UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: March 31, 2002
-------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from: to
----------------------- ----------------------
Commission file number: 0-23494
---------------------------------------------------------
BRIGHTPOINT, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 35-1778566
--------------------------------------------------------------------------------
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
600 East 96th Street, Suite 575, Indianapolis, Indiana 46240
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(317) 805-4100
--------------------------------------------------------------------------------
(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 May 13, 2002: 55,915,353 shares
BRIGHTPOINT, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1
Consolidated Statements of Operations
Three Months Ended March 31, 2001 and 2002.................3
Consolidated Balance Sheets
December 31, 2001 and March 31, 2002.......................4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 and 2002.................5
Notes to Consolidated Financial Statements..........................6
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............19
ITEM 3
Quantitative and Qualitative Disclosures
About Market Risk.........................................30
PART II. OTHER INFORMATION
ITEM 1
Legal Proceedings..................................................32
ITEM 6
Exhibits...........................................................33
Reports on Form 8-K................................................33
Signatures..................................................................34
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
March 31
2001 2002
--------- ---------
Revenue $ 353,891 $ 338,944
Cost of revenue 329,056 321,790
--------- ---------
Gross profit 24,835 17,154
Selling, general and administrative expenses 19,618 21,778
--------- ---------
Operating income (loss) from continuing operations 5,217 (4,624)
Interest expense 2,052 2,482
Other expenses 76 798
--------- ---------
Income (loss) from continuing operations before income taxes 3,089 (7,904)
and minority interest
Income taxes 1,153 (1,621)
--------- ---------
Income (loss) from continuing operations before minority interest 1,936 (6,283)
Minority interest 48 33
--------- ---------
Income (loss) from continuing operations 1,888 (6,316)
Discontinued operations:
Income (loss) from discontinued operations 513 (5,507)
Loss on disposal of discontinued operations - (3,868)
--------- ---------
Total discontinued operations 513 (9,375)
Income (loss) before extraordinary gain on debt extinguishment 2,401 (15,691)
Extraordinary gain on debt extinguishment, net of tax 4,623 -
--------- ---------
Net income (loss) $ 7,024 $ (15,691)
========= =========
Basic per share:
Income (loss) from continuing operations $ 0.03 $ (0.11)
Discontinued operations 0.01 (0.17)
Extraordinary gain on debt extinguishment, net of tax 0.09 -
--------- ---------
Net income (loss) $ 0.13 $ (0.28)
========= =========
Diluted per share:
Income (loss) from continuing operations $ 0.03 $ (0.11)
Discontinued operations 0.01 (0.17)
Extraordinary gain on debt extinguishment, net of tax 0.09 -
--------- ---------
Net income (loss) $ 0.13 $ (0.28)
========= =========
Weighted average common shares outstanding:
Basic 55,777 55,873
========= =========
Diluted 55,779 55,873
========= =========
See accompanying notes.
3
BRIGHTPOINT, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
December 31, 2001 March 31, 2002
----------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 58,295 $ 48,941
Pledged cash 16,657 32,417
Accounts receivable (less allowance for doubtful
accounts of $6,272 in 2001 and $5,605 in 2002) 181,755 159,037
Inventories 137,549 96,437
Contract financing receivable 60,404 37,250
Other current assets 33,115 29,164
--------- ---------
Total current assets 487,775 403,246
Property and equipment 45,047 44,571
Goodwill and other intangibles 61,258 56,846
Other assets 15,340 20,309
--------- ---------
Total assets $ 609,420 $ 524,972
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 194,776 $ 128,453
Accrued expenses 52,743 52,453
Unfunded portion of contract financing receivable 45,499 34,896
Lines of credit, short-term 10,323 10,969
Convertible notes, short-term - 132,953
--------- ---------
Total current liabilities 303,341 359,724
--------- ---------
Long-term liabilities:
Minority interest - 8,397
Line of credit 24,419 23,222
Convertible notes 131,647 -
--------- ---------
Total long-term liabilities 156,066 31,619
--------- ---------
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; 55,860 and 55,896 issued and
outstanding in 2001 and 2002, respectively 559 559
Additional paid-in capital 213,973 214,023
Retained earnings (deficit) (47,045) (62,736)
Accumulated other comprehensive loss (17,474) (18,217)
--------- ---------
Total stockholders' equity 150,013 133,629
--------- ---------
Total liabilities and stockholders' equity $ 609,420 $ 524,972
========= =========
See accompanying notes.
4
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Three Months Ended March 31
2001 2002
-------- --------
OPERATING ACTIVITIES
Net income (loss) $ 7,024 $(15,691)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 3,792 3,346
Amortization of debt discount 1,381 1,306
Extraordinary gain on debt extinguishment, net of tax (4,623) -
Discontinued operations (513) 9,375
Minority interest and deferred taxes 287 33
Pledged cash requirements - (15,760)
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable 31,440 22,434
Inventories 44,641 41,280
Other operating assets 2,058 2,537
Accounts payable and accrued expenses (68,783) (67,141)
-------- --------
Net cash provided (used) by operating activities 16,704 (18,281)
INVESTING ACTIVITIES
Capital expenditures (7,148) (3,069)
Decrease in funded contract financing receivables 3,810 12,506
Decrease (increase) in other assets (1,067) 129
-------- --------
Net cash provided (used) by investing activities (4,405) 9,566
FINANCING ACTIVITIES
Net payments on revolving credit facilities (5,851) (748)
Repurchase of convertible notes (10,095) -
Proceeds from common stock issuances under employee stock
option and purchase plans 78 50
-------- --------
Net cash used by financing activities (15,868) (698)
Effect of exchange rate changes on cash and cash
equivalents (943) 59
-------- --------
Net decrease in cash and cash equivalents (4,512) (9,354)
Cash and cash equivalents at beginning of period 79,718 58,295
-------- --------
Cash and cash equivalents at end of period $ 75,206 $ 48,941
======== ========
See accompanying notes.
5
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(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
2001 consolidated financial statements have been reclassified to conform to the
2002 presentation.
The consolidated balance sheet at December 31, 2001 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 and cash flows for the three months ended March 31,
2002 are not necessarily indicative of the operating results or cash flows that
may be expected for the entire year.
The Company has not materially changed its significant accounting policies from
those disclosed in its Form 10-K for the year ended December 31, 2001, except,
as discussed below, the implementation of Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, in the first
quarter of 2002 required the Company to present the results of certain
operations and related charges from the Company 2001 restructuring plan as
Discontinued Operations in the Consolidated Statements of Operations.
For further information, reference is made to the audited consolidated financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2001.
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
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of and also supersedes 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.
6
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2002
(UNAUDITED)
1. Basis of Presentation (continued)
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 became effective for financial statements issued
for fiscal years beginning after December 15, 2001 with early application
encouraged. The Company adopted SFAS No. 144 on January 1, 2002. The adoption of
SFAS No. 144 did not have a material effect on the Company's results of
operations, financial position or cash flows. See Note 2 to the Consolidated
Financial Statements for further discussion.
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 prior to June 30, 2002 with an
effective date of 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. Effective January 1, 2002, goodwill is no longer amortized and will be
tested for impairment at least annually. At March 31, 2002, the Company had
goodwill and other intangibles totaling approximately $56.8 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 2002, however,
during February of 2002, the Company completed the first step in the required
goodwill impairment testing process required by SFAS No. 142. The results of
this first step have indicated that the Company will need to complete the more
detailed second step in the required goodwill impairment testing process
required by SFAS No. 142 on portions of its goodwill and intangible assets. The
Company estimates that upon completion of its impairment testing it will record
a charge of up to $21.6 million. Of this amount, $8.5 million was recorded
during the three months ended March 31, 2002 in discontinued operations pursuant
to the recording of the transaction with Chinatron (see Note 2 to the
Consolidated Financial Statements). Upon completion of the Company's
implementation of SFAS No. 142, the $8.5 million will be reclassified from
discontinued operations as currently reported to the cumulative effect of an
accounting change along with any other impairment charges and be presented
effective January 1, 2002 along with the required disclosures regarding
reclassification of prior period amounts.
In April of 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections" (SFAS No. 145). SFAS No. 145 is required to be adopted in the
second quarter of 2002. The Company is currently evaluating the effects that
this standard will have on the results of the Company, if any.
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 and the Convertible Notes described
in Note 6 to the Consolidated Financial Statements.
7
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2002
(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 months
ended March 31, 2001 and 2002 (amounts in thousands, except per share data):
Three Months Ended March 31
2001 2002
------------- ----------
Income (loss) from continuing operations $ 1,888 $ (6,316)
Discontinued operations 513 (9,375)
Extraordinary gain on debt extinguishment, net of tax 4,623 -
------------- ----------
Net income (loss) $ 7,024 $ (15,691)
============= ==========
Basic:
Weighted average shares outstanding 55,777 55,873
============= ==========
Per share amount:
Income (loss) from continuing operations $ 0.03 $ (0.11)
Discontinued operations 0.01 (0.17)
Extraordinary gain on debt extinguishment, net of tax 0.09 -
------------- ----------
Net income (loss) $ 0.13 $ (0.28)
============= ==========
Diluted:
Weighted average shares outstanding 55,777 55,873
Net effect of dilutive stock options and stock warrants-based on
the treasury stock method using average market price 2 -
------------- ----------
Total weighted average shares outstanding 55,779 55,873
============= ==========
Per share amount:
Income (loss) from continuing operations $ 0.03 $ (0.11)
Discontinued operations 0.01 (0.17)
Extraordinary gain on debt extinguishment, net of tax 0.09 -
------------- ----------
Net income (loss) $ 0.13 $ (0.28)
============= ==========
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 months ended March 31, 2001, comprehensive income totaled $1.8 million.
