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: September 30, 2001
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: to
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Commission file number:0-23494
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BRIGHTPOINT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 35-1778566
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
6402 Corporate Drive, Indianapolis, Indiana 46278
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(Address of principal executive offices) (Zip Code)
(317) 297-6100
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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
Number of shares of common stock outstanding at November 13, 2001:
55,851,401 shares
BRIGHTPOINT, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2000 and 2001.......................4
Consolidated Balance Sheets
December 31, 2000 and September 30, 2001......................................5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and 2001.................................6
Notes to Consolidated Financial Statements.............................................7
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations................................20
ITEM 3
Quantitative and Qualitative Disclosures
About Market Risk............................................................30
PART II. OTHER INFORMATION
ITEM 1
Legal Proceedings.....................................................................31
ITEM 6
Exhibits..............................................................................31
Reports on Form 8-K...................................................................31
Signatures.....................................................................................32
BRIGHTPOINT, INC.
INTRODUCTORY NOTE
The Company issued a press release on November 13, 2001, which it filed as an
exhibit to a Form 8-K, relating to its intention to restate
its annual financial statements for 1998, 1999, 2000 and the interim periods of
2001. The effects of this restatement on the financial statements are
presented in the following Form 10-Q. See Note 10 to the Consolidated Financial
Statements for discussion of the details surrounding the restatement and
reconciliations of previously reported amounts.
The Company intends to file, as soon as practicable, amendments to its Annual
Reports on Form 10-K, with the related reports of the Company's independent
auditors, for the periods required, and to its Quarterly Reports on Form 10-Q
for the quarters ended March 31, 2001 and June 30, 2001, reflecting the effects
of the restatement discussed above.
3
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
2000 2001 2000 2001
----------- ----------- ----------- -----------
(AS RESTATED, (AS RESTATED, SEE NOTE 10)
SEE NOTE 10)
Revenue $ 517,360 $ 499,045 $ 1,456,942 $ 1,416,705
Cost of revenue 474,389 472,937 1,326,376 1,344,389
----------- ----------- ----------- -----------
Gross profit 42,971 26,108 130,566 72,316
Selling, general and administrative expenses 25,449 25,702 75,685 72,895
Unusual charges 137 3,375 5,468 3,375
----------- ----------- ----------- -----------
Income (loss) from operations 17,385 (2,969) 49,413 (3,954)
Interest expense 2,463 2,091 8,890 7,116
Other expenses 784 1,214 469 2,727
----------- ----------- ----------- -----------
Income (loss) before income taxes, minority interest
and extraordinary gain 14,138 (6,274) 40,054 (13,797)
Income taxes 4,802 614 13,605 (2,025)
----------- ----------- ----------- -----------
Income (loss) before minority interest and
extraordinary gain 9,336 (6,888) 26,449 (11,772)
Minority interest 166 (7) 295 44
----------- ----------- ----------- -----------
Income (loss) before extraordinary gain 9,170 (6,881) 26,154 (11,816)
Extraordinary gain on debt extinguishment, net of tax -- -- -- 4,623
----------- ----------- ----------- -----------
Net income (loss) $ 9,170 $ (6,881) $ 26,154 $ (7,193)
=========== =========== =========== ===========
Basic per share:
Income (loss) before extraordinary gain $ 0.16 $ (0.12) $ 0.47 $ (0.21)
Extraordinary gain on debt extinguishment, net of tax -- -- -- 0.08
----------- ----------- ----------- -----------
Net income (loss) $ 0.16 $ (0.12) $ 0.47 $ (0.13)
=========== =========== =========== ===========
Diluted per share:
Income (loss) before extraordinary gain $ 0.16 $ (0.12) $ 0.47 $ (0.21)
Extraordinary gain on debt extinguishment, net of tax -- -- -- 0.08
----------- ----------- ----------- -----------
Net income (loss) $ 0.16 $ (0.12) $ 0.47 $ (0.13)
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic 55,664 55,826 55,379 55,803
=========== =========== =========== ===========
Diluted 55,887 55,826 56,163 55,803
=========== =========== =========== ===========
See accompanying notes.
4
BRIGHTPOINT, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
December 31, 2000 September 30, 2001
----------------- ------------------
(AS RESTATED,
SEE NOTE 10)
ASSETS
Current assets:
Cash and cash equivalents $ 79,718 $ 47,682
Pledged cash -- 19,127
Accounts receivable (less allowance for doubtful
accounts of $6,548 in 2000 and $6,908 in 2001) 208,116 207,988
Inventories 226,785 157,961
Other current assets 52,059 51,501
--------- ---------
Total current assets 566,678 484,259
Property and equipment 36,763 46,890
Goodwill and other intangibles 72,390 68,198
Other assets 15,828 14,955
--------- ---------
Total assets $ 691,659 $ 614,302
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 232,159 $ 236,194
Accrued expenses 67,941 62,708
Current portion of long-term debt -- 8,715
--------- ---------
Total current liabilities 300,100 307,617
--------- ---------
Long-term debt:
Line of credit 53,685 --
Convertible notes 144,756 130,346
--------- ---------
Total long-term debt 198,441 130,346
--------- ---------
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; 55,763 and 55,838, issued and
outstanding in 2000 and 2001, respectively 558 558
Additional paid-in capital 213,714 213,913
Retained earnings (deficit) 5,277 (1,916)
Accumulated other comprehensive loss (26,431) (36,216)
--------- ---------
Total stockholders' equity 193,118 176,339
--------- ---------
Total liabilities and stockholders' equity $ 691,659 $ 614,302
========= =========
See accompanying notes
5
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Nine Months Ended September 30
2000 2001
--------- ---------
(AS RESTATED,
SEE NOTE 10)
OPERATING ACTIVITIES
Net income (loss) $ 26,154 $ (7,193)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 10,841 12,414
Amortization of debt discount 5,568 4,045
Income tax benefits from exercise of stock options 3,030 --
Extraordinary gain on debt extinguishment, net of tax -- (4,623)
Unusual charges 5,468 3,375
Minority interest and deferred taxes 295 (529)
Pledged cash requirements -- (19,127)
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable 26,403 (6,841)
Inventories (42,011) 64,298
Other operating assets 5,953 1,011
Accounts payable and accrued expenses 19,678 2,883
--------- ---------
Net cash provided by operating activities 61,379 49,713
INVESTING ACTIVITIES
Capital expenditures (9,224) (22,275)
Purchase acquisitions, net of cash acquired (4,604) (1,137)
Increase in funded contract financing receivables (1,420) (1,898)
Increase in other assets (592) (662)
--------- ---------
Net cash used by investing activities (15,840) (25,972)
FINANCING ACTIVITIES
Net proceeds (payments) on revolving credit facility 5,953 (44,961)
Repurchase of convertible notes -- (10,095)
Proceeds from common stock issuances under employee stock
option and purchase plans 6,363 188
--------- ---------
Net cash provided (used) by financing activities 12,316 (54,868)
Effect of exchange rate changes on cash and cash
equivalents (2,233) (909)
--------- ---------
Net decrease (increase) in cash and cash equivalents 55,622 (32,036)
Cash and cash equivalents at beginning of period 85,261 79,718
--------- ---------
Cash and cash equivalents at end of period $ 140,883 $ 47,682
========= =========
See accompanying notes.
6
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
1. Basis of Presentation
GENERAL
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with generally accepted accounting principles 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 generally accepted
accounting principles 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 majority-owned or controlled subsidiaries. Significant intercompany accounts
and transactions have been eliminated in consolidation. Certain amounts in the
2000 Consolidated Financial Statements have been reclassified to conform to the
2001 presentation.
The Consolidated Balance Sheet at December 31, 2000 has been derived from the
audited Consolidated Financial Statements at that date, but does not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The unaudited Consolidated
Statements of Operations for the three and nine months ended September 30, 2001
and the unaudited Consolidated Statement of Cash Flows for the nine months ended
September 30, 2001 are not necessarily indicative of the operating results or
cash flows that may be expected for the entire year.
For further information, reference is made to the audited Consolidated Financial
Statements and the notes thereto included in the Company's Annual Report on Form
10-K/A for the year ended December 31, 2000. As previously discussed, the
Company announced on November 13, 2001, that it will restate its annual
financial statements for 1998, 1999 and 2000, and its Quarterly Reports on Form
10-Q for the quarters ended March 31, 2001 and June 30, 2001. The restatement is
related to the accounting for certain insurance premiums, as discussed in detail
in Note 10 to the Consolidated Financial Statements.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is based on the weighted average number of
common shares outstanding during each period, and diluted net income (loss) per
share is based on the weighted average number of common shares and dilutive
common share equivalents outstanding during each period. The Company's common
share equivalents consist of stock options, stock warrants and the Convertible
Notes described in Note 6 to the Consolidated Financial Statements.
