Frank Terence
---------------------------------------
Frank Terence
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: November 25, 2003 /s/ Lisa M. Kelley
---------------------------------------
Lisa M. Kelley
Sr. Vice President,
Chief Accounting Officer and Corporate
Controller
(Principal Accounting Officer)
45
EXHIBIT INDEX
Exhibit No. Description
10.39 Amendment No. 5 dated July 7, 2003 to Credit Agreement among
Brightpoint North America L.P., and Wireless Fulfillment
Services LLC,, the other credit parties signatory thereto, the
lenders signatory thereto and General Electric Capital
Corporation (incorporated by reference to Exhibit 10.39 to the
Registrants Form 10-Q for the quarter ended June 30, 2003
previously filed with the SEC)
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
46