During the three months ended March 31, 2002, comprehensive loss totaled $16.4
million.
8
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2002
(UNAUDITED)
2. Discontinued Operations
During the first quarter of 2002, the Company, as required, adopted Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS No. 144). In connection with the adoption of
SFAS No. 144, the Company has reclassified, for all periods presented, the
results and related charges for the business units that the Company discontinued
or sold pursuant to its 2001 restructuring plan, as described below.
During 2001, the Company's board of directors approved a restructuring plan
(2001 Restructuring Plan) that the Company began to implement in the fourth
quarter of 2001. The primary goal in adopting the 2001 Restructuring Plan was to
better position the Company for long-term and more consistent success by
improving its cost structure and eliminating operations in which the Company
believes potential returns are not adequate to justify the risks of those
operations. Certain markets in which the Company operates, including Brazil,
Jamaica, South Africa, Venezuela and Zimbabwe, have unusually high risk profiles
due to many factors, including among other things, high importation duties,
currency restrictions and volatile political and economic climates. The Company
has determined that the risks of operating in these markets can no longer be
justified given the profitability potential of its operations in those markets,
therefore, these operations have been or will be sold or otherwise discontinued
pursuant to the 2001 Restructuring Plan. Additionally, pursuant to the 2001
Restructuring Plan, the Company completed in January 2002, through certain of
its subsidiaries, the formation of a joint venture with Hong Kong-based
Chinatron Group Holdings Limited (Chinatron). Chinatron is involved in the
wireless telecommunications and data industry and, is beneficially owned, in
part, by the managing director of Brightpoint China Limited and a former
executive of Brightpoint, Inc. In addition, an independent director of
Brightpoint, Inc. is also a director of Chinatron. A director and executive
officer of Brightpoint, Inc. and the managing director of Brightpoint China
Limited were founding shareholders of Chinatron. Prior to the Company entering
into the agreement to form the joint venture, the Company's director and
executive officer disposed of his interest in Chinatron primarily through the
sale of his interest to a company owned by the managing director of Brightpoint
China Limited and the former executive of Brightpoint, Inc. In exchange, the
Company's director and executive officer received the unconditional promise from
their company to pay him $350,000 ($200,000 of which has been paid to date). In
exchange for a 50% interest in Brightpoint China Limited, the Company received
preference shares in Chinatron with a face value of $10 million. On April 29,
2002, the Company announced that it had completed the sale of its remaining 50%
interest in Brightpoint China Limited to Chinatron. Pursuant to this
transaction, the Company received additional preference shares in Chinatron with
a face value of $11 million. In total, the Company now holds Chinatron
preference shares equaling a 19.9% interest in Chinatron. The Company currently
estimates that its aggregate amount of Chinatron preference shares have a fair
value of approximately $10 million and, pursuant to the transaction, recorded
losses of approximately $8.5 million during the three months ended March 31,
2002.
9
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2002
(UNAUDITED)
2. Discontinued Operations (continued)
The 2001 Restructuring Plan is also intended to improve the Company's cost
structure and, accordingly, the Company's former North America and Latin America
divisions were consolidated in 2001 and are managed as one division, referred to
as the Americas. Warehouse and logistics functions formerly based in Miami were
transferred to Indianapolis and the warehouse in Miami was closed. Additionally
the Company's operations and activities in Germany, the Netherlands and Belgium,
including regional management, will be consolidated into a new facility in
Germany. In total, the 2001 Restructuring Plan will result in a headcount
reduction of approximately 350 employees in most areas of the Company, including
marketing, operations, finance and administration.
For the three months ended March 31, 2002 discontinued operations experienced a
net loss of $5.5 million on revenue of $12.2 million and net losses on disposal
of approximately $3.9 million. These losses include $8.5 million related to the
transaction with Chinatron, $1.5 million in net losses during the first quarter
of 2002 from wind-up operations of discontinued entities (including the
Company's former China operation) and other minor adjustments to amounts
recorded pursuant to the 2001 Restructuring Plan. For the three months ended
March 31, 2001 the Company's discontinued operations generated net income of
approximately $0.5 million on revenue of approximately $111 million. To date,
the Company has recorded approximately $44.4 million in charges during 2001 and
2002 relative to the actions called for by the 2001 Restructuring Plan. As of
March 31, 2002 the actions called for by the 2001 Restructuring Plan were
substantially complete, however, the Company expects to continue to record
adjustments through discontinued operations as necessary. The Company believes
that the total of all charges incurred pursuant to the 2001 Restructuring Plan
will still fall within its previously disclosed range of between $45 million and
$55 million. Net assets held for sale or disposal pursuant to the 2001
Restructuring Plan are classified in the Consolidated Balance Sheet at March 31,
2002, as follows (in millions):
Total current assets $ 17.0
Property and equipment 2.4
Goodwill and other intangibles 12.5
Other non-current assets 1.0
--------
Total assets $ 32.9
========
Accounts payable $ 5.6
Lines of credit, short-term 7.6
Accrued expenses and other liabilities 6.6
--------
Total current liabilities 19.8
Minority interest 9.0
--------
Total liabilities $ 28.8
========
10
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2002
(UNAUDITED)
2. Discontinued Operations (continued)
As a result of actions taken in accordance with the 2001 Restructuring Plan, the
Company recorded non-recurring charges totaling approximately $36.5 million in
the fourth quarter of 2001 and $7.9 million in the first quarter of 2002,
respectively, as follows (in millions):
Quarter Ended
------------------------------------
December 31, 2001 March 31, 2002
------------------------------------
Non-cash charges:
Impairment of goodwill and investments $ 12.7 $ 8.2
Impairment of accounts receivable and inventories of
restructured operations 11.0 (1.5)
Impairment of fixed and other assets 4.7 1.0
Income tax effect of restructuring actions (12.1) -
Write-off of cumulative foreign currency translation
adjustments 16.8 (0.5)
------------------------------------
33.1 7.2
------------------------------------
Cash charges:
Employee termination costs 1.7 -
Lease termination costs 1.3 0.1
Other exit costs 0.4 0.6
------------------------------------
3.4 0.7
------------------------------------
$ 36.5 $ 7.9
------------------------------------
For the three months ended March 31, 2002 these charges are classified in
discontinued operations along with the related net operating losses from these
discontinued operations totaling $1.5 million. At March 31, 2002, the Company
had approximately $1.7 million in restructuring reserves related to the 2001
Restructuring Plan.
3. 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). These transactions resulted in an extraordinary gain of approximately
$4.6 million ($0.09 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.
11
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2002
(UNAUDITED)
4. Accounts Receivable Transfers
During the three months ended March 31, 2001 and 2002, 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 three months
ended March 31, 2001 and 2002 totaled $40.0 million and $40.7 million,
respectively. Fees, in the form of discounts, incurred in connection with these
sales totaled $0.9 million and $0.9 million during the three months ended March
31, 2001 and 2002, 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, although in limited circumstances related primarily to payment
disputes regarding the Company's performance in the original transactions, the
Company may be required to repurchase the corresponding accounts receivable
sold.
5. Contract Financing Receivable
The Company offers financing of inventory and receivables to certain network
operator customers and their authorized dealer agents and wireless equipment
manufacturers under contractual arrangements. Under these arrangements, the
Company manages and finances, but does not own, accounts receivable and
inventories for these customers. The amount financed pursuant to these
arrangements is recorded as a current asset under the caption "Contract
financing receivables." In addition, the Company has commitments under certain
contracts to provide inventory financing for these customers pursuant to various
limitations and provisions as defined in the applicable service agreements. At
March 31, 2002 and December 31, 2001, contract financing receivables of $37.3
million ($34.9 million of which was unfunded) and $60.4 million ($45.5 million
of which was unfunded), respectively, were secured by $19.6 million and $23.8
million, respectively, of wireless products located at the Company's facilities.
The Company's contract financing activities are provided to network operators
and their authorized dealer agents and wireless equipment manufacturers located
throughout the United States. Decisions to grant credit under these arrangements
are at the discretion of the Company, are made within guidelines established by
the network operators and wireless equipment manufacturers and are subject to
the Company's normal credit granting and ongoing credit evaluation process.
12
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2002
(UNAUDITED)
6. Lines of Credit and Long-term Debt
On March 11, 1998, the Company completed the issuance of zero-coupon,
subordinated, convertible notes due in the year 2018 (Convertible Notes) with an
aggregate face value of $380 million ($1,000 per Convertible Note) and a yield
to maturity of 4.00%. The Convertible Notes 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.
