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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, 2003
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from: to
---------------------- -----------------------
Commission file number: 0-23494
---------------------------------------------------------
BRIGHTPOINT, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 35-1778566
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State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
501 Airtech Parkway, Plainfield Indiana 46168
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(317) 707-2355
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act) [ ] Yes [X] No
Number of shares of the registrant's common stock outstanding at
May 12, 2003: 8,024,343 shares
BRIGHTPOINT, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1
Consolidated Statements of Operations
Three Months Ended March 31, 2003 and 2002................................3
Consolidated Balance Sheets
March 31, 2003 and December 31, 2002......................................4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 and 2002................................5
Notes to Consolidated Financial Statements.........................................6
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................21
ITEM 3
Quantitative and Qualitative Disclosures About Market Risk........................35
ITEM 4
Controls and Procedures...........................................................36
PART II. OTHER INFORMATION
ITEM 1
Legal Proceedings.................................................................37
ITEM 5
Other Information.................................................................38
ITEM 6
Exhibits..........................................................................38
Reports on Form 8-K...............................................................38
Signatures........................................................................39
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
---------------------------
2003 2002
----------- ----------
Revenue $ 340,190 $ 295,107
Cost of revenue 321,393 278,877
--------- ---------
Gross profit 18,797 16,230
Selling, general and administrative expenses 16,111 18,537
Facility consolidation charge 4,280 --
--------- ---------
Operating loss from continuing operations (1,594) (2,307)
Interest expense 371 2,482
Loss on extinguishment of debt 265 --
Other expenses 746 129
--------- ---------
Loss from continuing operations before income taxes (2,976) (4,918)
Income tax benefit (716) (1,621)
--------- ---------
Loss from continuing operations (2,260) (3,297)
Discontinued operations:
Loss from discontinued operations (273) (4,284)
Gain (loss) on disposal of discontinued operations (315) 376
--------- ---------
Total discontinued operations (588) (3,908)
Loss before cumulative effect of a change in accounting principle (2,848) (7,205)
Cumulative effect of a change in accounting principle, net of tax -- (40,748)
--------- ---------
Net loss $ (2,848) $ (47,953)
========= =========
Basic per share:
Loss from continuing operations $ (0.28) $ (0.41)
Discontinued operations (0.07) (0.49)
Cumulative effect of a change in accounting principle, net of tax -- (5.11)
--------- ---------
Net loss $ (0.35) $ (6.01)
========= =========
Diluted per share:
Loss from continuing operations $ (0.28) $ (0.41)
Discontinued operations (0.07) (0.49)
Cumulative effect of a change in accounting principle, net of tax -- (5.11)
--------- ---------
Net loss $ (0.35) $ (6.01)
========= =========
Weighted average common shares outstanding:
Basic 8,023 7,982
========= =========
Diluted 8,023 7,982
========= =========
See accompanying notes.
3
BRIGHTPOINT, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
MARCH 31, 2003 December 31, 2002
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 44,642 $ 43,798
Pledged cash 14,332 14,734
Accounts receivable (less allowance for doubtful
accounts of $5,501 in 2003 and $5,328 in 2002) 99,574 111,771
Inventories 77,023 73,472
Contract financing receivable 18,811 16,960
Other current assets 12,390 12,867
--------- ---------
Total current assets 266,772 273,602
Property and equipment 32,738 35,696
Goodwill and other intangibles 15,298 14,153
Other assets 12,480 12,851
--------- ---------
Total assets $ 327,288 $ 336,302
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 139,657 $ 129,621
Accrued expenses 46,924 48,816
Unfunded portion of contract financing receivable 19,502 22,102
Line of credit, short-term 49 51
Convertible notes, short-term 71 12,017
--------- ---------
Total current liabilities 206,203 212,607
--------- ---------
Long-term liabilities:
Line of credit 8,356 10,052
--------- ---------
Total long-term liabilities 8,356 10,052
--------- ---------
COMMITMENTS AND CONTINGENCIES
Stockholders' 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; 8,024 and 8,021 issued and
outstanding in 2003 and 2002, respectively 80 80
Additional paid-in capital 214,641 214,624
Retained earnings (deficit) (92,314) (89,466)
Accumulated other comprehensive loss (9,678) (11,595)
--------- ---------
Total stockholders' equity 112,729 113,643
--------- ---------
Total liabilities and stockholders' equity $ 327,288 $ 336,302
========= =========
See accompanying notes.
4
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
2003 2002
-------- --------
OPERATING ACTIVITIES
Net loss $ (2,848) $(47,953)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 3,387 2,804
Amortization of debt discount 33 1,306
Pledged cash requirements 402 (15,760)
Cumulative effect of a change in accounting principle, net of tax -- 40,748
Loss on debt extinguishment 265 --
Discontinued operations 588 3,908
Facility consolidation charge 4,280 --
Changes in operating assets and liabilities, net of
effects from acquisitions and divestitures:
Accounts receivable 15,322 22,434
Inventories (2,119) 41,280
Other operating assets 622 2,537
Accounts payable and accrued expenses (4,850) (65,707)
Net cash used by discontinued operations (114) (3,879)
-------- --------
Net cash provided (used) by operating activities 14,968 (18,282)
INVESTING ACTIVITIES
Capital expenditures (1,291) (3,069)
Purchase acquisitions, net of cash acquired (735) --
Decrease in funded contract financing receivables 1,582 12,506
Decrease in other assets 195 129
-------- --------
Net cash provided (used) by investing activities (249) 9,566
FINANCING ACTIVITIES
Net payments on revolving credit facilities (2,386) (748)
Repurchase of convertible notes (11,980) --
Proceeds from common stock issuances under employee stock
option and purchase plans 17 51
-------- --------
Net cash used by financing activities (14,349) (697)
Effect of exchange rate changes on cash and cash
Equivalents 474 59
-------- --------
Net increase (decrease) in cash and cash equivalents 844 (9,354)
Cash and cash equivalents at beginning of period 43,798 58,295
-------- --------
Cash and cash equivalents at end of period $ 44,642 $ 48,941
======== ========
See accompanying notes.
5
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
1. Basis of Presentation
GENERAL
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X of the Securities Exchange Act of 1934.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. The preparation of financial statements requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results are likely to differ
from those estimates, but management does not believe such differences will
materially affect the Company's financial position or results of operations. In
the opinion of the Company, all adjustments considered necessary to present
fairly the consolidated financial statements have been included.
The Consolidated Financial Statements include the accounts of the Company and
its wholly-owned or controlled subsidiaries. Significant intercompany accounts
and transactions have been eliminated in consolidation. Certain amounts in the
2002 Consolidated Financial Statements have been reclassified to conform to the
2003 presentation.
The consolidated balance sheet at December 31, 2002 has been derived from the
audited consolidated financial statements at that date, but does not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. The unaudited
consolidated statements of operations for the three months ended March 31, 2003
and the unaudited consolidated statement of cash flows for the three months
ended March 31, 2003 are not necessarily indicative of the operating results or
cash flows that may be expected for the entire year.
The Company has not changed its significant accounting policies from those
disclosed in its Form 10-K for the year ended December 31, 2002.
For further information, reference is made to the audited Consolidated Financial
Statements and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2002.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On April 30, 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities ("SFAS No. 149"). SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under Statement 133 and is to be applied prospectively to contracts entered into
or modified after June 30, 2003. The Company is currently evaluating the
effects, if any, that this standard will have on its results of operations and
financial position.
6
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)
1. Basis of Presentation (continued)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June of 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS
No.146). SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).
SFAS No. 146 generally requires companies to recognize costs associated with
exit activities when they are incurred rather than at the date of a commitment
to an exit or disposal plan and is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company applied the
provisions of SFAS No. 146 during the first quarter of 2003 based upon its
decision to consolidate its call center activities and close its Richmond,
California call center. See Note 2 to the Consolidated Financial Statements.
In April of 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections ("SFAS No. 145"). SFAS No. 145
rescinds both FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt ("FASB Statement No. 4"), and an amendment to that
Statement, FASB Statement No.64, Extinguishments of Debt Made to Satisfy Sinking
Fund Requirements ("FASB Statement No. 64"). FASB Statement No. 4 required that
all gains and losses from the extinguishment of debt be aggregated and, if
material, be classified as an extraordinary item, net of the related income tax
effect. Upon the adoption of SFAS No. 145, all gains and losses on the
extinguishment of debt for periods presented in the financial statements would
be classified as extraordinary items only if they meet the criteria in APB
Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of
disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions (APB No. 30). The provisions of SFAS No. 145
related to the rescission of FASB Statement No. 4 and FASB Statement No. 64
shall be applied for fiscal years beginning after May 15, 2002. The Company
adopted SFAS No. 145 on January 1, 2003 and classified amounts previously
reported as extraordinary gains or losses on debt extinguishment as a separate
line item before Income from Continuing Operations for all periods presented.
The provisions of SFAS No. 145 related to the rescission of FASB Statement No.
44, the amendment of FASB Statement No. 13 and Technical Corrections became
effective as of May 15, 2002 and did not have a material impact on the Company.
NET LOSS PER SHARE
Basic net loss per share is based on the weighted average number of common
shares outstanding during each period, and diluted net loss per share is based
on the weighted average number of common shares and dilutive common share
equivalents outstanding during each period. The Company's common share
equivalents consist of stock options and the Convertible Notes described in Note
8 to the Consolidated Financial Statements. At March 31, 2003 and 2002, the
Company's net losses resulted in no dilution of shares, therefore, no
reconciliation has been provided.
7
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)
1. Basis of Presentation (continued)
STOCK OPTIONS
The Company uses the intrinsic value method to account for stock options as
opposed to the fair value method. Under the intrinsic value method, no
compensation expense has been recognized for stock options granted to employees.
The table below presents a reconciliation of the Company's pro forma net loss
giving effect to the estimated compensation expense related to stock options
that would have been reported if the Company utilized the fair value method (in
thousands, except per share data):
THREE MONTHS ENDED MARCH 31
2003 2002
----------------------------
Net loss as reported $ (2,848) $ (47,953)
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 (267) (218)
----------------------------
Pro forma net loss $ (3,115) $ (48,171)
============================
Basic and diluted per share:
Net loss $ (0.35) $ (6.01)
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 (0.04) (0.02)
----------------------------
Pro forma net loss $ (0.39) $ (6.03)
============================
COMPREHENSIVE LOSS
Comprehensive loss is comprised of net loss and other comprehensive income
(loss). Other comprehensive income (loss) includes unrealized losses on
derivative financial instruments and gains or losses resulting from currency
translations of foreign investments. The details of comprehensive loss for the
three months ended March 31, 2003 and 2002 are as follows:
THREE MONTHS ENDED
MARCH 31
2003 2002
----------------------------
Net loss $ (2,848) $ (47,953)
Unrealized loss on derivatives - (50)
Foreign currency translation amounts 1,917 (693)
----------------------------
Comprehensive loss $ (931) $ (48,696)
============================
8
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)
2. Facility Consolidation Charge
During the first quarter of 2003, the Company began to consolidate its Richmond,
California call center operation into its Plainfield, Indiana facility to reduce
costs and increase productivity and profitability in its Americas division. The
Company recorded a pre-tax charge of $4.3 million which includes approximately
$2.8 million for the present value of estimated lease costs, net of an
anticipated sublease, non-cash losses on the disposal of assets of approximately
$1.1 million and severance and other costs of approximately $0.4 million. At
March 31, 2003, the Company had $3.2 million of reserves related to the facility
consolidation. In the second quarter of 2003, the Company anticipates recording
additional amounts of up to $0.2 million relating to severance and other costs
associated with the facility consolidation. Total cash outflows relating to the
charge were approximately $0.05 million in the first quarter of 2003 and are
expected to be approximately $0.7 million in the second quarter of 2003.
