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: June 30, 2004
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.
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(Exact name of registrant as specified in its charter)
Indiana 35-1778566
-------------------------------- -------------------------------------
State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization
501 Airtech Parkway, Plainfield Indiana 46168
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(317) 707-2355
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act) Yes [X] No [ ]
Number of shares of the registrant's common stock outstanding at July 19, 2004:
17,932,586 shares
BRIGHTPOINT, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1
Consolidated Statements of Income
Three and Six Months Ended June 30, 2004 and 2003..... 3
Consolidated Balance Sheets
June 30, 2004 and December 31, 2003................... 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2004 and 2003............... 5
Notes to Consolidated Financial Statements.................. 6
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 20
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk.. 41
ITEM 4
Controls and Procedures..................................... 42
PART II. OTHER INFORMATION
ITEM 1
Legal Proceedings........................................... 43
ITEM 4
Submission of Matters to a Vote of Security Holders......... 44
ITEM 6
Exhibits.................................................... 45
Reports on Form 8-K......................................... 45
Signatures.................................................. 46
Page 2
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenue
Product distribution revenue $ 397,509 $ 317,005 $ 775,451 $ 597,537
Integrated logistics services revenue 66,257 54,927 129,623 106,554
--------- --------- --------- ---------
Total revenue 463,766 371,932 905,074 704,091
Cost of revenue
Cost of product distribution revenue 382,717 304,720 747,378 577,745
Cost of integrated logistics services revenue 53,714 44,734 105,003 85,406
--------- --------- --------- ---------
Total cost of revenue 436,431 349,454 852,381 663,151
Gross profit 27,335 22,478 52,693 40,940
Selling, general and administrative expenses 19,901 15,419 39,958 30,815
Facility consolidation charge (benefit) (215) 181 (215) 4,461
--------- --------- --------- ---------
Operating income from continuing operations 7,649 6,878 12,950 5,664
Net interest expense 247 283 515 676
Loss on debt extinguishment - - - 265
Net other expenses 401 166 970 991
--------- --------- --------- ---------
Income from continuing operations before income taxes 7,001 6,429 11,465 3,732
Income tax expense 1,890 1,188 3,095 472
--------- --------- --------- ---------
Income from continuing operations 5,111 5,241 8,370 3,260
Discontinued operations:
Loss from discontinued operations (416) (1,423) (757) (1,975)
Gain (loss) on disposal of discontinued operations (410) 499 (4,644) 184
--------- --------- --------- ---------
Total discontinued operations (826) (924) (5,401) (1,791)
--------- --------- --------- ---------
Net income $ 4,285 $ 4,317 $ 2,969 $ 1,469
========= ========= ========= =========
Basic per share:
Income from continuing operations $ 0.27 $ 0.29 $ 0.43 $ 0.18
Discontinued operations (0.04) (0.05) (0.28) (0.10)
--------- --------- --------- ---------
Net income $ 0.23 $ 0.24 $ 0.15 $ 0.08
========= ========= ========= =========
Diluted per share:
Income from continuing operations $ 0.26 $ 0.28 $ 0.42 $ 0.18
Discontinued operations (0.04) (0.05) (0.27) (0.10)
--------- --------- --------- ---------
Net income $ 0.22 $ 0.23 $ 0.15 $ 0.08
========= ========= ========= =========
Weighted average common shares outstanding:
Basic 19,057 18,055 19,163 18,053
========= ========= ========= =========
Diluted 19,622 18,572 19,784 18,528
========= ========= ========= =========
See accompanying notes.
Page 3
BRIGHTPOINT, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
JUNE 30, December 31,
2004 2003
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 57,964 $ 98,879
Pledged cash 16,595 22,042
Accounts receivable (less allowance for doubtful
accounts of $3,808 and $7,683, respectively) 111,375 132,944
Inventories 111,575 108,665
Contract financing receivable 12,192 10,838
Other current assets 13,548 13,083
--------- ---------
Total current assets 323,249 386,451
Property and equipment, net 27,392 29,566
Goodwill and other intangibles, net 18,943 19,340
Other assets 9,300 9,333
--------- ---------
Total assets $ 378,884 $ 444,690
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 173,442 $ 204,242
Accrued expenses 50,417 60,960
Unfunded portion of contract financing receivable 24,005 15,697
Lines of credit 832 16,207
--------- ---------
Total current liabilities 248,696 297,106
--------- ---------
COMMITMENTS AND CONTINGENCIES
Shareholders' equity:
Preferred stock, $0.01 par value: 1,000 shares
authorized; no shares issued or outstanding - -
Common stock, $0.01 par value: 100,000 shares
authorized; 19,330 and 19,262 issued
in 2004 and 2003, respectively; 17,932 and
19,262 outstanding in 2004 and 2003,
respectively 193 193
Additional paid-in capital 227,710 227,338
Treasury stock, at cost, 1,398 shares (19,997) -
Retained earnings (deficit) (74,769) (77,738)
Accumulated other comprehensive loss (2,949) (2,209)
--------- ---------
Total shareholders' equity 130,188 147,584
--------- ---------
Total liabilities and shareholders' equity $ 378,884 $ 444,690
========= =========
See accompanying notes.
Page 4
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six Months Ended June 30,
2004 2003
-------- --------
OPERATING ACTIVITIES
Net income $ 2,969 $ 1,469
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,225 6,651
Discontinued operations 5,401 1,792
Net cash provided by (used in) discontinued operations (1,515) (1,747)
Pledged cash requirements 447 (2,173)
Facility consolidation charge (benefit) (215) 4,461
Loss on debt extinguishment - 265
Changes in operating assets and liabilities, net of
effects from acquisitions and divestitures:
Accounts receivable, net 6,856 9,981
Inventories, net (5,921) (23,542)
Other operating assets (1,636) (1,294)
Accounts payable (18,487) 34,900
Accrued expenses (5,028) (11,616)
-------- --------
Net cash provided by (used in) operating activities (11,904) 19,147
INVESTING ACTIVITIES
Decrease in funded contract financing receivables, net 7,536 8,369
Capital expenditures (3,604) (1,865)
Purchase acquisitions, net of cash acquired (601) (1,949)
Cash effect of divestitures 576 1,328
Decrease (increase) in other assets (467) 649
-------- --------
Net cash provided by investing activities 3,440 6,532
FINANCING ACTIVITIES
Purchase of treasury stock (19,997) -
Net proceeds (payments) on revolving credit facilities (15,639) 1,417
Pledged cash requirements - financing 5,000 -
Proceeds from common stock issuances under employee stock
option and purchase plans 371 39
Repurchase of convertible notes - (11,980)
-------- --------
Net cash used in financing activities (30,265) (10,524)
Effect of exchange rate changes on cash and cash
equivalents (2,186) 2,299
-------- --------
Net increase (decrease) in cash and cash equivalents (40,915) 17,454
Cash and cash equivalents at beginning of period 98,879 43,798
-------- --------
Cash and cash equivalents at end of period $ 57,964 $ 61,252
======== ========
See accompanying notes.
Page 5
PART I FINANCIAL INFORMATION
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
1. Basis of Presentation
GENERAL
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X of the Securities Exchange Act of 1934.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. The preparation of financial statements requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results are likely to differ
from those estimates, but management does not believe such differences will
materially affect Brightpoint, Inc.'s (the "Company") financial position or
results of operations. The Consolidated Financial Statements reflect all
adjustments considered, in the opinion of the Company, necessary to fairly
present the results for the periods. Such adjustments are of a normal recurring
nature.
The Consolidated Financial Statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned, with the exception of the
Brightpoint India Limited subsidiary that is 85% owned by the Company.