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 repurchased 94,000 Convertible Notes during the
fourth quarter of 2000 and realized a gain on the repurchases of approximately
$16.6 million ($10.0 million, net of tax) that was recorded as an extraordinary
gain on debt extinguishment in the Consolidated Statements of Operations. 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 ($0.09 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.
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. As of March 31, 2002 the Company has made no
repurchases of Convertible Notes pursuant to this plan. Repurchases, if any,
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.
No assurance can be given that the Company will repurchase any of the
Convertible Notes under this plan or otherwise. The Company has the right,
subject to certain limitations, 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 in such a manner. As of March 31,
2002, the remaining 250,000 Convertible Notes had an accreted book value of
approximately $133 million or $532 per Convertible Note. As of May 10, 2002 the
Convertible Notes had a fair market value of approximately $350 per Convertible
Note.
The $250 million face value of the Convertible Notes is convertible at the
option of the holder any time prior to maturity. These notes are convertible at
the rate of 19.109 shares of common stock per $1,000 face value note, for an
aggregate of 4,777,250 shares of common stock. The bondholders also may require
the Company to purchase the bonds on the fifth, tenth and fifteenth anniversary
date of the issuance of the bonds. The five-year anniversary is March 11, 2003.
The Company has the option to pay the purchase price of approximately $138
million for the 250,000 bonds in cash or common stock. If the Company is able
and choose to utilize common stock to satisfy this potential obligation, the
number of shares issued would be significant and could significantly dilute the
ownership interests of the Company's common stockholders. The number of shares
that would be issued to holders of the convertible bonds, if the Company chooses
to use only common stock and no cash to purchase the bonds,
13
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2002
(UNAUDITED)
6. Lines of Credit and Long-term Debt (continued)
would be the $138 million accreted value of the bonds at the five-year
anniversary date divided by the average sales price of the common stock for the
five trading day period prior to the three trading days before the five-year
anniversary date. If the holders of the Convertible Notes exercise their
mandatory purchase rights, as noted above, and if the Company determines to
satisfy all or a substantial portion of the purchase obligation in shares of its
Common Stock rather than cash, based upon the current market price of the
Company's Common Stock, the Company would not have sufficient authorized but
unissued shares available to satisfy its purchase obligation. Because the
bondholders have the ability to require the Company to repurchase the
Convertible Notes within less than a year from March 31, 2002, the Convertible
Notes have been classified as a current liability in the Consolidated Balance
Sheets at March 31, 2002. The Company is currently in the process of seeking the
advice of various experts in exploring alternatives relating to the requirement
to repurchase the Convertible Notes in March of 2003.
On October 31, 2001, the Company's primary North American operating
subsidiaries, Brightpoint North America L.P. and Wireless Fulfillment Services,
LLC (the Borrowers), entered into a new revolving credit facility, which was
amended on December 21, 2001 (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 Lenders). The Revolver
replaces the Company's former Bank One multicurrency facility discussed below,
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
$90 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 guaranteed by Brightpoint, Inc. and is secured by all of the
Borrower's assets in North America. The Company also has pledged the capital
stock of certain of its subsidiaries as collateral for the Revolver. 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, as well as, prohibit the Company from amending
the terms of the Convertible Notes without the prior written consent of GE
Capital. The provisions of the Revolver are such that if the Company's unused
borrowing availability falls below $20 million, the Company is then subject to a
minimum fixed charge coverage ratio as defined in the agreement and a
requirement to maintain an unused borrowing availability of $10 million. Any of
the following events could cause the Company to be in default under the
Revolver, including but not limited to, (i) the expiration or termination of the
Company's distribution agreement in the United States with Nokia Inc., (ii) a
change in control of the Company, (iii) Standard & Poor's lowering their issuer
rating of Brightpoint, Inc. to lower than "B", (iv) the availability of
borrowings under the Revolver falling below $10 million or (v) the violation of
the fixed charged coverage ratio, if applicable. In the event of default, the
Lenders may (i) terminate all or a portion of the Revolver with respect to
further advances or the incurrence of further letter of credit obligations, (ii)
declare all or any portion of the obligations due and payable and require any
and all of the letter of credit obligations be cash collateralized, or (iii)
exercise any rights and remedies provided to the Lenders under the loan document
or at law or equity. Additionally, the Lenders may increase the rate of interest
applicable to the advances and the letters of credit to the default rate as
defined in the agreement.
14
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2002
(UNAUDITED)
6. Lines of Credit and Long-term Debt (continued)
Subject to certain restrictions, the Company may use proceeds under the Revolver
to repurchase its outstanding Convertible Notes. At March 31, 2002, there was
approximately $23.2 million outstanding under the Revolver at an interest rate
of approximately 5.2%. Available funding under the Revolver was approximately
$25.7 million at March 31, 2002, however, the Company did not meet certain
financial covenant requirements to draw upon the $20 million minimum unused
borrowing availability.
During 2001, one of the Company's subsidiaries, Brightpoint (France) SARL,
entered into a short-term line of credit facility with Natexis Banque. The
facility has borrowing availability of up to approximately $6.9 million Euros
($6.1 million U.S. Dollars), is guaranteed by the receivables of one of
Brightpoint (France) SARL's customers and bears interest at EURIBOR plus 2.5%.
At March 31, 2002 and December 31, 2001, the interest rate was approximately
5.9% and 5.8%, respectively. A two-month notice is required to terminate the
facility. At March 31, 2002 and December 31, 2001, there was $3.3 million and
$6.1 million, respectively, outstanding under this facility. Also, during 2001,
another of the Company's subsidiaries, Brightpoint Australia Pty Ltd, entered
into a short-term line of credit facility with Westpac Banking Corporation. The
facility, which is due on demand, has borrowing availability of up to $10
million Australian Dollars ($5.1 million U.S. Dollars) and bears interest at
Westpac's base overdraft rate plus 1.95%. At December 31, 2001, the interest
rate was approximately 8.9%. The facility is secured by a fixed and floating
charge over all of the assets of Brightpoint Australia Pty Ltd and is guaranteed
by Brightpoint, Inc. At March 31, 2002, no amounts were outstanding under this
facility and at December 31, 2001 there was approximately $4.2 million U.S.
Dollars outstanding under this facility.
In January 2002, in connection with the agreement made with Chinatron as
discussed in Note 2 to the Consolidated Financial Statements, Brightpoint China
Limited entered into two separate credit facilities. The first agreement is with
DBS Kwong On Bank Limited, has a maximum available borrowing limit of
approximately 78.0 million Hong Kong Dollars (approximately $10 million U.S.
Dollars), bears interest at 0.5% over the prime rate as quoted by DBS Kwong On
Bank Limited (5.1% at March 31, 2002) and is due on demand. This facility is
supported by a letter of credit of $2.5 million issued by Brightpoint Holdings
B.V. and a $2.5 million letter of credit issued by a shareholder in Chinatron as
well as corporate and personal guarantees from certain shareholders of
Chinatron. This facility requires that Brightpoint China Limited maintain a
minimum paid up capital amount, a minimum net worth amount, a debt-to-equity
ratio within certain limits and shall not pledge any of its accounts receivable
to any other financial institution without prior consent. The second facility is
with Standard Chartered Bank, Hong Kong Branch and has a maximum available
borrowing limit of approximately $16 million U.S. Dollars, bears interest at the
greater of 0.5% over the prime rate as quoted by Standard Chartered Bank or
HIBOR plus 0.5% (5.6% at March 31, 2002) and is due on demand. The facility is
secured by a letter of credit of $7.5 million, issued by Brightpoint Holdings
B.V. as well as corporate and personal guarantees from certain shareholders of
Chinatron and requires a minimum level of paid up capital. This facility
includes a sub-facility under which portions of the maximum available borrowing
limit may be borrowed in Renminbi. At March 31, 2002 there was approximately
$7.6 million outstanding under the two China facilities discussed above. As more
fully discussed in Note 2 to the Consolidated Financial Statements, the Company
sold its remaining interests in Brightpoint China Limited in April of 2002 and,
consequently, has attained the release of both of the cash-secured letters of
credit supporting these facilities. Subsequent to March 31, 2002, the Company
will no longer consolidate Brightpoint China Limited and the facilities
discussed above will be the obligation of Chinatron.
15
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2002
(UNAUDITED)
7. Operating Segments
The Company operates in markets worldwide and has three operating segments.
These operating segments represent the Company's three divisions: the Americas,
Asia-Pacific and Europe. These divisions all derive revenues from sales of
wireless handsets, accessory programs and fees from the provision of integrated
logistics services. However, the divisions are managed separately because of the
geographic locations in which they operate.
The Company evaluates the performance of, and allocates resources to, these
segments based on income (loss) from continuing operations including allocated
corporate selling, general and administrative expenses. As discussed in Note 2
to the Consolidated Financial Statements, during the fourth quarter of 2001 the
Company implemented a restructuring plan that provided for selling or otherwise
disposing of certain operations. In January of 2002 the Company adopted SFAS No.
