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UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: March 31, 2005
-------------------------------------------------
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)
Indiana 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 [X] No [ ]
Number of shares of the registrant's common stock outstanding at May 5, 2005:
18,125,881 shares, excluding 1,833,000 treasury shares
BRIGHTPOINT, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1
Consolidated Statements of Operations
Three Months Ended March 31, 2005 and 2004.......... 3
Consolidated Balance Sheets
March 31, 2005 and December 31, 2004................ 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2005 and 2004.......... 5
Notes to Consolidated Financial Statements................... 6
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 19
ITEM 3
Quantitative and Qualitative Disclosures About Market Risk... 32
ITEM 4
Controls and Procedures...................................... 33
PART II. OTHER INFORMATION
ITEM 1
Legal Proceedings............................................ 36
ITEM 5
Other Information............................................ 37
ITEM 6
Exhibits..................................................... 37
Signatures................................................... 38
BRIGHTPOINT, INC.
INTRODUCTORY NOTE
The Company issued a press release on May 6, 2005, which it filed as an
exhibit to a Form 8-K, relating to the restatement of the Company's financial
statements as of and for the year ended December 31, 2004. The Company also
filed a Form 10-K/A describing the restatement of the Consolidated Financial
Statements as of and for the year ended December 31, 2004, and for all the
quarterly periods in 2004. The quarterly results for the first quarter of 2004
included herein are as restated. Please refer to Note 2 to the Consolidated
Financial Statements included herein as well as Note 19 to the Consolidated
Financial Statements included in the Form 10-K/A for additional information with
respect to the restatement.
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
--------- ---------
Revenue
Distribution revenue $ 406,725 $ 377,942
Logistics services revenue 78,889 62,268
--------- ---------
Total revenue 485,614 440,210
Cost of revenue
Cost of distribution revenue 390,585 364,660
Cost of logistics services revenue 66,732 51,482
--------- ---------
Total cost of revenue 457,317 416,142
Gross profit 28,297 24,068
Selling, general and administrative expenses 22,854 19,874
Facility consolidation charge 1,203 --
--------- ---------
Operating income from continuing operations 4,240 4,193
Interest expense 585 469
Interest income (212) (201)
Other expenses 202 568
--------- ---------
Income from continuing operations before income taxes 3,665 3,357
Income tax expense 1,100 1,003
--------- ---------
Income from continuing operations 2,565 2,354
Discontinued operations:
Loss from discontinued operations (29) (341)
Gain (loss) on disposal of discontinued operations 338 (4,234)
--------- ---------
Total discontinued operations 309 (4,575)
--------- ---------
Net income (loss) $ 2,874 $ (2,221)
========= =========
Basic per share:
Income from continuing operations $ 0.14 $ 0.12
Discontinued operations 0.02 (0.24)
--------- ---------
Net income (loss) $ 0.16 $ (0.12)
========= =========
Diluted per share:
Income from continuing operations $ 0.14 $ 0.12
Discontinued operations 0.02 (0.23)
--------- ---------
Net income (loss) $ 0.16 $ (0.11)
========= =========
Weighted average common shares outstanding:
Basic 17,707 19,270
========= =========
Diluted 18,373 19,940
========= =========
See accompanying notes.
Page 3 of 40
BRIGHTPOINT, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
MARCH 31, 2005 December 31, 2004
-------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 71,198 $ 72,120
Pledged cash 12,786 13,830
Accounts receivable (less allowance for doubtful
accounts of $6,219 in 2005 and $6,215 in 2004) 123,624 148,321
Inventories 105,535 110,089
Contract financing receivable 13,317 14,022
Other current assets 25,569 23,132
--------- ---------
Total current assets 352,029 381,514
Property and equipment, net 26,598 27,503
Goodwill and other intangibles, net 21,276 21,981
Other assets 7,796 6,586
--------- ---------
Total assets $ 407,699 $ 437,584
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 173,940 $ 201,621
Accrued expenses 60,408 61,851
Unfunded portion of contract financing receivable 20,876 23,375
Lines of credit 4,563 --
--------- ---------
Total current liabilities 259,787 286,847
--------- ---------
COMMITMENTS AND CONTINGENCIES
Minority interest -- --
Shareholders' equity:
Preferred stock, $0.01 par value: 1,000 shares
authorized; no shares issued or outstanding -- --
Common stock, $0.01 par value: 100,000 shares
authorized; 19,585 and 19,499 issued in 2005 and
in 2004, respectively 196 195
Treasury stock, at cost, 1,833 shares in 2005 and
1,606 shares in 2004 (28,409) (24,010)
Additional paid-in capital 234,291 233,768
Retained earnings (deficit) (61,094) (63,968)
Accumulated other comprehensive income 2,928 4,752
--------- ---------
Total shareholders' equity 147,912 150,737
--------- ---------
Total liabilities and shareholders' equity $ 407,699 $ 437,584
========= =========
See accompanying notes.
Page 4 of 40
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2005 2004
-------- --------
OPERATING ACTIVITIES
Net income (loss) $ 2,874 $ (2,221)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 3,016 2,661
Discontinued operations (309) 4,575
Net cash used by discontinued operations (3) (1,401)
Facility consolidation charge 1,203 --
Pledged cash requirements 1,044 538
Income tax benefits from exercise of stock options 208 --
Changes in deferred taxes (1,803) --
Changes in operating assets and liabilities, net
of effects from acquisitions and divestitures:
Accounts receivable, net 22,781 12,288
Inventories, net 2,722 9,731
Other operating assets (3,370) 1,142
Accounts payable (24,665) (22,464)
Accrued expenses 1,222 (8,634)
-------- --------
Net cash provided (used) by operating activities 4,920 (3,785)
INVESTING ACTIVITIES
Decrease (increase) in funded contract financing receivables (1,754) 2,868
Capital expenditures (2,155) (2,169)
Proceeds from Ireland sale -- 1,714
Increase in other assets (56) (374)
Purchase acquisitions, net of cash acquired (308) (213)
-------- --------
Net cash provided (used) by investing activities (4,273) 1,826
FINANCING ACTIVITIES
Net borrowing (payments) on credit facilities 4,667 (16,484)
Pledged cash requirements -- 5,000
Proceeds from common stock issuances under employee stock
option and purchase plans 316 308
Purchase of treasury stock (4,399) --
-------- --------
Net cash provided (used) in financing activities 584 (11,176)
Effect of exchange rate changes on cash and cash equivalents (2,153) (290)
-------- --------
Net decrease in cash and cash equivalents (922) (13,425)
Cash and cash equivalents at beginning of period 72,120 98,879
-------- --------
Cash and cash equivalents at end of period $ 71,198 $ 85,454
======== ========
See accompanying notes.
Page 5 of 40
PART I FINANCIAL INFORMATION
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(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 Brightpoint, Inc.'s (the "Company") financial position or
results of operations. The Consolidated Financial Statements reflect all
adjustments considered, in the opinion of the Company, necessary to fairly
present the results for the periods. Such adjustments are of a normal recurring
nature.
The Consolidated Financial Statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned, with the exception of the
Brightpoint India Limited subsidiary that is 85% owned by the Company.
Significant intercompany accounts and transactions have been eliminated in
consolidation. Certain amounts in the 2004 Consolidated Financial Statements
have been reclassified to conform to the 2005 presentation.
The Consolidated Balance Sheet at December 31, 2004 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 Statement of Operations for the three months ended March 31, 2005
and the unaudited Consolidated Statement of Cash Flows for the three months
ended March 31, 2005 are not necessarily indicative of the operating results or
cash flows that may be expected for the entire year.
Due to seasonal factors, the Company's 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 for the year ended December 31, 2004. For further
information, reference is made to the audited Consolidated Financial Statements
and the notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2004, as amended.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is based on the weighted average number of
common shares outstanding during each period, and diluted net income (loss) per
share is based on the weighted average number of
Page 6 of 40
common shares and dilutive common share equivalents outstanding during each
period. The table below presents a reconciliation of the net income (loss) per
share calculations (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
--------------------------
2005 2004
-------- --------
Income from continuing operations $ 2,565 $ 2,354
Discontinued operations 309 (4,575)
-------- --------
Net income (loss) $ 2,874 $ (2,221)
======== ========
Basic:
Weighted average shares outstanding 17,707 19,270
======== ========
Per share amount:
Income from continuing operations $ 0.14 $ 0.12
Discontinued operations 0.02 (0.24)
-------- --------
Net income (loss) $ 0.16 $ (0.12)
======== ========
Diluted:
Weighted average shares outstanding 17,707 19,270
Net effect of dilutive stock options - based on the
treasury stock method using average market price 666 670
-------- --------
Total weighted average shares outstanding 18,373 19,940
======== ========
Per share amount:
Income from continuing operations $ 0.14 $ 0.12
Discontinued operations 0.02 (0.23)
-------- --------
Net income (loss) $ 0.16 $ (0.11)
======== ========
Page 7 of 40
STOCK OPTIONS
The Company uses the intrinsic value method, as opposed to the fair value
method, in accounting for stock options. Under the intrinsic value method, no
material compensation expense has been recognized for stock options granted to
employees or stock sold pursuant to the employee stock purchase plan ("ESPP").