Significant intercompany accounts and transactions have been eliminated in
consolidation. Certain amounts in the 2003 Consolidated Financial Statements
have been reclassified to conform to the 2004 presentation.
The Consolidated Balance Sheet at December 31, 2003 has been derived from the
audited Consolidated Financial Statements at that date, but does not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. The unaudited
Consolidated Statements of Income for the three and six months ended June 30,
2004 and the unaudited Consolidated Statement of Cash Flows for the six months
ended June 30, 2004 are not necessarily indicative of the operating results or
cash flows that may be expected for the entire year.
Due to seasonal factors, the Company's interim results may not be indicative of
annual results.
The Company has not changed its significant accounting policies from those
disclosed in its Form 10-K for the year ended December 31, 2003. 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, 2003.
GROSS PROFIT ACCOUNTING POLICY
The Company determines its gross profit as the difference between net revenue
and cost of revenue. Cost of revenue includes the direct product costs, freight,
direct and indirect labor, facilities, equipment and
Page 6
PART I FINANCIAL INFORMATION
related costs, including depreciation, information systems including related
maintenance and depreciation, and other indirect costs associated with products
sold and services provided.
NET INCOME PER SHARE
Basic net income per share is based on the weighted average number of common
shares outstanding during each period, and diluted net income per share is based
on the weighted average number of common shares and dilutive common share
equivalents outstanding during each period. The table below presents a
reconciliation of the income per share calculations (in thousands, except per
share data):
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Income from continuing operations $ 5,111 $ 5,241 $ 8,370 $ 3,260
Discontinued operations (826) (924) (5,401) (1,791)
-------- -------- -------- --------
Net income $ 4,285 $ 4,317 $ 2,969 $ 1,469
======== ======== ======== ========
Basic:
Weighted average shares outstanding 19,057 18,055 19,163 18,053
======== ======== ======== ========
Per share amount:
Income from continuing operations $ 0.27 $ 0.29 $ 0.43 $ 0.18
Discontinued operations (0.04) (0.05) (0.28) (0.10)
-------- -------- -------- --------
Net income per share $ 0.23 $ 0.24 $ 0.15 $ 0.08
======== ======== ======== ========
Diluted:
Weighted average shares outstanding 19,057 18,055 19,163 18,053
Net effect of dilutive stock options,
based on the treasury stock method
using average market price 565 517 621 475
-------- -------- -------- --------
Total weighted average shares outstanding 19,622 18,572 19,784 18,528
======== ======== ======== ========
Per share amount:
Income from continuing operations $ 0.26 $ 0.28 $ 0.42 $ 0.18
Discontinued operations (0.04) (0.05) (0.27) (0.10)
-------- -------- -------- --------
Net income per share $ 0.22 $ 0.23 $ 0.15 $ 0.08
======== ======== ======== ========
Page 7
PART I FINANCIAL INFORMATION
TREASURY STOCK
On June 4, 2004, the Company announced that its Board of Directors had approved
a share repurchase program authorizing the Company to repurchase up to $20
million of the Company's common stock. During June 2004 the Company repurchased
1,397,500 shares of its own common stock at an average price of $14.31 per
share, totaling $20 million, completing the approved share repurchase program.
STOCK OPTIONS
The Company uses the intrinsic value method, as opposed to the fair value
method, in accounting for stock options. Under the intrinsic value method, no
material compensation expense has been recognized for stock options granted to
employees or stock sold pursuant to the employee stock purchase plan ("ESPP").
The table below presents a reconciliation of the Company's pro forma net loss
giving effect to the estimated compensation expense related to stock options,
the ESPP and the Independent Director Stock Compensation Plan that would have
been reported if the Company utilized the fair value method (in thousands,
except per share data):
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income as reported $ 4,285 $ 4,317 $ 2,969 $ 1,469
Stock-based compensation cost, net of related tax
effects, that would have been included in the
determination of net income if the fair value
method had been applied (717) (291) (1,180) (558)
--------- --------- --------- ---------
Pro forma net income $ 3,568 $ 4,026 $ 1,789 $ 911
========= ========= ========= =========
Basic earnings per share:
Net income as reported $ 0.23 $ 0.24 $ 0.15 $ 0.08
Stock-based compensation cost, net of related tax
effects, that would have been included in the
determination of net income if the fair value
method had been applied (0.04) (0.02) (0.06) (0.03)
--------- --------- --------- ---------
Pro forma net income $ 0.19 $ 0.22 $ 0.09 $ 0.05
========= ========= ========= =========
Diluted earnings per share:
Net income as reported $ 0.22 $ 0.23 $ 0.15 $ 0.08
Stock-based compensation cost, net of related tax
effects, that would have been included in the
determination of net income if the fair value
method had been applied (0.04) (0.02) (0.06) (0.03)
--------- --------- --------- ---------
Pro forma net income $ 0.18 $ 0.21 $ 0.09 $ 0.05
========= ========= ========= =========
Page 8
PART I FINANCIAL INFORMATION
COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and gains or losses resulting
from currency translations of foreign investments. The details of comprehensive
income for the three and six months ended June 30, 2004 and 2003, are as
follows:
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
2004 2003 2004 2003
------- ------- ------- ------
Net income $ 4,285 $4,317 $ 2,969 $1,469
Foreign currency translation amounts (2,627) 3,167 (740) 5,084
------ ----- ------- ------
Comprehensive income $ 1,658 $7,484 $ 2,229 $6,553
======= ====== ======= ======
2. Facility Consolidation Charge
During 2003, the Company consolidated its Richmond, California, call center
operation into its Plainfield, Indiana, facility to reduce costs and increase
productivity and profitability in its Americas division. During the six months
ended June 30, 2003, the Company recorded a pre-tax charge of $4.5 million. For
the year of 2003, the total pre-tax charge was $5.5 million which included
approximately $3.8 million for the present value of estimated lease costs, net
of an anticipated sublease, non-cash losses on the disposal of assets of
approximately $1.1 million and severance and other costs of approximately $600
thousand. During 2003, $2.1 million of this charge was used. The Company
terminated the lease during the second quarter of 2004 utilizing $2.5 million of
the reserve. The remaining reserve balance is related to final facility
equipment costs and related legal fees.
Reserve activity for the facility consolidation as of June 30, 2004 is as
follows (in thousands):
Lease Employee
Termination Fixed Termination Other Exit
Costs Assets Costs Costs Total
----------- ------- ----------- ---------- -------
December 31, 2003 $ 3,379 $ - $ - $ 9 $ 3,388
Provisions - - - - -
Cash usage (244) - - (9) -
Non-cash usage - - - - -
----------- ------- ----------- ---------- -------
March 31, 2004 $ 3,135 $ - $ - $ - $ 3,135
----------- ------- ----------- ---------- -------
Provisions - - - - -
Cash usage (2,759) - - - (2,759)
Non-cash usage (reversal) (215) - - - (215)
----------- ------- ----------- ---------- -------
JUNE 30, 2004 $ 161 $ - $ - $ - $ 161
=========== ======= =========== ========== =======
Page 9
PART I FINANCIAL INFORMATION
3. Divestitures
On May 7, 2004, through certain of the Company's subsidiaries the Company
completed the sale of its collective 100% interest in Brightpoint do Brasil
Ltda. ("Brightpoint Brazil"). The Company recorded a $584 thousand loss from the
sale, net of income taxes. Brightpoint Brazil was part of the 2001 Restructuring
Plan and has been included in discontinued operations for all periods presented.