3. Discontinued Operations
The Company adopted Statement of Financial Accounting Standards No. 144 (SFAS
No. 144) at the beginning of 2002. In connection with the adoption of SFAS No.
144, the results of operations and related disposal costs, gains and losses for
business units that we have eliminated or sold are classified in discontinued
operations, for all periods presented.
During the fourth quarter of 2002, the Company and certain of its subsidiaries
sold certain operating assets of Brightpoint de Mexico, S.A. de C.V. and their
respective ownership interests in Servicios Brightpoint de Mexico, S.A. de C.V.
to Soluciones Inteligentes para el Mercado Movil, S.A. de C.V., an entity which
is wholly-owned and controlled by Brightstar de Mexico S.A. de C.V. Pursuant to
the transaction, the Company received cash consideration totaling approximately
$1.7 million and a short-term promissory note from Soluciones Inteligentes para
el Mercado Movil, S.A. de C.V. totaling approximately $1.1 million that matured
in December 2002. The repayment of the promissory note was guaranteed by
Brightstar de Mexico S.A. de C.V. The Company recorded a net loss on the
transaction of $2.2 million in 2002, which included a $3.5 million non-cash
write-off of cumulative foreign currency translation adjustments and $3.4
million in tax benefits to be realized pursuant to the transaction. In addition,
during the fourth quarter of 2002, the Company committed to a plan to sell its
Puerto Rico operations, which sale was completed in February of 2003.
Consequently, the financial results of Puerto Rico are presented in the
Consolidated Statement of Operations as "Discontinued Operations."
During the third quarter of 2002, the Company and certain of its subsidiaries
sold their respective ownership interests in Brightpoint Middle East FZE, and
its subsidiary Fono Distribution Services LLC, and Brightpoint Jordan Limited to
Persequor Limited, an entity controlled by the former Managing Director of the
Company's operations in the Middle East and certain members of his management
team. Pursuant to the transaction, the Company received two subordinated
promissory notes with face values of $1.2 million and $3.0 million that mature
in 2004 and 2006, respectively. The notes bear interest at 4% per annum and were
recorded at a discount to face value for an aggregate carrying amount at
December 31, 2002 of $3.4 million. In addition, under the Sale and Purchase
Agreement, the Company may receive additional proceeds, which are contingent
upon collection of accounts receivable from a certain customer. The Company
received $0.3 million in contingent consideration during the fourth quarter of
2002 related to the transaction. There can be no assurance the Company will
receive any additional proceeds. The Company recorded an initial loss on the
transaction of $1.6 million, including the recognition of
9
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)
3. Discontinued Operations (continued)
accumulated foreign currency translation gains of $0.3 million. This loss and
the results of operations of the Company's former Middle East operations are
reflected in discontinued operations and prior periods have been reclassified
accordingly. Concurrent with the completion of this transaction, $5 million of
cash, which was pledged by Brightpoint Holdings B.V. to support letters of
credit utilized by the Company's operations in the Middle East, was released and
was classified as unrestricted. The Company has paid and will pay management
fees, including performance based bonuses, to Persequor for providing management
services relating to the Hong Kong-based sales activities of Brightpoint Asia
Limited which the Company retained pursuant to the transaction.
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. Certain markets in which the Company operated,
including Brazil, Jamaica, South Africa, Venezuela and Zimbabwe, had unusually
high risk profiles due to many factors, including among other things, high
importation duties, currency restrictions and volatile political and economic
environments. The Company determined that the risks of operating in these
markets could no longer be justified given the profitability potential of its
operations in those markets, therefore, these operations were sold or otherwise
discontinued pursuant to the 2001 Restructuring Plan. During the fourth quarter
of 2001, the Company completed the sale of its former operations in Jamaica
(Brightpoint Jamaica Limited) pursuant to the 2001 Restructuring Plan. The
Company incurred a loss on this disposal of approximately $1.3 million ($0.8
million, net of tax).
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 Holdings Limited ("Chinatron").
Chinatron is involved in the wireless telecommunications and data industry and,
is beneficially owned, in part, by the former managing director of Brightpoint
China Limited and by a former executive of Brightpoint, Inc. In addition, Jerre
L. Stead, a director of Brightpoint, Inc. became and remains a director of
Chinatron, pursuant to the transaction. The Company's Chairman of the Board and
Chief Executive Officer, Robert J. Laikin, and the former managing director of
Brightpoint China Limited were founding shareholders of Chinatron. Prior to the
Company entering into the agreement to form the joint venture, Mr. Laikin,
disposed of his interest in Chinatron primarily through the sale of his interest
to a company owned by the former managing director of Brightpoint China Limited
and by a former executive of Brightpoint, Inc. In exchange, Mr. Laikin, received
the unconditional promise from their company to pay him $350,000 ($300,000 of
which has been paid to date). In exchange for a 50% interest in Brightpoint
China Limited pursuant to the formation of the joint venture, the Company
received preference shares in Chinatron 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 preference shares in Chinatron
with a face value of $11 million. The Company currently estimates that its
aggregate amount of Chinatron preference shares have a fair value of
approximately $2 million. 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 Hong Kong-based
Brightpoint Asia
10
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)
3. Discontinued Operations (continued)
Limited operations managed by Persequor. The Company recorded losses related to
the sale of Brightpoint China Limited to Chinatron of approximately $8.5 million
during the three months ended March 31, 2002. Upon adoption of SFAS 142, as
discussed below, the Company reclassified these losses to cumulative effect of a
change in accounting principle effective January 1, 2002 as they related to
goodwill that was required to be written-off pursuant the transitional
impairment test.
The 2001 Restructuring Plan was also intended to improve the Company's cost
structure and, accordingly, the Company's former North America and Latin America
divisions were consolidated in 2001 and are managed as one division, referred to
as the Americas. Warehouse and logistics functions formerly based in Miami were
transferred to Indianapolis and the warehouse in Miami was closed. Additionally
the Company's operations and activities in Germany, the Netherlands and Belgium,
including regional management, were consolidated into a new facility in Germany.
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. In addition, the Miami
business and its sales office were closed during the second quarter of 2002.
This closure is reflected in discontinued operations and prior periods have been
reclassified accordingly.
For the three months ended March 31, 2003 and 2002, discontinued operations
experienced net losses of $0.3 million and $4.3 million, respectively, on
revenue of $0.3 million and $56.0 million, respectively. In addition, these
operations also experienced a net loss on disposal of discontinued operations of
approximately $0.3 million during the three months ended March 31, 2003 and a
net gain of $0.4 million during the three months ended March 31, 2002. As of
March 31, 2003 the actions called for by the 2001 Restructuring Plan were
substantially complete, however, the Company expects to continue to record
adjustments through discontinued operations as necessary.
Further details of discontinued operations are as follows (in millions):
THREE MONTHS ENDED
MARCH 31
2003 2002
--------------------------------
Revenue $ 0.3 $ 56.0
================================
Net operating loss $ (0.1) $ (4.5)
Restructuring Plan charges (0.4) 0.6
Net loss related to Mexico sale (0.1) -
--------------------------------
Total discontinued operations $ (0.6) $ (3.9)
================================
11
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)
3. Discontinued Operations (continued)
At March 31, 2003, the Company had approximately $0.9 million in restructuring
reserves related to the 2001 Restructuring Plan.
Net assets related to discontinued operations are classified in the Consolidated
Balance Sheet at March 31, 2003 as follows (in millions):
Total current assets $ 7.8
Other non-current assets 0.1
-------
Total assets $ 7.9
=======
Accounts payable $ 0.6
Accrued expenses and other liabilities 3.3
-------
Total liabilities $ 3.9
=======
4. Cumulative Effect of a Change in Accounting Principle
As of January 1, 2002, the Company adopted SFAS No. 142. Pursuant to the
provisions of SFAS 142 the Company stopped amortizing goodwill as of January 1,
2002 and performs an impairment test on its goodwill at least annually. During
the second quarter of 2002, the Company completed the transitional impairment
test required under SFAS No. 142. The initial step of the impairment test was to
identify potential goodwill impairment by comparing the fair value of the
Company's reporting units to their carrying values including the applicable
goodwill. These fair values were determined by calculating the discounted free
cash flow expected to be generated by each reporting unit taking into account
what the Company considers to be the appropriate industry and market rate
assumptions. If the carrying value exceeded the fair value, then a second step
was performed, which compared the implied fair value of the applicable reporting
unit's goodwill with the carrying amount of that goodwill, to measure the amount
of goodwill impairment, if any. As a result of the initial transitional
impairment test, the Company recorded an impairment charge of approximately
$40.7 million during the first quarter of 2002, which is presented as a
cumulative effect of a change in accounting principle, net of tax, for the three
months ended March 31, 2003. On October 1, 2002, the Company performed the
required annual impairment test on its remaining goodwill and incurred no
significant additional impairment charges.
In addition to performing the required transitional impairment test on the
Company's goodwill, SFAS No. 142 required the Company to reassess the expected
useful lives of existing intangible assets including patents, trademarks and
trade names for which the useful life is determinable. At March 31, 2003, these
intangibles total $1.4 million, net of accumulated amortization of $0.9 million
and are currently being amortized as required by SFAS 142 over three to five
years at approximately $0.4 million per year. The Company incurred no impairment
charges as a result of SFAS No. 142 for intangibles with determinable useful
lives which are subject to amortization.
12
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)
4. Cumulative Effect of a Change in Accounting Principle (continued)
The changes in the carrying amount of goodwill by operating segment for the
three months ended March 31, 2003 are as follows (in thousands):
Europe Asia-Pacific Total
----------- ------------ -----------
Balance at December 31, 2002 $ 12,778 $ 280 $ 13,058
Goodwill from acquisitions 307 - 307
Effects of foreign currency fluctuation and other 480 15 495
----------- ------------ -----------
Balance at March 31, 2003 $ 13,565 $ 295 $ 13,860
=========== ============ ===========
5. Accounts Receivable Transfers
During the three months ended March 31, 2003 and 2002, the Company entered into
certain transactions or agreements with banks and other third-party financing
organizations in France, Ireland, Sweden, Australia and Mexico with respect to a
portion of its accounts receivable in order to reduce the amount of working
capital required to fund such receivables. These transactions have been treated
as sales pursuant to current accounting principles generally accepted in the
United States and, accordingly, are accounted for as off-balance sheet
arrangements.