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 and the ESPP that would have been reported if the Company utilized the
fair value method (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2005 2004
--------- ---------
Net income (loss) as reported $ 2,874 $ (2,221)
Stock-based employee compensation cost, net of related tax effects,
that would have been included in the determination of net loss if the
fair value method had been applied (569) (462)
--------- ---------
Pro forma net income (loss) $ 2,305 $ (2,683)
========= =========
Basic per share:
Net income (loss) $ 0.16 $ (0.12)
Stock-based employee compensation cost, net of related tax effects,
that would have been included in the determination of net loss if
the fair value method had been applied (0.03) (0.02)
--------- ---------
Pro forma net income (loss) $ 0.13 $ (0.14)
========= =========
Diluted per share:
Net income (loss) $ 0.16 $ (0.11)
Stock-based employee compensation cost, net of related tax effects,
that would have been included in the determination of net loss if
the fair value method had been applied (0.03) (0.02)
--------- ---------
Pro forma net income (loss) $ 0.13 $ (0.13)
========= =========
COMPREHENSIVE INCOME
Comprehensive income is comprised of net loss and gains or losses resulting from
currency translations of foreign investments. The details of comprehensive
income are as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2005 2004
------- -------
Net income (loss) $ 2,874 $(2,221)
Foreign currency translation amounts (1,824) 1,883
------- -------
Comprehensive income $ 1,050 $ (338)
======= =======
Page 8 of 40
2. Restatement of Prior Period Financial Statements
As described in Amendment No. 2 on Form 10-K/A for the year ended December 31,
2004 ("Form 10-K/A"), we have restated our consolidated financial statements for
the year ended December 31, 2004 ("Restatement"). This Note should be read in
conjunction with Note 19, "Restatement of Consolidated Financial Statements" in
the notes to our consolidated financial statements included in Item 8,
"Financial Statements and Supplementary Data" of the Form 10-K/A, which provides
further information on the nature and impact of the Restatement.
The determination to restate our consolidated financial statements and selected
financial information for the year ended and as of December 31, 2004, was made
as a result of management's identification of errors through the Company's
continuing self-assessment and self-testing of its internal control over
financial reporting and during the monthly financial closing process relating
to our France and Australia operations in the first quarter of 2005.
As a result of the Restatement, the Company's quarterly reports on Form 10-Q
for the periods ended March 31, June 30, and September 30, 2004 filed by the
Company should no longer be relied upon.
Certain amounts in other notes to our consolidated financial statements within
this Form 10-Q have been restated to reflect the Restatement adjustments.
The Restatement reduced our income from continuing operations for the first
quarter of 2004 by $905 thousand and increased our net loss for the first
quarter of 2004 by $905 thousand.
3. Facility Consolidation Charge
In September 2004, the Company's Australian subsidiary entered into a new
facility lease arrangement which commenced in the first quarter of 2005. The
Company vacated its previous location in Australia in the first quarter of 2005
and recorded a pre-tax charge of $1.2 million, which included approximately $968
thousand for the present value of estimated lease costs, net of an anticipated
sublease and non-cash losses on the disposal of assets of approximately $235
thousand. If the Company is unsuccessful in terminating the lease, finding a
sub-lessee or if the terms of any sublease are less than this estimate, the
Company may incur additional expenses.
Reserve activity for the facility consolidation as of March 31, 2005 is as
follows (in thousands):
Lease
Termination Fixed Other Exit
Costs Assets Costs Total
----------- ------- ---------- -------
Provisions $ 968 $ 235 $ -- $ 1,203
Cash usage (90) -- -- (90)
Non-cash usage -- (221) -- (221)
------- ------- ---- -------
MARCH 31, 2005 $ 878 $ 14 $ -- $ 892
======= ======= ==== =======
Page 9 of 40
4. Discontinued Operations
Details of discontinued operations are as follows (in thousands):
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
------- -------
Revenue ................................................... $ -- $ 4,037
======= =======
Loss from discontinued operations
Net operating loss .................................... $ (27) $ (335)
Restructuring plan charges ............................ (2) (54)
Other ................................................. -- 48
------- -------
Total loss from discontinued operations ................... (29) (341)
------- -------
Gain (Loss) on disposal of discontinued operations
Restructuring plan charges (including foreign currency
translation adjustments) ........................... 335 (451)
Other ................................................. 3 (26)
Sale of Ireland ....................................... -- (3,757)
------- -------
Total gain (loss) on disposal of discontinued operations .. 338 (4,234)
------- -------
Total discontinued operations ............................. $ 309 $(4,575)
======= =======
Net assets, including reserves, related to discontinued operations are
classified in the Consolidated Balance Sheets as follows (in thousands):
MARCH 31, 2005 December 31, 2004
-------------- -----------------
Total current assets ...................... $286 $551
Other non-current assets .................. 131 137
---- ----
Total assets .............................. $417 $688
==== ====
Accounts payable and accrued expenses ..... $701 $770
---- ----
Total liabilities ......................... $701 $770
==== ====
2001 Restructuring Plan
During 2001, the Company's Board of Directors approved a restructuring plan
("2001 Restructuring Plan") that the Company began to implement in the fourth
quarter of 2001. The primary goal in adopting the 2001 Restructuring Plan was to
better position the Company for long-term and more consistent success by
improving its cost structure and divesting or closing operations in which the
Company believed potential returns were not likely to generate an acceptable
return on invested capital, therefore, certain operations were sold or otherwise
discontinued pursuant to the 2001 Restructuring Plan. In total, the 2001
Restructuring Plan resulted in a headcount reduction of approximately 350
employees across most areas of the Company, including marketing, operations,
finance and administration.
2001 Restructuring Plan specific to the China operations
Additionally, pursuant to the 2001 Restructuring Plan, the Company completed in
January 2002, through certain of its subsidiaries, the formation of a joint
venture with Hong Kong-based Chinatron Group
Page 10 of 40
Holdings Limited ("Chinatron"). Chinatron is involved in the global wireless
industry. In exchange for a 50% interest in Brightpoint China Limited pursuant
to the formation of the joint venture, the Company received Chinatron Class B
Preference Shares with a face value of $10 million. On April 29, 2002, the
Company announced that it had completed the sale of its remaining 50% interest
in Brightpoint China Limited to Chinatron. Pursuant to this transaction, the
Company received additional Chinatron Class B Preference Shares with a face
value of $11 million. In accordance with SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, the Company designated the Chinatron
Class B Preference Shares as held-to-maturity. The carrying value was $1.6
million at March 31, 2005 and December 31, 2004. Pursuant to these transactions,
Chinatron and the Company entered into a services agreement, whereby Chinatron
provides warehouse management services in Hong Kong supporting the Company's
Brightpoint Asia Limited operations managed by Persequor Limited.
As of December 31, 2003, 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. The Company recorded
losses (credits) related to the 2001 Restructuring Plan as presented below (in
thousands):
THREE MONTHS ENDED
MARCH 31,
----------------------------
2005 2004
----------- -----------
Cash charges
Other exit costs $ 2 $ 75
----------- -----------
Total cash charges 2 75
----------- -----------
Non-cash charges (credits):
Impairment of fixed and other assets -- 313
Income tax effect of restructuring actions -- (21)
Write-off of cumulative foreign currency translation adjustments (335) 138
----------- -----------
Total non-cash charges (credits) (335) 430
----------- -----------
Total restructuring plan charges (credits) $ (333) $ 505
=========== ===========
Utilization of the 2001 Restructuring Plan charges discussed above is as follows
(in thousands):
Lease Employee
Termination Termination Other Exit
Costs Costs Costs Total
----- ----- ----- -----
December 31, 2002 .. $ 205 $ 25 $ 727 $ 957
Provisions (1) ..... 6 -- 41 47
Cash usage ......... (201) (25) (214) (440)
Non-cash usage ..... -- -- (145) (145)
--------- --------- --------- ---------
December 31, 2003 .. $ 10 $ -- $ 409 $ 419
--------- --------- --------- ---------
Provisions (1) ..... -- -- 97 97
Cash usage ......... (10) -- (121) (131)
Non-cash usage ..... -- -- (309) (309)
--------- --------- --------- ---------
December 31, 2004 .. $ -- $ -- $ 76 $ 76
--------- --------- --------- ---------
PROVISIONS (1) ..... -- -- -- --
CASH USAGE ......... -- -- (39) (39)
NON-CASH USAGE ..... -- -- (3) (3)
--------- --------- --------- ---------
MARCH 31, 2005 ..... $ -- $ -- $ 34 $ 34
========= ========= ========= =========
(1) Provisions do not include items that were directly expensed in the period.