On February 19, 2004, the Company's subsidiary, Brightpoint Holdings B.V.,
completed the sale of its 100% interest in Brightpoint (Ireland) Limited
("Brightpoint Ireland") to Celtic Telecom Consultants Ltd. Consideration for the
sale consisted of cash of approximately $1.7 million. The Company recorded a
$3.8 million loss from the sale and a $310 thousand loss from Brightpoint
Ireland's results of operations during the first quarter of 2004. The loss
includes the non-cash write-off of approximately $1.6 million pertaining to
cumulative currency translation adjustments. Brightpoint Ireland was a part of
the Company's Europe division. The Consolidated Financial Statements include
Brightpoint Ireland's results in discontinued operations for all periods
presented.
4. Discontinued Operations
Details of discontinued operations are as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue $ - $ 7,473 $ 4,037 $ 15,504
============ ============ ============ ============
Loss from discontinued operations
Net operating loss $ (49) $ (1,352) $ (384) $ (1,746)
Restructuring plan charges (318) 78 (372) 153
Other (49) (149) (1) (382)
------------ ------------ ------------ ------------
Total loss from discontinued operations (416) (1,423) (757) (1,975)
------------ ------------ ------------ ------------
Gain (loss) on disposal of discontinued operations
Restructuring plan charges 166 (786) (285) (1,043)
Other 2 1,285 (24) 1,227
Sale of Brightpoint do Brazil Ltda (584) - (584) -
Sale of Brightpoint (Ireland) Limited 6 - (3,751) -
------------ ------------ ------------ ------------
Total gain (loss) on disposal of discontinued operations (410) 499 (4,644) 184
------------ ------------ ------------ ------------
Total discontinued operations $ (826) $ (924) $ (5,401) $ (1,791)
============ ============ ============ ============
Page 10
PART I FINANCIAL INFORMATION
Net assets, including reserves, related to discontinued operations are
classified in the Consolidated Balance Sheets as follows (in thousands):
JUNE 30, 2004 December 31, 2003
------------- -----------------
Total current assets $ 550 $ 857
Other non-current assets - 127
------------- -----------------
Total assets $ 550 $ 984
============= =================
Accounts payable $ 60 $ 57
Accrued expenses and other liabilities 927 2,760
------------- -----------------
Total liabilities $ 987 $ 2,817
============= =================
2001 Restructuring Plan
During 2001, the Company's Board of Directors approved a restructuring plan
("2001 Restructuring Plan") that the Company began to implement in the fourth
quarter of 2001. The primary goal in adopting the 2001 Restructuring Plan was to
better position the Company for long-term and more consistent success by
improving its cost structure and divesting or closing operations in which the
Company believed potential returns were not likely to generate an acceptable
return on invested capital. Therefore, certain operations were sold, or
otherwise discontinued, pursuant to the 2001 Restructuring Plan. In total, the
2001 Restructuring Plan resulted in a headcount reduction of approximately 350
employees across most areas of the Company, including marketing, operations,
finance and administration.
2001 Restructuring Plan specific to the China operations
Additionally, pursuant to the 2001 Restructuring Plan, the Company completed in
January 2002, through certain of its subsidiaries, the formation of a joint
venture with Hong Kong-based Chinatron Group Holdings Limited ("Chinatron").
Chinatron is involved in the global wireless industry. In exchange for a 50%
interest in Brightpoint China Limited pursuant to the formation of the joint
venture, the Company received Chinatron Class B Preference Shares with a face
value of $10 million. On April 29, 2002, the Company announced that it had
completed the sale of its remaining 50% interest in Brightpoint China Limited to
Chinatron. Pursuant to this transaction, the Company received additional
Chinatron Class B Preference Shares with a face value of $11 million. In
accordance with SFAS 115, Accounting for Certain Investments in Debt and Equity
Securities, the Company designated the Chinatron Class B Preference Shares as
held-to-maturity. The carrying value of the aggregate $21 million face value of
the Chinatron Class B Preference Shares was $2 million at June 30, 2004, and
December 31, 2003. Pursuant to these transactions, Chinatron and the Company
entered into a services agreement, whereby Chinatron provides warehouse
management services in Hong Kong supporting the Company's Brightpoint Asia
Limited operations managed by Persequor Limited.
Page 11
PART I FINANCIAL INFORMATION
As of June 30, 2004, actions called for by the 2001 Restructuring Plan were
substantially complete, however, the Company expects to continue to record
adjustments through discontinued operations as necessary. The Company recorded
losses related to the 2001 Restructuring Plan as presented below (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Cash charges (credits):
Employee termination costs $ - $ 2 $ - $ 5
Sale of Brightpoint do Brazil Ltda 1,138 - 1,138 -
Other exit costs 17 37 92 (29)
------- ------- ------- -------
Total cash charges (credits) 1,155 62 1,230 (24)
------- ------- ------- -------
Non-cash charges (credits):
Write-off of Brightpoint do Brazil Ltda. net assets (203) - (203) -
Impairment of accounts receivable and inventories - 7 - 12
Impairment of fixed and other assets 301 58 614 71
Income tax effect of restructuring actions (597) (125) (618) (125)
Write-off of cumulative foreign currency translation adjustments 80 706 218 947
------- ------- ------- -------
Total non-cash charges (credits) (419) 646 11 905
------- ------- ------- -------
Total restructuring plan charges $ 736 $ 708 $ 1,241 $ 881
======= ======= ======= =======
Page 12
PART I FINANCIAL INFORMATION
Utilization of the 2001 Restructuring Plan charges discussed above is as follows
(in thousands):
Lease Employee
Termination Termination Other Exit
Costs Costs Costs Total
----------- ----------- ---------- -------
January 1, 2001 $ - $ - $ - $ -
Provisions (1) 314 619 1,810 2,743
----------- ----------- ---------- -------
December 31, 2001 314 619 1,810 2,743
Provisions (1) 348 502 1,199 2,049
Cash usage (457) (1,096) (2,093) (3,646)
Non-cash usage - - (189) (190)
----------- ----------- ---------- -------
December 31, 2002 $ 205 $ 25 $ 727 $ 957
Provisions (1) 6 - 41 47
Cash usage (201) (25) (214) (440)
Non-cash usage - - (145) (145)
----------- ----------- ---------- -------
December 31, 2003 $ 10 $ - $ 409 $ 419
----------- ----------- ---------- -------
Provisions (1) - - - -
Cash usage - - 6 6
Non-cash usage - - 40 40
----------- ----------- ---------- -------
March 31, 2004 $ 10 $ - $ 363 $ 373
----------- ----------- ---------- -------
CASH USAGE - - (22) (22)
NON-CASH USAGE (10) - (277) (287)
----------- ----------- ---------- -------
JUNE 30, 2004 $ - $ - $ 64 $ 64
=========== =========== ========== =======
(1) Provisions do not include items that were directly expensed in the period.
Page 13
PART I FINANCIAL INFORMATION
5. Accounts Receivable Transfers
During the six months ended June 30, 2004 and 2003, the Company entered into
certain transactions or agreements with banks and other third-party financing
organizations in France, Norway and Sweden, with respect to a portion of its
accounts receivable in order to reduce the amount of working capital required to
fund such receivables. During the three and six months ended June 30, 2003, the
Company also entered into certain transactions or agreements with banks and
other third-party financing organizations in Ireland with respect to the sale of
a portion of its accounts receivable. These transactions have been treated as
sales pursuant to current accounting principles generally accepted in the United
States and, accordingly, are accounted for as off-balance sheet arrangements.
Net funds received reduced the accounts receivable outstanding while increasing
cash. Fees incurred are recorded as losses on the sale of assets and are
included as a component of "Net other expenses" in the Consolidated Statements
of Income.