7
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001
(UNAUDITED)
1. Basis of Presentation (continued)
NET INCOME (LOSS) PER SHARE (CONTINUED)
The following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations for the three and
nine months ended September 30, 2000 and 2001 (amounts in thousands, except per
share data), as restated, see Note 10 to the Consolidated Financial Statements:
Three Months Ended Nine Months Ended
September 30 September 30
2000 2001 2000 2001
-------- -------- -------- --------
Basic:
Income (loss) before extraordinary gain $ 9,170 $ (6,881) $ 26,154 $(11,816)
Extraordinary gain on debt extinguishment, net of tax -- -- -- 4,623
-------- -------- -------- --------
Net income (loss) $ 9,170 $ (6,881) $ 26,154 $ (7,193)
======== ======== ======== ========
Weighted average shares outstanding 55,664 55,826 55,379 55,803
======== ======== ======== ========
Per share amount:
Income (loss) before extraordinary gain $ 0.16 $ (0.12) $ 0.47 $ (0.21)
Extraordinary gain on debt extinguishment, net of tax -- -- -- 0.08
-------- -------- -------- --------
Net income (loss) $ 0.16 $ (0.12) $ 0.47 $ (0.13)
======== ======== ======== ========
Diluted:
Income (loss) before extraordinary gain $ 9,170 $ (6,881) $ 26,154 $(11,816)
Extraordinary gain on debt extinguishment, net of tax -- -- -- 4,623
-------- -------- -------- --------
Net income (loss) $ 9,170 $ (6,881) $ 26,154 $ (7,193)
======== ======== ======== ========
Weighted average shares outstanding 55,664 55,826 55,379 55,803
Net effect of dilutive stock options and stock
warrants-based on the treasury stock method using
average market price 223 -- 784 --
-------- -------- -------- --------
Total weighted average shares outstanding 55,887 55,826 56,163 55,803
======== ======== ======== ========
Per share amount:
Income (loss) before extraordinary gain $ 0.16 $ (0.12) $ 0.47 $ (0.21)
Extraordinary gain on debt extinguishment, net of tax -- -- -- 0.08
-------- -------- -------- --------
Net income (loss) $ 0.16 $ (0.12) $ 0.47 $ (0.13)
======== ======== ======== ========
8
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001
(UNAUDITED)
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income (loss). Other comprehensive income (loss) includes
unrealized gains or losses on derivative financial instruments and gains or
losses resulting from currency translations of foreign investments. During the
three and nine months ended September 30, 2000, comprehensive income totaled
$6.4 million and $20.3 million, as restated, respectively, and during the three
and nine months ended September 30, 2001, comprehensive loss totaled $9.1
million and $17.0 million, as restated, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On October 3, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144
supercedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of and also supercedes the
accounting and reporting provisions of APB Opinion Number 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, for segments of a business to be disposed of. Among its many
provisions, SFAS No. 144 retains the fundamental requirements of both previous
standards, however, it resolves significant implementation issues related to
FASB Statement No. 121 and broadens the separate presentation of discontinued
operations in the income statement required by APB Opinion Number 30 to include
a component of an entity (rather than a segment of a business). The provisions
of SFAS No. 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001 with early application encouraged. The Company
is currently evaluating the impact this standard will have on its financial
statements and the accounting for certain actions to be taken pursuant to the
restructuring plan that will be implemented beginning in the fourth quarter of
2001 (See Note 9 to the Consolidated Financial Statements).
On October 1, 2001, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on EITF Issue No. 01-10, Accounting for the Impact of the Terrorist
Attacks of September 11, 2001. The EITF decided that although the terrorist
attacks of September 11, 2001 were certainly extraordinary, the financial
reporting treatment that uses that label would not be the appropriate way to
communicate the financial effects of those events and should not be used in this
case. The EITF observed that the economic effects of the events were so
extensive and pervasive that it would be impossible to capture them in any one
financial statement line item. Although the Company believes its business was
impacted by the events of September 11, 2001, pursuant to the consensus reached
on Issue No. 01-10 the Company will not report any extraordinary items related
to the events.
On June 29, 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 142
addresses accounting and reporting of acquired goodwill and other intangible
assets and must be adopted by the Company on January 1, 2002. In addition, the
goodwill impairment testing provisions of SFAS No. 142 must be applied to any
goodwill or other intangible assets that are recognized in the Company's
financial statements at the time of adoption. Upon
9
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001
(UNAUDITED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
adoption, goodwill will no longer be amortized and will be tested for impairment
at least annually. During the three and nine months ended September 30, 2001,
the Company recorded amortization of goodwill and other intangibles of
approximately $0.7 million and $2.2 million, respectively. At September 30,
2001, the Company had goodwill and other intangibles totaling approximately
$68.2 million, net of accumulated amortization. Any goodwill or other intangible
asset impairment losses recognized from the initial impairment test are required
to be reported as a cumulative effect of a change in accounting principle in the
Company's financial statements. The Company is currently assessing the impact
that SFAS No. 142 will have on its financial statements upon adoption in the
first quarter of 2002.
Also, on June 29, 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, Business Combinations (SFAS No. 141). SFAS No. 141 must be
applied to all business combinations that are completed after June 30, 2001.
Among its many provisions, SFAS No. 141 eliminated the pooling-of-interests
method of accounting for business combinations, requires the purchase method of
accounting for business combinations and changes the criteria to recognize
intangible assets separately from goodwill. The Company believes the adoption of
SFAS No. 141 did not have a material affect on its financial statements.
2. Extraordinary Gain on Debt Extinguishment
During the first quarter of 2001, the Company repurchased 36,000 of its
zero-coupon, subordinated, convertible notes due 2018 (Convertible Notes) for
approximately $10 million (prices ranging from $278 to $283 per Convertible
Note). As of September 30, 2001, the Convertible Notes have an accreted book
value of approximately $521 per Convertible Note. These transactions resulted in
an extraordinary gain of approximately $4.6 million ($0.08 per diluted share)
after transaction and unamortized debt issuance costs and applicable taxes. Each
of the Convertible Notes converts, at the option of the holder, into 19.109
shares of the Company's common stock. These transactions, along with the
purchase of 94,000 Convertible Notes in 2000, completed the 130,000 Convertible
Notes repurchase plan previously approved by the Company's Board of Directors.
On October 30, 2001, the Company's Board of Directors approved, subject to
certain conditions, the purchase of the remaining Convertible Notes. See Note 6
to the Consolidated Financial Statements.
3. Unusual Charges
In the third quarter of 2001, the Company recorded an unusual charge of
approximately $3.4 million ($2.8 million after applicable income tax benefit) or
$0.05 per diluted share related to the settlement of disputed amounts due to the
Company from a wireless equipment manufacturer with which the Company has not
done business for several quarters. The loss includes applicable legal fees and
the Company believes it will incur no further losses related to the dispute.
During the first quarter of 2000, the Company began the process of consolidating
four Indianapolis, Indiana locations and a location in Bensalem, Pennsylvania
into a single, new facility located near the Indianapolis International Airport
and designed specifically for the Company and its processes. The Company
recorded an unusual charge of $5.8 million ($3.5 million or $0.06 per share net
of related tax benefits) during the nine months ended September 30, 2000 related
to the consolidation for moving costs,
10
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001
(UNAUDITED)
3. Unusual Charges (continued)
the disposal of assets not used in the new facility and the estimated impact of
vacating the unused facilities, net of potential subleases. On September 28,
2001, the Company entered into an agreement to terminate its financial
obligations with respect to the last of the unused, or partially used,
facilities. The Company believes that the termination agreement had no effect on
its current year financial statements and no significant adjustments to the
charge are anticipated in future periods. Consequently, the Company had no
remaining facility consolidation reserves at September 30, 2001.
4. Acquisitions and Divestitures
In September of 2001, the Company acquired Mega-Hertz SARL, a provider of
distribution and integrated logistics services to the wireless
telecommunications industry in France in order to expand the Company's customer
base and geographic presence. This transaction was accounted for as a purchase
and, accordingly, the Consolidated Financial Statements include the operating
results of this business from the effective date of acquisition. The purchase
price consisted of $1.1 million in cash and the assumption of certain
liabilities. As a result of this acquisition, the Company recorded goodwill and
other intangible assets totaling approximately $0.7 million which, pursuant to
the provisions of SFAS No. 141, will not be amortized, but will be tested for
impairment at least annually.