Net funds received from the sales of accounts receivable during the three months
ended March 31, 2003 and 2002 totaled $58.1 million and $40.7 million,
respectively. Fees, in the form of discounts, incurred in connection with these
sales totaled $0.4 million and $0.9 million during the three months ended March
31, 2003 and 2002, respectively, and were recorded as losses on the sale of
assets. Approximately $0.4 million and $0.2 million during the three months
ended March 31, 2003 and 2002, respectively, of these fees relate to continuing
operations and are included as a component of "Other expenses" in the
Consolidated Statements of Operations. The remainder of the fees during the
three months ended March 31, 2002 relate to the Company's former Mexico
operation and are included in net loss from discontinued operations in the
Consolidated Statements of Operations. The Company is the collection agent on
behalf of the bank or other third-party financing organization for many of these
arrangements and has no significant retained interests or servicing liabilities
related to accounts receivable that it has sold. The Company may be required to
repurchase certain accounts receivable sold in certain circumstances, including,
but not limited to, accounts receivable in dispute or otherwise not collectible,
accounts receivable in which credit insurance is not maintained and a violation
of, the expiration or early termination of the agreement pursuant to which these
arrangements are conducted. These agreements require the Company's subsidiaries
to provide collateral in the form of pledged assets and/or in certain situations
the Company may provide a guarantee of its subsidiaries obligations. Pursuant to
these arrangements, approximately $24.2 million and $30.1 million of trade
accounts receivable were sold to and held by banks and other third-party
financing institutions at March 31, 2003 and December 31, 2002, respectively.
13
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)
6. Contract Financing Receivable
The Company offers financing of inventory and receivables to certain network
operator customers and their authorized dealer agents and wireless equipment
manufacturers under contractual arrangements. Under these arrangements, the
Company records the accounts receivable from sales on behalf of these customers
and inventory and accounts payable for product purchased under these
arrangements, however, the Company has the ability to require these customers,
subject to certain limitations, to assume the accounts receivable or repurchase
the inventory that we have purchased on their behalf. Consequently, the Company
is financing these receivables and inventory and has a receivable from these
customers for amounts it has financed. The amount financed pursuant to these
arrangements is recorded as a current asset under the caption "Contract
financing receivables" and any trade accounts payable pursuant to the
arrangements is recorded as a current liability under the heading "Unfunded
portion of contract financing receivable." The Company charges a fee for
providing these contract financing services and records revenue for these
integrated logistics services at the amount of the net margin rather than the
gross amount of the transactions. In addition, the Company has commitments under
certain contracts to provide inventory financing for these customers pursuant to
various limitations and provisions as defined in the applicable service
agreements. At March 31, 2003 and December 31, 2002, contract financing
receivables of $18.8 million and $17.0 million, respectively, included $6.1
million and $5.5 million, respectively, of wireless products located at the
Company's facilities. In addition, at March 31, 2003 and December 31, 2002, the
Company had $19.5 million and $22.1 million, respectively, in vendor payables
related to purchases made for these arrangements which it considers to be the
unfunded portion of these receivables.
The Company's contract financing activities are provided to wireless network
operators and their authorized dealer agents and wireless equipment
manufacturers located primarily throughout the United States. Decisions to grant
credit under these arrangements are generally at the discretion of the Company,
are made within guidelines established by the wireless network operators and
wireless equipment manufacturers and are subject to the Company's normal credit
granting and ongoing credit evaluation process.
7. Acquisitions and Divestitures
See Note 3 to the Consolidated Financial Statements for discussions of the
Company's divestiture activities during 2002.
During the first quarter of 2003, the Company acquired certain net assets of
three entities that provide activation and other services to the wireless
telecommunications industry in France. The purpose of these acquisitions was to
expand the Company's customer base and geographic presence in France. These
transactions were accounted for as purchases and, accordingly, the Consolidated
Financial Statements include the operating results of these businesses from the
effective dates of the acquisitions. The combined purchase price consisted of
$0.6 million in cash. As a result of these acquisitions, the Company recorded
goodwill and other intangible assets totaling approximately $0.7 million.
14
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)
8. Lines of Credit and Long-term Debt
On March 11, 1998, the Company completed the issuance of zero-coupon,
subordinated, convertible notes due in the year 2018 (Convertible Notes) with an
aggregate face value of $380 million ($1,000 per Convertible Note) and a yield
to maturity of 4.00%. The Convertible Notes were subordinated to all existing
and future senior indebtedness of the Company and all other liabilities,
including trade payables of the Company's subsidiaries. The Convertible Notes
resulted in gross proceeds to the Company of approximately $172 million (issue
price of $452.89 per Convertible Note) and required no periodic cash payments of
interest. The proceeds were used initially to reduce borrowings under the
Company's revolving credit facility and to invest in highly-liquid, short-term
investments pending use in operations.
In the first quarter of 2003 the Company repurchased 21,803 of the 21,932
Convertible Notes then outstanding. Of the repurchased Convertible Notes, 4,201
were repurchased pursuant to the exercise of a put option on March 11, 2003 by
the holders of the Convertible Notes that required the Company to repurchase
outstanding Convertible Notes at an accreted value of approximately $552 per
Convertible Note. The aggregate purchase price for all of these repurchases was
$12 million ($549 per Convertible Note) which approximated their accreted value.
As of March 31, 2003 the Company had repurchased all but 129 Convertible Notes
outstanding with an accreted value of approximately $0.07 million. On April 30,
2003, the Company redeemed all of the remaining Convertible Notes.
On October 31, 2001, the Company's primary North American operating
subsidiaries, Brightpoint North America L.P. and Wireless Fulfillment Services,
LLC (the Borrowers), entered into a new revolving credit facility, with General
Electric Capital Corporation (GE Capital) which was amended on December 21,
2001, September 27, 2002, December 13, 2002, and March 27, 2003 (the Revolver)
to provide capital for its North American operations. GE Capital acted as agent
for a syndicate of banks (the Lenders). The Revolver replaces the Company's
former Bank One multicurrency facility, does not prohibit the Company from
borrowing additional funds outside of the United States and expires in October
of 2004. The Revolver provides borrowing availability, subject to borrowing base
calculations and other limitations, of up to a maximum of $70 million and
currently bears interest, at the Borrowers' option, at the prime rate plus 1.50%
or LIBOR plus 3.00%. 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 in North America. The
Company also has pledged certain intellectual property and the capital stock of
certain of its subsidiaries as collateral for the Revolver. 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 terms of the Revolver
include negative covenants that, among other things, limit the Borrowers'
ability to sell certain assets and make certain payments outside the normal
course of business, as well as prohibit us from amending the terms of the
Convertible Notes or the Company's distribution agreement with Nokia Inc. in the
United States without the prior written consent of GE Capital. The provisions of
the Revolver are such that if the Company's borrowing availability falls between
$12.5 million and $10.0 million, the Company is subject, during such time, to a
minimum fixed charge coverage ratio as defined in the Revolver. If the Company's
borrowing availability falls below $10.0 million, the Company is then subject at
all times thereafter to a minimum fixed charge coverage ratio as defined in the
Revolver. The provisions of the Revolver require the Company to maintain at all
times a minimum borrowing availability of $7 million. Any of the following
events could cause the Company to be in default under the Revolver, including
but not limited to, (i) the expiration or termination
15
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)
8. Lines of Credit and Long-term Debt (continued)
of the Company's distribution agreement in the United States with Nokia Inc.,
(ii) a change in control of the Company, (iii) failure to maintain a tangible
net worth, subject to certain adjustments, of at least $75 million, (iv) the
borrowing availability under the Revolver falling below $7 million or (v) the
violation of the fixed charge coverage ratio, if applicable. In the event of
default, the Lenders may (i) terminate all or a portion of the Revolver with
respect to further advances or the incurrence of further letter of credit
obligations, (ii) declare all or any portion of the obligations due and payable
and require any and all of the letter of credit obligations be cash
collateralized, or (iii) exercise any rights and remedies provided to the
Lenders under the loan document or at law or equity. Additionally, the Lenders
may increase the rate of interest applicable to the advances and the letters of
credit to the default rate as defined in the agreement.
At March 31, 2003 and December 31, 2002, there were no amounts outstanding under
the Revolver and available funding, net of the applicable required availability
minimum at March 31, 2003 and December 31, 2002, was $21.4 million and $29.5
million, respectively.
In December of 2002, the Company's primary Australian operating subsidiaries,
Brightpoint Australia Pty Ltd and Advanced Portable Technologies Pty Limited,
entered into a revolving credit facility (the Facility) with GE Commercial
Finance in Australia. 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 $30.2 million U.S. Dollars at March 31, 2003). Borrowings on the
Facility were used to repay borrowings under the Company's former Westpac
overdraft facility and to repay intercompany loans with Brightpoint Holdings
B.V., the Company's primary foreign finance subsidiary. Future borrowings under
the Facility will 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 Bank Bill Swap Reference
rate plus 2.9%. 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, 2003 and December 31, 2002, there was $8.4 million
and $10.1 million outstanding, respectively, under the Facility at an interest
rate of approximately 7.6% at March 31, 2003 and 7.8% at December 31, 2002. At
March 31, 2003 there was approximately $13.1 million of unused availability
under the Facility.
Another of the Company's subsidiaries, Brightpoint Sweden AB, has a short-term
line of credit facility with SEB Finans AB. The facility has borrowing
availability of up to 15 million Swedish Krona (approximately $1.8 million U.S.
Dollars at March 31, 2003) and bears interest at 4.5%. The facility is supported
by a guarantee provided by the Company. At March 31, 2003 and December 31, 2002,
there were no amounts outstanding under this facility.
At March 31, 2003 and December 31, 2002, the Company was in compliance with the
covenants in its credit agreements.
Cash-secured letters of credits of approximately $13.0 million supporting the
Company's Brightpoint Asia Limited and Brightpoint Philippines vendor credit
lines were issued by financial institutions on behalf of the Company and are
outstanding at March 31, 2003. The related cash collateral has been reported
under the heading "Pledged Cash" in the Consolidated Balance Sheet.
16
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)
9. Operating Segments
The Company operates in markets worldwide and has three operating segments.
These operating segments represent the Company's three divisions: the Americas,
Asia-Pacific and Europe. These divisions all derive revenues from sales of
wireless handsets, accessory programs and fees from the provision of integrated
logistics services. The divisions are managed separately because of the
geographic locations in which they operate.
The Company evaluates the performance of, and allocates resources to, these
segments based on operating income (loss) from continuing operations including
allocated corporate selling, general and administrative expenses. As discussed
in Note 2 to the Consolidated Financial Statements, during the fourth quarter of
2001 the Company implemented a restructuring plan that provided for selling or
otherwise disposing of certain operations. In January of 2002, the Company
adopted SFAS No. 144 which changed the presentation of discontinued operations.