Net funds received from the sales of accounts receivable for continuing
operations during the six months ended June 30, 2004 and 2003, totaled $184
million and $113 million, respectively. Fees, in the form of discounts, incurred
in connection with these sales totaled $542 thousand and $655 thousand during
the six months ended June 30, 2004 and 2003, respectively.
For discontinued operations, net funds received from the sales of accounts
receivable during the three and six months ended June 30, 2003, totaled $8.0
million and $12.4 million, respectively. Fees, in the form of discounts,
incurred in connection with these sales totaled $53 thousand and $111 thousand
during the three and six months ended June 30, 2003, respectively. These fees
were originally recorded as a component of "Net other expenses" in the
Consolidated Statements of Income, but have now been reclassified as a component
of "Loss from discontinued operations" in the Consolidated Statements of Income.
The Company is the collection agent on behalf of the bank or other third-party
financing organization for many of these arrangements and has no significant
retained interests or servicing liabilities related to accounts receivable that
it has sold. The Company may be required to repurchase certain accounts
receivable sold in certain circumstances, including, but not limited to,
accounts receivable in dispute or otherwise not collectible, accounts receivable
in which credit insurance is not maintained and a violation of, the expiration
or early termination of the agreement pursuant to which these arrangements are
conducted. There were no significant repurchases of accounts receivable sold
during the six months ended June 30, 2004 and 2003. These agreements require the
Company's subsidiaries to provide collateral in the form of pledged assets
and/or, in certain situations, a guarantee by the Company of its subsidiaries'
obligations.
Pursuant to these arrangements, approximately $36 million and $27 million of
trade accounts receivable were sold to and held by banks and other third-party
financing institutions at June 30, 2004 and 2003, respectively. Amounts held by
banks or other financing institutions at June 30, 2004 were for transactions
related to the Company's Norway, Sweden and France arrangements. All other
arrangements have been terminated or expired.
Page 14
PART I FINANCIAL INFORMATION
6. Lines of Credit and Long-term Debt
OUTSTANDING AT:
---------------------------------
CREDIT AGREEMENTS JUNE 30, 2004 December 31, 2003
----------------- ------------- -----------------
- Asia-Pacific $ - $16,171
- The Americas - -
- Europe 832 36
---- -------
Total $832 $16,207
---- -------
Lines of Credit -Americas Division
On March 18, 2004, the Company's primary North American operating subsidiaries,
Brightpoint North America L.P. and Wireless Fulfillment Services, LLC (the
"Borrowers"), entered into an Amended and Restated Credit Facility (the
"Revolver") amending and restating the previous agreement dated October 31,
2001, between the Borrowers and General Electric Capital Corporation ("GE
Capital") to provide capital for its North American operations. GE Capital acted
as the agent for a syndicate of banks (the "Lenders"). The Revolver expires in
March of 2007. The Revolver provides borrowing availability, subject to
borrowing base calculations and other limitations, of up to a maximum of $70
million and currently bears interest, at the Borrowers' option, at the prime
rate plus 0% or LIBOR plus 1.25%. The applicable interest rate that the
Borrowers are subject to can be adjusted quarterly based upon certain financial
measurements defined in the Revolver. The Revolver is guaranteed by Brightpoint,
Inc., and is secured by, among other things, all of the Borrowers' assets. The
Revolver is subject to certain financial covenants, which include maintaining a
minimum fixed charge coverage ratio. The Revolver is a secured asset-based
facility where a borrowing base is calculated periodically using eligible
accounts receivable and inventory, subject to certain adjustments. Eligible
accounts receivable and inventories fluctuate over time, which can increase or
decrease borrowing availability. The Company also has pledged certain
intellectual property and the capital stock of certain of its subsidiaries as
collateral for the Revolver. At June 30, 2004, and December 31, 2003, there were
no amounts outstanding under the Revolver with available funding, net of the
applicable required availability minimum and letters of credit, of approximately
$34 million and $27 million, respectively.
Lines of Credit - Asia-Pacific
In December of 2002, the Company's primary Australian operating subsidiary,
Brightpoint Australia Pty Ltd, entered into a revolving credit facility (the
"Facility") with GE Commercial Finance in Australia. The Facility, which matures
in December of 2005, provides borrowing availability, subject to borrowing base
calculations and other limitations, of up to a maximum amount of 50 million
Australian dollars (approximately $36 million U.S. dollars at June 30, 2004).
Borrowings under the Facility are used for general working capital purposes. The
Facility is subject to certain financial covenants, which include maintaining a
minimum fixed charge coverage ratio and bears interest at the Bank Bill Swap
Reference rate plus 2.9% (totaling 8.45% at June 30, 2004). The Facility is a
secured asset-based facility where a borrowing base is calculated periodically
using eligible accounts receivable and inventory, subject to certain
adjustments. Eligible accounts receivable and inventories fluctuate over time,
which can increase or decrease borrowing availability. At June 30, 2004, there
was no amount outstanding under the facility with available funding of $27
million. At December 31, 2003, there was $11.9 million outstanding under the
Facility at an interest rate of approximately 7.8% with available funding of
$13.4 million.
In December of 2003, the Company's Brightpoint India Private Limited subsidiary
entered into a short-term credit facility with ABN Amro. At December 31, 2003,
$4.3 million was outstanding at an interest rate of 6.5%. In January 2004, this
credit facility was paid and terminated.
Page 15
PART I FINANCIAL INFORMATION
In July of 2003, the Company's primary operating subsidiary in the Philippines,
Brightpoint Philippines, Inc. entered into a credit facility with Banco de Oro.
The facility, which matures in February of 2005, provides borrowing
availability, up to a maximum amount of 50 million Philippine Pesos
(approximately $892 thousand U.S. dollars, at June 30, 2004), guaranteed by
Brightpoint, Inc. The facility bears interest at the Prime Lending Rate (10.75%
at June 30, 2004). At June 30, 2004, and December 31, 2003, the facility had no
amounts outstanding with available funding of approximately $892 thousand
dollars.
In November 2003, the Company's primary operating subsidiary in New Zealand,
Brightpoint New Zealand Limited, entered into a revolving credit facility with
GE Commercial Finance in Australia. This facility, which matures in November of
2006, provides borrowing availability, subject to borrowing base calculations
and other limitations, of up to a maximum amount of 12 million New Zealand
dollars (approximately $7.5 million U.S. dollars at June 30, 2004). Future
borrowings under the facility will be used for general working capital purposes.
The facility is subject to certain financial covenants, which include
maintaining a minimum fixed charge coverage ratio and bears interest at the New
Zealand Index Rate plus 3.15% (9.1% at June 30, 2004). The facility is a secured
asset-based facility where a borrowing base is calculated periodically using
eligible accounts receivable and inventory, subject to certain adjustments.
Eligible accounts receivable and inventories fluctuate over time, which can
increase or decrease borrowing availability. At June 30, 2004 and December 31,
2003, there were no amounts outstanding under the facility with available
funding of approximately $1.4 million and $3.9 million, respectively.
Lines of Credit - Europe
The Company's primary operating subsidiary in Sweden, Brightpoint Sweden AB, has
a short-term line of credit facility with SEB Finans AB. The facility has
borrowing availability of up to 15 million Swedish Krona (approximately $2.0
million U.S. dollars at June 30, 2004) and bears interest at the SEB Banken Base
plus 1% (2.75% at June 30, 2004). The facility is supported by a guarantee
provided by the Company. At June 30, 2004, there was $832 thousand outstanding
under this facility. At December 31, 2003, no amounts were outstanding under
this facility. Available funding was approximately $1.2 million and $2.1 million
as of June 30, 2004 and December 31, 2003, respectively.