144 which changed the presentation of discontinued operations. See Notes 1 and 2
to the Consolidated Financial Statements for further discussion. A summary of
the Company's operations by segment is presented below (in thousands):
2001 2002
----------------------------------- -------------------------------------
REVENUES FROM INCOME FROM REVENUES FROM INCOME (LOSS)
EXTERNAL CUSTOMERS OPERATIONS EXTERNAL CUSTOMERS FROM OPERATIONS
------------------ ----------- ------------------ ---------------
THREE MONTHS ENDED
MARCH 31:
The Americas $ 186,275 $ 2,172 $ 147,545 $ (2,693)
Asia-Pacific 105,842 2,255 139,626 1,086
Europe 61,774 790 51,773 (3,017)
------------------ ----------- ------------------ ---------------
$ 353,891 $ 5,217 $ 338,944 $ (4,624)
================== =========== ================== ===============
DECEMBER 31, MARCH 31,
TOTAL SEGMENT ASSETS: 2001 2002
------------- ----------
The Americas (1) (2) $ 402,030 $ 286,534
Asia-Pacific (2) 98,539 133,431
Europe (2) 108,851 105,007
------------- ----------
$ 609,420 $ 524,972
============= ==========
(1) Includes assets of the Company's corporate operations.
(2) Includes assets held for sale or disposal of discontinued operations at
March 31, 2002.
16
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2002
(UNAUDITED)
8. Contingencies
In February 2002, Nora Lee, filed a complaint in the Circuit Court, Marion
County, Indiana, against all of the Company's current directors, its former
corporate controller and its current independent auditors, Ernst & Young LLP,
which action is entitled Nora Lee Derivatively on Behalf of Nominal Defendant
Brightpoint, Inc., vs. Robert J. Laikin, et. al. and Brightpoint, Inc. as a
Nominal Defendant, Cause No. 49C01-0202-CT-000399.
The plaintiff alleges, among other things, that certain of the individual
defendants sold the Company's Common Stock while in possession of material
non-public information regarding the Company, that the individual defendants
violated their fiduciary duties of loyalty, good faith and due care by, among
other things, causing the Company to disseminate misleading and inaccurate
financial information, failing to implement and maintain internal adequate
accounting control systems, wasting corporate assets and exposing the Company to
losses. The plaintiff is seeking to recover unspecified damages from all
defendants, the imposition of a constructive trust for the amounts of profits
received by the individual defendants who sold the Company's common stock and
recovery of reasonable litigation costs and expenses.
The Company and several of its executive officers and directors were named as
defendants in two complaints filed in November and December 2001, in the United
States District Court for the Southern District of Indiana, entitled Weiss v.
Brightpoint, Inc., et. al., Cause No. IP01-1796-C-T/K; and Mueller v.
Brightpoint, Inc., et. al., Cause No. IP01-1922-C-M/S. In February 2002, the
Court consolidated the Weiss and Mueller actions and appointed John Kilcoyne as
lead plaintiff in this action which is now known as In re Brightpoint, Inc.
Securities Litigation. A consolidated amended complaint was filed in April 2002.
The amended complaint, among other things, adds the Company's current
independent auditors as a defendant.
The action is a purported class action asserted on behalf of all purchasers of
the Company's publicly traded securities between January 29, 1999 and January
31, 2002, alleging violations of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder by the Company and certain of its
officers and directors, as well as the Company's current independent auditors,
and violations of Section 20(a) of the Exchange Act by the individual
defendants.
The amended complaint alleges, among other things, that the Company
intentionally concealed and falsified its financial condition, and issued
financial statements which violated generally accepted accounting principles, in
order that it would not be declared in default of its loan covenants under its
line of credit. The amended complaint also alleges that, due to the false
financial statements, the Company's stock was traded at artificially inflated
prices. Plaintiff seeks compensatory damages, including interest, against all of
the defendants and recovery of their reasonable litigation costs and expenses.
The Company disputes these claims and intends to vigorously defend this matter.
17
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2002
(UNAUDITED)
8. Contingencies (continued)
A complaint was filed on November 23, 2001 against the Company and 87 other
defendants in the United States District Court for the District of Arizona,
entitled Lemelson Medical, Education and Research Foundation LP v. Federal
Express Corporation, et.al., Cause No. CIV01-2287-PHX-PGR. The plaintiff claims
the Company and other defendants have infringed 7 patents alleged to cover bar
code technology. The case seeks unspecified damages, treble damages and
injunctive relief. The Court has ordered the case stayed pending the decision in
a related case in which a number of bar code equipment manufacturers have sought
a declaration that the patents asserted are invalid and unenforceable. The trial
of that related case is currently scheduled to begin in November 2002. The
Company disputes these claims and intends to defend vigorously this matter.
The Company has responded to requests for information and subpoenas from the
Securities and Exchange Commission (SEC) in connection with an investigation
including its accounting treatment of a certain contract entered into with an
insurance company. In addition, certain of the Company's officers or employees
have provided testimony to the SEC and the Company believes that the staff of
the SEC will subpoena additional testimony of certain of its officers and
employees.
The Company is from time to time, also involved in certain legal proceedings in
the ordinary course of conducting its business. While the ultimate liability
pursuant to these actions cannot currently be determined, the Company believes
these legal proceedings will not have a material adverse effect on its financial
position.
The Company's Certificate of Incorporation and By-laws provide for it to
indemnify its officers and directors to the extent permitted by law. In
connection therewith the Company has entered into indemnification agreements
with its executive officers and directors. In accordance with the terms of these
agreements the Company intends to reimburse them for their personal legal
expenses arising from certain pending litigation and regulatory matters.
18
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. The preparation of
financial statements in conformity with generally accepted accounting principles
requires us 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 we do not believe such differences will
materially affect our financial position or results of operations. See Note 1 to
the consolidated financial statements included in this report for information
regarding our critical accounting policies. 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 our Annual Report on Form 10-K for the year ended December 31,
2001.
During the first quarter of 2002, we completed, through certain of our
subsidiaries, the formation of a joint venture with Hong Kong-based Chinatron
Group Holdings Limited (Chinatron). In exchange for a 50% interest in
Brightpoint China Limited, we received preference shares in Chinatron with a
face value of $10 million. In April of 2002, we sold our remaining 50% interest
in Brightpoint China Limited to Chinatron in exchange for additional preference
shares in Chinatron with a face value of $11 million. Our preference shares in
Chinatron are convertible into Chinatron ordinary shares which represent a 19.9%
interest in Chinatron. We believe the Chinatron transaction reduced the capital
we employ in the China market, including Hong Kong, while allowing us to
continue to participate on a limited basis in this large handset market.
On April 29, 2002, we announced that our Board of Directors has approved a
1-for-7 reverse split of our common stock. We intend to submit the reverse split
for approval by our stockholders at our Annual Meeting of Stockholders currently
scheduled for June 26, 2002. If the reverse split is effected, we would have
approximately 8 million shares of common stock issued and outstanding of 100
million shares of common stock authorized.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During the first quarter of 2002 we adopted Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144). In connection with the adoption of SFAS No. 144 we have
reclassified, for all periods presented, the results of operations and related
charges for the business units that we discontinued or sold pursuant to our 2001
Restructuring Plan, including our former operations in China which were sold in
April of 2002 pursuant to the Chinatron transaction discussed above. See further
discussion below under the heading "Discontinued Operations."
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 prior to June 30, 2002 with an effective date of
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 our financial statements at the time of adoption. Upon adoption,
goodwill will no longer be amortized and will be tested for impairment at least
annually. At March 31, 2002, we had goodwill and other intangibles totaling
approximately $56.8 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 our financial statements.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
We are currently assessing the impact that SFAS No. 142 will have on our
financial statements upon adoption in 2002, however, during February of 2002, we
completed the first step in the required goodwill impairment testing process
required by SFAS No. 142. The results of this first step have indicated that we
will need to complete the more detailed second step in the required goodwill
impairment testing process required by SFAS No. 142 on portions of our goodwill
and intangible assets. We estimate that upon completion of our impairment
testing we will record a charge of up to $21.6 million. Of this amount, $8.5
million was recorded during the three months ended March 31, 2002 in
discontinued operations pursuant to the recording of the transaction with
Chinatron (see Note 2 to the Consolidated Financial Statements). Upon completion
of our implementation of SFAS No. 142, the $8.5 million will be reclassified
from discontinued operations as currently reported to the cumulative effect of
an accounting change along with any other impairment charges and be presented
effective January 1, 2002 along with the required disclosures regarding
reclassification of prior period amounts.
In April of 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections (SFAS No. 145). SFAS No. 145 is required to be adopted in the second
quarter of 2002. We are currently evaluating the effects that this standard will
have on our results if any.