See Notes 1 and 2 to the Consolidated Financial Statements for further
discussion. A summary of the Company's operations by segment is presented below
(in thousands):
2003 2002
-------------------------------------- -----------------------------------
OPERATING INCOME OPERATING INCOME
(LOSS) FROM (LOSS) FROM
REVENUES FROM CONTINUING REVENUES FROM CONTINUING
EXTERNAL CUSTOMERS OPERATIONS EXTERNAL CUSTOMERS OPERATIONS
------------------ --------------- ------------------ ----------
THREE MONTHS ENDED
MARCH 31:
The Americas (1) $ 94,827 $ (3,507) $ 131,626 $ (501)
Asia-Pacific 176,405 1,656 111,708 1,131
Europe 68,958 257 51,773 (2,937)
--------- --------- --------- ---------
$ 340,190 $ (1,594) $ 295,107 $ (2,307)
========= ========= ========= =========
MARCH 31, DECEMBER 31,
TOTAL SEGMENT ASSETS: 2003 2002
-------- ------------
The Americas (2) (3) $146,140 $204,510
Asia-Pacific (3) 106,487 58,815
Europe (3) 74,661 72,977
-------- --------
$327,288 $336,302
======== ========
(1) Includes $4.3 million facility consolidation charge for the three months
ended March 31, 2003, which includes approximately $2.8 million for the
present value of estimated lease costs, net of an anticipated sublease,
non-cash losses on the disposal of assets of approximately $1.1 million and
severance and other costs of approximately $0.4 million.
(2) Includes assets of the Company's corporate operations.
(3) Includes assets held for sale or disposal of discontinued operations at
March 31, 2003.
17
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)
10. Contingencies
The Company and several of its executive officers and directors were named as
defendants in two complaints filed in November and December 2001, in the United
States District Court for the Southern District of Indiana, entitled Weiss v.
Brightpoint, Inc., et. al., Cause No. IP01-1796-C-T/K; and Mueller v.
Brightpoint, Inc., et. al., Cause No. IP01-1922-C-M/S. In February 2002, the
Court consolidated the Weiss and Mueller actions and appointed John Kilcoyne as
lead plaintiff in this action which is now known as In re Brightpoint, Inc.
Securities Litigation. A consolidated amended complaint was filed in April 2002.
The amended complaint, among other things, added the Company's current
independent auditors as a defendant. The action is a purported class action
asserted on behalf of all purchasers of the Company's publicly traded securities
between January 29, 1999 and January 31, 2002.
On April 29, 2003, the parties to the litigation entered into a Stipulation of
Settlement. The settlement provides for the Company's insurer, under the
Company's directors and officers liability policy to pay $5,050,000. These funds
will be used to make distributions to members of the class who timely file a
proof of claim, and to pay plaintiff's attorney's fees and expenses. On May 1,
2003, the Court issued an order preliminarily approving the settlement and
providing for notice of the settlement to the class. A hearing on final approval
of the settlement has been scheduled for July 18, 2003.
In February 2002, Nora Lee, filed a complaint in the Circuit Court, Marion
County, Indiana, Derivatively on Behalf of Nominal Defendant Brightpoint, Inc.,
vs. Robert J. Laikin, et. al. and Brightpoint, Inc. as a Nominal Defendant,
Cause No. 49C01-0202-CT-000399. The parties previously have filed a stipulation
agreeing to stay all proceedings in this derivative action pending a decision on
the motions to dismiss the amended complaint in the In Re: Brightpoint, Inc.
Securities Litigation action.
On April 30, 2003, a Stipulation of Settlement of this derivative action was
filed with the Court. The settlement provides that the Company acknowledges it
has made certain changes in its corporate governance policies and agrees to pay
up to $275,000 for plaintiff's attorney's fees and expenses, as may be awarded
by the Court. On May 2, 2003, the Court issued an order preliminarily approving
the settlement and providing for notice of settlement. A hearing on final
approval of the settlement has been scheduled for July 2, 2003.
A complaint was filed on November 23, 2001 against the Company and 87 other
defendants in the United States District Court for the District of Arizona,
entitled Lemelson Medical, Education and Research Foundation LP v. Federal
Express Corporation, et.al., Cause No. CIV01-2287-PHX-PGR. The plaintiff claims
the Company and other defendants have infringed 7 patents alleged to cover bar
code technology. The case seeks unspecified damages, treble damages and
injunctive relief. The Court has ordered the case stayed pending the decision in
a related case in which a number of bar code equipment manufacturers have sought
a declaration that the patents asserted are invalid and unenforceable. That
trial concluded in January 2003, but the decision may not be issued for several
months. The Company disputes these claims and intends to defend vigorously this
matter.
18
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)
10. Contingencies (continued)
A complaint was filed against the Company on November 25, 2002 in the United
States District Court for the Southern District of Indiana, entitled Chanin
Capital Partners LLC v. Brightpoint, Inc., Cause No. CV-1834-JDT. The plaintiff
claims the Company breached a services contract with defendant under which the
plaintiff alleges it was entitled to receive both a monthly advisory fee of
$125,000 and an additional fee, due under certain specified circumstances, of
$1.5 million less the amount of any previously-paid monthly advisory fees. The
plaintiff seeks compensatory damages in an amount including, but not limited to
$1.5 million, less advisory fees paid and payable, plus unreimbursed reasonable
expenses, applicable pre-judgment and post-judgment statutory interest, and
reasonable costs of the action. In addition, the plaintiff claims that it is
entitled to recover $125,000 for a monthly advisory fee on a theory of account
stated. The Company disputes these claims and intends to defend this matter
vigorously.
The Company has responded to requests for information and subpoenas from the
Securities and Exchange Commission (SEC) in connection with an investigation of
certain matters including its accounting treatment of a certain contract entered
into with an insurance company. In addition, certain of the Company's officers,
directors and employees have provided testimony to the SEC.
The Company is from time to time, also involved in certain legal proceedings in
the ordinary course of conducting its business. While the ultimate liability
pursuant to these actions cannot currently be determined, the Company believes
these legal proceedings will not have a material adverse effect on its financial
position.
The Company's Certificate of Incorporation and By-laws provide for it to
indemnify its officers and directors to the extent permitted by law. In
connection therewith, the Company has entered into indemnification agreements
with its executive officers and directors. In accordance with the terms of these
agreements the Company has reimbursed certain of its former and current
executive officers and intends to reimburse its officers and directors for their
personal legal expenses arising from certain pending litigation and regulatory
matters.
The Company's subsidiary in South Africa whose operations were discontinued
pursuant to the 2001 Restructuring Plan has received an assessment from the
South Africa Revenue Service ("SARS") regarding value-added taxes the SARS
claims are due, relating to certain product sale and purchase transactions
entered into by the Company's subsidiary in South Africa from 2000 to 2002.
Although the Company's liability pursuant to this assessment by the SARS, if
any, cannot currently be determined, the Company believes the range of the
potential liability is between $0 and $1.2 million U.S. dollars (at current
exchange rates) including penalties and interest.
19
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
(UNAUDITED)
11. Subsequent Events
As more fully described in Note 3 to the Consolidated Financial Statements,
pursuant to the sale, through certain of the Company's subsidiaries, of the
Company's interests in Brightpoint Middle East FZE, its subsidiary Fono
Distribution Services LLC and Brightpoint Jordan Limited to Persequor Limited,
the Company could receive additional proceeds, which were contingent upon
collection of accounts receivable from a certain customer. In April of 2003, the
Company received an additional $1.3 in contingent consideration from Persequor
Limited related to the transaction. As of April 30, 2003, there were no further
amounts of additional contingent consideration due to the Company pursuant to
the Sale and Purchase Agreement with Persequor Limited.
On April 30, 2003, the Company and certain other parties, including certain of
the Company's officers and directors, entered into a Release Agreement with the
Company's insurance carrier relating to claims made by the Company under its
directors and officers insurance policy to recover costs incurred by the
Company, including reimbursement for costs and expenses of certain of the
Company's current and former officers and directors, relating to the shareholder
litigation and investigative matters described in Note 10 to the Consolidated
Financial Statements. Pursuant to the Release Agreement the Company received
$1.175 million in cash and agreed, among other things, not to pursue certain
claims. The settlement amount of $1.175 million will be recorded in the
Consolidated Statement of Operations in the second quarter of 2003.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW AND RECENT DEVELOPMENTS
This discussion and analysis should be read in conjunction with the accompanying
Consolidated Financial Statements and related notes. Our discussion and analysis
of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of financial statements in conformity with generally accepted accounting
principles requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of any contingent assets
and liabilities at the financial statement date and reported amounts of revenue
and expenses during the reporting period. On an on-going basis we review our
estimates and assumptions. Our estimates were based on our historical experience
and various other assumptions that we believe to be reasonable under the
circumstances. Actual results are likely to differ from those estimates under
different assumptions or conditions, but we do not believe such differences will
materially affect our financial position or results of operations. Our critical
accounting policies, the policies we believe are most important to the
presentation of our financial statements and require the most difficult,
subjective and complex judgments are outlined in our Annual Report on Form 10-K
for the year ended December 31, 2002 and have not changed significantly. Certain
statements made in this report may contain forward-looking statements. For a
description of risks and uncertainties relating to such forward-looking
statements, see the cautionary statements contained in Exhibit 99.1 to this
report and our Annual Report on Form 10-K for the year ended December 31, 2002.
In the first quarter of 2003 we repurchased 21,803 of our 21,932 outstanding
zero-coupon, subordinated convertible notes due in the year 2018 ("Convertible
Notes"). Of the repurchased Convertible Notes, 4,201 were repurchased pursuant
to the exercise of a put option on March 11, 2003 by the holders of the
Convertible Notes that required us to repurchase outstanding Convertible Notes
at an accreted value of approximately $552 per Convertible Note. The aggregate
purchase price for all of these repurchases was $12 million ($549 per
Convertible Note) which approximated their accreted value. On March 31, 2003,
129 Convertible Notes were outstanding with an accreted value of $0.07 million
and on April 30, 2003, we redeemed all of the outstanding Convertible Notes.