At June 30, 2004 and December 31, 2003, the Company was in compliance with the
covenants in its credit agreements. Net interest expense was approximately $247
thousand and $515 thousand for the three and six months ended June 30, 2004. Net
interest expense includes fees paid for unused capacity on credit lines and
amortization of deferred financing fees.
A cash-secured standby letter of credit of $15 million supporting the Company's
Brightpoint Asia Limited vendor credit line was issued by a financial
institution on behalf of the Company and was outstanding at June 30, 2004, as
compared to $20 million at December 31, 2003, which supported the Company's
Brightpoint Asia Limited and Brightpoint Philippines vendor credit lines and a
short-term line of credit in India. The related cash collateral has been
reported under the heading "Pledged Cash" in the Consolidated Balance Sheet.
Page 16
PART I FINANCIAL INFORMATION
7. Guarantees
In 2002, the Financial Accounting Standards Board issued Interpretation No. 45
(FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires
guarantees to be recorded at fair value and requires a guarantor to make
significant new disclosure, even when the likelihood of making any payments
under the guarantee is remote.
The Company has issued certain guarantees on behalf of its subsidiaries with
regard to lines of credit and long-term debt, for which the liability is
recorded in the Company's financial statements. Although the guarantees relating
to lines of credit and long-term debt are excluded from the scope of FIN 45, the
nature of these guarantees and the amount outstanding are described in Note 6 to
the consolidated financial statements.
In some circumstances, the Company purchases inventory with payment terms
requiring letters of credit. As of June 30, 2004, the Company has issued $28
million in standby letters of credit. These standby letters of credit are
generally issued for a one-year term and are supported by either availability
under the Company's credit facilities or cash deposits. The underlying
obligations for which these letters of credit have been issued are recorded in
the financial statements at their full value. Should the Company fail to pay its
obligation to one or all of these suppliers, the suppliers may draw on the
standby letter of credit issued for them. The maximum future payments under
these letters of credit are $28 million.
Additionally, the Company has issued certain guarantees on behalf of its
subsidiaries with regard to accounts receivable transferred, the nature of which
is described is described in Note 5. While we do not currently anticipate the
funding of these guarantees, the maximum potential amount of future payments
under these guarantees at June 30, 2004, is approximately $36 million.
The Company has entered into indemnification agreements with its officers and
directors, to the extent permitted by law, pursuant to which the Company has
agreed to reimburse its officers and directors for legal expenses in the event
of litigation and regulatory matters. The terms of these indemnification
agreements provide for no limitation to the maximum potential future payments.
The Company has a directors and officers insurance policy that may mitigate the
potential liability and payments.
Page 17
PART I FINANCIAL INFORMATION
8. Operating Segments
The Company's operations are divided into three geographic operating segments.
These operating segments represent its three divisions: Asia-Pacific, The
Americas and Europe. These divisions all derive revenues from sales of wireless
devices, accessory programs and fees from the provision of integrated logistics
services.
The Company evaluates the performance of, and allocates resources to, these
segments based on operating income from continuing operations including
allocated corporate selling, general and administrative expenses. All amounts
presented below exclude the results of operations that have been discontinued. A
summary of the Company's operations by segment is presented below (in thousands)
for the three and six months ended June 30, 2004 and 2003:
Integrated Operating
Distribution Logistics Services Total Income (Loss)
Revenue from Revenue from Revenue from
External External from External Continuing
Customers Customers Customers Operations (1)
------------ ------------------- ------------- --------------
THREE MONTHS ENDED JUNE 30, 2004:
ASIA-PACIFIC $ 241,295 $ 11,623 $ 252,918 $ 2,787
THE AMERICAS 97,904 24,069 121,973 3,774
EUROPE 58,310 30,565 88,875 1,088
------------ ------------------- ------------- --------------
$ 397,509 $ 66,257 $ 463,766 $ 7,649
============ =================== ============= ==============
Three months ended June 30, 2003:
Asia-Pacific $ 193,627 $ 9,692 $ 203,319 $ 3,385
The Americas 83,197 17,631 100,828 1,979
Europe 40,181 27,604 67,785 1,514
------------ ------------------- ------------- --------------
$ 317,005 $ 54,927 $ 371,932 $ 6,878
============ =================== ============= ==============
SIX MONTHS ENDED JUNE 30, 2004:
ASIA-PACIFIC $ 471,001 $ 22,630 $ 493,631 $ 4,561
THE AMERICAS 193,373 46,896 240,269 6,503
EUROPE 111,077 60,097 171,174 1,886
------------ ------------------- ------------- --------------
$ 775,451 $ 129,623 $ 905,074 $ 12,950
============ =================== ============= ==============
Six months ended June 30, 2003:
Asia-Pacific $ 361,848 $ 17,877 $ 379,724 $ 5,026
The Americas (2) 158,717 36,937 195,655 (1,527)
Europe 76,973 51,740 128,712 2,165
------------ ------------------- ------------- --------------
$ 597,538 $ 106,554 $ 704,091 $ 5,664
============ =================== ============= ==============
(1) Certain corporate expenses are allocated to the segments based on total
revenue.
(2) Includes $4.5 million facility consolidation charge for the six months
ended June 30, 2003.
Page 18
PART I FINANCIAL INFORMATION
JUNE 30, December 31,
2004 2003
-------- ------------
TOTAL SEGMENT ASSETS:
Asia-Pacific $153,876 $159,005
The Americas (1) 147,530 190,077
Europe 77,478 95,608
-------- --------
$378,884 $444,690
======== ========
(1) Corporate assets are included in the Americas segment.
9. Contingencies
The Company is from time to time involved in certain legal proceedings in the
ordinary course of conducting its business. While the ultimate liability
pursuant to these actions cannot currently be determined, the Company believes
these legal proceedings will not have a material adverse effect on its financial
position.
The Company's subsidiary in South Africa, whose operations were discontinued
pursuant to the 2001 Restructuring Plan, has received an assessment from the
South Africa Revenue Service ("SARS") regarding value-added taxes the SARS
claims are due, relating to certain product sale and purchase transactions
entered into by the Company's subsidiary in South Africa from 2000 to 2002.
Although the Company's liability pursuant to this assessment by the SARS, if
any, cannot currently be determined, the Company believes the range of the
potential liability is between $0 and $1.5 million U.S. dollars (at current
exchange rates) including penalties and interest. The potential assessment is
not estimable and, therefore, is not reflected as a liability or recorded as an
expense.
A complaint was filed on November 23, 2001, against us and 87 other defendants
in the United States District Court for the District of Arizona, entitled
Lemelson Medical, Education and Research Foundation LP v. Federal Express
Corporation, et.al., Cause No. CIV01-2287-PHX-PGR. The plaintiff claims that we
and other defendants have infringed 7 patents alleged to cover bar code
technology. The case seeks unspecified damages, treble damages and injunctive
relief. The Court has ordered the case stayed pending the decision in a related
case in which a number of bar code equipment manufacturers have sought a
declaration that the patents asserted are invalid and unenforceable. That trial
concluded in January 2003. In January 2004, the Court rendered its decision that
the patents asserted by Lemelson were found to be invalid and unenforceable.
Lemelson filed an appeal to the Court of Appeals for the Federal Circuit on June
23, 2004. We continue to dispute these claims and intend to defend this matter
vigorously.