Page 11 of 40
5. Accounts Receivable Transfers
During the quarters ended March 31, 2005 and 2004, the Company entered into
certain transactions or agreements with banks and other third-party financing
organizations in Norway, Sweden, and France with respect to the sale of 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 United States generally accepted accounting
principles and, accordingly, are accounted for as off-balance sheet
arrangements. Net funds received reduced the accounts receivable outstanding
while increasing cash. Fees incurred are recorded as losses on the sale of
assets and are included as a component of "Other expenses" in the Consolidated
Statements of Operations.
Net funds received from the sales of accounts receivable for continuing
operations during the quarter ended March 31, 2005 and 2004 totaled $61 million
and $91 million, respectively. Fees, in the form of discounts, incurred in
connection with these sales totaled $199 thousand and $311 thousand during the
quarter ended March 31, 2005 and 2004, respectively. These fees are included as
a component of "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. There were no significant repurchases of accounts receivable sold
during the quarter ended March 31, 2005 and March 31, 2004. These agreements
require the Company's subsidiaries to provide collateral in the form of pledged
assets and/or, in certain situations, a guarantee by the Company of its
subsidiaries' obligations.
Pursuant to these arrangements, approximately $19 million and $27 million of
trade accounts receivable were sold to and held by banks and other third-party
financing institutions at March 31, 2005 and 2004, respectively. Amounts held by
banks or other financing institutions at March 31, 2005 were for transactions
related to the Company's Norway and Sweden arrangements. All other arrangements
have been terminated or expired.
Page 12 of 40
6. Lines of Credit and Long-term Debt
OUTSTANDING AT:
-------------------------------------
CREDIT AGREEMENTS MARCH 31, 2005 December 31, 2004
- ----------------- -------------- -----------------
- The Americas ... $ -- $ --
- Asia-Pacific ... -- --
- Europe ......... 4,563 --
------ ---------
Total ............... $4,563 $ --
====== =========
Lines of Credit -Americas Division
On September 23, 2004, the Company's primary North American operating
subsidiaries, Brightpoint North America L.P. and Wireless Fulfillment Services,
LLC (the "Borrowers"), amended their Amended and Restated Credit Facility (the
"Revolver") dated March 18, 2004, between the Borrowers and General Electric
Capital Corporation ("GE Capital"). The amendment reduced the required tangible
net worth covenant by $20 million and allows for further reductions equal to the
purchase price of any issued and outstanding shares of common stock of the
Company repurchased by the Company in the future. GE Capital acted as the agent
for a syndicate of banks (the "Lenders"). The Revolver expires in March of 2007.
The Revolver provides borrowing availability, subject to borrowing base
calculations and other limitations, of up to a maximum of $70 million and at
March 31, 2005, bears interest, at the Borrowers' option, at the prime rate plus
0.25% or LIBOR plus 1.75%. The applicable interest rate that the Borrowers are
subject to can be adjusted quarterly based upon certain financial measurements
defined in the Revolver. The Revolver is guaranteed by Brightpoint, Inc., and is
secured by, among other things, all of the Borrowers' assets. The Revolver is
subject to certain financial covenants, which include maintaining a minimum
fixed charge coverage ratio. The Revolver is a secured asset-based facility
where a borrowing base is calculated periodically using eligible accounts
receivable and inventory, subject to certain adjustments. Eligible accounts
receivable and inventories fluctuate over time, which can increase or decrease
borrowing availability. The Company also has pledged certain intellectual
property and the capital stock of certain of its subsidiaries as collateral for
the Revolver. At March 31, 2005, and December 31, 2004, there were no amounts
outstanding under the Revolver with available funding, net of the applicable
required availability minimum and letters of credit, of approximately $26
million and $33 million, respectively.
Lines of Credit - Asia-Pacific
In December of 2002, the Company's primary Australian operating subsidiary,
Brightpoint Australia Pty Ltd, entered into a revolving credit facility (the
"Facility") with GE Commercial Finance in Australia. The Facility, which matures
in December of 2005, provides borrowing availability, subject to borrowing base
calculations and other limitations, of up to a maximum amount of 50 million
Australian dollars (approximately $39 million U.S. dollars at March 31, 2005).
Borrowings under the Facility are used for general working capital purposes. The
Facility is subject to certain financial covenants, which include maintaining a
minimum fixed charge coverage ratio and bears interest at the Bank Bill Swap
Reference rate plus 2.9% (totaling 8.72% at March 31, 2005). The Facility is a
secured asset-based facility where a borrowing base is calculated periodically
using eligible accounts receivable and inventory, subject to certain
adjustments. Eligible accounts receivable and inventories fluctuate over time,
which can increase or decrease borrowing availability. At March 31, 2005, and
December 31, 2004, there was no amount outstanding under the Facility with
available funding of $33 million and $32 million, respectively.
Page 13 of 40
In July of 2003, the Company's primary operating subsidiary in the Philippines,
Brightpoint Philippines, Inc. ("Brightpoint Philippines") entered into a credit
facility with Banco de Oro. The facility, which matures in April of 2005,
provides borrowing availability, up to a maximum amount of 50 million Philippine
Pesos (approximately $910 thousand U.S. dollars, at March 31, 2005), and is
guaranteed by Brightpoint, Inc. The facility bears interest at the Prime Lending
Rate (11% at March 31, 2005). At March 31, 2005 and December 31, 2004, the
facility had no amounts outstanding with available funding of approximately $910
thousand and $889 thousand, respectively. In April of 2004, Brightpoint
Philippines entered into another credit facility with Banco de Oro. This
facility allows for letters of credit to be issued to one of Brightpoint
Philippine's main suppliers up to a total of $4 million. In January 2005, a $2
million letter of credit was issued by Banco de Oro on the Company's behalf to
Brightpoint Philippines main supplier and at March 31, 2005, the facility had no
amounts outstanding with $2 million of available funding. At December 31, 2004,
the facility had no amounts outstanding with available funding of approximately
$4 million.
In November 2003, the Company's primary operating subsidiary in New Zealand,
Brightpoint New Zealand Limited, entered into a revolving credit facility with
GE Commercial Finance in Australia. This facility, which matures in November of
2006, provides borrowing availability, subject to borrowing base calculations
and other limitations, of up to a maximum amount of 12 million New Zealand
dollars (approximately $8.5 million U.S. dollars at March 31, 2005). Borrowings
under the facility may be used for general working capital purposes. The
facility is subject to certain financial covenants, which include maintaining a
minimum fixed charge coverage ratio and bears interest at the New Zealand Index
Rate plus 3.15% (10% at March 31, 2005). The facility is a secured asset-based
facility where a borrowing base is calculated periodically using eligible
accounts receivable and inventory, subject to certain adjustments. Eligible
accounts receivable and inventories fluctuate over time, which can increase or
decrease borrowing availability. At March 31, 2005 and December 31, 2004, there
were no amounts outstanding under the facility with available funding of
approximately $6.7 million and $8.5 million, respectively.
A $15 million standby letter of credit supporting the Company's Brightpoint Asia
Limited's vendor credit line has been issued by financial institutions on the
Company's behalf and was outstanding at March 31, 2005 and December 31, 2004
secured by $12 million of cash, the assets of Brightpoint Asia Limited and a
guarantee issued by Brightpoint, Inc. The related cash collateral has been
reported under the heading "Pledged cash" in the Consolidated Balance Sheet.
Lines of Credit - Europe
The Company's primary operating subsidiary in Sweden, 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 $2.2
million U.S. dollars at March 31, 2005) and bears interest at the SEB Banken
Base plus 0.75% (2.75% at March 31, 2005). The facility is supported by a
guarantee provided by the Company. At March 31, 2005 and December 31, 2004,
there were no amounts outstanding under the facility with available funding of
approximately $2.2 million.
The Company's primary operating subsidiary in France, Brightpoint France,
entered into a short-term line of credit facility with Natexis in the first
quarter of 2005. The facility has borrowing availability of
Page 14 of 40
up to 2.5 million Euro (approximately $3.2 million U.S. dollars at March 31,
2005) and bears interest at the 3 month Euribor rate plus 2.5% (4.63% at March
31, 2005). The facility is supported by a guarantee provided by the Company. At
March 31, 2005, there was approximately $3.2 million U.S. dollars outstanding on
the facility, with no available funding. Additionally, in April 2004,
Brightpoint France, entered into a receivable sale facility with GE Factofrance.
The facility does not meet the requirements of an accounts receivable transfer
under current United States generally accepted accounting principles and
therefore amounts advanced under this facility against receivables not collected
by GE Factofrance are included on the Consolidated Balance Sheet under lines of
credit and accounts receivable. At March 31, 2005, there was approximately $1.4
million U.S. dollars outstanding on the facility.
7. Guarantees
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.
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 Note 6 to
the consolidated financial statements.