RESULTS OF OPERATIONS
Revenue
Revenue by Division (in thousands):
Three Months Ended
----------------------------------------------------------------------------- Change from Change from
March 31, Percent December 31, Percent March 31, Percent Q1 2001 to Q4 2001 to
2001 of Total 2001 of Total 2002 of Total Q1 2002 Q1 2002
--------------------------------------------------------------------------------------------------------
The Americas $186,275 53% $182,616 49% $147,545 44% (21%) (19%)
Asia-Pacific 105,842 30% 112,424 30% 139,626 41% 32% 24%
Europe 61,774 17% 79,535 21% 51,773 15% (16%) (35%)
--------------------------------------------------------------------------------------------------------
Total $353,891 100% $374,575 100% $338,944 100% (4%) (10%)
========================================================================================================
Revenue in the quarter ended March 31, 2002, decreased 4% compared to the first
quarter of 2001 and 10% compared to the fourth quarter of 2001. We have
historically experienced a similar sequential decline in revenue during the
first quarter from the fourth quarter due to seasonality. However, this decline
was more pronounced during the first quarter of 2002 in our Europe and Americas
divisions as we experienced lower-than-anticipated demand for our products and
services due primarily to slower growth in new wireless subscribers and lower
demand for replacement handsets.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Revenue (continued)
In addition, we continue to experience a general reduction in handset subsidies
and in the number of promotional programs sponsored by network operators in many
parts of the world in which we transact business. The revenue declines in the
Americas and Europe divisions, in the first quarter of 2002 as compared to both
the first and fourth quarters of 2001, were partially offset by increases in
revenue in our Asia-Pacific division, which includes the Middle East, but
excludes China, which, as discussed below, is now classified as a discontinued
operation.
Revenue by Service Line (in thousands):
Three Months Ended
------------------------------------------------------------------------- Change from Change from
March 31, Percent December 31, Percent March 31, Percent Q1 2001 to Q4 2001 to
2001 of Total 2001 of Total 2002 of Total Q1 2002 Q1 2002
-----------------------------------------------------------------------------------------------------
Sales of wireless handsets $280,289 79% $294,127 79% $269,300 80% (4%) (8%)
Accessory programs 40,743 12% 30,614 8% 31,404 9% (23%) 3%
Integrated logistics
services 32,859 9% 49,834 13% 38,240 11% 16% (23%)
-----------------------------------------------------------------------------------------------------
Total $353,891 100% $374,575 100% $338,944 100% (4%) (10%)
======================================================================================================
Compared to the first and fourth quarters of 2001, we experienced a decline in
wireless handset sales in the first quarter of 2002 due to the factors affecting
worldwide demand for wireless handsets discussed previously. In addition, demand
for much of our integrated logistics services is generated, directly or
indirectly, through promotional programs sponsored by network operators. Many
network operators reduced or delayed promotional programs during recent
quarters, causing our revenues in this service line to decrease sequentially.
When compared to the first quarter of 2001, the decrease in accessory program
revenue was also primarily the result of reductions in promotional programs
sponsored by network operators and the increase in integrated logistics services
reflects the addition of new significant logistics services customers in certain
markets during the fourth quarter of 2001.
Gross Profit
Three Months Ended
----------------------------------------------- Change from Change from
March 31, December 31, March 31, Q1 2001 to Q4 2001 to
(In thousands) 2001 2001 2002 Q1 2002 Q1 2002
------------------------------------------------------------------------------------------------------------
Gross profit $ 24,835 $ 25,139 $ 17,154 (31%) (32%)
Gross margin 7.0% 6.7% 5.1%
------------------------------------------------------------------------------------------------------------
Gross profit for the three months ended March 31, 2002, decreased 31% and 32%,
respectively, over the first and fourth quarters of 2001 resulting in a gross
margin of 5.1% for first quarter of 2002, compared to gross margins of 7.0% and
6.7% for the first and fourth quarters of 2001, respectively. The decrease in
gross margin during the first quarter of 2002 was due primarily to the
write-down of certain inventories in Germany and Mexico totaling approximately
$2.8 million to adjust the carrying cost of those inventories to estimated net
realizable value based on current market conditions. We also experienced
downward pressures on gross margin during the first quarter of 2002 in certain
markets due to lower demand.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Selling, General and Administrative Expenses
Three Months Ended
------------------------------------------------ Change from Change from
(In thousands) March 31, December 31, March 31, Q1 2001 to Q4 2001 to
2001 2001 2002 Q1 2002 Q1 2002
-------------------------------------------------------------------------------------------------------------------------------
Selling, general and $ 19,618 $ 22,247 $ 21,778 11% (2%)
administrative expenses
As a percent of revenue 5.5% 5.9% 6.4%
-------------------------------------------------------------------------------------------------------------------------------
When compared to the first quarter of 2001, selling, general and administrative
expenses increased approximately $2.2 million and also increased as a percent of
revenue due primarily to increased corporate and other overhead costs, including
legal, accounting and other professional fees. Selling, general and
administrative expenses for the first quarter of 2002 decreased slightly from
the fourth quarter of 2001, but increased as a percent of revenue due to the
decrease in total revenue.
Operating Income (Loss) from Continuing Operations
Three Months Ended
-----------------------------------------------
(In thousands) March 31, December 31, March 31,
2001 2001 2002
--------------------------------------------------------------------------------
Operating income (loss) from
continuing operations $ 5,217 $ 2,892 $ (4,624)
As a percent of revenue 1.5% 0.8% (1.4%)
--------------------------------------------------------------------------------
For the first quarter of 2002 we experienced an operating loss from continuing
operations compared to operating income from continuing operations in the first
and fourth quarters of 2001. The decrease during the first quarter of 2002 when
compared to the first quarter of 2001 was due to the reduction in revenue, the
decrease in gross margin and the increase in selling, general and administrative
expenses as a percent of revenue. When comparing the first quarter of 2002 to
the fourth quarter of 2001 the decrease in operating income from continuing
operations was due to the reduction in revenue and corresponding reduction in
both gross profit and gross margin.
Income (Loss) from Continuing Operations
The loss from continuing operations for the first quarter of 2002 was $6.3
million compared to income from continuing operations of $1.9 million and $1.5
million in the first and fourth quarters of 2001, respectively. In both
instances, the decrease was due primarily to the factors discussed above in the
analyses of revenue, gross margin and selling, general and administrative
expenses. Net loss per diluted share from continuing operations was $0.11 for
the first quarter of 2002 compared to net income per diluted share from
continuing operations of $0.03 for each of the first and fourth quarters of
2001.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Discontinued Operations
During the first quarter of 2002 we adopted Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144). In connection with the required adoption of SFAS No. 144
we have reclassified, for all periods presented, the results of operations and
related charges for the business units (Brazil, Belgium, Holland, Jamaica,
Miami, South Africa, Venezuela and Zimbabwe locations) that we discontinued or
sold pursuant to our 2001 Restructuring Plan. Additionally, as a result of the
transaction with Chinatron discussed above in the section entitled "Overview and
Recent Developments," our former operations in China, including Hong Kong are
also classified as discontinued operations. See Notes 1 and 2 to the
Consolidated Financial Statements for further discussions regarding the adoption
of SFAS No. 144 and our 2001 Restructuring Plan.
For the three months ended March 31, 2002 discontinued operations experienced a
net loss of $5.5 million on revenue of $12.2 million and net losses on disposal
of approximately $3.9 million. These losses include $8.5 million related to the
transaction with Chinatron, $1.5 million in net losses during the first quarter
of 2002 from wind-up operations of discontinued entities (including our former
China operation) and other minor adjustments to amounts recorded pursuant to the
2001 Restructuring Plan. For the three months ended March 31, 2001 our
discontinued operations generated net income of approximately $0.5 million on
revenue of approximately $111 million. To date, we have recorded approximately
$44.4 million in charges during 2001 and 2002 relative to the actions called for
by the 2001 Restructuring Plan. As of March 31, 2002 the actions called for by
the 2001 Restructuring Plan were substantially complete, however, we expect to
continue to record adjustments through discontinued operations as necessary. We
believe that the total of all charges incurred pursuant to the 2001
Restructuring Plan will still fall within our previously disclosed range of
between $45 million and $55 million. In total, the 2001 Restructuring Plan will
result in a headcount reduction of approximately 350 employees in most of our
functional areas, including marketing, operations, finance and administration.
Extraordinary Gain on Debt Extinguishment
During the first quarter of 2001, we repurchased 36,000 of our 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
($0.09 per diluted share) after transaction and unamortized debt issuance costs
and applicable taxes.
Net Income (Loss)
Due primarily to the factors discussed above, our net loss for the first quarter
of 2002 was $15.7 million, or $0.28 per diluted share, compared to net income of
$7.0 million, or $0.13 per diluted share, in the first quarter of 2001 and a net
loss of $46.6 million, or $0.83 per diluted share, for the fourth quarter of
2001.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
(In thousands) December 31, 2001 March 31, 2002
------------------------------------------------------------------------------------------------
Cash and cash equivalents (includes restricted cash) $ 74,952 $ 81,358
Working capital $ 184,434 $ 176,475
Current ratio 1.61 : 1 1.78 : 1
------------------------------------------------------------------------------------------------
We have historically satisfied our working capital requirements principally
through cash flow from operations, vendor financing, bank borrowings and the
issuance of equity and debt securities. The decrease in working capital at March
31, 2002 compared to December 31, 2001 is comprised primarily of the effect of
decreases in accounts receivable, inventories and funded contract financing
activities, partially offset by a decrease in accounts payable. We believe that
cash flow from operations and available bank borrowings will be sufficient to
continue funding our short-term capital requirements. However, repurchases of
Convertible Notes (described below), if any, significant changes in our business
model, significant operating losses or expansion of operations in the future may
require us to seek additional and alternative sources of capital.