Page 19
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW AND RECENT DEVELOPMENTS
This discussion and analysis should be read in conjunction with the accompanying
Consolidated Financial Statements and related notes. Our discussion and analysis
of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of financial statements in conformity with generally accepted accounting
principles requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of any contingent assets
and liabilities at the financial statement date and reported amounts of revenue
and expenses during the reporting period. On an on-going basis we review our
estimates and assumptions. Our estimates were based on our historical experience
and various other assumptions that we believe to be reasonable under the
circumstances. Actual results are likely to differ from those estimates under
different assumptions or conditions, but we do not believe such differences will
materially affect our financial position or results of operations. Our critical
accounting policies, the policies we believe are most important to the
presentation of our financial statements and require the most difficult,
subjective and complex judgments are outlined in our Annual Report on Form 10-K,
for the year ended December 31, 2003, and have not changed significantly.
Certain statements made in this report may contain forward-looking statements.
For a description of risks and uncertainties relating to such forward-looking
statements, see the cautionary statements contained in Exhibit 99.1 to this
report and our Annual Report on Form 10-K for the year ended December 31, 2003.
Our operating results are influenced by a number of seasonal factors, which may
cause our revenue and operating results to fluctuate on a quarterly basis. These
fluctuations are the result of several factors, including, but not limited to:
- promotions and subsidies by wireless network operators;
- the timing of local holidays and other events affecting
consumer demand;
- the timing of the introduction of new products by our
suppliers and competitors;
- purchasing patterns of customers in different markets; and
- weather patterns.
Due to seasonal factors, our interim results may not be indicative of annual
results.
Page 20
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE AND WIRELESS DEVICES HANDLED FOR THE THREE MONTHS ENDED JUNE 30, 2004
(Amounts in 000s)
Change from
% of 2003 to
June 30, 2004 % of Total June 30, 2003 Total 2004
------------- ---------- ------------- ----- -----------
REVENUE BY DIVISION:
Asia-Pacific $252,918 55% $203,319 55% 24%
The Americas 121,973 26% 100,828 27% 21%
Europe 88,875 19% 67,785 18% 31%
-------- --- -------- --- --
Total $463,766 100% $371,932 100% 25%
======== === ======== === ==
REVENUE BY SERVICE LINE:
Product distribution $397,509 86% $317,005 85% 25%
Integrated logistics services 66,257 14% 54,927 15% 21%
-------- --- -------- --- --
Total $463,766 100% $371,932 100% 25%
======== === ======== === ==
WIRELESS DEVICES HANDLED BY DIVISION:
Asia-Pacific 1,975 33% 1,170 29% 69%
The Americas 3,747 63% 2,772 67% 35%
Europe 209 4% 161 4% 30%
-------- --- -------- --- --
Total 5,931 100% 4,103 100% 45%
======== === ======== === ==
WIRELESS DEVICES HANDLED BY SERVICE LINE:
Sales of wireless devices 2,761 47% 1,983 48% 39%
Integrated logistics services 3,170 53% 2,120 52% 50%
-------- --- -------- --- --
Total 5,931 100% 4,103 100% 45%
======== === ======== === ==
Globally, the availability of feature rich wireless devices, wireless network
operator promotional activity and compelling pricing by manufacturers induced
subscribers to upgrade their wireless devices. Revenue in the second quarter of
2004 was $464 million, an increase of 25% from $372 million in the second
quarter of 2003. Wireless devices handled increased by 45% from the second
quarter of 2003. The revenue increase was attributable to the strong market
demand for our products and services, our presence in India, which began late in
the second quarter of 2003, manufacturer and wireless network operator
promotional activity, the addition of sales of prepaid wireless airtime in the
Americas division and certain European markets, and the strengthening of foreign
currencies relative to the U.S. dollar, which accounted for approximately 3
percentage points of the increase in revenue. The revenue increase was partially
offset by an overall 11% decline on a constant currency basis in the average
selling price of wireless devices sold and a sales mix shift from product
distribution sales to fee-based logistics services. The increase in revenue and
wireless devices handled was pervasive throughout all divisions and service
lines.
Wireless devices handled, as compared to the second quarter of 2003:
The number of wireless devices sold through our distribution business
increased 39%, primarily as a result of strong market demand in the
Asia-Pacific division, our presence in India, which began
Page 21
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
late in the second quarter of 2003, and increased demand in certain
European markets initiated through network operator promotional programs.
The number of wireless devices handled through our integrated logistics
business increased 50%, primarily as a result of increased demand from
current logistics services customers and the addition of a new significant
logistics services customer in the Americas division.
Revenue by division, as compared to the second quarter of 2003:
The revenue increase in the Asia-Pacific division of 24% was attributable
to increased demand fueled by competitive pricing by Nokia, one of our key
suppliers, our presence in India, which began late in the second quarter
of 2003, the strengthening of foreign currencies relative to the U.S.
dollar, which accounted for approximately 4 percentage points of the
increase in revenue, and various network operator promotional programs in
certain markets. The increase in revenue was partially offset by a 28%
decrease on a constant currency basis in the average selling price of
wireless devices as a result of competitive pricing and a shift in sales
mix toward lower-end wireless devices in certain markets.
The revenue increase in the Americas division of 21% was attributable to a
21% increase in the average selling prices of wireless devices sold and a
37% increase in logistics services revenues. The higher increase in
logistics services revenue than the overall revenue increase was caused by
a sales mix shift from product distribution sales to fee-based logistics
services. The increase in the average selling price of wireless devices
sold was due to the replacement cycle for more fully featured wireless
devices and a more diversified product offering. The Americas division
experienced 47% growth in wireless devices handled in its logistics
services business, which was attributable to increased demand experienced
by our network operator customers, including mobile virtual network
operators, the addition of a new significant customer and expansion of
services to customers. The increase in logistics services revenue in the
Americas division was less than the unit growth rate due to changes in the
mix of services provided to certain customers and reduced fee structures
with certain customers.
The revenue increase in the Europe division of 31% was primarily
attributable to a 30% increase in wireless devices handled due to network
operator promotional programs in certain markets, a 18% increase on a
constant currency basis in the average selling price of wireless devices
sold, the strengthening of foreign currencies relative to the U.S. dollar,
which accounted for approximately 7 percentage points of the increase in
revenue, and expansion of electronic prepaid card distribution in certain
markets.
Revenue by service line, as compared to the second quarter of 2003:
We experienced a 25% increase in revenue from product distribution
primarily as a result of competitive pricing by a key manufacturer in
conjunction with strong market demand in the Asia-Pacific division,
increased demand for feature-rich products, which resulted in a 21%
increase in average selling prices in the Americas division, our presence
in India, which began late in the
Page 22
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
second quarter of 2003, and increased demand in certain European markets
driven by network operator promotional programs. The increase in revenue
from product distribution was partially offset by reduced average selling
prices in the Asia-Pacific division as a result of competitive pricing by
a key manufacturer.
We experienced a 21% increase in revenue from integrated logistics
services primarily as a result of a 50% growth rate in wireless devices
handled caused by increased demand from current logistics services
customers and the addition of a new significant customer in the Americas
division, the addition of sales of prepaid wireless airtime across all
divisions. The increase in logistics services revenue was less than the
unit growth rate due to the mix of services provided and reduced fee
structures with certain customers.