In some circumstances, the Company purchases inventory with payment terms
requiring letters of credit. As of March 31, 2005, the Company has issued $24
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 $24 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 is described in Note 5. While we do not currently anticipate the
funding of these guarantees, the maximum potential amount of future payments
under these guarantees at March 31, 2005 is approximately $19 million.
The Company has entered into indemnification agreements with its officers and
directors, to the extent permitted by law, pursuant to which the Company has
agreed to reimburse its officers and directors for legal expenses in the event
of litigation and regulatory matters. The terms of these indemnification
agreements provide for no limitation to the maximum potential future payments.
The Company has a directors and officers insurance policy that may mitigate the
potential liability and payments.
Page 15 of 40
8. Operating Segments
The Company's operations are divided into three geographic operating segments.
These operating segments represent its three divisions: The Americas,
Asia-Pacific, and Europe. These divisions all derive revenues from sales of
wireless devices, accessory programs and fees from the provision of logistics
services.
Page 16 of 40
The Company evaluates the performance of, and allocates resources to, these
segments based on operating income from continuing operations including
allocated corporate selling, general and administrative expenses. All amounts
presented below exclude the results of operations that have been discontinued. A
summary of the Company's operations by segment is presented below (in thousands)
for the quarter ended March 31, 2005 and 2004:
Product Logistics
Distribution Services Total Operating
Revenue from Revenue from Revenue Income from
External External from External Continuing
Customers Customers Customers Operations (1)
----------- ----------- ----------- -----------
MARCH 31, 2005:
THE AMERICAS $ 99,074 $ 33,953 $ 133,027 $ 5,535
ASIA-PACIFIC 245,615 7,304 252,919 1,135
EUROPE 62,036 37,632 99,668 (2,430)
----------- ----------- ----------- -----------
$ 406,725 $ 78,889 $ 485,614 $ 4,240
=========== =========== =========== ===========
March 31, 2004:
The Americas $ 95,469 $ 22,827 $ 118,296 $ 2,775
Asia-Pacific 229,706 11,007 240,713 1,872
Europe 52,767 28,434 81,201 (454)
----------- ----------- ----------- -----------
$ 377,942 $ 62,268 $ 440,210 $ 4,193
=========== =========== =========== ===========
(1) Certain corporate expenses are allocated to the segments based on total
revenue.
MARCH 31, December 31,
TOTAL SEGMENT ASSETS: 2005 2004
-------- --------
The Americas (2) ....... $141,979 $152,401
Asia-Pacific ........... 166,290 160,578
Europe ................. 99,430 124,605
-------- --------
$407,699 $437,584
======== ========
(2) Corporate assets are included in the Americas segment.
9. Contingencies
The Company is from time to time 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
Consolidated Financial Statements as a whole.
A Complaint was filed on January 4, 2005 against the Company in the Circuit
Court for Baltimore County, Maryland, Case No. 03-C-05-000067 CN, entitled
Iridium Satellite, LLC, Plaintiff v. Brightpoint, Inc., Defendant. The matter
was removed to the United States District Court, District of Maryland, Baltimore
Division. In the Complaint, the Plaintiff alleges claims of trover and
conversion, fraudulent misrepresentation and breach of contract. All claims
relate to the ownership and disposition of 1,500 Series 9500 satellite
telephones. The Plaintiff seeks damages in the amount of $750,000 with interest
and costs. The Company continues to dispute these claims and intends to defend
this matter vigorously.
Page 17 of 40
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
that 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. In January 2004, the Court rendered its
decision that the patents asserted by Lemelson were found to be invalid and
unenforceable. Lemelson filed an appeal to the Court of Appeals for the Federal
Circuit on June 23, 2004. The Company continues to dispute these claims and
intends to defend this matter vigorously.
Page 18 of 40
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW AND RECENT DEVELOPMENTS
This Management's Discussion and Analysis reflects the restatement of our
consolidated financial statements for the year ended December 31, 2004, as
discussed in Note 2 to the consolidated financial statements.
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,
for the year ended December 31, 2004, as amended, and have not changed
significantly. Certain statements made in this report may contain
forward-looking statements. For a description of risks and uncertainties
relating to such forward-looking statements, see the cautionary statements
contained in Exhibit 99.1 to this report and our Annual Report on Form 10-K for
the year ended December 31, 2004, as amended.
Our operating results 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 mobile 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.
Due to seasonal factors, our interim results may not be indicative of annual
results.
The Company is conducting a review of our operations in France. We are
committed to completing our evaluation of our France operations and exploring
various strategic alternatives to enhance long-term shareholder value
including, but not limited to, the sale, restructuring, closure or other
corporate action relating to all or a portion of these operations. We do not
expect to disclose developments with respect to the exploration of strategic
alternatives for our operations in France unless and until we have entered into
a definitive transaction or other action. There can be no assurance that the
Company will complete any such sale, restructuring, closure or other corporate
action relating to all or a portion of these operations.
Page 19 of 40
RESULTS OF OPERATIONS
Revenue
Three Months Ended
------------------------------------------------
(Amounts in 000s) Change
from
MARCH 31, Percent March 31, Percent Q1 2004 to
2005 of Total 2004 of Total Q1 2005
-------- -------- -------- -------- --------
REVENUE BY DIVISION:
The Americas .............................. $133,027 27% $118,296 27% 12%
Asia-Pacific .............................. 252,919 52% 240,713 55% 5%
Europe .................................... 99,668 21% 81,201 18% 23%
-------- -------- -------- -------- --------
Total ............................. $485,614 100% $440,210 100% 10%
======== ======== ======== ======== ========
REVENUE BY SERVICE LINE:
Distribution .............................. $406,725 84% $377,942 86% 8%
Logistics services ........................ 78,889 16% 62,268 14% 27%
-------- -------- -------- -------- --------
Total ............................. $485,614 100% $440,210 100% 10%
======== ======== ======== ======== ========
WIRELESS DEVICES HANDLED BY DIVISION:
The Americas .............................. 5,614 74% 3,930 69% 43%
Asia-Pacific .............................. 1,756 23% 1,544 27% 14%
Europe .................................... 254 3% 204 4% 25%
-------- -------- -------- -------- --------
Total ............................. 7,624 100% 5,678 100% 34%
======== ======== ======== ======== ========
WIRELESS DEVICES HANDLED BY SERVICE LINE:
Distribution .............................. 2,599 34% 2,370 42% 10%
Logistics services ........................ 5,025 66% 3,308 58% 52%
-------- -------- -------- -------- --------
Total ............................. 7,624 100% 5,678 100% 34%
======== ======== ======== ======== ========
Globally, the availability of feature-rich devices, compelling pricing by
manufacturers, mobile operator promotional activities and the deployment of
wireless data services caused subscribers to upgrade their wireless devices.
During the first quarter of 2005, we experienced a 34% increase in wireless
devices handled from the first quarter of 2004 with a notable mix shift from
product distribution sales to fee-based logistics services. While the number of
wireless devices handled in logistics services and distribution increased from
the first quarter of 2004, the growth in logistics services volumes outpaced the
growth experienced in our distribution business. As fee-based logistics services
typically generate significantly less revenue per transaction than distribution
sales, the sales mix shift from units handled through distribution to logistics
services resulted in a 10% year-over-year increase in revenue despite the 34%
increase in total wireless devices handled. A 52% increase in wireless devices
handled through our fee-based logistics services business, which was due to
significant increases in demand by logistics customers in our Americas division,
and to a lesser extent, our entry into the Slovak Republic in July 2004, was a
primary driver for the increase in logistics services revenue. Additionally, the
increase in revenue was positively affected by the 14% increase in wireless
devices sold in our Asia-Pacific division, which due to strong demand for
wireless devices in Australia and in markets served by our Brightpoint Asia
Limited operations and partially offset by reduced unit volumes in the
Philippines.
Wireless devices handled, as compared to the first quarter of 2004:
Page 20 of 40
The number of wireless devices sold through our distribution business
increased 10%, primarily as a result of strong market demand in the
Asia-Pacific division. In particular, the increase in volumes was driven
by strong market demand in Australia and in markets served by our
Brightpoint Asia Limited operations due to continued promotional
activities by mobile operators. Partially offsetting the growth in
distribution volumes was a 73% decline in wireless devices sold in our
operations in the Philippines due to our local mobile operator customer
purchasing products from its parent company.
The number of wireless devices handled through our logistics business
increased 52%, primarily as a result of increased demand from current
logistics services customers and the addition of new logistics services
customers in the Americas division and our entry into the Slovak Republic
in July 2004. In the United States, our unit growth has been driven by the
growth of key logistics customers (Boost Mobile, Nextel, Virgin Mobile and
TracFone, and the addition of Cricket Communications as a customer in
March 2004). Another significant driver for increased logistics services
volumes in the Americas was a 140% increase in wireless devices handled by
our operations in Colombia in response to significant promotional
activities by COMCEL, our primary customer in Colombia.