Net cash used by operating activities was $18.3 million for the three months
ended March 31, 2002, as compared to cash provided by operating activities of
$16.7 million in the comparable prior period. The decrease was primarily the
result of a reduction in earnings and accounts payable and the increase in
pledged cash requirements in the first quarter of 2002 partially offset by cash
generated through reducing accounts receivable and inventories during the
period. Additionally, as of March 31, 2002, average days revenue in accounts
receivable were approximately 42 days, compared to days revenue in accounts
receivable of approximately 45 days and 34 days for the fourth and first
quarters of 2001, respectively. During the first quarter of 2002 and the fourth
quarter of 2001, average inventory turns were 11 times and during the first
quarter of 2001 average inventory turns were 9 times. Average days costs in
accounts payable were 43 days for the first quarter of 2002, compared to 50 days
and 39 days in the fourth and first quarters of 2001, respectively. These
changes combined to create an increase in cash conversion cycle days to 31 days
in the first quarter of 2001 from 29 days in the fourth quarter of 2001. Cash
conversion cycle days decreased when compared to the 38 days experienced in the
first quarter of 2001.
Unrestricted cash and cash equivalents decreased by approximately $9.4 million
during the first quarter of 2002 when compared to December 31, 2001 and pledged
cash increased by approximately $15.8 million during the first quarter of 2002
when compared to December 31, 2001. The increase in pledged cash is attributable
to the issuance of cash-secured letters of credit to support certain debt
facilities of Brightpoint China Limited. Subsequent to March 31, 2002, $10
million of our pledged cash was released pursuant to the transaction completed
with Chinatron in April of 2002 and discussed previously. A significant portion
of our cash is held by Brightpoint Holdings B.V., our primary foreign finance
subsidiary, which operates as our European Treasury Center, and if brought back
to the United States could have certain adverse tax implications.
The reduction in accounts receivable in the first quarter of 2002 was
attributable to the decreased sales activity and successful acceleration of our
accounts receivable collection cycle, as well as, sales or financing
transactions of certain accounts receivable to financing organizations. During
2001 and the first quarter of 2002, we entered into certain transactions with
financing organizations with respect to a portion of our accounts receivable in
order to reduce the amount of working capital required to fund such receivables.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Certain of these transactions qualify as sales pursuant to current accounting
principles generally accepted in the United States. Net funds received from the
sales of accounts receivable during the first quarter of 2001 and 2002 totaled
$40.0 million and $40.7 million, respectively. We are the collection agent on
behalf of the financing organization for many of these arrangements. We have no
significant retained interests or servicing liabilities related to accounts
receivable that we have sold, although in limited circumstances related
primarily to payment disputes regarding our performance in the original
transactions, we may be required to repurchase the accounts. The collection of
our accounts receivable and our ability to accelerate our collection cycle
through the sale of accounts receivable is affected by several factors,
including, but not limited to, our credit granting policies, contractual
provisions, our customers' and our overall credit rating as determined by
various credit rating agencies, industry and economic conditions, the ability of
the customer to provide security, collateral or guarantees relative to credit
granted by us, the customer's and our recent operating results, financial
position and cash flows and our ability to obtain credit insurance on amounts
that we are owed. Adverse changes in any of these factors, certain of which may
not be wholly in our control, could create delays in collecting or an inability
to collect our accounts receivable which could have a material adverse effect on
our financial position cash flows and results of operations.
At March 31, 2002, our allowance for doubtful accounts was $5.6 million compared
to $6.3 million at December 31, 2001, which we believe was adequate for the size
and nature of our receivables at those dates. Bad debt expense as a percent of
revenues was less than 1.0% for the first quarter of 2002. However, we have
incurred significant accounts receivable impairments in connection with our 1999
and 2001 restructuring plans because we ceased doing business in certain
markets, significantly reducing our ability to collect the related receivables.
Also, our accounts receivable are concentrated with network operators, agent
dealers and retailers operating in the wireless telecommunications and data
industry and delays in collection or the uncollectibility of accounts receivable
could have an adverse effect on our liquidity and working capital position. We
believe that during 2001 and the first part of 2002 many participants in the
wireless telecommunications and data industry, including certain of our
customers, experienced operating results that were below previous expectations,
were subject to decreases in overall credit ratings and faced higher costs in
obtaining capital. We believe this trend will continue in 2002 and could have an
adverse effect on our financial position and results of operations. In
connection with our on-going business activities, we intend to offer open
account terms to additional customers, which subjects us to further credit
risks, particularly in the event that receivables are concentrated in particular
geographic markets or with particular customers. We seek to minimize losses on
credit sales by closely monitoring our customers' credit worthiness and by
obtaining, where available, credit insurance or security on open account sales
to certain customers.
The decrease in inventories and corresponding increase in average inventory
turns during the first quarter of 2002 are due primarily to a reduction in our
inventory levels commensurate with the overall lower demand in 2002 which we
expect to continue in certain markets during 2002. Additionally, during the
first quarter of 2002, we recorded inventory valuation adjustments of
approximately $2.8 million in Germany and Mexico to adjust inventories to their
estimated net realizable value based on the current market conditions. These
valuation adjustments were the result of the over-supply of product in our
distribution channel and the lower-than-anticipated level of demand experienced
in the first quarter of 2002. Significant portions of the impacted inventories
were wireless accessories.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
We offer financing of inventory and receivables to certain network operator
customers and their agents and manufacturer customers under contractual
arrangements. Under these contracts we manage and finance, but do not own,
inventories and receivables for these customers resulting in a contract
financing receivable. Contract financing receivables decreased to $37.3 million
in the first quarter of 2002 from $60.4 million at December 31, 2001. Contract
financing receivables are partially offset by the $34.9 million and $45.5
million unfunded portion of these receivables at March 31, 2002 and December 31,
2001, respectively. The decrease is due to the overall lower demand being
experienced by some of these customers. These receivables were secured at March
31, 2001 and December 31, 2001 by $19.6 million and $23.8 million, respectively,
of wireless products located at our facilities. In addition, we have commitments
under these contracts to provide inventory financing for these customers
pursuant to various limitations defined in the applicable service agreements.
The first quarter of 2002 reduction in accounts payable is due primarily to the
reduced business activity in the first quarter of 2002, including inventory
purchases and the reduction in average days costs in accounts payable days. We
rely on our suppliers to provide trade credit facilities and favorable payment
terms to adequately fund our on-going operations and product purchases. The
payment terms received from our suppliers is dependent on several factors,
including, but not limited to, our payment history with the supplier, the
suppliers credit granting policies, contractual provisions, our overall credit
rating as determined by various credit rating agencies, our recent operating
results, financial position and cash flows and the supplier's ability to obtain
credit insurance on amounts that we owe them. Adverse changes in any of these
factors, certain of which may not be entirely within our control, could have a
material adverse effect on our operations. We have, from time to time, obtained
extended payment terms from certain significant vendors at the end of each
quarter. Consequently, our accounts payable and cash balances at quarter end may
be higher than what is experienced throughout the quarter.
During the first quarter of 2002 net property and equipment was relatively
unchanged as compared to December 31, 2001 as the level of capital expenditures
($3.1 million) in the first quarter of 2002 was commensurate with depreciation
expense of $3.3 incurred during the period. We currently intend to invest an
aggregate of $10 to $14 million in capital expenditures (related primarily to
information technology) over the next year.
The decrease in goodwill and other intangibles in the first quarter of 2002 as
compared to December 31, 2001 is primarily the result of current year
amortization expense of other intangibles and non-cash write-offs totaling
approximately $4.3 million in our China operations pursuant to the Chinatron
transaction discussed previously.
The increase in net cash provided by investing activities in the first quarter
of 2002 as compared to the same period in 2001 is due primarily the decrease in
our funded contract financing activities discussed above.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On March 11, 1998, we 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 of our existing and
future senior indebtedness and all other liabilities, including trade payables
of our subsidiaries. The Convertible Notes resulted in gross proceeds 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 our revolving credit facility and to invest in highly
liquid, short-term investments pending use in operations. On October 30, 2000,
we announced that our Board of Directors had approved a plan under which we
could repurchase up to 130,000 Convertible Notes. We repurchased 94,000
Convertible Notes during the fourth quarter of 2000 and realized a gain on the
repurchases of approximately $16.6 million ($10.0 million, net of tax) that was
recorded as an extraordinary gain on debt extinguishment in the Consolidated
Statements of Operations. During the first quarter of 2001, we repurchased
36,000 Convertible Notes for approximately $10 million (prices ranging from $278
to $283 per Convertible Note), resulting in an extraordinary gain of
approximately $4.6 million ($0.09 per diluted share) after transaction and
unamortized debt issuance costs and applicable taxes. As of March 31, 2001, our
plan to repurchase 130,000 Convertible Notes was completed.