On February 19, 2003, we announced that we would consolidate our Richmond,
California call center operation into our Plainfield, Indiana, facility to
reduce costs and increase productivity and profitability in our Americas
division. By utilizing existing infrastructure in Plainfield, we expect to
realize annual pre-tax cost savings, beginning in the second quarter of 2003, of
approximately $2.0 million to $2.5 million. We recorded a pre-tax charge of $4.3
million relating to the facility consolidation which includes the present value
of estimated lease costs, net of an anticipated sublease, non-cash losses on the
disposal of assets, severance and other costs. In the second quarter of 2003, we
anticipate recording additional amounts of up to $0.2 million relating to
severance and other costs associated with the facility consolidation. Total cash
outflows relating to the charge were approximately $0.05 million in the first
quarter of 2003 and are expected to be approximately $0.7 million in the second
quarter of 2003.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
This discussion includes certain non-GAAP financial measures that present
operating results on a pro forma basis which exclude certain items. A "non-GAAP
financial measure" is defined as a numerical measure of a company's financial
performance, financial position or cash flows that excludes (or includes)
amounts that are included in (or excluded from) the most directly comparable
measure calculated and or presented in accordance with GAAP in the company's
financial statements. We have chosen to provide the supplemental non-GAAP
information in this discussion because we believe that it provides a meaningful
comparison of our continuing operations for the periods presented. The non-GAAP
financial measures used by us should not be considered in isolation or as a
substitute for measures of financial performance prepared in accordance with
GAAP. Reconciliations of GAAP results to non-GAAP measurements and details of
the excluded items are provided in a supplemental table later in this discussion
of results of operations.
Revenue
Revenue by Division (in thousands):
Three Months Ended
------------------------------------------------------------------------------ Change from Change from
MARCH 31, PERCENT March 31, Percent December 31, Percent Q1 2002 to Q1 Q4 2002 to
2003 OF TOTAL 2002 of Total 2002 of Total 2003 Q1 2003
------------------------------------------------------------------------------------------------------------
The Americas $94,827 28% $131,626 45% $111,476 33% (28%) (15%)
Asia-Pacific 176,405 52% 111,708 38% 154,545 45% 58% 14%
Europe 68,958 20% 51,773 17% 75,657 22% 33% (9%)
-----------------------------------------------------------------------------------------------------------
Total $340,190 100% $295,107 100% $341,678 100% 15% **
===========================================================================================================
** less than 1%
Revenue in the first quarter of 2003, was $340 million, an increase of 15% from
$295 million in the first quarter of 2002. The increase in revenue was primarily
attributable to strong market demand for our products in the Asia-Pacific
division and the strengthening of foreign currencies against the U.S. dollar,
which accounted for approximately six percentage points of the increase in
revenue. These increases were offset by a decline in revenue in the Americas
division due to a sales mix shift from product distribution revenue to fee-based
logistics services revenue, the lack of availability of certain CDMA-based
wireless devices, and the loss of customers due to industry consolidation. Total
wireless devices handled in the first quarter of 2003 were approximately 3.9
million, an increase of 11% from approximately 3.5 million wireless devices
handled in the first quarter of 2002. As compared to the fourth quarter of 2002,
revenue declined by less than 1% as strong market demand for our products in the
Asia-Pacific region was offset by declines in revenue in the Americas and Europe
divisions. These declines were primarily due to the lack of availability of
certain CDMA-based wireless devices in United States and seasonality. Total
wireless devices handled in the first quarter of 2003 declined by 6% from
approximately 4.2 million wireless devices handled in the fourth quarter of
2002.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Revenue (continued)
Revenue by Service Line (in thousands):
Three Months Ended
--------------------------------------------------------------------- Change from Change from
MARCH 31, PERCENT March 31, Percent December 31, Percent Q1 2002 to Q4 2002 to
2003 OF TOTAL 2002 of Total 2002 of Total Q1 2003 Q1 2003
-------------------------------------------------------------------------------------------------
Sales of wireless handsets $271,713 85% $227,098 77% $279,361 82% 20% (3%)
Accessory programs 16,476 5% 30,442 10% 17,696 5% (46%) (7%)
Integrated logistics
services 52,001 15% 37,567 13% 44,621 13% 38% 17%
-------------------------------------------------------------------------------------------------
Total $340,190 100% $295,107 100% $341,678 100% 15% **
=================================================================================================
** Less than 1%
Compared to the first quarter of 2002, we experienced an increase in revenue
from wireless handset sales in the first quarter of 2003 due primarily to
increased volumes in the Asia-Pacific division partially offset by decreased
handset distribution volumes in the Americas division due the factors affecting
divisional revenue discussed previously. When compared to the fourth quarter of
2002, revenues from wireless handset sales decreased slightly due primarily to
seasonal factors and the lack of availability of certain CDMA-based wireless
devices. Compared to the first quarter and fourth quarters of 2002, we
experienced decreased revenue from accessory programs during the first quarter
of 2003, particularly in the Americas division which experienced a sales mix
shift from accessory program revenue to integrated logistics services.
Additionally, many handsets now include accessories bundled with the product
that would have previously been sold separately. This has diminished overall
demand for our accessory programs. Additionally, technological advancements in
wireless devices, including extended battery life, have reduced overall demand
for certain accessory products. When compared to the first and fourth quarters
of 2002, the increase in integrated logistics services revenues during the first
quarter of 2003 reflects increased revenue from our services related to prepaid
wireless airtime in Sweden and Norway and the addition of new logistics services
customers in the United States.
Gross Profit
Three Months Ended Percent Change
------------------------------------------------------- ---------------------------------
(In thousands) MARCH 31, March 31, December 31, Q1 2002 to Q4 2002 to
2003 2002 2002 Q1 2003 Q1 2003
- ---------------------------------------------------------------------------------------------------------------
Gross profit $ 18,797 $ 16,230 $ 21,343 16% (12%)
Gross margin 5.5% 5.5% 6.2%
- ---------------------------------------------------------------------------------------------------------------
Gross profit for the first quarter of 2003, increased 16% when compared to the
first quarter of 2002 and decreased 12% when compared to the fourth quarter of
2002. Gross margin was 5.5% for the first quarter of 2003 the same as in the
first quarter of 2002, compared to gross margins of 6.2% for the fourth quarter
of 2002. The decline in gross margin from the fourth quarter of 2002 is
attributable to a higher proportion of revenue in the Asia-Pacific division,
which experienced a reduction in supplier incentives due to program changes and
which generally has lower gross margins than the Company as a whole. In
addition, in the first quarter of 2003, annual supplier incentives recorded for
certain Europe markets decreased when compared to the fourth quarter of 2002. We
accrue annual incentives and rebates based on the terms of the specific vendor
program and sales of qualifying products. Some of these programs may extend over
one or more quarterly reporting periods. Actual rebates may vary based on
volume, other sales achievement levels or negotiations with the vendor, which
could result in an increase or reduction in the estimated amounts previously
accrued.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Selling, General and Administrative Expenses
Three Months Ended Percent Change
------------------------------------------- -------------------------
(In thousands) MARCH 31, March 31, December 31, Q1 2002 to Q4 2002 to
2003 2002 2002 Q1 2003 Q1 2003
- ----------------------------------------------------------------------------------------------------
Selling, general and
administrative expenses $16,111 $18,537 $16,382 (13%) (2%)
As a percent of revenue 4.7% 6.3% 4.8%
- ----------------------------------------------------------------------------------------------------
Selling, general and administrative ("SG&A") expenses decreased by 13%, or $2.4
million, from the first quarter of 2002 to $16.1 million. SG&A declined by 2%,
or $0.3 million, from $16.4 million in the fourth quarter of 2002. SG&A expenses
declined to 4.7% of revenue from 6.3% in the first quarter of 2002 and from 4.8%
in the fourth quarter of 2002. The improvement in SG&A, in dollars and as a
percent of revenue, was driven by cost reduction action taken in 2002, which
includes the reduction in personnel costs and corporate overhead costs.
Facility Consolidation Charge
On February 19, 2003, we announced that we would consolidate our Richmond,
California call center operation into our Plainfield, Indiana, facility to
reduce costs and increase productivity and profitability in our Americas
division. We recorded a pre-tax charge of $4.3 million ($3.2 million, net of
tax) relating to the facility consolidation which includes approximately $2.8
million for the present value of estimated lease costs, net of an anticipated
sublease, non-cash losses on the disposal of assets of approximately $1.1
million and severance and other costs of approximately $0.4 million. In the
second quarter of 2003, we anticipate recording additional amounts of up to $0.2
million relating to severance and other costs associated with the facility
consolidation.
See Note 2 to the Consolidated Financial Statements for further discussion.
Operating Income (Loss) from Continuing Operations
Three Months Ended
---------------------------------------------
MARCH 31, March 31, December 31,
(In thousands) 2003 2002 2002
- --------------------------------------------------------------------------------
Operating income (loss) from
continuing operations $ (1,594) $ (2,307) $ 4,961
As a percent of revenue (0.5%) (0.8%) 1.5%
- --------------------------------------------------------------------------------
Operating loss from continuing operations (including the facility consolidation
charge) for the first quarter of 2003 was $1.6 million, an improvement of $0.7
million from the first quarter of 2002 and a decline of $6.6 million from the
fourth quarter of 2002.
Excluding the facility consolidation charge, pro forma operating income from
continuing operations was $2.7 million, an improvement of $5.0 million from the
first quarter of 2002 and a decline of $2.3 million from the fourth quarter of
2002. The improvement in pro forma operating income from continuing operations
from the first quarter of 2002 is due to the increase in revenue and the
reduction in SG&A as described above. The decline in pro forma operating income
from continuing operations from the fourth quarter of 2002 is attributable to
the reduction in gross margin as described above.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Income (Loss) from Continuing Operations
Three Months Ended
-----------------------------------------------
MARCH 31, March 31, December 31,
(In thousands) 2003 2002 2002
- --------------------------------------------------------------------------------
Income (loss) from continuing
operations $ (2,260) $ (3,297) $ 3,544
As a percent of revenue (0.7%) (1.1%) 0.9%
- --------------------------------------------------------------------------------
Loss from continuing operations for the first quarter of 2003 was $2.3 million
compared to a loss from continuing operations of $3.3 million in the first
quarter of 2002 and income from continuing operations of $3.5 million for the
fourth quarter of 2002 and was primarily attributable to the factors discussed
above in the analyses of revenue, gross margin, SG&A and the facility
consolidation charge. In addition, interest expense for the first quarter of
2003 decreased $2.1 million and $0.2 million from the first and fourth quarters
of 2002, respectively. These reductions are the direct result of the Convertible
Note repurchases discussed above and the reduction of other debt. Other expenses
for the first quarter of 2003 were $0.7 million, an increase of $0.6 million
from the first quarter of 2002. The increase from the first quarter of 2002 is
due in part to our accrual of $0.3 million in connection with the preliminary
settlement of the shareholder derivative action pending in Marion County Circuit
Court, Indianapolis, Indiana as previously announced on April 30, 2003 and fees
relating to an increased level of accounts receivable sales. As compared to the
fourth quarter of 2002, other expenses increased by $0.3 million primarily due
to the shareholder derivative action settlement costs. Loss per diluted share
from continuing operations was $0.28 for the first quarter of 2003 compared to a
loss per diluted share from continuing operations of $0.41 in the first quarter
of 2002 and income per diluted share from continuing operations of $0.44 in the
fourth quarter of 2003.