Revenue by division, as compared to the first quarter of 2004:
The 12% revenue increase in our Americas division was primarily due to a
43% increase in wireless devices handled which was partially offset by a
sales mix shift from units handled through distribution to logistics
services. The Americas division's growth in wireless devices handled was
primarily due to a 51% increase in its logistics services volumes, which
was ascribable to increased demand experienced by our mobile operator
customers, including mobile virtual network operators, the increased scope
of value-added services to some logistics customers and the addition of a
new significant customer. Revenue in the Americas division was also
positively impacted by an increase in sales of prepaid wireless airtime
and an increased level of activations in our channel services business in
the United States.
Our Asia-Pacific division experienced a 5% increase in revenue which was
primarily due to a 14% increase in wireless devices handled which was
partially offset by a 7% decline in the average selling price of wireless
devices due to a mix shift toward lower-priced CDMA handsets in India and
prepaid wireless devices in Australia. The increase in volumes was due to
strong market demand in Australia and in markets served by our Brightpoint
Asia Limited operations due to continued promotional activities by mobile
operators. Partially offsetting our Asia-Pacific division's growth in unit
volumes was a 73% decline in wireless devices sold in our operations in
the Philippines due to a local mobile operator customer purchasing
products from its parent company.
The revenue increase of 23% in the Europe division was primarily
attributable to the addition of wireless devices sold in certain markets,
strengthening of foreign currencies relative to the U.S. dollar, which
accounted for approximately 7 percentage points of the increase in
revenue, the increased sales of prepaid wireless airtime, a 6% increase,
on a constant currency basis, in the
Page 21 of 40
average selling price of wireless devices sold and our entry into the
Finnish and Slovak markets. The revenue increase was partially offset by a
decline in wireless devices sold in certain markets where seasonal
promotional campaigns did not recur.
Revenue by service line, as compared to the first quarter of 2004:
We experienced an 8% increase in revenue from distribution primarily as a
result of strong market demand in the Asia-Pacific division, the addition
of wireless devices sold in certain markets and our entry into Finland.
We experienced a 27% increase in revenue from logistics services primarily
as a result of a 52% growth rate in wireless devices handled as a result
of increased demand from current logistics services customers and the
addition of a new significant customer in the Americas, increased sales of
prepaid wireless airtime across all divisions and our entry into the
Slovak Republic. The increase in logistics services revenue was less than
the unit growth rate in wireless devices handled due to changes in the
scope and mix of services and related tiered-fee structures provided to
customers.
Revenue change analysis as compared to the first quarter of 2004:
Units Revenue
----- -------
Effect of change in wireless devices handled on revenue (volume) 34% 29%
Mix shift of wireless devices handled from product distribution to fee-based logistics
services (20%)
Change in prices (4%)
Effect of foreign currency 2%
Other 3%
---
Overall percentage change in revenue 10%
===
Within the 7.6 million wireless devices handled and as compared to the 5.7
million units that we handled in the first quarter of last year, we saw a
significant sales mix shift from product distribution sales to fee-based
logistics services. Total wireless devices handled drive our profitability and
our business model benefits from activity in both product distribution and
logistics services. Shifts in sales mix from one to another can affect our
revenue line without having as much of an impact on profitability.
The table above reconciles our wireless device unit growth to our overall
revenue growth, which includes wireless device revenue through both logistics
services and distribution and other non-wireless device revenue. Although our
wireless devices handled growth was 34%, our revenue growth was 10%. Holding the
prior year's sales mix constant, this growth in wireless devices handled would
have had a 20% favorable effect on total revenue. Because we experienced a
significant shift in sales mix from higher-revenue distribution sales to
lower-revenue fee-based logistics services, the effect of the 34% increase in
volume had a lesser impact on revenue. The effect was more noticeable in gross
profit and gross margin, which grew 18% and was up 0.3 percentage points,
respectively. Logistics services grew from 58% of total wireless devices handled
in 2004 to 66% in 2005. Conversely, distribution declined from 42% to 34% of
total wireless devices handled in 2005.
Page 22 of 40
Gross Profit and Gross Margin
Gross profit by service line:
Three Months Ended Change from
----------------------------------------------------
(Amounts in 000s) MARCH 31, % of March 31, % of Q1 2004 to
2005 Total 2004 Total Q1 2005
--------- --------- --------- --------- ---------
Product distribution ........... $ 16,140 57% $ 13,282 55% 22%
Integrated logistics services .. 12,157 43% 10,786 45% 13%
--------- --------- --------- --------- ---------
Total ...................... $ 28,297 100% $ 24,068 100% 18%
========= ========= ========= ========= =========
Gross profit by service line, as compared to the first quarter of 2004:
The overall $4.2 million, or 18%, increase in gross profit was primarily
attributable to a 0.5 percentage point improvement in distribution gross
margin and an 8% increase in distribution revenue.
The $2.9 million, or 22%, increase in gross profit from distribution
revenue was primarily due to the addition of new feature-rich wireless
devices to our product portfolio in certain markets and the overall 8%
increase in wireless devices sold. These increases were partially offset
by sales of low-end lower gross margin wireless devices in certain
Asia-Pacific markets.
The $1.4 million, or 13%, increase in gross profit from logistics services
was primarily attributable to a 51% increase in wireless devices handled
in logistics services in the Americas division and the related benefit of
leveraging existing capacity, increased sales of prepaid wireless airtime
in the United States and increased subscriber activations in our channel
services business in the United States. These items were partially offset
by reduced gross margins on activation commissions in our operations in
France and reduced gross margin on sales of prepaid wireless airtime due
to pricing pressures in our Europe division.
Gross Margin by Service Line:
Three Months Ended Change from
------------------------
MARCH 31, March 31, Q1 2004 to
2005 2004 Q1 2005
--------- --------- -------------
Distribution 4.0% 3.5% 0.5% points
Logistics services 15.4% 17.3% (1.9)% points
--------- --------- -------------
Total 5.8% 5.5% 0.3% points
========= ========= =============
Gross Margin by Service Line, as compared to the first quarter of 2004:
Overall gross margin increased from 5.5% to 5.8%, principally as a result
of a 34% increase in wireless devices handled and the related benefit of
leveraging existing capacity, a notable sales mix shift to fee-based
logistics services, which generally yield a higher margin, and the
addition of new feature-rich wireless devices, which generally yield a
higher margin, to our product portfolio in certain markets. These
improvements were offset by reduced gross margins on activation
commissions in our operations in France, increased sales of prepaid
wireless airtime, which yields a relatively lower gross margin, and
pricing pressures on prepaid wireless airtime margins in our Europe
division.
Page 23 of 40
Selling, General and Administrative Expenses
Three Months Ended
------------------------ Change from
(Amounts in 000s) MARCH 31, March 31, Q1 2004 to
2005 2004 Q1 2005
Selling, general and administrative
expenses $ 22,854 $ 19,874 15%
--------- ---------
As a percent of revenue 4.7% 4.5%
========= =========
SG&A expenses increased 15% in conjunction with a 10% increase in revenue and an
18% increase in gross profit, as compared to the first quarter of 2004. The
overall $3.0 million, or 15%, increase in SG&A expenses primarily resulted from
our entry into the Slovak and Finnish markets during July and August of 2004,
respectively, an increase of approximately $651 thousand in bad debt expense in
our operations in France, an estimated $633 thousand unfavorable effect from the
strengthening of foreign currencies against the U.S. dollar and approximately
$500 thousand of professional fees, travel expenses and other items pertaining
to the evaluation and negotiation of potential geographic expansion
opportunities in the Europe and Asia-Pacific divisions which we currently
believe will not be consummated.
Facility Consolidation Charge
In September 2004, our Australian subsidiary entered into a new facility lease
arrangement which commenced in the first quarter of 2005. We vacated our
previous location in Australia in the first quarter of 2005 and recorded a
pre-tax charge of $1.2 million, which included approximately $968 thousand for
the present value of estimated lease costs, net of an anticipated sublease, and
non-cash losses on the disposal of assets of approximately $235 thousand. If we
are unsuccessful in terminating the lease, finding a sub-lessee or if the terms
of any sublease are less than this estimate, we may incur additional expenses.
See Note 3 to the Consolidated Financial Statements for further discussion.
Operating Income from Continuing Operations
Three Months Ended OI Dollar
----------------------------------------------- Change from
(Amounts in 000s) MARCH 31, OI March 31, OI Q1 2004 to
2005 MARGIN 2004 Margin Q1 2005
---- ------ ---- ------ -------
The Americas $ 5,535 4.2% $ 2,775 2.3% 99%
Asia-Pacific 1,135 0.4% 1,872 0.8% (39%)
Europe (2,430) (2.4)% (454) (0.6)% (435%)
------- ------- ------- ------- -------
Operating income from continuing
operations $ 4,240 0.9% $ 4,193 1.0% 1%
======= ======= ======= ======= =======
Operating income from continuing operations increased by $47 thousand as
compared to the first quarter of 2004. The increase in operating income from
continuing operations was primarily due to a 10% increase in revenue and the
associated 18% increase in gross profit, partially offset by a 15% increase in
SG&A expenses and the $1.2 million facility consolidation charge in Australia.