On November 1, 2001, we announced that our Board of Directors had approved
another plan under which we may repurchase the remaining 250,000 Convertible
Notes. Repurchases, if any, may 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. We have the right, subject to certain
limitations to fund the repurchases of the Convertible Notes from borrowings
under our North America revolving credit facility (discussed below) and from
working capital, however no assurance can be given that we will repurchase any
Convertible Notes. As of March 31, 2002 the remaining 250,000 Convertible Notes
had an accreted book value of approximately $532 per Convertible Note and as of
May 10, 2002 had an estimated fair market value of approximately $350 per
Convertible Note based on the quoted market price.
The $250 million face value of the Convertible Notes is convertible at the
option of the holder any time prior to maturity. These notes are convertible at
the rate of 19.109 shares of common stock per $1,000 face value note, for an
aggregate of 4,777,250 shares of common stock. The bondholders also may require
us to purchase the bonds on the fifth, tenth and fifteenth anniversary date of
the issuance of the bonds. The five-year anniversary is March 11, 2003. We have
the option to pay the purchase price of approximately $138 million for the
250,000 bonds in cash or common stock. If we are able and choose to utilize
common stock to satisfy this potential obligation, the number of shares issued
would be significant and could significantly dilute the ownership interests of
our common stockholders. The number of shares that would be issued to holders of
the convertible bonds, if we choose to use only common stock and no cash to
purchase the bonds, would be the $138 million accreted value of the bonds at the
five-year anniversary date divided by the average sales price of the common
stock for the five trading day period prior to the three trading days before the
five-year anniversary date. If the holders of the Convertible Notes exercise
their mandatory purchase rights, as noted above, and if we determine to satisfy
all or a substantial portion of the purchase obligation in shares of our Common
Stock rather than cash, based upon the current market price of the our Common
Stock, we would not have sufficient authorized but unissued shares available to
satisfy our purchase obligations.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Because the bondholders have the ability to require us to repurchase the
Convertible Notes within less than a year from March 31, 2002, the Convertible
Notes have been classified as a current liability in the Consolidated Balance
Sheets at March 31, 2002. We are currently in the process of seeking the advice
of various experts in exploring alternatives relating to the requirement to
repurchase the Convertible Notes in March of 2003.
On October 31, 2001, our primary North American operating subsidiaries,
Brightpoint North America L.P. and Wireless Fulfillment Services, LLC (the
Borrowers), entered into a new revolving credit facility, which was amended on
December 31, 2001 (the Revolver), with General Electric Capital Corporation (GE
Capital) to provide capital for our North American operations. GE Capital acted
as agent for a syndicate of banks (the Lenders). The Revolver replaces our
former Bank One multicurrency facility discussed below, does not prohibit us
from borrowing additional funds outside of the United States and expires in
October of 2004. The Revolver provides borrowing availability, subject to
borrowing base calculations and other limitations, of $90 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 guaranteed
by Brightpoint, Inc. and is secured by all of the Borrower's assets in North
America. 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 us and
other payments outside the normal course of business, as well as, prohibit us
from amending the terms of the Convertible Notes without the prior written
consent of GE Capital. The provisions of the Revolver are such that if our
unused borrowing availability falls below $20 million, we are then subject to a
minimum fixed charge coverage ratio as defined in the agreement and a
requirement to maintain an unused borrowing availability of $10 million. Any of
the following events could cause us to be in default under the Revolver,
including but not limited to, (i) the expiration or termination of our
distribution agreement in the United States with Nokia Inc., (ii) a change in
control of Brightpoint, Inc., (iii) Standard & Poor's lowering their issuer
rating of Brightpoint, Inc. to lower than "B", (iv) the availability of
borrowings under the Revolver falling below $10 million or (v) the violation of
the fixed charged coverage ratio, if applicable. In the event of default, the
Lenders may (i) terminate all or a portion of the Revolver with respect to
further advances or the incurrence of further letter of credit obligations, (ii)
declare all or any portion of the obligations due and payable and require any
and all of the letter of credit obligations be cash collateralized, or (iii)
exercise any rights and remedies provided to the Lenders under the loan document
or at law or equity. Additionally, the Lenders may increase the rate of interest
applicable to the advances and the letters of credit to the default rate as
defined in the agreement. Subject to certain restrictions, we may use proceeds
under the Revolver to repurchase our outstanding Convertible Notes. At March 31,
2002, there was approximately $23.2 million outstanding under the Revolver at an
interest rate of 5.2%. Available funding under the Revolver was approximately
$25.7 million at March 31, 2002, however, we did not meet certain financial
covenant requirements to draw upon the $20 million minimum unused borrowing
availability.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
During 2001, one of our subsidiaries, Brightpoint (France) SARL, entered into a
short-term line of credit facility with Natexis Banque. The facility has
borrowing availability of up to approximately $6.9 million Euros ($6.1 million
U.S. Dollars), is guaranteed by the receivables of one of Brightpoint (France)
SARL's customers and bears interest at EURIBOR plus 2.5%. At March 31, 2001 and
December 31, 2001, the interest rate on this facility was approximately 5.9% and
5.8%, respectively. A two-month notice is required to terminate the facility. At
March 31, 2002 and December 31, 2001, there was $3.3 million and $6.1 million,
respectively, outstanding under this facility. Also, during 2001, another of our
subsidiaries, Brightpoint Australia Pty Ltd, entered into a short-term line of
credit facility with Westpac Banking Corporation. The facility, which is due on
demand, has borrowing availability of up to $10 million Australian Dollars ($5.1
million U.S. Dollars) and bears interest at Westpac's base overdraft rate plus
1.95%. At December 31, 2001, the interest rate was approximately 8.9%. The
facility is secured by a fixed and floating charge over all of the assets of
Brightpoint Australia Pty Ltd and is guaranteed by Brightpoint, Inc. At March
31, 2001 no amounts were outstanding under this facility and at December 31,
2001, there was approximately $4.2 million U.S. Dollars outstanding under this
facility.
In January 2002, in connection with the agreement made with Chinatron as
discussed in Note 6 to the Consolidated Financial Statements, Brightpoint China
Limited entered into two separate credit facilities. The first agreement is with
DBS Kwong On Bank Limited, has a maximum available borrowing limit of
approximately 78.0 million Hong Kong Dollars (approximately $10 million U.S.
Dollars), bears interest at 0.5% over the prime rate as quoted by DBS Kwong On
Bank Limited (5.1% at March 31, 2002) and is due on demand. This facility is
supported by a letter of credit of $2.5 million issued by Brightpoint Holdings
B.V. and a $2.5 million letter of credit issued by a shareholder in Chinatron as
well as corporate and personal guarantees from certain shareholders of
Chinatron. This facility requires that Brightpoint China Limited maintain a
minimum paid up capital amount, a minimum net worth amount, a debt-to-equity
ratio within certain limits and shall not pledge any of its accounts receivable
to any other financial institution without prior consent. The second facility is
with Standard Chartered Bank, Hong Kong Branch and has a maximum available
borrowing limit of approximately $16 million U.S. Dollars, bears interest at the
greater of 0.5% over the prime rate as quoted by Standard Chartered Bank or
HIBOR plus 0.5% (5.6% at March 31, 2002) and is due on demand. The facility is
secured by a letter of credit of $7.5 million, issued by Brightpoint Holdings
B.V. as well as corporate and personal guarantees from certain shareholders of
Chinatron and requires a minimum level of paid up capital. This facility
includes a sub-facility under which portions of the maximum available borrowing
limit may be borrowed in Renminbi. At March 31, 2002 there was approximately
$7.6 million outstanding under the two China facilities discussed above. As more
fully discussed in Note 2 to the Consolidated Financial Statements, we sold our
remaining interests in Brightpoint China Limited in April of 2002 and,
consequently, has attained the release of both of the cash-secured letters of
credit supporting these facilities. Subsequent to March 31, 2002 we will no
longer consolidate Brightpoint China Limited and the facilities discussed above
will be the obligation of Chinatron.
Net cash used by financing activities in the first quarter of 2002 decreased
significantly when compared to the first quarter of 2001 as we repurchased
Convertible Notes as discussed above during the first quarter of 2001 and did
not repurchase Convertible Notes during the first quarter of 2002.
The decrease in stockholders' equity from December 31, 2001 to March 31, 2002 of
$16.4 million resulted primarily from the net loss in the first quarter of 2002
of $15.7 million.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate and Foreign Currency Exchange Rate Risks
We are exposed to financial market risks, including changes in interest rates
and foreign currency exchange rates. To mitigate interest rate risks, we have
periodically utilized interest rate swaps to convert certain portions of our
variable rate debt to fixed interest rates. To mitigate foreign currency
exchange rate risks, we periodically utilize derivative financial instruments
under the Foreign Currency Risk Management Policy approved by our Board of
Directors. We do not use derivative instruments for speculative or trading
purposes.