Pro Forma Income (Loss) from Continuing Operations
On a pro forma basis, income from continuing operations for the first quarter of
2003 would have been $1.1 million compared to a loss from continuing operations
of $3.3 million in the first quarter of 2002 and income from continuing
operations of $3.1 million for the fourth quarter of 2002. Pro forma income per
diluted share from continuing operations would have been $0.14 for the first
quarter of 2003 compared to a loss per diluted share from continuing operations
of $0.41 in the first quarter of 2002 and pro forma income per diluted share
from continuing operations of $0.38 in the fourth quarter of 2002. The pro forma
results for the first quarter of 2003 exclude the $4.3 million pre-tax facility
consolidation charge ($3.2 million, net of tax) and a $0.2 million loss on
extinguishment of debt, net of tax. The pro forma results for the first quarter
of 2002 exclude the cumulative effect of a change in accounting principle (SFAS
142), net of tax, of $40.7 million. The pro forma results for the fourth quarter
of 2002 exclude a $0.5 million gain on debt extinguishment, net of tax, which
was reclassified to continuing operations in accordance with SFAS 145.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
A reconciliation of pro forma income from continuing operations to income (loss)
from continuing operations in accordance with accounting principles generally
accepted in the United States ("GAAP") is as follows:
RECONCILIATION OF PRO FORMA AMOUNTS TO GAAP
(in thousands, except per share data)
Three Months Ended
-------------------------------------
March 31, March 31, December 31,
2003 2002 2002
-------- -------- -----------
Operating income (loss) from continuing operations - GAAP
presentation $ (1,594) $ (2,307) $ 4,961
Facility consolidation charge 4,280 -- --
-------- -------- --------
Operating income (loss) from continuing operations -
Pro Forma presentation $ 2,686 $ (2,307) $ 4,961
======== ======== ========
Income (loss) from continuing operations - GAAP presentation $ (2,260) $ (3,297) $ 3,544
Facility consolidation charge, net of tax 3,231 -- --
(Gain) loss on debt extinguishment, net of tax 158 -- (452)
-------- -------- --------
Income (loss) from continuing operations - Pro Forma presentation $ 1,129 $ (3,297) $ 3,092
======== ======== ========
Net income (loss) - GAAP presentation $ (2,848) $(47,953) $ 1,261
Facility consolidation charge, net of tax 3,231 -- --
(Gain) loss on debt extinguishment, net of tax 158 -- (452)
Cumulative effect of a change in accounting principle, net of tax -- 40,748 --
-------- -------- --------
Net income (loss) - Pro Forma presentation $ 541 $ (7,205) $ 809
======== ======== ========
Per Share Amounts:
Income (loss) from continuing operations - GAAP presentation $ (0.28) $ (0.41) $ 0.44
Facility consolidation charge, net of tax 0.40 -- --
(Gain) loss on debt extinguishment, net of tax 0.02 -- (0.06)
-------- -------- --------
Income (loss) from continuing operations - Pro Forma presentation $ 0.14 $ (0.41) $ 0.38
======== ======== ========
Net income (loss) - GAAP presentation $ (0.35) $ (6.01) $ 0.16
Facility consolidation charge, net of tax 0.40 -- --
(Gain) loss on debt extinguishment, net of tax 0.02 -- (0.06)
Cumulative effect of a change in accounting principle, net of tax -- 5.11 --
-------- -------- --------
Net income (loss) - Pro Forma presentation $ 0.07 $ (0.90) $ 0.10
======== ======== ========
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Discontinued Operations
During 2002, we took action to better position ourselves for long-term and more
consistent success by divesting or closing operations in which potential returns
were not likely to generate an acceptable return on invested capital. The action
included; i) the sale, through certain of our subsidiaries, of our interests in
Brightpoint China Limited to Chinatron, ii) the sale, through certain of our
subsidiaries, of our interests in Brightpoint Middle East FZE, its subsidiary
Fono Distribution Services LLC and Brightpoint Jordan Limited to Persequor
Limited, iii) the sale, through certain of our subsidiaries, of certain
operating assets of Brightpoint de Mexico. S.A. de C.V and our respective
ownership interest in Servicios Brightpoint de Mexico, S.A. de C.V. to
Soluciones Inteligentes para el Mercado Movil, S.A. de C.V. (SIMM), an entity
which is wholly-owned and controlled by Brightstar de Mexico S.A. de C.V, iv)
closure of our Miami sales office and v) the continued execution of our 2001
restructuring plan, which called for the elimination of operations in Brazil,
Jamaica, South Africa, Venezuela and Zimbabwe and the consolidation of our
operations and activities in Germany, the Netherlands and Belgium, including
regional management, into a new facility in Germany. Net losses in the first
quarter of 2003 resulting from these actions and the related losses from the
operations of the entities eliminated by these actions totaled $0.6 million
($0.07 per share) compared to $3.9 million ($0.49 per share) in first quarter of
2002 and was comprised primarily of unrealized foreign currency translation
losses caused by the strengthening of foreign currencies relative to the U.S.
dollar. See Note 3 to the Consolidated Financial Statements for further
discussion.
Cumulative Effect of a Change in Accounting Principle
During the second quarter of 2002, we completed the goodwill and other
intangible asset impairment testing required by the adoption of SFAS 142.
Consequently, we recorded in the first quarter of 2002 an impairment charge
totaling $40.7 million relating to this change in accounting principle.
Approximately $8.5 million of this charge related to the sale of Brightpoint
China Limited to Chinatron Group Holdings Limited which was previously
classified in discontinued operations in our March 31, 2002 financial statements
and has now been reclassified to the cumulative effect of an accounting change
as a part of the adoption of SFAS 142. See Note 4 to the Consolidated Financial
Statements for further discussion.
Net Loss
As a result of the factors, charges and gains discussed above, our net loss for
the first quarter of 2003 was $2.8 million, or $0.35 per diluted share, compared
to a net loss of $48.0 million, or $6.01 per diluted share, in the first quarter
of 2002 and net income of $0.8 million, or $0.16 per diluted share, for the
fourth quarter of 2002.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
(In thousands) March 31, 2003 December 31, 2002
- --------------------------------------------------------------------------------------------
Cash and cash equivalents (includes pledged cash) $ 58,974 $ 58,532
Working capital $ 60,569 $ 60,995
Current ratio 1.29:1 1.29:1
- --------------------------------------------------------------------------------------------
We have historically satisfied our working capital requirements principally
through cash flow from operations, vendor financing, bank borrowings and the
issuance of equity and debt securities. The slight decrease in working capital
at March 31, 2003 compared to December 31, 2002 is comprised primarily of the
effect of a decrease in accounts receivable and an increase in accounts payable
partially offset by increases in inventory and funded contract financing
activities. We believe that cash flow from operations and available bank
borrowings will be sufficient to continue funding our short-term capital
requirements. However, significant changes in our business model, significant
operating losses or expansion of operations in the future may require us to seek
additional and alternative sources of capital. Consequently, there can be no
assurance that we will be able to obtain any additional funding on terms
acceptable to us or at all.
Net cash provided by operating activities was $15.0 million for the first
quarter of 2003, as compared to cash used by operating activities of $18.3
million in the first quarter of 2002. The increase in 2003 was primarily the
result of the decreased net loss and by improved working capital management in
the first quarter of 2003. Additionally, during the first quarter of 2003,
average days sales outstanding in accounts receivable were approximately 25
days, compared to approximately 38 days and 28 days for the first and fourth
quarters of 2002, respectively. During the first quarter of 2003, days inventory
on-hand were 23 days, compared to 29 days and 22 days in the first and fourth
quarters of 2002, respectively. Average days payable outstanding were 42 days
for the first quarter of 2003, compared to 40 days and 39 days for the first and
fourth quarters of 2002, respectively. These changes combined to create a
decrease in cash conversion cycle days to 6 days in the first quarter of 2003
from 27 days in the first quarter of 2002 and 11 days in the fourth quarter of
2002. This reduction was primarily the result of our efforts to reduce accounts
receivable. A cash conversion cycle of 6 days may not be sustainable. Details of
our methodology for calculating cash conversion cycle days are included in our
Annual Report on Form 10-K for the year ended December 31, 2002.
Unrestricted cash and cash equivalents at March 31, 2003 increased by
approximately $0.8 million when compared to December 31, 2002 and pledged cash
decreased by approximately $0.4 million at March 31, 2003 when compared to
December 31, 2002. The increase in unrestricted cash is primarily the result of
cash generated from operating activities offset by repurchases of Convertible
Notes during the quarter. The reduction in pledged cash is primarily the result
of the elimination of certain cash-secured letters of credit in Australia.
The reduction in accounts receivable during the first quarter of 2003 was
attributable to the successful acceleration of our accounts receivable
collection cycle and sales or financing transactions of certain accounts
receivable to banks and other financing organizations. During the three months
ended March 31, 2003 and 2002, we entered into certain transactions or
agreements with banks and other financing organizations in Ireland, Sweden,
Australia, Mexico and France with respect to a portion of our accounts
receivable in order to reduce the amount of working capital required to fund
such receivables. Certain of these transactions qualify as sales pursuant to
current accounting principles generally accepted in the United States and,
accordingly, are accounted for as off-balance sheet arrangements. Net funds
received from the sales of accounts receivable during three months ended March
31, 2003 and 2002 totaled $58.1 million and $40.7 million, respectively.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
We are the collection agent on behalf of the financing organization for many of
these arrangements. We have no significant retained interests or servicing
liabilities related to accounts receivable that we have sold, although, we may
be required to repurchase certain accounts receivable in certain circumstances
including, but not limited to, accounts receivable in dispute or otherwise not
collectible, accounts receivable in which credit insurance is not maintained and
a violation of, the expiration or early termination of the agreement pursuant to
which these arrangements are conducted. These agreements require our
subsidiaries to provide collateral in the form of pledged assets and/or in
certain situations a guarantee of our subsidiaries obligations may be given by
us. Pursuant to these arrangements, approximately $24.2 million and $30.1
million of trade accounts receivable were sold to and held by banks and other
third-party financing institutions at March 31, 2003 and December 31, 2002,
respectively. For more information on our accounts receivable transfers, see
Note 5 to the Consolidated Financial Statements. The collection of our accounts
receivable and our ability to accelerate our collection cycle through the sale
of accounts receivable is affected by several factors, including, but not
limited to, our credit granting policies, contractual provisions, our customers'
and our overall credit rating as determined by various credit rating agencies,
industry and economic conditions, the ability of the customer to provide
security, collateral or guarantees relative to credit granted by us, the
customer's and our recent operating results, financial position and cash flows
and our ability to obtain credit insurance on amounts that we are owed. Adverse
changes in any of these factors, certain of which may not be wholly in our
control, could create delays in collecting or an inability to collect our
accounts receivable which could have a material adverse effect on our financial
position, cash flows and results of operations.