REVENUE AND WIRELESS DEVICES HANDLED FOR THE SIX MONTHS ENDED JUNE 30, 2004
(Amounts in 000s)
Change from
June 30, 2004 % of June 30, 2003 % of 2003 to
Total Total 2004
------------- ----- ------------- ----- -----------
REVENUE BY DIVISION:
Asia-Pacific $493,631 55% $379,724 54% 30%
The Americas 240,269 26% 195,655 28% 23%
Europe 171,174 19% 128,712 18% 33%
-------- --- -------- --- --
Total $905,074 100% $704,091 100% 29%
======== === ======== === ==
REVENUE BY SERVICE LINE:
Product distribution $775,451 86% $597,538 85% 30%
Integrated logistics services 129,623 14% 106,553 15% 22%
-------- --- -------- --- --
Total $905,074 100% $704,091 100% 29%
======== === ======== === ==
WIRELESS DEVICES HANDLED BY DIVISION:
Asia-Pacific 3,519 30% 2,235 28% 57%
The Americas 7,677 66% 5,430 68% 41%
Europe 413 4% 325 4% 27%
-------- --- -------- --- --
Total 11,609 100% 7,990 100% 45%
======== === ======== === ==
WIRELESS DEVICES HANDLED BY SERVICE LINE:
Sales of wireless devices 5,131 44% 3,792 47% 35%
Integrated logistics services 6,478 56% 4,198 53% 54%
-------- --- -------- --- --
Total 11,609 100% 7,990 100% 45%
======== === ======== === ==
Globally, the availability of feature rich wireless devices, wireless network
operator promotional activity and compelling pricing by manufacturers induced
subscribers to upgrade their wireless devices. Revenue in the six months ended
June 30, 2004, was $905 million, an increase of 29% as compared to $704 million
in the six months ended June 30, 2003. Wireless devices handled increased by 45%
as compared to the six months ended June 30, 2003. The revenue increase was
attributable to the strong market demand for our products and services, our
presence in India, which began late in the second quarter of 2003, manufacturer
and wireless network operator promotional activity, the addition of sales of
prepaid wireless airtime in the Americas division and certain European markets,
and the strengthening of foreign currencies
Page 23
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
relative the U.S. dollar, which accounted for approximately 3 percentage points
of the increase in revenue. The revenue increase was partially offset by an
overall 5% decline on a constant currency basis in the average selling price of
wireless devices sold and a sales mix shift from product distribution sales to
fee-based logistics services. The increase in revenue and wireless devices
handled was pervasive throughout all divisions and service lines.
Wireless devices handled, as compared to the six months ended June 30, 2003:
The number of wireless devices sold through our distribution business
increased 35%, primarily as a result of competitive pricing by a key
manufacturer in conjunction with strong market demand in the Asia-Pacific
division, our presence in India, which began late in the second quarter of
2003, and increased demand in certain European markets driven by network
operator promotional programs.
The number of wireless devices handled through our integrated logistics
business increased 54%, primarily as a result of increased demand from
current logistics services customers and the addition of new logistics
services customers in the Americas division.
Revenue by division, as compared to the six months ended June 30, 2003:
The revenue increase in the Asia-Pacific division of 30% was attributable
to increased demand fueled by competitive pricing by Nokia, one of our key
suppliers, the strengthening of foreign currencies relative to the U.S.
dollar, which accounted for approximately 4 percentage points of the
increase in revenue, our presence in India, which began late in the second
quarter of 2003, and various network operator promotional programs in
certain markets. The increase in revenue was partially offset by a 20%
decrease on a constant currency basis in the average selling price of
wireless devices sold as a result of competitive pricing and a shift in
sales mix toward lower-end wireless devices in certain markets.
The revenue increase in the Americas division of 23% was attributable to a
21% increase in the average selling price of wireless devices sold and a
27% increase in logistics services revenues. The increase in the average
selling price of wireless devices sold was due to the replacement cycle
for more fully featured wireless devices and a more diversified product
offering. The Americas division experienced 53% growth in wireless devices
handled in its logistics services business, which was attributable to
increased demand experienced by our network operator customers, the
addition of a new significant customer and expansion of services to
customers. The increase in logistics services revenue in the Americas
division was less than the unit growth rate due to changes in the mix of
services provided to certain customers, and reduced fee structures with
certain customers.
The revenue increase in the Europe division of 33% was primarily
attributable to a 27% increase in wireless devices handled due to network
operator promotional programs in certain markets, a 18% increase in the
average selling price of wireless devices sold, the strengthening of
foreign
Page 24
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
currencies relative to the U.S. dollar, which accounted for approximately
7 percentage points of the increase in revenue, and expansion of
electronic prepaid card distribution in certain markets.
Revenue by service line, as compared to the six months ended June 30, 2003:
We experienced a 30% increase in revenue from product distribution
primarily as a result of competitive pricing by a key manufacturer in
conjunction with strong market demand in the Asia-Pacific division,
increased demand for feature-rich products, which resulted in a 21%
increase in average selling prices in the Americas division, our presence
in India, which began late in the second quarter of 2003, and increased
demand in certain European markets initiated through network operator
promotional programs. The increase in revenue from product distribution
was partially offset by reduced average selling prices in the Asia-Pacific
division as a result of competitive pricing by a key manufacturer.
We experienced a 22% increase in revenue from integrated logistics
services primarily as a result of a 54% growth rate in wireless devices
handled caused by the increased demand from current logistics services
customers and the addition of new customers in the Americas division, the
addition of sales of prepaid wireless airtime across all divisions. The
increase in logistics services revenue was less than the unit growth rate
due to the mix of services provided and changes in the scope of services
provided to certain customers.
Gross Profit and Gross Margin
(Amounts in 000s)
Three Months Ended Six Months Ended Percent Change
---------------------- ---------------------- ------------------------
JUNE 30, June 30, June 30, June 30, Q2 2003 to YTD 2003 to
2004 2003 2004 2003 Q2 2004 YTD 2004
--------- --------- --------- --------- ---------- -----------
Product distribution $ 14,792 $ 12,285 $ 28,073 $ 19,792 20% 42%
Integrated logistics services 12,543 10,193 24,620 21,148 23% 16%
--------- --------- --------- --------- ---- ----
Gross profit $ 27,335 $ 22,478 $ 52,693 $ 40,940 22% 29%
--------- --------- --------- --------- ---- ----
Product distribution 3.7% 3.9% 3.6% 3.3% (0.2) pts 0.3 pts
Integrated logistics services 18.9% 18.6% 19.0% 19.8% 0.3 pts (0.8) pts
--------- --------- --------- --------- ---- ----
Gross margin 5.9% 6.0% 5.8% 5.8% (0.1) pt 0.0 pts
--------- --------- --------- --------- ---- ----
Gross profit and gross margin by service line, as compared to the second quarter
of 2003:
The overall 22% increase in gross profit was primarily attributable to a
45% increase in wireless devices handled, a 25% increase in total revenue
and operating efficiencies in the Americas division, which included the
consolidation of its Richmond, California, call center with its
Plainfield, Indiana, call center and other efficiency initiatives.
The 20% increase in gross profit from product distribution revenue was
primarily attributable to a 39% increase in wireless devices sold, which
led to a 25% increase in product distribution revenue. The growth in gross
profit was less than revenue growth due to a 0.2 percentage point decline
in gross margin. The inclusion of our lower gross margin India business in
our revenue mix, lower
Page 25
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
margin prepaid wireless devices sold in the Asia-Pacific division and the
growth of an existing accessories product line sold in the Asia-Pacific
division, which yields a lower gross margin, were significant contributors
to the decrease in gross margin in product distribution. These decreases
were partially offset by improvements in gross margin in the Americas and
Europe division. The Americas division experienced the benefit of
efficiency improvements, while the Europe division benefited the result of
a shift to higher gross margin products in certain European markets and
increased operating leverage of the cost infrastructure due to higher
volumes.
The 23% increase in gross profit from integrated logistics services was
attributable to a 21% increase in logistics services revenue. The slightly
higher rate of growth of gross profit, as compared to revenue growth, was
due to a slight improvement in gross margin. The increase in gross margin
from integrated logistics services was primarily due to efficiency
improvements in the Americas division partially offset by the launch of
prepaid airtime, which yields a relatively lower gross margin, in the
Americas division and certain markets within the Europe division.