In December of 2000, the Company acquired Advanced Portable Technologies Pty Ltd
(APT) located in Sydney, Australia, a provider of distribution and other
outsourced services to the wireless data and portable computer industry in
Australia and New Zealand. This transaction was accounted for as a purchase and,
accordingly, the Consolidated Financial Statements include the operating results
of this business from the effective date of acquisition. The purchase price
consisted of $0.9 million in cash, the assumption of certain liabilities and
remaining contingent consideration of up to $1.3 million based upon the future
operating results of the business over the three years subsequent to the
acquisition. Goodwill of approximately $1.0 million resulted from this
acquisition. Also during 2000, the Company made cash payments of contingent
consideration totaling $4.6 million related to purchase acquisitions completed
prior to 1999. These payments resulted in additional goodwill being recorded in
2000 that is currently being amortized over the remaining amortization periods
of the related acquisitions. The Company does not believe it has any other
obligations related to contingent consideration for prior acquisitions, other
than the amount for APT mentioned above.
The impact of these acquisitions was not material in relation to the Company's
consolidated results of operations. Consequently, pro forma information is not
presented.
11
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001
(UNAUDITED)
5. Accounts Receivable Transfers
During the nine months ended September 30, 2000 and 2001, the Company entered
into certain transactions with financing organizations 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 the provisions of FASB Statement No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No.
140), which became effective for transactions occurring after March 31, 2001.
The Company adopted the disclosure provisions of SFAS No. 140 in 2000. SFAS No.
140 replaces FASB Statement No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. Net funds received from the
sales of accounts receivable during the nine months ended September 30, 2000 and
2001 totaled $93.0 million (6% of revenues) and $83.2 million (6% of revenues),
respectively. Fees, in the form of discounts, incurred in connection with these
sales totaled $1.6 million and $2.6 million during the nine months ended
September 30, 2000 and 2001, respectively, and were recorded as losses on the
sale of assets which are included as a component of "Other expenses" in the
Consolidated Statements of Operations. The Company is the collection agent on
behalf of the financing organization for many of these arrangements and has no
significant retained interests or servicing liabilities related to accounts
receivable that it has sold.
6. 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 are 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 require 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.
Each Convertible Note is convertible at the option of the holder any time prior
to maturity. Upon conversion, the Company, at its option, will deliver to the
holder 19.109 shares of common stock per Convertible Note or cash equal to the
market value of such shares. On or after March 11, 2003, the Convertible Notes
may be redeemed at any time by the Company for cash equal to the issue price
plus accrued original discount through the date of redemption. In addition, each
Convertible Note may be redeemed at the option of the holder on March 11, 2003,
2008 or 2013. The purchase price for each Convertible Note at these redemption
dates is approximately $552, $673 and $820, respectively, which is equal to the
issue price plus accrued original discount through the date of redemption. The
Company may elect at its option to pay for such redemption in cash or common
stock, or any combination thereof equaling the purchase price.
On October 30, 2000, the Company announced that its Board of Directors had
approved a plan under which the Company could repurchase up to 130,000
Convertible Notes. During the first quarter of 2001, the
12
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001
(UNAUDITED)
6. Long-term Debt (continued)
Company repurchased 36,000 Convertible Notes for approximately $10 million
(prices ranging from $278 to $283 per Convertible Note). These transactions
resulted in an extraordinary gain of approximately $4.6 million ($0.08 per
diluted share) after transaction and unamortized debt issuance costs and
applicable taxes. As of March 31, 2001, the Company's plan to repurchase 130,000
Convertible Notes was completed. As of September 30, 2001, the remaining 250,000
Convertible Notes had an accreted book value of approximately $521 per
Convertible Note.
On November 1, 2001, the Company announced that its Board of Directors had
approved another plan under which the Company may repurchase the remaining
250,000 Convertible Notes. Repurchases will be made in the open market, in
privately-negotiated transactions or otherwise. The timing and amount of
repurchases, if any, will depend on many factors, including but not limited to,
the availability of capital, the prevailing market price of the Convertible
Notes and overall market conditions. The Company intends to fund the repurchases
of the Convertible Notes from borrowings under its North America revolving
credit facility (discussed below) and from working capital, however no assurance
can be given that the Company will repurchase any Convertible Notes.
On July 27, 1999, the Company amended and restated its five-year senior secured
revolving line of credit facility (the Facility) with Bank One, Indiana,
National Association, as agent for a group of banks (collectively, the Banks).
On November 1, 2001, the Facility was cancelled and replaced with the new
Revolver discussed below. The Facility, which subject to various restrictions,
allowed for borrowings of up to $175 million, had a stated maturity date of June
2002, and generally bore interest, at the Company's option, at: (i) the greater
of the agent bank's corporate base rate plus a spread of 0 to 100 basis points
and the Federal Funds effective rate plus 0.50%; or (ii) the rate at which
deposits in United States Dollars or Eurocurrencies are offered by the agent
bank to first-class banks in the London interbank market plus a spread ranging
from 140 to 250 basis points (based on the Company's leverage ratio) plus a
spread reserve, if any. Borrowings by the Company's non-United States
subsidiaries bore interest at various rates based on the type and term of
advance selected and the prevailing interest rates of the country in which the
subsidiary is domiciled. At September 30, 2001, there were no amounts
outstanding under the Facility and there was an aggregate of $12.2 million in
letters of credit issued.
All of the Company's assets located in the United States and between 65% and
100% of the capital stock of certain of the Company's subsidiaries were pledged
to the Banks as collateral for the Facility, and the Company was substantially
prohibited from incurring additional indebtedness. Funding under the Facility
was limited by an asset coverage test, which was measured monthly. Due to the
Company's lower operating results during the first nine months of 2001, the
Company would not have been in compliance with certain financial covenants under
the Facility, thereby significantly limiting its borrowing capacity, had it not
entered into its new facility with General Electric Capital Corporation
discussed below. In addition to certain net worth and other financial covenants,
the Facility limited or prohibited the Company, subject to certain exceptions,
from declaring or paying cash dividends, making capital distributions or other
payments to stockholders, merging or consolidating with another corporation, or
selling portions of its assets. The Company and the Banks amended the Facility
on October 27, 2000, to allow the Company to execute the Convertible Note
repurchases discussed above and to modify its leverage ratio covenant upon
completion of the repurchases.
13
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001
(UNAUDITED)
6. Long-term Debt (continued)
In December 1999, Brightpoint International Trading (Guangzhou) Co., Ltd. (an
indirect subsidiary of Brightpoint, Inc.) entered into a $4.8 million one-year
secured loan (denominated in China's local currency, the Renminbi) with China
Construction Bank Guangzhou Economic Technological Development District Branch
(China Construction Bank). In December 2000 and again in April 2001, the Company
renewed and revised its agreement with China Construction Bank. The current
agreement matures during the fourth quarter of 2001 and increased available
advances from $4.8 million to $8.5 million. At September 30, 2001, there was
approximately $8.5 million outstanding pursuant to the loan agreement at an
interest rate of approximately 5.9%. The loan prohibits the borrower from making
various changes in its ownership structure.
The secured loan with China Construction Bank discussed above is supported by a
stand-by letter of credit of $6.3 million which was issued under the Facility
and cash collateral of approximately $2.5 million which is presented separately
in the Consolidated Balance Sheets under the caption "Pledged cash." In
addition, the Company had pledged other cash collateral totaling approximately
$16.6 million in support of certain letters of credit issued in connection with
its open account purchases with certain manufacturers. The Company has
classified amounts outstanding under the secured loan as a current liability in
the Consolidated Balance Sheets as these amounts fall due within twelve months.
On October 31, 2001, the Company's North American subsidiaries, Brightpoint
North America L.P. and Wireless Fulfillment Services, LLC (the Borrowers),
entered into a new revolving credit facility (the Revolver) with General
Electric Capital Corporation (GE Capital) to provide capital for its North
American operations. GE Capital acted as agent for a syndicate of banks. The
Revolver replaces the 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 $80 million and bears interest, at the
Borrower's option, at the prime rate plus 1.25% or LIBOR plus 2.75%, for the
first twelve months and those rates may be periodically adjusted thereafter
based on certain financial measurements. The Revolver is secured by all of the
Company's assets in North America and borrowing availability under the Revolver
is based primarily on a percentage of eligible accounts receivable and
inventory. The terms of the Revolver include negative covenants that, among
other things, limit the Borrower's ability to sell certain assets and make
certain payments, including but not limited to, dividends, repurchases of common
stock, payments to the Company and other payments outside the normal course of
business. Subject to certain restrictions, the Company may use proceeds under
the Revolver to repurchase its outstanding Convertible Notes.
7. Operating Segments
The Company operates in markets worldwide and has four operating segments. These
operating segments represent the Company's four divisions: North America;
Asia-Pacific; Europe; and Latin America. These divisions all derive revenues
from sales of wireless handsets, accessory programs and fees from the provision
of integrated logistics services. However, the divisions are managed separately
because of the geographic locations in which they operate.