Page 24 of 40
The increase in operating income from continuing operations in our Americas
division was principally due to a 43% increase in wireless devices handled,
operating leverage associated with the increased unit volumes and a reduction in
bad debt expense.
The operating loss in the Europe division was primarily due to a $3.6 million
operating loss in our France operations partially offset by a $2.0 million
increase in operating profitability in our operations in Germany due to the
addition of HTC's Qtek branded smartphones to our product portfolio in the
second half of 2004. The operating loss in France was primarily attributable to
a reduction in gross profit from activation commissions and a $651 thousand
increase in bad debt expense.
The decrease in operating income from continuing operations in our Asia-Pacific
division was primarily due to a $1.2 facility consolidation charge in Australia,
which was partially offset by a 14% increase in wireless devices handled driven
by strong demand in Australia and in markets served by our Brightpoint Asia
operations. As previously announced, our Australian operation has moved to a
larger facility in anticipation of growth opportunities. During the first
quarter of 2005, the Company recorded a pre-tax charge of $1.2 million relating
to the anticipated lease costs, net of sublease income, for the remaining term
of the previous location and other items. If we are unsuccessful in terminating
the lease of the previous location, finding a sub-lessee or if the terms of any
sublease are less than this estimate, we may incur additional expenses.
Operating income from continuing operations in the first quarter of 2005 was
also negatively effected by approximately $500 thousand of professional fees,
travel expenses and other items pertaining to the evaluation and negotiation of
potential geographic expansion opportunities in the Europe and Asia-Pacific
divisions which we currently believe will not be consummated.
Income from Continuing Operations
Three Months Ended
-------------------------- Change from
(Amounts in 000s) MARCH 31, March 31, Q1 2004 to
2005 2004 Q1 2005
Income from continuing operations $ 2,565 $ 2,354 $ 211
As a percent of revenue 0.5% 0.5%
Diluted per share $ 0.14 $ 0.12 17%
Diluted shares outstanding 18,373 19,940 (8%)
Income from continuing operations for the first quarter of 2005 increased $211
thousand, or 9%, as compared to the first quarter of 2004. The increase was
primarily attributable to a 10% increase in revenue and the associated 18%
increase in gross profit, partially offset by a 15% increase in SG&A expenses
and the $1.2 million facility consolidation charge in Australia.
Income per diluted share from continuing operations was $0.14 for the first
quarter of 2005 compared to income per diluted share from continuing operations
of $0.12 in the first quarter of 2004. The reduction in diluted shares
outstanding is attributable to the repurchase of approximately 1.8 million
shares of the Company's common stock pursuant to the previously approved and
announced share repurchase plans.
Page 25 of 40
Discontinued Operations
Three Months Ended
----------------------- Change from
(Amounts in 000s) MARCH 31, March 31, Q1 2004 to
2005 2004 Q1 2005
---- ---- -------
Loss from discontinued operations $ (29) $ (341) 91%
Gain (loss) on disposal of
discontinued operations 338 (4,234) N/M
-------- --------
Total discontinued operations $ 309 $ (4,575)
-------- --------
Diluted per share $ 0.02 $ (0.23) N/M
Diluted shares outstanding 18,373 19,940 (8%)
N/M: Not Meaningful.
The total gain from discontinued operations in the first quarter of 2005 was
primarily attributable to unrealized foreign currency translation gains caused
by the strengthening of the U.S. Dollar relative to certain foreign currencies.
On February 19, 2004, the Company's subsidiary, Brightpoint Holdings B.V.,
completed the sale of its 100% interest in Brightpoint (Ireland) Limited
("Brightpoint Ireland") to Celtic Telecom Consultants Ltd. Cash consideration
for the sale was approximately $1.7 million. During the first quarter of 2004,
we incurred a loss of $310 thousand relating to Brightpoint Ireland's results of
operations. These losses are included in the loss from discontinued operations.
Also, as a result of the sale of Brightpoint Ireland, in the first quarter of
2004, we incurred a $3.8 million loss, which is included as a part of the loss
on disposal of discontinued operations. This loss includes the non-cash
write-off of approximately $1.6 million of cumulative currency translation
adjustments.
Total discontinued operations for the first quarter of 2005 and 2004, excluding
Brightpoint Ireland, was a gain of $309 thousand and a loss of $508 thousand,
respectively. These gains and losses are a result of actions taken in 2001 and
2002 to sell, dispose or eliminate operations in certain markets and are
comprised primarily of assets written off that had became unrealizable,
professional and liquidation fees and unrealized foreign currency translation
gains and losses caused by changes in foreign currencies relative to the U.S.
dollar.
Page 26 of 40
Net Income (Loss)
Three Months Ended
--------------------------- Change from
(Amounts in 000s) MARCH 31, March 31, Q1 2004 to
2005 2004 Q1 2005
---- ---- -------
Net income (loss) $ 2,874 $ (2,221) $ 5,095
As a percent of revenue 0.6% (0.5%)
Diluted per share $ 0.16 $ (0.11) N/M
Diluted shares outstanding 18,373 19,940 (8%)
Net income for the first quarter of 2005 was $2.9 million, or $0.16 per diluted
share, compared to a net loss of $2.2 million, or $0.11 per diluted share, in
the first quarter of 2004. The reduction in diluted shares outstanding is
attributable to the repurchase of approximately 1.8 million shares of the
Company's common stock pursuant to the previously approved and announced share
repurchase plans.
The increase in net income for the first quarter of 2005 as compared to the
first quarter of 2004 is primarily due to a $4.9 million improvement in
discontinued operations and a 9% increase in income from continuing operations.
The increase in income from continuing operations was primarily attributable to
a 10% increase in revenue and the associated 18% increase in gross profit,
partially offset by a 15% increase in SG&A expenses and the $1.2 million
facility consolidation charge in Australia.
Page 27 of 40
RETURN ON INVESTED CAPITAL FROM OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
RETURN ON INVESTED CAPITAL FROM OPERATIONS ("ROIC")
We believe that it is equally important for our business to manage its balance
sheet as its statement of operations. A measurement that ties the statement of
operation performance with the balance sheet performance is Return on Invested
Capital from Operations, or ROIC. We believe if we are able to grow our earnings
while minimizing the use of invested capital, we will be optimizing shareholder
value and concurrently preserving resources in preparation for further potential
growth opportunities. We take a simple approach in calculating ROIC: we apply an
estimated average tax rate to the operating income of our continuing operations
with adjustments for unusual items, such as facility consolidation charges, and
apply this tax-adjusted operating income to our average capital base, which, in
our case, is our shareholders' equity and debt. The details of this measurement
are outlined below.
Three Months Ended Trailing Twelve Months Ended
------------------ ----------------------------
March 31, March 31, December 31, March 31, March 31, December 31,
2005 2004 2004 2005 2004 2004
--------- --------- --------- --------- --------- ---------
Operating income after taxes:
Operating income from
continuing operations $ 4,240 $ 4,193 $ 12,148 $ 30,978 $ 29,088 $ 30,931
Plus: Facility consolidation charge 1,203 -- (21) 967 1,181 (236)
Less: Estimated income taxes(1) (1,634) (1,253) (3,595) (9,350) (7,634) (8,969)
--------- --------- --------- --------- --------- ---------
Operating income after taxes $ 3,809 $ 2,940 $ 8,532 $ 22,595 $ 22,635 $ 21,726
========= ========= ========= ========= ========= =========
Invested capital:
Debt $ 4,563 $ -- $ -- $ 4,563 $ -- $ --
Shareholders' equity 147,912 147,555 150,737 147,912 147,555 150,737
--------- --------- --------- --------- --------- ---------
Invested capital $ 152,475 $ 147,555 $ 150,737 $ 152,475 $ 147,555 $ 150,737
========= ========= ========= ========= ========= =========
Average invested capital (2) $ 151,606 $ 155,673 $ 144,363 $ 143,714 $ 139,821 $ 145,977
========= ========= ========= ========= ========= =========
ROIC (3) 10% 8% 24% 16% 16% 15%
========= ========= ========= ========= ========= =========
(1) Estimated income taxes were calculated by multiplying the sum of operating
income from continuing operations and the facility consolidation charge by
the respective periods' effective tax rate.
(2) Average invested capital for quarterly periods represents the simple
average of the beginning and ending invested capital amounts for the
respective quarter. Average invested capital for the trailing twelve month
periods represents the average of the ending invested capital amounts for
the current and four prior quarter period ends.
(3) ROIC is calculated by dividing operating income after taxes by average
invested capital. ROIC for quarterly periods is stated on an annualized
basis and is calculated by dividing operating income after taxes by
average invested capital and multiplying the result by four (4) to state
ROIC on an annualized basis.