At March 31, 2003, our allowance for doubtful accounts was $5.5 million compared
to $5.3 million at December 31, 2002, which we believe was adequate for the size
and nature of our receivables at those dates. Bad debt expense as a percent of
revenues was less than 1.0% for the first quarter of 2003. However, we have
incurred significant accounts receivable impairments in connection with our 1999
and 2001 restructuring plans because we ceased doing business in certain
markets, significantly reducing our ability to collect the related receivables.
Also, our accounts receivable are concentrated with network operators, agent
dealers and retailers operating in the wireless telecommunications and data
industry and delays in collection or the uncollectibility of accounts receivable
could have an adverse effect on our liquidity and working capital position. We
believe that during 2001 and 2002 many participants in the wireless
telecommunications and data industry, including certain of our customers,
experienced operating results that were below previous expectations, decreases
in overall credit ratings and increasing costs to obtain capital. We believe
this trend may continue into 2003 and could have an adverse effect on our
financial position and results of operations. We intend to offer open account
terms to additional customers, which subjects us to further credit risks,
particularly in the event that receivables are concentrated in particular
geographic markets or with particular customers. We seek to minimize losses on
credit sales by closely monitoring our customers' credit worthiness and by
obtaining, where available, credit insurance or security on open account sales
to certain customers.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The increase in inventories and corresponding increase in days inventory on-hand
during the first quarter of 2003 are due primarily to an increase in March 31,
2003 inventory levels in our Brightpoint Asia Limited operations, managed by
Persequor Limited, partially offset by a decrease in our inventory levels in the
United States. We believe the increased inventory levels in our Brightpoint Asia
Limited operations were the result of decreased demand in certain Asia markets
due to the uncertainty created by Severe Acute Respiratory Syndrome (SARS) in
those markets. With regards to inventory levels in the United States, in
December of 2002, we entered into an amendment to our distribution agreement
with a significant vendor in the United States that, among other provisions,
changed certain purchasing and invoicing processes to create a just-in-time
inventory arrangement that has allowed us to reduce the amount of inventories of
this vendor's products that we own at any given point in time. This arrangement
allowed us to reduce our inventory levels at March 31, 2003. This arrangement is
initially set to expire in June of 2003 which could impact our inventory levels
and liquidity.
We offer financing of inventory and receivables to certain network operator
customers and their agents and manufacturer customers under contractual
arrangements. Under these contracts we manage and finance inventories and
receivables for these customers resulting in a contract financing receivable.
Contract financing receivables increased to $18.8 million at March 31, 2003 from
$17.0 million at December 31, 2002. In addition, we have vendor payables of
$19.5 million and $21.1 million at March 31, 2003 and December 31, 2002,
respectively that represent the unfunded portion of these contract financing
receivables. The increase in contract financing receivables is due to slightly
increased demand being experienced by some of these customers. These receivables
included $6.1 million and $5.8 million of wireless products located at our
facilities at March 31, 2003 and December 31, 2002 respectively. In addition, we
have commitments under these contracts to provide inventory financing for these
customers pursuant to various limitations defined in the applicable service
agreements. See Note 6 to the Consolidated Financial Statements.
The increase in accounts payable at March 31, 2003 when compared to December 31,
2002 is due primarily to increased vendor payables in our Brightpoint Asia
Limited operations, managed by Persequor Limited relating to certain inventory
purchases near the end of the first quarter of 2003 and the increase in average
days payables outstanding. We rely on our suppliers to provide trade credit
facilities and favorable payment terms to adequately fund our on-going
operations and product purchases. The payment terms received from our suppliers
is dependent on several factors, including, but not limited to, our payment
history with the supplier, the suppliers credit granting policies, contractual
provisions, our overall credit rating as determined by various credit rating
agencies, our recent operating results, financial position and cash flows and
the supplier's ability to obtain credit insurance on amounts that we owe them.
Adverse changes in any of these factors, certain of which may not be wholly in
our control, could have a material adverse effect on our operations.
At March 31, 2003, net property and equipment decreased due primarily to
depreciation expense recorded in first quarter of 2003 and the write-off of
certain fixed assets in connection with the consolidation of our Richmond,
California call center to our facility in Plainfield, Indiana as discussed
previously. Capital expenditures totaled $1.3 million in the first quarter of
2003 as compared to $3.1 million in the first quarter of 2002.
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The slight increase in goodwill and other intangibles at March 31, 2003 as
compared to December 31, 2002 is primarily the result of certain small purchase
acquisitions in France during the first quarter of 2003 and the effects of the
translation of foreign currency denominated goodwill and other intangibles as
foreign currencies strengthened against the U.S. dollar during the first quarter
of 2003. See Note 7 to the Consolidated Financial Statements for further
discussion regarding our acquisition activities.
Net cash used by investing activities for the first quarter of 2003 was $0.2
million compared to net cash provided by investing activities of $9.6 in the
same period of 2002. The increase is due primarily to the slight increase in our
funded contract financing activities in the first quarter of 2003 as compared to
the large decrease in these activities in the first quarter of 2002.
In the first quarter of 2003 we repurchased 21,803 of our 21,932 outstanding
zero-coupon, subordinated convertible notes due in the year 2018 ("Convertible
Notes"). Of the repurchased Convertible Notes, 4,201 were repurchased pursuant
to the exercise of a put option on March 11, 2003 by the holders of the
Convertible Notes that required us to repurchase outstanding Convertible Notes
at an accreted value of approximately $552 per Convertible Note. The aggregate
purchase price for all of these repurchases was $12 million ($549 per
Convertible Note) which approximated their accreted value. On March 31, 2003,
129 Convertible Notes were outstanding with an accreted value of $0.07 million
and on April 30, 2003, we redeemed all of the outstanding Convertible Notes.
On October 31, 2001, our primary North American operating subsidiaries,
Brightpoint North America L.P. and Wireless Fulfillment Services, LLC (the
Borrowers), entered into a new revolving credit facility, with General Electric
Capital Corporation (GE Capital) which was amended on December 21, 2001,
September 27, 2002, December 13, 2002, and March 27, 2003 (the Revolver) to
provide capital for our North American operations. GE Capital acted as agent for
a syndicate of banks (the Lenders). The Revolver replaces our former Bank One
multicurrency facility, does not prohibit us from borrowing additional funds
outside of the United States and expires in October of 2004. The Revolver
provides borrowing availability, subject to borrowing base calculations and
other limitations, of up to a maximum of $70 million and currently bears
interest, at the Borrowers' option, at the prime rate plus 1.50% or LIBOR plus
3.00%. 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 in North America. We also have
pledged certain intellectual property and the capital stock of certain of our
subsidiaries as collateral for the Revolver. 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 terms of the Revolver include
negative covenants that, among other things, limit the Borrowers' ability to
sell certain assets and make certain payments outside the normal course of
business, as well as prohibit us from amending the terms of the Convertible
Notes or our distribution agreement with Nokia Inc. in the United States without
the prior written consent of GE Capital. The provisions of the Revolver are such
that if our borrowing availability falls between $12.5 million and $10.0
million, we are subject, during such time, to a minimum fixed charge coverage
ratio as defined in the Revolver. If our borrowing availability falls below
$10.0 million, we are then subject at all times thereafter to a minimum fixed
charge coverage ratio as defined in the Revolver. The provisions of the Revolver
require us to maintain at all times a minimum borrowing availability of $7
million. Any of the following events could cause us to be in default under the
Revolver, including but not limited to, (i) the expiration or termination of our
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
distribution agreement in the United States with Nokia Inc., (ii) a change in
control of us, (iii) our failure to maintain a tangible net worth, subject to
certain adjustments, of at least $75 million, (iv) the borrowing availability
under the Revolver falling below $7 million or (v) the violation of the fixed
charge coverage ratio, if applicable. In the event of default, the Lenders may
(i) terminate all or a portion of the Revolver with respect to further advances
or the incurrence of further letter of credit obligations, (ii) declare all or
any portion of the obligations due and payable and require any and all of the
letter of credit obligations be cash collateralized, or (iii) exercise any
rights and remedies provided to the Lenders under the loan document or at law or
equity. Additionally, the Lenders may increase the rate of interest applicable
to the advances and the letters of credit to the default rate as defined in the
agreement.
At March 31, 2003 and December 31, 2002, there were no amounts outstanding under
the Revolver and available funding, net of the applicable required availability
minimum at March 31, 2003 and December 31, 2002, was $21.4 million and $29.5
million, respectively.
In December of 2002, our primary Australian operating subsidiaries, Brightpoint
Australia Pty Ltd and Advanced Portable Technologies Pty Limited, entered into a
revolving credit facility (the Facility) with GE Commercial Finance in
Australia. 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 $30.2
million U.S. Dollars at March 31, 2003). Borrowings on the Facility were used to
repay borrowings under the Westpac overdraft facility and to repay intercompany
loans with Brightpoint Holdings B.V., our primary foreign finance subsidiary.
Future borrowings under the Facility will 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 Bank
Bill Swap Reference rate plus 2.9%. 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, 2003 and December 31, 2002, there
was $8.4 million and $10.1 million outstanding, respectively, under the Facility
at an interest rate of approximately 7.6% at March 31, 2003 and 7.8% at December
31, 2002. At March 31, 2003 there was approximately $13.1 million of unused
availability under the Facility.
Another of our subsidiaries, Brightpoint Sweden AB, has a short-term line of
credit facility with SEB Finans AB. The facility has borrowing availability of
up to 15 million Swedish Krona (approximately $1.8 million U.S. Dollars at
March 31, 2003) and bears interest at 4.5%. The facility is supported by our
guarantee. At March 31, 2003 and December 31, 2002, there were no amounts
outstanding under this facility.
At March 31, 2003 and December 31, 2002, we were in compliance with the
covenants in our credit agreements.
Cash-secured letters of credits of approximately $13.0 million supporting our
Brightpoint Asia Limited and Brightpoint Philippines vendor credit lines have
been issued by financial institutions on our behalf and are outstanding at March
31, 2003. The related cash collateral has been reported under the heading
"Pledged Cash" in the Consolidated Balance Sheet.
Net cash used by financing activities during the first quarter of 2003 increased
when compared to the same period in 2002 due to the repurchases of Convertible
Notes discussed above.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On April 30, 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities ("SFAS No. 149"). SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under Statement 133 and is to be applied prospectively to contracts entered into
or modified after June 30, 2003. We are currently evaluating the effects, if
any, that this standard will have on our results of operations and financial
position.
In June of 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS
No.146). SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).
SFAS No. 146 generally requires companies to recognize costs associated with
exit activities when they are incurred rather than at the date of a commitment
to an exit or disposal plan and is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. We applied the provisions
of SFAS No. 146 during the first quarter of 2003 based upon our decision to
consolidate call center activities and close our Richmond, California call
center. See Note 2 to the Consolidated Financial Statements.