14
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001
(UNAUDITED)
7. Operating Segments (continued)
The Company evaluates the performance of, and allocates resources to, these
segments based on income (loss) from operations including allocated corporate
selling, general and administrative expenses. As discussed in Note 3 to the
Consolidated Financial Statements, during 2000 and 2001 the Company incurred
unusual charges, which affected certain operating segments. A summary of the
Company's operations by segment with and without the unusual charges is
presented below (in thousands), as restated, see Note 10 to the Consolidated
Financial Statements:
2000 2001
------------------------------------------ -------------------------------------------
REVENUES REVENUES
FROM INCOME (LOSS) INCOME (LOSS) FROM INCOME INCOME (LOSS)
EXTERNAL FROM FROM EXTERNAL (LOSS) FROM FROM
CUSTOMERS OPERATIONS OPERATIONS (1) CUSTOMERS OPERATIONS OPERATIONS (1)
------------------------------------------ -------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30:
North America (2) $ 197,827 $ 9,068 $ 9,143 $ 174,231 $ 826 $ 826
Asia-Pacific 183,627 6,688 6,619 199,766 (131) 3,244
Europe 75,024 2,666 2,797 75,170 (4) (4)
Latin America 60,882 (1,037) (1,037) 49,878 (3,660) (3,660)
----------- ----------- ----------- ----------- ----------- -----------
$ 517,360 $ 17,385 $ 17,522 $ 499,045 $ (2,969) $ 406
=========== =========== =========== =========== =========== ===========
NINE MONTHS ENDED
SEPTEMBER 30:
North America (2) $ 526,531 $ 24,922 $ 30,698 $ 481,905 $ (7,191) $ (7,191)
Asia-Pacific 515,697 19,313 17,865 551,277 7,661 11,036
Europe 212,571 6,185 7,325 214,112 (1,026) (1,026)
Latin America 202,143 (1,007) (1,007) 169,411 (3,398) (3,398)
----------- ----------- ----------- ----------- ----------- -----------
$ 1,456,942 $ 49,413 $ 54,881 $ 1,416,705 $ (3,954) $ (579)
=========== =========== =========== =========== =========== ===========
(1) Excludes other unusual charges resulting from the Company's 1999
restructuring plan and facilities consolidation in 2000.
(2) Includes the impact of approximately $13.7 million of inventory
write-downs made in the second quarter of 2001.
DECEMBER 31, SEPTEMBER 30,
TOTAL SEGMENT ASSETS: 2000 2001
-------- --------
North America (3) $311,402 $282,151
Asia-Pacific 120,386 100,356
Europe 147,239 106,929
Latin America 112,632 124,866
-------- --------
$691,659 $614,302
======== ========
(3) Includes assets of the Company's corporate operations.
15
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001
(UNAUDITED)
7. Operating Segments (continued)
As previously discussed in the Company's Form 10-Q for the quarter ended June
30, 2001, the Company's Middle East operations are now included in the
Asia-Pacific division rather than the Europe division. Consistent with current
accounting guidance, the Company reclassified its historical operating segment
data to reflect this management change. This change had no effect on previously
issued Consolidated Financial Statements. As more fully discussed in Note 9 to
the Consolidated Financial Statements, the Company's Board of Directors approved
a restructuring plan on November 1, 2001 that, among other things, will result
in the consolidation of the North America and Latin America divisions into a
single unit managed as the Americas division. The Company will reclassify its
historical operating segment data to reflect this change beginning in the fourth
quarter of 2001.
8. Contingencies
Various lawsuits, claims and proceedings have been or may be asserted against
the Company in the normal course of business. While the ultimate liability
pursuant to these actions cannot currently be determined, the Company believes
the legal proceedings in which it is currently involved will not have a material
adverse effect on its financial position.
The Company and certain of its executive officers, two of whom are also
directors, were named as defendants in four actions filed in June and July 1999,
in the United States District Court for the Southern District of Indiana. These
actions were subsequently consolidated by the court into a single action. The
action involved a purported class of purchasers of the Company's common stock
during the period October 2, 1998 through March 10, 1999. The Company and
certain of its officers and directors filed a motion to dismiss the action and
the court granted such motion on March 29, 2001, subject to the plaintiffs right
to file a motion for leave to amend the complaint before April 26, 2001. The
plaintiffs did not file such a motion and the court entered final judgment
dismissing the action.
9. Subsequent Event
On November 1, 2001, the Company announced that its Board of Directors had
approved a restructuring plan (the Plan) to be implemented beginning in the
fourth quarter of 2001. Under the Plan certain operations doing business in
higher risk markets (Brazil, Jamaica, South Africa, Venezuela and Zimbabwe) will
be sold or otherwise disposed of. Additionally, the Company intends to form a
joint venture with Chinatron Group Holdings limited, which, subject to
completion, should allow the Company to reduce the capital it employs in the
China market, including Hong Kong, yet continue to participate in this large
handset market.
The Plan is also intended to improve the Company's cost structure and,
accordingly, the Company's North America and Latin America divisions will be
consolidated and managed as one division, referred to as the Americas. Warehouse
and logistics functions currently based in Miami will be transferred to
Indianapolis and the warehouse in Miami will be closed. The Company's operations
and activities in Germany, the Netherlands and Belgium, including regional
management, will be combined into a new facility in Germany. The Company
believes that the Plan will result in a headcount reduction of approximately 350
16
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001
(UNAUDITED)
9. Subsequent Event (continued)
employees (in excess of 15% of the Company's worldwide workforce) and a
reduction in selling, general and administrative expenses of approximately $3
million to $4 million per quarter, beginning in the first quarter of 2002.
The above actions will result in a non-recurring charge in the fourth quarter of
2001 of approximately $55 million to $65 million ($0.99 to $1.11 per share,
after applicable taxes). The charge will include the write-off of goodwill and
investments, accumulated foreign currency translation adjustments, accounts
receivable, inventory and fixed and other assets related to the eliminated
activities, as well as related cash expenses, including severance payments to
terminated employees. This cash portion of the non-recurring charge is estimated
to be approximately $4 million.
10. Restatement of Previously Issued Financial Statements
On November 13, 2001 the Company announced that it intended to restate
its annual financial statements for 1998, 1999 and 2000 and all interim periods
of 2001. The restated financial statements reflect the correction of an error in
applying generally accepted accounting principles pertaining to the recording of
certain insurance premiums for a policy that was entered into during 1998. At
that time, the Company purchased an insurance policy that provided coverage for
both retroactive and prospective occurrences. The retroactive occurrences
related primarily to losses the Company had sustained and recorded in connection
with its closure and discontinuance of its trading division in the fourth
quarter of 1998. The Company recorded the premiums on this policy as expense
over the prospective policy period. The Company has responded to requests for
information and a subpoena from the Securities and Exchange Commission. The
Company believes that the staff of the Securities and Exchange Commission will
subpoena the testimony of certain officers and employees of the Company. In
connection with those responses, the Company and its independent auditors
reviewed the policy and the accounting for the related insurance transactions.
Upon further review, the Company and its independent auditors now believe that
premium expense should have been accrued at the date the Company entered into
the insurance policy, rather than over the prospective policy period because the
Company could not allocate the costs of the policy between the retroactive and
prospective coverage. Accordingly, approximately $15 million should have been
accrued at the date the Company entered into the insurance policy, rather than
as the premiums were paid. While the method of accounting for combined
retroactive and prospective insurance premiums used in the restatement is based
upon accounting practices that were widely recognized as being generally
accepted at the time the Company issued the 1998 financial statements, it was
not until May 1999 that the Financial Accounting Standards Board staff confirmed
the restated accounting practice as being generally accepted for entities other
than insurance companies. The restated financial statements also include certain
adjustments and reclassifications that were previously deemed to be immaterial.
The Company believes that the restatement had no effect on the Company's cash
flow and no material effect on the Company's financial position as of September
30, 2001, or any future date. The Company believes that it will recognize a gain
in the fourth quarter of 2001 related to the termination of the retroactive
portion of the insurance policy, which will result in the complete reversal of
the remaining accrual.
The Company intends to file, as soon as practicable, amendments to its Annual
Reports on Form 10-K, with the related reports of the Company's independent
auditors, for the required periods, and to its Quarterly Reports on Form 10-Q
for the quarters ended March 31, 2001 and June 30, 2001, reflecting the effects
of the restatement discussed above.
17
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001
(UNAUDITED)
10. Restatement of Previously Issued Financial Statements (continued)
The following tables reconcile the effects of the restatements for the three
months ended September 30, 2000 and the nine months ended September 30, 2000 and
2001. Information for the three months ended September 30, 2001 is also
presented to show the immaterial changes to the amounts disclosed in the
Company's November 1, 2001 earnings release. All information in the following
tables is presented in thousands, except per share data.