Due to seasonality, annualized quarterly ROIC in the first quarter is typically
lower than other quarters. ROIC was 10% for the first quarter as compared to 24%
in the fourth quarter of 2004.
CASH CONVERSION CYCLE
Three Months
THREE MONTHS ENDED Ended
MARCH 31, December 31,
2005 2004 2004
------- ------- -------
Days sales outstanding in accounts receivable .. 22 21 24
Days inventory on-hand ......................... 22 23 23
Days payable outstanding ....................... (37) (40) (41)
------- ------- -------
Cash conversion cycle days ................. 7 4 6
======= ======= =======
Page 28 of 40
A key source of our liquidity is our ability to invest in inventory, sell the
inventory to our customers, collect cash from our customers, and pay our
suppliers. We refer to this as the cash conversion cycle. For additional
information regarding this measurement and the detail calculation of the
components of the cash conversion cycle, please refer to our Annual Report on
Form 10-K for the year ended December 31, 2004, as amended.
During the first quarter of 2005, the cash conversion cycle increased to 7 days
from 4 days as compared to the first quarter of 2004 and 6 days as compared to
the fourth quarter of 2004.
The sequential change in the cash conversion cycle was the result of a 4-day
decrease in days payable outstanding, partially offset by a 2-day decrease in
days of sales outstanding and a 1-day decrease in days of inventory outstanding.
The decrease in days of payable outstanding was substantially due to the timing
of inventory receipts and the related payment terms from suppliers. In addition,
from time to time, we may pay our suppliers prior to the invoice due date to
take advantage of certain early payment discounts. This may consume our cash or
may cause us to borrow from lenders. The decrease in the days of sales
outstanding was mostly due to improved collections.
A cash conversion cycle of 7 days is a low number for a distribution company and
it is unlikely that we can sustain this short cycle for an extended period of
time. From time to time, we may pay our suppliers prior to the invoice due date
in order to take advantage of early settlement discounts. Increases in the cash
conversion cycle would have the effect of consuming our cash, causing us to
borrow from lenders or issuing stockholders' equity to fund the related increase
in working capital. Our potential investments in new markets may cause us to
increase our inventory levels in conditions where our customer base is
relatively new and whose purchasing behavior is less predictable. This situation
can have the effect of increasing our cash conversion cycle and consequently
consume our cash or increase our debt levels.
CONSOLIDATED STATEMENTS OF CASH FLOWS
We use the indirect method of preparing and presenting our statements of cash
flows. In our opinion, it is more practical than the direct method and provides
the reader with a good perspective and analysis of the Company's cash flows.
OPERATING ACTIVITIES
In the first quarter of 2005, net cash provided by operating activities was $4.9
million. Net cash provided by operating activities was primarily due to net
income of $2.9 million, depreciation and amortization of $3.0 million, a
reduction in pledged cash of $1.0 million and partially offset by changes in
deferred taxes of $1.8 million and a $1.3 million increase in operating assets
and liabilities consisting primarily of a changes in accounts receivable,
inventories and accounts payable.
Page 29 of 40
MARCH 31, December 31,
(Amounts in 000s) 2005 2004
- ----------------- ---- ----
Working capital .... $ 92,242 $ 94,667
Current ratio ...... 1.36:1 1.33:1
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. We believe that positive 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.
INVESTING ACTIVITIES
In the first quarter of 2005, net cash used by investing activities was $4.3
million. Net cash used by investing activities was primarily due to $2.2 million
used for capital expenditures and a $1.8 million increase in funded contract
financing receivables. Capital expenditures were primarily directed toward
improving our information systems, particularly in the United States, the
expansion of our warranty and non-warranty repair business in India and moving
our operations in Australia into a new facility. 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. The increase in contract financing receivables
is due to timing of product receipts at the end of the quarter.
FINANCING ACTIVITIES
In the first quarter of 2005, net cash provided by financing activities was $584
thousand. Net cash provided by financing activities was primarily comprised of
net borrowings on credit facilities of $4.7 million partially offset by $4.4
million of repurchases of our common stock. On November 30, 2004, we announced
that our Board of Directors had approved a share repurchase program authorizing
the Company to repurchase up to $20 million of the Company's common stock by
December 31, 2005. During the first quarter of 2005, the Company repurchased
approximately 227 thousand shares of its own common stock at an average price of
$19.35 per share, totaling $4.4 million. As of March 31, 2005, approximately
$11.6 million may be used to purchase shares under this program. Detail of the
repurchases is provided in the table below.
Issuer purchases of equity securities:
Total number of shares Total amount Maximum dollar value of
Total number purchased as part of purchased as part shares that may yet be
Month of purchase of shares Average price the publicly announced of the publicly purchased under the
purchased paid per share program announced program program
January 2005 .......... 150,300 $19.38 150,300 $2,915,706 $13,071,524
February 2005 ......... 75,000 $19.25 75,000 $1,445,495 $11,626,029
March 2005 ............ 2,100 $18.04 2,100 $37,922 $11,588,107
------- ------ ------- ---------- -----------
Total/Average ......... 227,400 $19.35 227,400 $4,399,123 $11,588,107
======= ====== ======= ========== ===========
Page 30 of 40
LINES OF CREDIT
The table below summarizes lines of credit that were available to the Company as
of March 31, 2005:
(Amounts in 000s) Letters of Credit & Net
Commitment Gross Availability Outstanding Guarantees Availability
---------- ----------------- --------------- ------------------ ------------
North America $ 70,000 $ 28,965 $ -- $ 2,500 $ 26,465
Australia 38,645 37,534 -- 4,317 33,217
New Zealand 8,540 6,689 -- 21 6,668
Sweden 2,165 2,164 -- -- 2,164
Philippines 4,910 4,910 -- 2,000 2,910
France 4,539 4,539 4,563 -- (24)
--------- -------- ------ -------- --------
Total $ 128,799 $ 84,801 $4,563 $ 8,838 $ 71,400
========= ======== ====== ======== ========
Additional details on the above lines of credit are disclosed in Note 6 of the
Notes to Consolidated Financial Statements.
OFF-BALANCE SHEET ARRANGEMENTS - ACCOUNTS RECEIVABLES TRANSFERS
During the quarters ended March 31, 2005 and 2004, the Company entered into
certain transactions or agreements with banks and other third-party financing
organizations in Norway, Sweden, and France with respect to the sale of 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 United States generally accepted accounting
principles and, accordingly, are accounted for as off-balance sheet
arrangements. Net funds received, other than from GE Factofrance, reduced the
accounts receivable outstanding while increasing cash. Fees incurred are
recorded as losses on the sale of assets and are included as a component of
"Other expenses" in the Consolidated Statements of Operations.
Net funds received from the sales of accounts receivable for continuing
operations during the quarter ended March 31, 2005 and 2004 totaled $61 million
and $91 million, respectively. Fees, in the form of discounts, incurred in
connection with these sales totaled $199 thousand and $311 thousand during the
quarter ended March 31, 2005 and 2004, respectively. These fees are included as
a component of "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. There were no significant repurchases of accounts receivable sold
during the quarters ended March 31, 2005 and 2004. These agreements require the
Company's subsidiaries to provide collateral in the form of pledged assets
and/or, in certain situations, a guarantee by the Company of its subsidiaries'
obligations.
Page 31 of 40
Pursuant to these arrangements, approximately $19 million and $27 million of
trade accounts receivable were sold to and held by banks and other third-party
financing institutions at March 31, 2005 and 2004, respectively. Amounts held by
banks or other financing institutions at March 31, 2005 were for transactions
related to the Company's Norway and Sweden arrangements. All other arrangements
have been terminated or expired.
LIQUIDITY ANALYSIS
Our measurement for liquidity is the summation of total unrestricted cash and
unused borrowing availability. We use this measurement as an indicator of how
much access to cash we have to either grow the business through investment in
new markets, acquisitions, or through expansion of existing service or product
lines or to contend with adversity such as unforeseen operating losses
potentially caused by reduced demand for our products and services, a material
uncollectible accounts receivable, or a material inventory write-down, as
examples. The table below shows this calculation.
(Amounts in 000s) MARCH 31, December 31,
2005 2004 % Change
Unrestricted cash $ 71,198 $ 72,120 (1%)
Borrowing availability 71,400 77,146 (7%)
-------- -------- --------
Liquidity $142,598 $149,266 (4%)
======== ======== ========
As of March 31, 2005 and December 31, 2004, our liquidity was $143 million and
$149 million, respectively. The primary change in liquidity from December 31,
2004, was due to a $5.7 million, or 7%, reduction of borrowing availability due
to outstanding borrowings on our credit facilities and seasonal fluctuations in
working capital.
We routinely make large payments, in certain occasions, in excess of $10
million, to suppliers and routinely collect large payments from customers, in
certain occasions, in excess of $10 million. The timing of these payments or
collections can cause our cash balances and borrowings to fluctuate throughout
the year. During the first quarter of 2005, our largest outstanding borrowings
on a given day were approximately $27 million with an average outstanding
balance of approximately $16 million.