We are exposed to changes in interest rates on our variable interest rate
revolving lines of credit. A 10% increase in short-term borrowing rates during
2001 would have resulted in only a nominal increase in interest expense. We did
not have any interest rate swaps outstanding at March 31, 2002.
A substantial portion of our revenue and expenses are transacted in markets
worldwide and are denominated in currencies other than the U.S. Dollar.
Accordingly, our future results could be adversely affected by a variety of
factors, including changes in specific countries' political, economic or
regulatory conditions and trade protection measures.
Our foreign currency risk management program is designed to reduce but not
eliminate unanticipated fluctuations in earnings, cash flows and the value of
foreign investments caused by volatility in currency exchange rates by hedging,
where believed to be cost-effective, significant exposures with foreign currency
exchange contracts, options and foreign currency borrowings. Our hedging
programs reduce, but do not eliminate, the impact of foreign currency exchange
rate movements. An adverse change (defined as a 10% strengthening of the U.S.
Dollar) in all exchange rates would not have had a negative impact on our
results of operations for 2002, due to the aggregate losses experienced in our
foreign operations. At March 31, 2002, there were no cash flow or net investment
hedges open. Our sensitivity analysis of foreign currency exchange rate
movements does not factor in a potential change in volumes or local currency
prices of our products sold or services provided. Actual results may differ
materially from those discussed above.
Certain of our 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 non-cash
transactions. Local currencies remained legal tender until December 31, 2001 at
which time participating countries issued 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 2001,
our 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." We have made significant investments in
information technology in Europe and have experienced no significant information
technology or operational problems as a result of the Euro conversion. In
addition, we continue to evaluate the effects on our business of the Euro
conversion for the affected operations and believe that the completion of the
Euro conversion during 2001 and 2002 will not have a material effect on our
financial position or results of operations.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
Equity Price Risks
We have issued zero-coupon, subordinated, convertible notes (Convertible Notes).
The Convertible Notes have an accreted value at March 31, 2002 of approximately
$133 million (approximately $532 per Convertible Note). The holders of the
Convertible Notes may cause us to repurchase the Convertible Notes on March 11,
2003, at the accreted value at that date for cash or common stock. The accreted
value at March 11, 2003 will be approximately $552 per Convertible Note.
If we are able and choose to use common stock to satisfy this potential
obligation, the number of shares to be issued will be directly affected by the
market price of the common stock on the five trading days prior to the three
trading days before March 11, 2003. The number of shares that would be issued to
satisfy this potential obligation would be calculated as the total number of
Convertible Notes outstanding (250,000 as of March 31, 2002) multiplied by the
accreted value per Convertible Note at March 11, 2003 (approximately $552 per
Convertible Note) divided by the market price of the common stock calculated in
the aforementioned manner. If common stock is used to satisfy this potential
obligation, it could result in significant dilution to the holders of our common
stock.
We have, and may from time to time in the future, repurchase Convertible Notes
depending on many factors including but not limited to, the availability of
capital, the prevailing market price of the Convertible Notes and overall market
conditions, however, no assurance can be given that we will repurchase any
Convertible Notes.
31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In February 2002, Nora Lee, filed a complaint in the Circuit Court, Marion
County, Indiana, against all of the Company's current directors, its former
corporate controller and its current independent auditors, Ernst & Young LLP,
which action is entitled Nora Lee Derivatively on Behalf of Nominal Defendant
Brightpoint, Inc., vs. Robert J. Laikin, et. al. and Brightpoint, Inc. as a
Nominal Defendant, Cause No. 49C01-0202-CT-000399.
The plaintiff alleges, among other things, that certain of the individual
defendants sold the Company's Common Stock while in possession of material
non-public information regarding the Company, that the individual defendants
violated their fiduciary duties of loyalty, good faith and due care by, among
other things, causing the Company to disseminate misleading and inaccurate
financial information, failing to implement and maintain internal adequate
accounting control systems, wasting corporate assets and exposing the Company to
losses. The plaintiff is seeking to recover unspecified damages from all
defendants, the imposition of a constructive trust for the amounts of profits
received by the individual defendants who sold the Company's common stock and
recovery of reasonable litigation costs and expenses.
The Company and several of its executive officers and directors were named as
defendants in two complaints filed in November and December 2001, in the United
States District Court for the Southern District of Indiana, entitled Weiss v.
Brightpoint, Inc., et. al., Cause No. IP01-1796-C-T/K; and Mueller v.
Brightpoint, Inc., et. al., Cause No. IP01-1922-C-M/S. In February 2002, the
Court consolidated the Weiss and Mueller actions and appointed John Kilcoyne as
lead plaintiff in this action which is now known as In re Brightpoint, Inc.
Securities Litigation. A consolidated amended complaint was filed in April 2002.
The amended complaint, among other things, adds the Company's current
independent auditors as a defendant.
The action is a purported class action asserted on behalf of all purchasers of
the Company's publicly traded securities between January 29, 1999 and January
31, 2002, alleging violations of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder by the Company and certain of its
officers and directors, as well as the Company's current independent auditors,
and violations of Section 20(a) of the Exchange Act by the individual
defendants.
The amended complaint alleges, among other things, that the Company
intentionally concealed and falsified its financial condition, and issued
financial statements which violated generally accepted accounting principles, in
order that it would not be declared in default of its loan covenants under its
line of credit. The amended complaint also alleges that, due to the false
financial statements, the Company's stock was traded at artificially inflated
prices. Plaintiff seeks compensatory damages, including interest, against all of
the defendants and recovery of their reasonable litigation costs and expenses.
The Company disputes these claims and intends to vigorously defend this matter.
A complaint was filed on November 23, 2001 against the Company and 87 other
defendants in the United States District Court for the District of Arizona,
entitled Lemelson Medical, Education and Research Foundation LP v. Federal
Express Corporation, et.al., Cause No. CIV01-2287-PHX-PGR. The plaintiff claims
the Company and other defendants have infringed 7 patents alleged to cover bar
code technology. The case seeks unspecified damages, treble damages and
injunctive relief. The Court has ordered the case stayed pending the decision in
a related case in which a number of bar code equipment manufacturers have sought
a declaration that the patents asserted are invalid and unenforceable. The trial
of that related case is currently scheduled to begin in November 2002. The
Company disputes these claims and intends to defend vigorously this matter.
32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (continued)
The Company has responded to requests for information and subpoenas from the
Securities and Exchange Commission (SEC) in connection with an investigation
including its accounting treatment of a certain contract entered into with an
insurance company. In addition, certain of the Company's officers or employees
have provided testimony to the SEC and the Company believes that the staff of
the SEC will subpoena additional testimony of certain of its officers and
employees.
The Company is from time to time, also involved in certain legal proceedings in
the ordinary course of conducting its business. While the ultimate liability
pursuant to these actions cannot currently be determined, the Company believes
these legal proceedings will not have a material adverse effect on its financial
position.
The Company's Certificate of Incorporation and By-laws provide for it to
indemnify its officers and directors to the extent permitted by law. In
connection therewith, the Company has entered into indemnification agreements
with its executive officers and directors. In accordance with the terms of these
agreements the Company intends to reimburse them for their personal legal
expenses arising from certain pending litigation and regulatory matters.
Item 6. Exhibits
(a) Exhibits
The list of exhibits is hereby incorporated by reference to the
Exhibit Index on page 35 of this report.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K for the event dated
January 31, 2002 under Item 5 to report that the Company would further
restate its annual financial statements for 1998, 1999, 2000 and the
interim periods of 2001.
The Company filed a Current Report on Form 8-K for the event dated
January 30, 2002 under Item 5 to report that the Master Services
Agreement between Brightpoint North America L.P. and Qwest Business
Resources, Inc. described in the Form 8-K of Brightpoint, Inc. filed
on July 24, 2001 had been terminated.
The Company filed a Current Report on Form 8-K for the event dated
November 1, 2001 under Item 5 to report that the Company announced
that through its North American subsidiaries, Brightpoint North
America, L.P. and Wireless Fulfillment Services LLC (the Borrowers),
it had entered into a new revolving credit facility (the Revolver)
with a syndicate of lenders led by GE Capital to provide capital for
its North American operations. In addition, the Company reported that
the Borrowers entered into an amendment and waiver to the Revolver.
The Company also reported that on February 8, 2002, Nora Lee, filed a
complaint in the Superior Court, Marion County, Indiana, Derivatively
on Behalf of Nominal Defendant Brightpoint, Inc., vs. Robert J. Laikin
and James Mark Howell, John W. Adams, Rollin M. Dick, Stephen H.
Simon, Todd H. Stuart, Robert F. Wagner, Jerre L. Stead, John P.
Delaney and Ernst & Young LLP and Brightpoint, Inc. as a Nominal
Defendant.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Brightpoint, Inc.
-----------------
(Registrant)
Date May 14, 2002 /s/ Frank Terence
------------------ --------------------------------------
Frank Terence
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
34
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
99 Cautionary Statements
35