Three Months Ended Nine Months Ended
September 30 September 30
2000 2001 2000 2001
--------- --------- --------- ---------
Income (loss) from operations
as previously reported $ 16,672 $ (3,682) $ 47,048 $ (6,088)
Effects of insurance accounting correction 713 713 2,139 2,139
Effects of adjustments previously
deemed immaterial -- -- 226 (5)
--------- --------- --------- ---------
Income (loss) from operations as restated $ 17,385 $ (2,969) $ 49,413 $ (3,954)
========= ========= ========= =========
Income (loss) before income taxes, minority interest
and extraordinary gain as previously reported $ 13,425 $ (6,987) $ 37,667 $ (15,931)
Effects of insurance accounting correction 713 713 2,139 2,139
Effects of adjustments previously
deemed immaterial -- -- 248 (5)
--------- --------- --------- ---------
Income (loss) before income taxes, minority interest
and extraordinary gain as restated $ 14,138 $ (6,274) $ 40,054 $ (13,797)
Net income (loss) as previously reported $ 8,678 $ (7,373) $ 24,430 $ (8,664)
Effects of insurance accounting correction 492 492 1,476 1,476
Effects of adjustments previously deemed
immaterial -- -- 248 (5)
--------- --------- --------- ---------
Net income (loss) as restated $ 9,170 $ (6,881) $ 26,154 $ (7,193)
========= ========= ========= =========
Net income (loss) per share (basic)
as previously reported $ 0.16 $ (0.13) $ 0.44 $ (0.16)
Effects of insurance accounting correction(1) 0.00 0.01 0.03 0.03
--------- --------- --------- ---------
Net income (loss) per share (basic) as restated $ 0.16 $ (0.12) $ 0.47 $ (0.13)
========= ========= ========= =========
Net income (loss) per share (diluted)
as previously reported $ 0.16 $ (0.13) $ 0.44 $ (0.16)
Effects of insurance accounting correction(1) 0.00 0.01 0.03 0.03
--------- --------- --------- ---------
Net income (loss) per share (diluted) as restated $ 0.16 $ (0.12) $ 0.47 $ (0.13)
========= ========= ========= =========
(1) For the three months ended September 30, 2000, the per share amount is less
than one cent.
18
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2001
(UNAUDITED)
10. Restatement of Previously Issued Financial Statements (continued)
The effects of the restatements on the Balance Sheets are as follows (in
thousands):
December 31, 2000 September 30, 2001
----------------- ------------------
Total current liabilities as previously reported $ 293,618 $ 302,606
Effects of insurance accounting correction 6,487 5,011
Effects of adjustments previously
deemed immaterial (5) --
--------- ---------
Total current liabilities as restated $ 300,100 $ 307,617
========= =========
Total stockholders' equity as previously reported $ 199,600 $ 181,350
Effects of insurance accounting correction (6,487) (5,011)
Effects of adjustments previously
deemed immaterial 5 --
--------- ---------
Total stockholders' equity as restated $ 193,118 $ 176,339
========= =========
19
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. 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 Exhibit 99 to
this report and the Company's Annual Report on Form 10-K/A for the year ended
December 31, 2000.
On November 13, 2001, the Company announced that it would restate its
annual financial statements for 1998, 1999, 2000 and the interim periods of
2001. As more fully discussed in Note 10 to the Consolidated Financial
Statements, the Company purchased an insurance policy in 1998 that provided
coverage for both retroactive and prospective occurrences. The retroactive
occurrences related primarily to previously reported losses the Company had
sustained in its trading division, an operation that the Company closed in 1998.
The Company has responded to requests for information and a subpoena from the
Securities and Exchange Commission. The Company believes that the staff of the
Securities and Exchange Commission will subpoena the testimony of certain
officers and employees of the Company. In connection with those responses, the
Company and its independent auditors reviewed the policy and the accounting for
the related insurance transactions. Upon further review, the Company and its
independent auditors now believe that premium expense should have been accrued
at the date the Company entered into the insurance policy, rather than over the
prospective policy period because the Company could not allocate the costs of
the policy between the retroactive and prospective coverage. Accordingly,
approximately $15 million should have been accrued at the date the Company
entered into the insurance policy, rather than as the premiums were paid. While
the method of accounting for combined retroactive and prospective insurance
premiums used in the restatement is based upon accounting practices that were
widely recognized as being generally accepted at the time the Company issued the
1998 financial statements, it was not until May 1999 that the Financial
Accounting Standards Board staff confirmed the restated accounting practice as
being generally accepted for entities other than insurance companies. The
restated financial statements also include certain adjustments and
reclassifications that were previously deemed to be immaterial. The Company
believes that the restatement had no effect on the Company's cash flow and no
material effect on the Company's financial position as of September 30, 2001, or
any future date. The Company believes that it will recognize a gain in the
fourth quarter of 2001 related to the termination of the retroactive portion of
the insurance policy, which will result in the complete reversal of the
remaining accrual. See Note 10 to the Consolidated Financial Statements for
further discussion.
On October 31, 2001, the Company's North American subsidiaries, Brightpoint
North America L.P. and Wireless Fulfillment Services, LLC (the Borrowers),
entered into a new revolving credit facility (the Revolver) with General
Electric Capital Corporation (GE Capital) to provide capital for its North
American operations. GE Capital acted as agent for a syndicate of banks. The
Revolver replaces the 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 $80 million and bears interest, at the
Borrower's option, at the prime rate plus 1.25% or LIBOR plus 2.75%, for the
first twelve months and those rates may be periodically adjusted thereafter
based on certain financial measurements. The Revolver is secured by all of the
Company's assets in North America and borrowing availability under the Revolver
is based primarily on a percentage of eligible accounts receivable and
inventory. The terms of the Revolver include negative covenants that, among
other things, limit the Borrower's ability to sell certain assets and make
certain payments, including but not limited to, dividends, repurchases of common
stock, payments to the Company and other payments outside the normal course of
business. Subject to certain restrictions, the Company may use proceeds under
the Revolver to repurchase its outstanding Convertible Notes.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW AND RECENT DEVELOPMENTS (CONTINUED)
In addition, on November 1, 2001, the Company announced that its Board of
Directors had approved a plan under which the Company may repurchase the
remaining 250,000 Convertible Notes (accreted book value of approximately $130
million at September 30, 2001). Repurchases will be made in the open market, in
privately-negotiated transactions or otherwise. The timing and amount of
repurchases, if any, will depend on many factors, including but not limited to,
the availability of capital, the prevailing market price of the Convertible
Notes and overall market conditions. The Company intends to fund the repurchases
of the Convertible Notes from borrowings under its North America revolving
credit facility and from working capital, however no assurance can be given that
the Company will repurchase any Convertible Notes.
Also on November 1, 2001, the Company announced that its Board of Directors had
approved a restructuring plan (the Plan) to be implemented beginning in the
fourth quarter of 2001. The Company's primary goal in adopting the Plan is to
better position the Company for long-term and more consistent success by i)
eliminating operations in which potential returns are not adequate to justify
the risks inherent in those operations and ii) improving the Company's cost
structure.
Under the Plan certain operations doing business in certain higher risk markets
(Brazil, Jamaica, South Africa, Venezuela and Zimbabwe) will be sold or
otherwise disposed of. Additionally, the Company intends to form a joint venture
with Chinatron Group Holdings limited, which, subject to completion, should
allow the Company to reduce the capital it employs in the China market,
including Hong Kong, yet continue to participate in this large handset market.
The Plan is also intended to improve the Company's cost structure and,
accordingly, the Company's North America and Latin America divisions will be
consolidated and managed as one division, referred to as the Americas. Warehouse
and logistics functions currently based in Miami will be transferred to
Indianapolis and the warehouse in Miami will be closed. The Company's operations
and activities in Germany, the Netherlands and Belgium, including regional
management, will be combined into a new facility in Germany. The Company
believes that the Plan will result in a headcount reduction of approximately 350
employees (in excess of 15% of the Company's worldwide workforce) and a
reduction in selling, general and administrative expenses of approximately $3
million to $4 million per quarter, beginning in the first quarter of 2002.
The actions of the Plan described above will result in a non-recurring charge in
the fourth quarter of 2001 of approximately $55 million to $65 million ($0.99 to
$1.11 per share, after applicable taxes). The charge will include the write-off
of goodwill and investments, accumulated foreign currency translation
adjustments, accounts receivable, inventory and fixed and other assets related
to the eliminated activities, as well as related cash expenses, including
severance payments to terminated employees. This cash portion of the
non-recurring charge is estimated to be approximately $4 million.
Beginning in the third quarter of 2001 the Company's operations in the Middle
East are managed and reported as a part of what is currently the Company's
Asia-Pacific division and are no longer reported as part of the Europe division.