While it is difficult to quantify the adequacy of our liquidity for future
needs, with our cash balance and unused borrowing availability, totaling $143
million on March 31, 2005, we believe we have adequate liquidity to operate the
business with our own resources for the next 12 months and to invest in
potential growth opportunities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject us to concentrations of credit
risk consist principally of cash investments, forward currency contracts and
accounts receivable. We maintain cash investments primarily in AAA rated money
market mutual funds and overnight repurchase agreements, which have minimal
credit risk. We place forward currency contracts with high credit-quality
financial institutions
Page 32 of 40
in order to minimize credit risk exposure. Concentrations of credit risk with
respect to accounts receivable are limited due to the large number of
geographically dispersed customers. We perform ongoing credit evaluations of our
customers' financial condition and generally do not require collateral to secure
accounts receivable.
EXCHANGE RATE RISK MANAGEMENT
A substantial portion of our revenue and expenses are transacted in markets
worldwide and may be 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 and cash flows caused by
volatility in currency exchange rates by hedging. Generally, through purchase of
forward contracts, we hedge transactional currency risk, but do not hedge
foreign currency revenue or future operating income. Also, we do not hedge our
investment in foreign subsidiaries, where fluctuations in foreign currency
exchange rates may affect our comprehensive income or loss. At March 31, 2005
and December 31, 2004, the face amount of outstanding forward currency contracts
to buy U.S. dollars to hedge those currency exposures associated with certain
assets and liabilities denominated in non-functional currencies was $15 million
and $23 million, respectively. An adverse change (defined as a 10% strengthening
of the U.S. dollar) in all exchange rates, relative to our foreign currency risk
management program, would have had no material impact on our results of
operations for 2004 or 2003. At March 31, 2005, there was 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.
INTEREST RATE RISK MANAGEMENT
We are exposed to potential loss due to changes in interest rates. Investments
with interest rate risk include short-term marketable securities. Debt with
interest rate risk includes the fixed and variable rate debt. To mitigate
interest rate risks, we have, in the past, utilized interest rate swaps to
convert certain portions of our variable rate debt to fixed interest rates.
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 quarter would have resulted in only a nominal increase in interest expense.
We did not have any interest rate swaps outstanding at March 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, including the Company's Principal Executive
Officer and its Senior Vice President, Corporate Controller, Chief Accounting
Officer and acting Chief Financial Officer ("Principal Financial Officer"), has
evaluated the effectiveness of its disclosure controls and procedures
Page 33 of 40
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the
end of the period covered by this quarterly report. Based on that evaluation,
the Principal Executive Officer ad Principal Financial Officer have concluded
that, solely due to the material weaknesses described below, the Company's
disclosure controls and procedures were not effective as of December 31, 2004.
Management of the Company has revised its assessment of the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
originally included in Management's Report on Internal Control Over Financial
Reporting in the Company's annual report on Form 10-K filed on February 3, 2005.
In that report, management concluded that the Company's internal control over
financial reporting was effective as of December 31, 2004, notwithstanding the
existence of significant deficiencies that were deemed by the Company's
management not to be material weaknesses. Subsequent to filing its annual report
on Form 10-K on February 3, 2005, the Company identified errors in its 2004
financial statements and has restated those annual financial statements filed on
Form 10K/A on May 9, 2005. Management has concluded that these errors resulted
from control deficiencies that represent material weaknesses in internal control
over financial reporting. As a result, management has revised its assessment of
the effectiveness of the Company's internal control over financial reporting due
to the following identified material weaknesses:
- The Company's operations in France receive mobile operator
commission, subsidy, bonus and residual airtime revenues as a result
of subscriber activations or subscriber upgrades generated by the
Company's network of independent authorized retailers and the
Company's directly owned retail stores. The financial reporting
control procedures for certain account receivable reconciliations
and revenue recognition control procedures for proper pricing and
invoicing of these transactions failed to operate effectively and in
a timely fashion as of December 31, 2004. In addition, revenue
recognition control procedures for invoicing and cash application of
receipts related to these transactions were ineffectively designed
as of December 31, 2004. Due to errors made in recording these
transactions, the Company's operations in France overstated revenue
resulting in a related overstatement of accounts receivable. In
addition, certain other related adjustments were made in error which
did not have an impact on net income, but resulted in an overall
understatement of accounts receivable and accounts payable during
the year ended December 31, 2004.
- The Company's operations in Australia failed to identify certain
rebates that were not recorded related to a 2004 program, which
resulted in an error in the December 31, 2004 financial statements.
The communications process whereby new contracts are forwarded to
regional finance personnel did not include communicating significant
modifications to contracts. Accordingly, internal control in
relation to the communication of rebate arrangements (between the
product manager/country manager and the finance team) and
assessments as to whether the terms and conditions for rebates have
been achieved did not operate effectively. This error resulted in an
overstatement of cost of revenue and the understatement of vendor
receivables that would have reduced accounts payable, resulting in
an overstatement of accounts payable in the 2004 financial
statements.
Page 34 of 40
SUBSEQUENT CONTROL CHANGES
The Company has implemented changes in procedures for the reporting of
mobile operator commissions, subsidies and bonuses in its France operations and
rebates earned on non-financial key performance metrics in its Australia
operations and believes that these changes will assure proper recognition of
these items. As part of the assessment of its internal controls over financial
reporting, the Company has initiated immediate changes in processes in our
France and Australia operations to correct the errors that occurred and to
reduce the likelihood that similar errors could occur in the future. In
addition, management of the Company, with the assistance of certain members of
the Board of Directors, is reviewing the regional financial organizational
structure, instituting new financial reporting and revenue recognition controls
at all Brightpoint locations, performing supplementary detailed monthly review
of accounts by regional and corporate management and executing more frequent
internal audits.
The changes in the Company's internal control over financial reporting
described in the previous paragraph were implemented subsequent to the quarter
ended March 31, 2005. There were no changes in the Company's internal control
over financial reporting that occurred during the quarter ended March 31, 2005,
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
Page 35 of 40
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time 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
Consolidated Financial Statements as a whole.
A Complaint was filed on January 4, 2005 against the Company in the Circuit
Court for Baltimore County, Maryland, Case No. 03-C-05-000067 CN, entitled
Iridium Satellite, LLC, Plaintiff v. Brightpoint, Inc., Defendant. The matter
was removed to the United States District Court, District of Maryland, Baltimore
Division. In the Complaint, the Plaintiff alleges claims of trover and
conversion, fraudulent misrepresentation and breach of contract. All claims
relate to the ownership and disposition of 1,500 Series 9500 satellite
telephones. The Plaintiff seeks damages in the amount of $750,000 with interest
and costs. The Company continues to dispute these claims and intends to defend
this matter vigorously.
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
that 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. In January 2004, the Court rendered its
decision that the patents asserted by Lemelson were found to be invalid and
unenforceable. Lemelson filed an appeal to the Court of Appeals for the Federal
Circuit on June 23, 2004. The Company continues to dispute these claims and
intends to defend this matter vigorously.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On November 30, 2004, we announced that our Board of Directors had approved a
share repurchase program authorizing the Company to repurchase up to $20 million
of the Company's common stock by December 31, 2005. During the first quarter of
2005, the Company repurchased approximately 227 thousand shares of its own
common stock at an average price of $19.35 per share, totaling $4.4 million. As
of March 31, 2005, approximately $11.6 million may be used to purchase shares
under this program. Detail of the repurchases is provided in the table below.
Total number of shares Total amount Maximum dollar value of
Total number purchased as part of purchased as part shares that may yet be
of shares Average price the publicly announced of the publicly purchased under the
Month of purchase purchased paid per share program announced program program
- ----------------- --------- -------------- ---------------------- ----------------- -----------------------
January 2005 150,300 $19.38 150,300 $2,915,706 $13,071,524
February 2005 75,000 $19.25 75,000 $1,445,495 $11,626,029
March 2005 2,100 $18.04 2,100 $37,922 $11,588,107
------- ------ ------- ---------- -----------
Total/Average 227,400 $19.35 227,400 $4,399,123 $11,588,107
======= ====== ======= ========== ===========
Page 36 of 40
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
The list of exhibits is hereby incorporated by reference to the
Exhibit Index on page 39 of this report.
Page 37 of 40
PART II. OTHER INFORMATION
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: May 9, 2005 /s/ Robert J. Laikin
------------------- ---------------------------------------
Robert J. Laikin
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date: May 9, 2005 /s/ Lisa M. Kelley
------------------- ---------------------------------------
Lisa M. Kelley
Senior Vice President, Corporate Controller and
Chief Accounting Officer and acting Chief
Financial Officer (Principal Accounting Officer
and acting Principal Financial Officer)
Page 38 of 40
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 Summary Sheet of Director and Executive Officer Compensation.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, implementing
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934 implementing
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1 Cautionary Statements.
Page 39 of 40