In April of 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections ("SFAS No. 145"). SFAS No. 145
rescinds both FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt ("FASB Statement No. 4"), and an amendment to that
Statement, FASB Statement No.64, Extinguishments of Debt Made to Satisfy Sinking
Fund Requirements ("FASB Statement No. 64"). FASB Statement No. 4 required that
all gains and losses from the extinguishment of debt be aggregated and, if
material, be classified as an extraordinary item, net of the related income tax
effect. Upon the adoption of SFAS No. 145, all gains and losses on the
extinguishment of debt for periods presented in the financial statements would
be classified as extraordinary items only if they meet the criteria in APB
Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of
disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions (APB No. 30). The provisions of SFAS No. 145
related to the rescission of FASB Statement No. 4 and FASB Statement No. 64
shall be applied for fiscal years beginning after May 15, 2002. The Company
adopted SFAS No. 145 on January 1, 2003 and classified amounts previously
reported as extraordinary gains or losses on debt extinguishment as a separate
line item before Income from Continuing Operations for all periods presented.
The provisions of SFAS No. 145 related to the rescission of FASB Statement No.
44, the amendment of FASB Statement No. 13 and Technical Corrections became
effective as of May 15, 2002 and did not have a material impact on us.
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
SUBSEQUENT EVENTS
As more fully described in Note 3 to the Consolidated Financial Statements,
pursuant to the sale, through certain of our subsidiaries, of our interests in
Brightpoint Middle East FZE, its subsidiary Fono Distribution Services LLC and
Brightpoint Jordan Limited to Persequor Limited, we could receive additional
proceeds, which were contingent upon collection of accounts receivable from a
certain customer. In April of 2003, we received an additional $1.3 in contingent
consideration from Persequor Limited related to the transaction which will be
shown as an adjustment to the loss on the transaction within discontinued
operations in the second quarter of 2003. As of April 30, 2003, there were no
further amounts of additional contingent consideration due to us pursuant to the
Sale and Purchase Agreement with Persequor Limited.
On April 30, 2003, we and certain other parties, including certain of our
officers and directors, entered into a Release Agreement with our insurance
carrier relating to claims made by us under our directors and officers insurance
policy to recover costs incurred by us, including reimbursement for costs and
expenses of certain of our current and former officers and directors, relating
to the shareholder litigation and investigative matters described in Note 10 to
the Consolidated Financial Statements. Pursuant to the Release Agreement we
received $1.175 million in cash and agreed, among other things, not to pursue
certain claims. The settlement amount of $1.175 million will be recorded in our
Consolidated Statement of Operations in the second quarter of 2003.
34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE AND FOREIGN CURRENCY EXCHANGE RATE RISKS
We are exposed to financial market risks, including changes in interest rates
and foreign currency exchange rates. To mitigate interest rate risks, we have
historically utilized interest rate swaps to convert certain portions of our
variable rate debt to fixed interest rates. To mitigate foreign currency
exchange rate risks, we periodically utilize derivative financial instruments
under the Foreign Currency Risk Management Policy approved by our Board of
Directors. We do not use derivative instruments for speculative or trading
purposes.
We are exposed to changes in interest rates on our variable interest rate
revolving lines of credit. A 10% increase in short-term borrowing rates during
the three months ended March 31, 2003, would have resulted in only a nominal
increase in interest expense. We did not have any interest rate swaps
outstanding at March 31, 2003.
A portion of our revenue and expenses are transacted in markets worldwide and
are denominated in currencies other than the U.S. Dollar. Accordingly, our
future results could be adversely affected by a variety of factors, including
changes in specific countries' political, economic or regulatory conditions and
trade protection measures.
Our foreign currency risk management program is designed to reduce but not
eliminate unanticipated fluctuations in earnings, cash flows and the value of
foreign investments caused by volatility in currency exchange rates by hedging,
where believed to be cost-effective, significant exposures with foreign currency
exchange contracts, options and foreign currency borrowings. Our hedging
programs reduce, but do not eliminate, the impact of foreign currency exchange
rate movements. An adverse change (defined as a 10% strengthening of the U.S.
Dollar) in all exchange rates would not have had a negative impact on our
results of operations for March 31, 2003, due to the aggregate losses
experienced in our foreign operations. At March 31, 2003, there were no cash
flow or net investment hedges open. Our sensitivity analysis of foreign currency
exchange rate movements does not factor in a potential change in volumes or
local currency prices of our products sold or services provided. Actual results
may differ materially from those discussed above.
35
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of our management,
including the Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), of the effectiveness of our disclosure controls and procedures. Based
on that evaluation, the CEO and CFO have concluded that our disclosure controls
and procedures are effective to ensure that information required to be disclosed
by us in reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. Subsequent to
the date of their evaluation, there were no significant changes in our internal
controls or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We and several of our executive officers and directors were named as defendants
in two complaints filed in November and December 2001, in the United States
District Court for the Southern District of Indiana, entitled Weiss v.
Brightpoint, Inc., et. al., Cause No. IP01-1796-C-T/K; and Mueller v.
Brightpoint, Inc., et. al., Cause No. IP01-1922-C-M/S. In February 2002, the
Court consolidated the Weiss and Mueller actions and appointed John Kilcoyne as
lead plaintiff in this action which is now known as In re Brightpoint, Inc.
Securities Litigation. A consolidated amended complaint was filed in April 2002.
A consolidated amended complaint was filed in April 2002. The amended complaint,
among other things, added our current independent auditors as a defendant. The
action is a purported class action asserted on behalf of all purchasers of our
publicly traded securities between January 29, 1999 and January 31, 2002.
On April 29, 2003, the parties to the litigation entered into a Stipulation of
Settlement. The settlement provides for our insurer, under our directors and
officers liability policy to pay $5,050,000. These funds will be used to make
distributions to members of the class who timely file a proof of claim, and to
pay plaintiff's attorney's fees and expenses. On May 1, 2003, the Court issued
an order preliminarily approving the settlement and providing for notice of the
settlement to the class. A hearing on final approval of the settlement has been
scheduled for July 18, 2003.
In February 2002, Nora Lee, filed a complaint in the Circuit Court, Marion
County, Indiana, Derivatively on Behalf of Nominal Defendant Brightpoint, Inc.,
vs. Robert J. Laikin, et. al. and Brightpoint, Inc. as a Nominal Defendant,
Cause No. 49C01-0202-CT-000399.The parties previously have filed a stipulation
agreeing to stay all proceedings in this derivative action pending a decision on
the motions to dismiss the amended complaint in the In Re: Brightpoint, Inc.
Securities Litigation action.
On April 30, 2003, a Stipulation of Settlement of this derivative action was
filed with the Court. The settlement provides that we acknowledge that we have
made certain changes in our corporate governance policies and agree to pay up to
$275,000 for plaintiff's attorney's fees and expenses, as may be awarded by the
Court. On May 2, 2003, the Court issued an order preliminarily approving the
settlement and providing for notice of settlement. A hearing on final approval
of the settlement has been scheduled for July 2, 2003.
A complaint was filed on November 23, 2001 against us 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 we and other
defendants have infringed 7 patents alleged to cover bar code technology. The
case seeks unspecified damages, treble damages and injunctive relief. The Court
has ordered the case stayed pending the decision in a related case in which a
number of bar code equipment manufacturers have sought a declaration that the
patents asserted are invalid and unenforceable. That trial concluded in January
2003, but the decision may not be issued for several months. We dispute these
claims and intends to defend vigorously this matter.
37
PART II. OTHER INFORMATION (CONTINUED)
Item 1. Legal Proceedings (continued)
A complaint was filed against us on November 25, 2002 in the United States
District Court for the Southern District of Indiana, entitled Chanin Capital
Partners LLC v. Brightpoint, Inc., Cause No. CV-1834-JDT. The plaintiff claims
we breached a services contract with defendant under which the plaintiff alleges
it was entitled to receive both a monthly advisory fee of $125,000 and an
additional fee, due under certain specified circumstances, of $1.5 million less
the amount of any previously-paid monthly advisory fees. The plaintiff seeks
compensatory damages in an amount including, but not limited to $1.5 million,
less advisory fees paid and payable, plus unreimbursed reasonable expenses,
applicable pre-judgment and post-judgment statutory interest, and reasonable
costs of the action. In addition, the plaintiff claims that it is entitled to
recover $125,000 for a monthly advisory fee on a theory of account stated. We
dispute these claims and intend to defend this matter vigorously.
We have responded to requests for information and subpoenas from the Securities
and Exchange Commission (SEC) in connection with an investigation of certain
matters including our accounting treatment of a certain contract entered into
with an insurance company. In addition, certain of our officers, directors and
employees have provided testimony to the SEC.
We are from time to time, also involved in certain legal proceedings in the
ordinary course of conducting our business. While the ultimate liability
pursuant to these actions cannot currently be determined, we believe these legal
proceedings will not have a material adverse effect on our financial position.
Our Certificate of Incorporation and By-laws provide for us to indemnify our
officers and directors to the extent permitted by law. In connection therewith,
we have entered into indemnification agreements with our executive officers and
directors. In accordance with the terms of these agreements we have reimbursed
certain of our former and current executive officers and intend to reimburse our
officers and directors for their personal legal expenses arising from certain
pending litigation and regulatory matters.
Item 5. Other Information
Our Audit Committee has approved the provision by our external auditor, Ernst &
Young, of the non-audit service of rendering tax advice. This disclosure is made
pursuant to Section 10A(i)(2) of the Securities Exchange Act, as added by
Section 202 of the Sarbanes-Oxley Act of 2002.
Item 6. Exhibits
(a) Exhibits
The list of exhibits is hereby incorporated by reference to the
Exhibit Index on page 42 of this report.
(b) Reports on Form 8-K
During the quarter ended March 31, 2003, we filed a Current Report on
Form 8-K for the event dated December 19, 2002 under Item 9 to report
that our subsidiary had entered into an amendment to its distribution
agreement with Nokia, Inc.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Brightpoint, Inc.
-----------------
(Registrant)
Date: May 14, 2003 /s/ Frank Terence
-------------------------- ---------------------------------------
Frank Terence
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: May 14, 2003 /s/ Gregory L. Wiles
-------------------------- ---------------------------------------
Gregory L. Wiles
Vice President and Corporate Controller
(Principal Accounting Officer)
39
Certification of Principal Executive Officer
I, Robert J. Laikin, Chairman of the Board and Chief Executive Officer of
Brightpoint, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Brightpoint, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Robert J. Laikin
----------------------------------
Robert J. Laikin
Chairman of the Board and
Chief Executive Officer
40
Certification of Principal Financial Officer
I, Frank Terence, Executive Vice President and Chief Financial Officer of
Brightpoint, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Brightpoint, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Frank Terence
----------------------------------
Frank Terence
Executive Vice President, Chief
Financial Officer and Treasurer
41
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 Amendment No. 4 dated March 27, 2003 to the Credit Agreement
among Brightpoint North America, L.P., Wireless Fulfillment
Services, LLC, the other credit parties signatory thereto, the
lenders signatory thereto and General Electric Capital
Corporation
99.1 Cautionary Statements
99.2 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
99.3 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
42