Consistent with current accounting guidance, the Company reclassified its
historical operating segment data to reflect this management change during the
third quarter of 2001. This change had no effect on previously issued
Consolidated Financial Statements.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW AND RECENT DEVELOPMENTS (CONTINUED)
During the second quarter of 2001, the Company recorded inventory valuation
adjustments of approximately $13.7 million ($8.4 million, or $0.15 per diluted
share, net of tax benefit) to adjust inventories to their estimated net
realizable value based on market conditions. These valuation adjustments were
the result of the over-supply of product in the Company's distribution channel
and the lower-than-anticipated level of demand experienced in the second quarter
of 2001. The write-downs were related to the Company's North America division
and a significant portion of the impacted inventories were wireless accessories.
As of September 2001, the Company had disposed of materially all of the
inventory to which the write-downs related.
During the first quarter of 2001, the Company repurchased 36,000 of its
zero-coupon, subordinated, convertible notes due 2018 (Convertible Notes) for
approximately $10 million (prices ranging from $278 to $283 per Convertible
Note). These transactions resulted in an extraordinary gain of approximately
$4.6 million ($0.08 per diluted share) after transaction and unamortized debt
issuance costs and applicable taxes. Along with the purchase of 94,000
Convertible Notes in 2000, these transactions completed the 130,000 Convertible
Notes repurchase plan previously approved by the Company's Board of Directors.
As of September 30, 2001, the remaining 250,000 Convertible Notes have an
accreted book value of approximately $521 per Convertible Note.
During the first quarter of 2000, the Company began the process of consolidating
four Indianapolis, Indiana, locations and a location in Bensalem, Pennsylvania,
into a single, new facility located near the Indianapolis International Airport
and designed specifically for the Company and its processes. The Company
recorded an unusual charge of $5.8 million ($3.5 million or $0.06 per share net
of related tax benefits) during the nine months ended September 30, 2000,
related to the consolidation for moving costs, the disposal of assets not used
in the new facility and the estimated impact of vacating the unused facilities,
net of potential subleases. On September 28, 2001, the Company entered into an
agreement to terminate its financial obligations with respect to the last of the
unused, or partially used, facilities. The Company believes that the termination
agreement had no effect on its current year financial statements and no
significant adjustments to the charge are anticipated in future periods.
Consequently, the Company had no remaining facility consolidation reserves at
September 30, 2001. See Note 3 to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
Because of the significance of the restructuring plan to be implemented
beginning in the fourth quarter of 2001, results of operations have been
delineated between the results of recurring operations and the results of
non-recurring operations. Results of recurring operations include the results of
those operations that will be continued after implementation of the
restructuring plan and results of non-recurring operations include those
operations (Belgium, Brazil, Jamaica, the Netherlands, South Africa, Venezuela
and Zimbabwe) that will be sold or otherwise discontinued pursuant to the
restructuring plan. In addition, certain nonrecurring items related to i) the
Company's facilities consolidation in 2000, ii) an extraordinary gain on debt
extinguishment in the first quarter of 2001 and iii) a loss in the third quarter
of 2001 resulting from the settlement of disputed amounts due to the Company
from a handset manufacturer with which the Company severed its trading
relationship have been segregated from recurring operations and discussed
separately.
In addition, as discussed above, the results of operations in this discussion
have been restated for the correction of an accounting error. See Note 10 to the
Consolidated Financial Statements for details of the restatement.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECURRING OPERATIONS - RESTATED
Recurring Revenue
Three Months Ended September 30 Nine Months Ended September 30
--------------------------------------------------------------------------------
(In thousands) 2000 2001 Change 2000 2001 Change
--------------------------------------------------------------------------------
Revenue $ 476,680 $ 476,682 0% $1,314,138 $1,332,155 1%
--------------------------------------------------------------------------------
Revenue from recurring operations for the three months ended September 30, 2001,
was flat compared to the third quarter of 2000 and up 15% compared to the second
quarter of 2001. There was a slight increase in revenue from recurring
operations when comparing the nine months ended September 30, 2001 to the
comparable period of 2000. The slight increase was due primarily to the industry
channels moving back into equilibrium, however, the demand for wireless products
continued at levels lower than originally anticipated as a result of economic,
market and industry conditions. Units handled for the third quarter of 2001 were
consistent with the third quarter of 2000, but increased 12% from the second
quarter of 2001.
Recurring Revenue by Division (in thousands):
Three Months Ended September 30 Nine Months Ended September 30
----------------------------------------- -------------------------------------------
2000 2001 2000 2001
----------------------------------------- -------------------------------------------
North America $ 197,827 41% $ 174,231 37% $ 526,531 40% $ 481,905 36%
Asia-Pacific 183,627 39% 199,766 42% 515,697 39% 551,277 41%
Europe 64,693 14% 69,019 14% 184,841 14% 194,115 15%
Latin America 30,533 6% 33,666 7% 87,069 7% 104,858 8%
------------------------------------------ -----------------------------------------
Total $ 476,680 100% $ 476,682 100% $1,314,138 100% $1,332,155 100%
------------------------------------------ -----------------------------------------
Revenues for the three and nine months ended September 30, 2001 were lower in
the North America division as compared to the same periods in 2000 due primarily
to the economic slow-down in the United States that began in the fourth quarter
of 2000.
The increases in revenues for the three and nine months ended September 30, 2001
in the Asia-Pacific division compared to the same periods in 2000 was comprised
primarily of an increase in revenues generated by the Company's operations in
the Middle East offset by a decrease in revenues generated by the Company's
operations in China. The Latin America and Europe divisions experienced slight
increases in revenue for the three and nine months ended September 30, 2001 when
compared to the same periods in 2000. Third quarter 2001 revenues from recurring
operations in the North America, Europe and Asia-Pacific divisions increased by
14%, 10% and 25%, respectively, when compared to the second quarter of 2001 in
which the Company generated revenues from recurring operations of $416 million.
These sequential increases were primarily the result of a slight recovery during
the third quarter of 2001 in the level of demand for the Company's products and
services.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RECURRING OPERATIONS - RESTATED (CONTINUED)
Recurring Revenue by Service Line (in thousands):
Three Months Ended September 30 Nine Months Ended September 30
----------------------------------------- -----------------------------------------------
2000 2001 2000 2001
----------------------------------------- -----------------------------------------------
Sales of wireless handsets $ 388,061 81% $ 405,921 85% $ 1,034,574 79% $ 1,113,901 84%
Accessory programs 51,998 11% 34,243 7% 161,691 12% 111,676 8%
Integrated logistics services 36,621 8% 36,518 8% 117,873 9% 106,578 8%
----------------------------------------- -----------------------------------------------
$ 476,680 100% $ 476,682 100% $ 1,314,138 100% $ 1,332,155 100%
----------------------------------------- -----------------------------------------------
Revenue from wireless handsets generated from recurring operations increased 5%
for the three months ended September 30, 2001 and 8% for the nine months ended
September 30, 2001, as compared to the same periods in 2000. This increase is
due primarily to increased demand for the Company's products in certain European
markets and the Middle East. Integrated logistics services revenues for the
third quarter of 2001 were essentially flat with the third quarter of 2000,
while there was a decrease of 10% when comparing the nine months ended September
30, 2001 to the same period of the prior year. Revenue from accessory programs
for the three and nine months ended September 30, 2001 decreased 34% and 31%,
respectively, compared to the same periods in the 2000. Demand for the Company's
accessory programs and, to a lesser extent, integrated logistics services
continue to be adversely affected by lower levels of promotional programs
sponsored by network operators, particularly in the United States.
Gross Profit
Three Months Ended September 30 Nine Months Ended September 30
-------------------------------------- ------------------------------------
(In thousands) 2000 2001 Change 2000 2001 Change
----------------------------------------------------------- ------------------------------------
Gross profit $ 40,186 $ 25,860 (36%) $ 121,864 $ 65,994 (46%)
Gross margin 8.4% 5.4% 9.3% 5.0%
----------------------------------------------------------- ------------------------------------
Gross profit for the three and nine months ended September 30, 2001, decreased
36% and 46%, respectively, over the same periods in 2000 resulting in gross
margins of 5.4% for third quarter of 2001 and 5.0% for the nine months ended,
compared to gross margins of 8.4% and 9.3% for the comparable prior periods. The
decreases in gross margins were due primarily to i) a greater percentage of the
total revenue derived from lower margin handset sales, ii) lower margins on
those handset sales resulting from the oversupply of product in the channel and
iii) inventory write-downs made during the second quarter of 2001. As previously
discussed, due to higher levels of inventories in the channel and the
lower-than-expected level of demand experienced during the second quarter of
2001, the Company recorded inventory valuation adjustments of approximately
$13.7 million to adjust inventories to their estimated net realizable value
based on the current market conditions.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RECURRING OPERATIONS - RESTATED (CONTINUED)
Selling, General and Administrative Expenses
Three Months Ended September 30 Nine Months Ended September 30
------------------------------------------ ------------------------------------------
(In thousands) 2000 2001 Change 2000 2001 Change
--------------------------------------------------------------------------------------------------------------------------
Selling, general and
administrative expenses $ 22,130 $ 21,479 (3%) $ 67,083 $ 61,081 (9%)
As a percent of revenue 4.6% 4.5% 5.1% 4.6%
--------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses for recurring operations during the
third quarter of 2001 decreased 3% from the third quarter of 2000 and increased
20% from $17.8 million (4.3% of revenue) in the second quarter of 2001. The
sequential increase was due to the increase in revenue, as well as costs related
to the Company's information technology initiatives and the costs of integrating
and serving new logistics contracts. The decrease in costs in the third quarter
of 2001 compared to the third quarter of 2000 reflected our cost management
initiatives. For the nine months ended September 30, 2001, selling, general and
administrative expenses have decreased 9% from the comparable prior period. This
decrease was primarily the result of cost control measures instituted in
response to the current market conditions.
Income from Recurring Operations
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ------------------------------
(In thousands) 2000 2001 2000 2001
-----------------------------------------------------------------------------------------------------
Income from operations $ 18,056 $ 4,381 $ 54,781 $ 4,913
As a percent of revenue 3.8% 0.9% 4.2% 0.4%
-----------------------------------------------------------------------------------------------------
The decreases in income from recurring operations and operating margins for the
three and nine months ended September 30, 2001 as compared to the same periods
in 2000 resulted primarily from the decrease in gross margins described above.
Net Income (Loss)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- --------------------------
(In thousands, except per share data) 2000 2001 2000 2001
----------------------------------------------------------------------------------------------------------
Net income (loss) $ 10,109 $ 1,532 $ 30,135 $ (819)
Net income (loss) per diluted share (1) $ 0.18 0.03 $ 0.53 $ (0.01)
Weighted average shares outstanding (diluted) (1) 63,148 55,830 63,424 55,803
-----------------------------------------------------------------------------------------------------------
(1) For the three and nine months ended September 30, 2000, reflects an after
tax add-back of interest expense of $1.2 million and $3.7 million, respectively,
to net income and an increase of 7.3 million in weighted average shares
outstanding for each period to reflect the dilutive effect of the Company's
Convertible Notes.
The decreases in net income (loss) and net income (loss) per diluted share for
the three and nine months ended September 30, 2001, when compared to the same
periods in 2000, were due primarily to the factors discussed above in the
analyses of revenue, gross profit and selling, general and administrative
expenses.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
NON-RECURRING OPERATIONS - RESTATED
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30 September 30
2000 2001 2000 2001
--------- --------- --------- ---------
Revenue $ 40,680 $ 22,363 $ 142,804 $ 84,550
Gross profit 2,785 248 8,702 6,322
Selling, general and
administrative expenses 3,319 4,223 8,602 11,814
Operating income (loss) (534) (3,975) 100 (5,492)
Net loss $ (832) $ (5,583) $ (823) $ (8,168)
========= ========= ========= =========
Net loss per share $ (0.02) $ (0.10) $ (0.02) $ (0.15)
========= ========= ========= =========
As previously discussed, non-recurring operations include certain operations in
Belgium, Brazil, Jamaica, the Netherlands, South Africa, Venezuela and Zimbabwe
that will be sold or otherwise discontinued pursuant to the Company's
restructuring plan to be implemented beginning in the fourth quarter of 2001. As
industry, economic and other conditions continued to worsen in these markets,
non-recurring operations experienced a significant decrease in revenue and a
significant increase in net operating losses for the three and nine months ended
September 30, 2001 when compared to prior periods. The Company believes that the
sale or discontinuation of these operations upon execution of the restructuring
plan will result in improved long-term profitability, including the reduction in
selling general and administrative costs of approximately $3 to $4 million per
quarter beginning in the first quarter of 2002.
LIQUIDITY AND CAPITAL RESOURCES - RESTATED
(In thousands) December 31, 2000 September 30, 2001
------------------------------------------ ------------------------- -------------------------
Cash and cash equivalents $ 79,718 $ 47,682
Working capital $ 266,578 $ 176,642
Current ratio 1.89 : 1 1.57 : 1
------------------------------------------ ------------------------- -------------------------
The Company has historically satisfied its working capital requirements
principally through cash flow from operations, vendor financing, bank borrowings
and the issuance of equity and debt securities. The decrease in working capital
at September 30, 2001 compared to December 31, 2000 is comprised primarily of
the effect of decreases in cash and inventories.
Net cash provided by operating activities was $49.7 million for the nine months
ended September 30, 2001, as compared to net cash provided by operating
activities of $61.4 million in the comparable prior period. The decrease in cash
provided by operating activities during the nine months ended September 30,
2001, as compared to the prior period was primarily the result of a reduction in
earnings partially offset by the reduction in working capital.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES - RESTATED (CONTINUED)
In addition, for the third quarter of 2001, days revenue outstanding in accounts
receivable was approximately 36 days, compared to days revenue outstanding of
approximately 33 days for the prior year third quarter. During the third quarter
of 2001, annualized inventory turns were 12 times, compared to 10 times during
the third quarter of 2000 and inventory balances were approximately $69 million
lower than inventories at December 31, 2000. Average days costs in accounts
payable were 40 days for the third quarter of 2001, compared to 38 days for the
third quarter of 2000. These changes combined to create a decrease in cash
conversion cycle days to 27 days in the third quarter of 2001, from 32 days in
the same period of 2000.
Net cash used by investing activities for the nine months ended September 30,
2001, was $26.0 million as compared to $15.8 million in the comparable prior
period. The change between periods is primarily comprised of increases in cash
used for capital expenditures (primarily for upgrades to and enhancements in the
Company's information technology), partially offset by a reduction in cash
expended for acquisition activities during the nine months ended September 30,
2001. Net cash used by financing activities for the nine months ended September
30, 2001, was $54.9 million compared to cash provided by financing activities of
$12.3 million for the comparable prior period. The change between periods was
primarily the result of increased payments on the Facility and the repurchase of
Convertible Notes.
The Company's long-term debt at September 30, 2001, is comprised of the
Company's zero-coupon, subordinated, convertible notes (the Convertible Notes)
which have an aggregate principal amount at maturity of $250.0 million ($1,000
face value per Convertible Note). The Convertible Notes are due in the year
2018, have a yield to maturity of 4.00% and are convertible into the Company's
common stock at a rate of 19.109 shares per Convertible Note. The accreted value
of the Convertible Notes was approximately $130 million at September 30, 2001.
In addition, the Company had permitted indebtedness totaling approximately $8.7
million at September 30, 2001 under its senior secured revolving line of credit
facility (the Facility) which had been periodically modified. Based on the
current maturity of the Facility, the Company has classified amounts outstanding
as current liabilities in the Consolidated Balance Sheets, as these amounts fall
due within twelve months. On November 1, 2001, the Facility was cancelled and
replaced with the new revolver discussed below. The Facility provided the
Company, based upon a borrowing base calculation and subject to various
financial covenants, with a maximum borrowing capacity of up to $175 million.
Interest rates on U.S. Dollar borrowings under the Facility, excluding fees,
ranged from 140 basis points to 250 basis points above LIBOR, depending on
certain leverage ratios.
On October 30, 2000, the Company announced that its Board of Directors had
approved a plan under which the Company could repurchase up to 130,000
Convertible Notes. The Company and the Banks amended the Facility on October 27,
2000, to allow the Company to execute such repurchases and to modify its
leverage ratio covenant upon completion of the repurchases. As of March 31,
2001, the Company's plan to repurchase 130,000 Convertible Notes was complete.
During the first quarter of 2001, the Company repurchased 36,000 Convertible
Notes for approximately $10 million (prices ranging from $278 to $283 per
Convertible Note). These transactions resulted in an extraordinary gain of
approximately $4.6 million ($0.08 per diluted share) after transaction and
unamortized debt issuance costs and applicable taxes. As of September 30, 2001,
the remaining 250,000 Convertible Notes had an accreted book value of
approximately $521 per Convertible Note. See Note 6 to the Consolidated
Financial Statements.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES - RESTATED (CONTINUED)
On November 1, 2001, the Company announced that its Board of Directors had
approved another plan under which the Company may repurchase the remaining
250,000 Convertible Notes (accreted book value of approximately $130 million at
September 30, 2001). Repurchases will be made in the open market, in
privately-negotiated transactions or otherwise. The timing and amount of
repurchases, if any, will depend on many factors, including but not limited to,
the availability of capital, the prevailing market price of the Convertible
Notes and overall market conditions. The Company intends to fund the repurchases
of the Convertible Notes from borrowings under its North America revolving
credit facility and from working capital, however no assurance can be given that
the Company will repurchase any Convertible Notes.
All of the Company's assets located in the United States and between 65% and
100% of the capital stock of certain of the Company's subsidiaries were pledged
to the Banks as collateral for the Facility, and the Company was substantially
prohibited from incurring additional indebtedness, either of which terms could
have limited the Company's ability to implement its expansion plans. In
addition, at September 30, 2001 the Company had pledged cash balances totaling
approximately $19.1 million as cash collateral for certain of its borrowings in
the Peoples Republic of China and certain trade credit facilities. The Company
was also subject to certain covenants as more fully described in Note 6 to the
Consolidated Financial Statements.
On October 31, 2001, the Company's North American subsidiaries, Brightpoint
North America L.P. and Wireless Fulfillment Services, LLC (the Borrowers),
entered into a new revolving credit facility (the Revolver) with General
Electric Capital Corporation (GE Capital) to provide capital for its North
American operations. GE Capital acted as agent for a syndicate of banks. The
Revolver replaces the 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 $80 million and bears interest, at the
Borrower's option, at the prime rate plus 1.25% or LIBOR plus 2.75%, for the
first twelve months and those rates may be periodically adjusted thereafter
based on certain financial measurements. The Revolver is secured by all of the
Company's assets in North America and borrowing availability under the Revolver
is based primarily on a percentage of eligible accounts receivable and
inventory. The terms of the Revolver include negative covenants that, among
other things, limit the Borrower's ability to sell certain assets and make
certain payments, including but not limited to, dividends, repurchases of common
stock, payments to the Company and other payments outside the normal course of
business. Subject to certain restrictions, the Company may use proceeds under
the Revolver to repurchase its outstanding Convertible Notes.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On October 3, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144
supercedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of and also supercedes the
accounting and reporting provisions of APB Opinion Number 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, for segments of a business to be disposed of. Among its many
provisions, SFAS No. 144 retains the fundamental requirements of both previous
standards, however, it resolves significant implementation issues related to
FASB Statement No. 121 and broadens the separate presentation of
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
discontinued operations in the income statement required by APB Opinion Number
30 to include a component of an entity (rather than a segment of a business).
The provisions of SFAS No. 144 are effective for financial statements issued for
fiscal years beginning after December 15, 2001 with early application
encouraged. The Company is currently evaluating the impact this standard will
have on its financial statements and the accounting for certain actions to be
taken pursuant to the restructuring plan that will be implemented beginning in
the fourth quarter of 2001 (See Note 9 to the Consolidated Financial
Statements).
On October 1, 2001, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on EITF Issue No. 01-10, Accounting for the Impact of the Terrorist
Attacks of September 11, 2001. The EITF decided that although the terrorist
attacks of September 11, 2001 were certainly extraordinary, the financial
reporting treatment that uses that label would not be an effective way to
communicate the financial effects of those events and should not be used in this
case. The EITF observed that the economic effects of the events were so
extensive and pervasive that it would be impossible to capture them in any one
financial statement line item. Although the Company believes its business was
impacted by the events of September 11, 2001, pursuant to the consensus reached
on Issue No. 01-10 the Company will not report any extraordinary items related
to the events.
On June 29, 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 142
addresses accounting and reporting of acquired goodwill and other intangible
assets and must be adopted by the Company on January 1, 2002. In addition, the
goodwill impairment testing provisions of SFAS No. 142 must be applied to any
goodwill or other intangible assets that are recognized in the Company's
financial statements at the time of adoption. Upon adoption, goodwill will no
longer be amortized and will be tested for impairment at least annually. During
the three and nine months ended September 30, 2001, the Company recorded
amortization of goodwill and other intangibles of approximately $0.7 million and
$2.2 million, respectively. At September 30, 2001, the Company had goodwill and
other intangibles totaling approximately $68.2 million, net of accumulated
amortization. Any goodwill or other intangible asset impairment losses
recognized from the initial impairment test are required to be reported as a
cumulative effect of a change in accounting principle in the Company's financial
statements. The Company is currently assessing the impact that SFAS No. 142 will
have on its financial statements upon adoption in the first quarter of 2002.
Also, on June 29, 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, Business Combinations (SFAS No. 141). SFAS No. 141 must be
applied to all business combinations that are completed after June 30, 2001.
Among its many provisions, SFAS No. 141 eliminated the pooling-of-interests
method of accounting for business combinations, requires the purchase method of
accounting for business combinations and changes the criteria to recognize
intangible assets separately from goodwill. The Company believes the adoption of
SFAS No. 141 did not have a material affect on its financial statements.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL MARKET RISK MANAGEMENT
The Company is exposed to financial market risks, including changes in interest
rates and foreign currency exchange rates. To mitigate interest rate risks, the
Company has utilized interest rate swaps to convert certain portions of its
variable rate debt to fixed interest rates. To mitigate foreign currency
exchange rate risks, the Company utilizes its multi-currency revolving line of
credit and derivative financial instruments under a risk management program
approved by the Company's Board of Directors. The Company does not use
derivative instruments for speculative or trading purposes.
The Company is exposed to changes in interest rates on its variable interest
rate revolving lines of credit. A 10% increase in short-term borrowing rates
during the quarter ended September 30, 2001, would have resulted in only a
nominal increase in interest expense as well as a nominal increase in the fair
value of the Company's interest rate swaps at September 30, 2001.
A substantial portion of the Company's revenue and expenses are transacted in
markets outside of the United States and are denominated in currencies other
than the U.S. Dollar. Accordingly, the Company's future results could be
adversely affected by a variety of factors, including changes in a specific
country's political, economic or regulatory conditions and trade protection
measures.
The Company's 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. The
Company's hedging programs reduce, but do not eliminate, the impact of foreign
exchange rate movements. An adverse change (defined as a 10% strengthening of
the U.S. Dollar) in all exchange rates would have resulted in only a nominal
decrease in results of operations for the nine months ended September 30, 2001.
The same adverse change in exchange rates would have resulted in a $2.5 million
increase in the fair value of the Company's cash flow and net investment hedges
open at September 30, 2001. The majority of this fair value increase would
offset currency devaluations from translating the Company's foreign investments
from functional currencies to the U.S. Dollar. The Company's sensitivity
analysis of foreign exchange rate movements does not factor in a potential
change in volumes or local currency prices of its products sold or services
provided. Actual results may differ materially from those discussed above.
Certain of the Company's foreign entities are located in countries that are
members of the European Union (EU) and, accordingly, have adopted the Euro, the
EU's new single currency, as their legal currency effective January 1, 1999.
From that date, the Euro has been traded on currency exchanges and available for
noncash transactions. Local currencies remain legal tender until December 31,
2001 at which time participating countries will issue Euro-denominated bills and
coins for use in cash transactions. By no later than July 1, 2002, participating
countries will withdraw all bills and coins denominated in local currencies.
During 2000 and 2001, the Company's operations that are located in EU countries
(France, Germany, Ireland and the Netherlands) have transacted business in both
the Euro and their local currency as appropriate to the nature of the
transaction under the EU's "no compulsion, no prohibition principle." The
Company has made significant investments in information technology in Europe and
has experienced no significant information technology or operational problems as
a result of the Euro conversion. In addition, the Company continues to evaluate
the effects on its business of the Euro conversion for the affected operations
and believes that the completion of the Euro conversion during 2001 and 2002
will not have a material effect on its financial position or results of
operations.
30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time, involved in certain legal proceedings in the
ordinary course of conducting its business. While the ultimate liability
pursuant to these actions cannot currently be determined, the Company believes
the legal proceedings in which it is currently involved will not have a material
adverse effect on its financial position.
Item 6. Exhibits
(a) Exhibits
The list of exhibits is hereby incorporated by reference to the
Exhibit Index on page 30 of this report.
(b) Reports on Form 8-K
On July 24, 2001, the Company filed a Form 8-K with the Securities and
Exchange Commission reporting under Item 5 - Other Events, announcing
that Brightpoint North America L.P., a subsidiary of Brightpoint,
Inc., has entered into a Master Services Agreement with Qwest Business
Resources, Inc., the purchasing agent for the Qwest companies on
behalf of Qwest Wireless, L.L.C., to provide integrated logistics
services related to wireless handsets and accessories for Qwest's
retail stores and indirect dealer channel. Under the agreement,
Brightpoint will provide a variety of services including custom
packaging, programming, fulfillment and inventory management.
31
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 November 14, 2001 /s/ Phillip A. Bounsall
---------------------- --------------------------------
Phillip A. Bounsall
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
32
EXHIBIT INDEX
Exhibit No. Description
99 Cautionary Statements
33