Gross profit and margin by service line, as compared to the six months ended
June 30, 2003:
The 29% increase in gross profit was mostly attributable to a 45% increase
in wireless devices handled contributing to a 29% increase in total
revenue, operational efficiencies and improvements in the Americas
division, which included the consolidation of its Richmond, California,
call center with its Plainfield, Indiana, call center and the result of
other efficiency initiatives.
The 42% increase in gross profit from product distribution revenue was
mostly ascribed to a 35% increase in wireless devices sold, which led to a
30% increase in product distribution revenue. The growth in gross profit
was larger than the revenue growth due to 0.3 percentage point increase in
gross margin. The increase in gross margin from product distribution was
primarily the result of increased leverage of the cost infrastructure in
the Americas division due to higher volumes and a shift to higher margin
products in certain European markets. These increases were partially
offset by the inclusion of our lower gross margin India business in our
revenue mix.
The 16% increase in gross profit from integrated logistics services was
attributable to a 22% increase in logistics services revenue. The growth
in gross profit was less than revenue growth due to the 0.8 percentage
point decline in gross margin. The decrease in gross margin from
integrated logistics services was primarily a result of the addition of
prepaid airtime, which yields a relatively lower gross margin, in the
Americas division and certain markets within the Europe division.
Page 26
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Selling, General and Administrative Expenses
(Amounts in 000s)
Three Months Ended Six Months Ended Percent Change
-------------------- -------------------- --------------------------
JUNE 30, June 30, June 30, June 30, Q2 2003 to YTD 2003 to
2004 2003 2004 2003 Q2 2004 YTD 2004
-------- -------- -------- -------- ---------- -----------
Selling, general and
administrative expenses $ 19,901 $ 15,419 $ 39,958 $ 30,815 26% 13%
As a percent of revenue 4.3% 4.1% 4.4% 4.4% 0.2 pts (0.0) pts
As compared to the second quarter of 2003, SG&A expenses increased 26% in
parallel with a 25% increase in revenue. The $4.5 million increase in spending
primarily resulted from the benefit of a $900 thousand legal expense recovery in
2003, which did not recur in 2004, an estimated $700 thousand unfavorable effect
of the strengthening of foreign currencies relative to the U.S. dollar, our
presence in India, which began late in the second quarter of 2003, a 50%
increase in expenses related to being a publicly traded company, which included
costs related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002
and increased insurance premiums, our focus on business expansion across all
divisions.
As compared to the six months ended June 30, 2003, SG&A expenses increased 13%
in conjunction with a 29% increase in revenue. The $9.0 million increase in
spending primarily resulted from an estimated $1.4 million unfavorable effect
from the strengthening of foreign currencies relative to the U.S. dollar, our
presence in India, which began late in the second quarter of 2003, a 70%
increase in expenses related to being a publicly traded company, which included
costs related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002
and increased insurance premiums, and the benefit of a $900 thousand legal
expense recovery in 2003, which did not recur in 2004.
Facility Consolidation Charge
On February 19, 2003, we announced that we would consolidate our Richmond,
California, call center operation into our Plainfield, Indiana, facility to
reduce costs and increase productivity and profitability in our Americas
division. We completed the consolidation of the facility in April of 2003. In
the six months ended June 30, 2003, we recorded a pre-tax charge of $4.5 million
relating to the facility consolidation which included approximately $2.8 million
for the present value of estimated lease costs, net of an anticipated sublease,
non-cash losses on the disposal of assets of approximately $1.1 million and
severance and other costs of approximately $600 thousand. During the second
quarter of 2004, we terminated the lease and related liabilities at $215
thousand less than expected.
Page 27
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Operating Income and Margin from Continuing Operations
(Amounts in 000s)
Three Months Ended Six Months Ended Percent Change
-------------------- ----------------------- -----------------------
JUNE 30, June 30, June 30, June 30, Q2 2003 to YTD 2003 to
2004 2003 2004 2003 Q2 2004 YTD 2004
-------- --------- --------- --------- ---------- -----------
OPERATING INCOME:
Asia-Pacific $ 2,787 $ 3,385 $ 4,561 $ 5,026 (18%) (9%)
The Americas (1) 3,774 1,979 6,503 (1,527) 91% N/M
Europe 1,088 1,514 1,886 2,165 (28%) (13%)
-------- ------- --------- ------- --- ---
Total $ 7,649 $ 6,878 $ 12,950 $ 5,664 11% 129%
======== ======= ========= ======= === ===
OPERATING MARGIN:
Asia-Pacific 1.1% 1.7% 0.9% 1.3% (0.6) pts (0.4) pts
The Americas (1) 3.1 2.0 2.7 (0.8) 0.9 pts 3.5 pts
Europe 1.2 2.2 1.1 1.7 (1.0) pts (0.6) pts
-------- ------- --------- ------- --- ---
Total 1.6% 1.8% 1.4% 1.4% (0.2) pts 0.0 pts
======== ======= ========= ======= === ===
(1) Includes a facility consolidation charge of $4.5 million for the six
months ended June 30, 2003.
As compared to the second quarter of 2003, operating income from continuing
operations increased $771 thousand. The increase in operating income from
continuing operations was primarily a result of the 25% increase in revenue and
the associated 22% increase in gross profit, partially offset by increased SG&A
expenses. The increase in revenue and associated gross profit was primarily
attributable to the competitive pricing by a key manufacturer in conjunction
with strong market demand for our products and services, our presence in India,
which began late in the second quarter of 2003, manufacturer and wireless
network operator promotional activity and the launch of sales of prepaid
wireless airtime in the Americas division and certain European markets. The
increase in revenue and gross profit was partially offset by the $4.1 million
increase in SG&A expenses that was primarily attributable to the benefit of a
$900 thousand legal expense recovery in 2003, which did not recur in 2004, an
estimated $700 thousand unfavorable effect from the strengthening of foreign
currencies relative to the U.S. dollar, our presence in India, which began late
in the second quarter of 2003, a 50% increase in expenses related to being a
publicly traded company, which included costs related to compliance with Section
404 of the Sarbanes-Oxley Act of 2002 and increased insurance premiums, our
focus on business expansion in the European region and the development of
channel services in the Americas division.
As compared to the six months ended June 30, 2003, operating income from
continuing operations increased $7.3 million. The increase in operating income
from continuing operations was primarily a result of the 29% increase in
revenue, the associated 29% increase in gross profit, and the $4.5 million
facility consolidation charge incurred in 2003, which did not recur in 2004. The
increase in revenue and associated gross profit was primarily attributable to
the competitive pricing by a key manufacturer in conjunction with strong market
demand for our products, our presence in India, which began late in the second
quarter of 2003, manufacturer and wireless network promotional activity and the
addition of sales of prepaid wireless airtime in the Americas division and
certain European markets. The increase in revenue and gross profit was partially
offset by the $4.5 million increase in SG&A expenses, primarily resulting from
an estimated $1.4 million unfavorable effect from the strengthening of foreign
currencies relative to the U.S. dollar, our presence in India, which began late
in the second quarter of 2003, a 70% increase in expenses related to being a
publicly traded company, which included costs related to
Page 28
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and increased
insurance premiums, the benefit of a $900 thousand legal expense recovery in
2003, which did not recur in 2004.
Income from Continuing Operations
(Amounts in 000s)
Three Months Ended Six Months Ended
------------------------ ------------------------
JUNE 30, June 30, June 30, June 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Income from continuing
operations $ 5,111 $ 5,241 $ 8,370 $ 3,260
As a percent of revenue 1.1% 1.4% 0.9% 0.5%
Diluted shares outstanding 19,622 18,572 19,784 18,528
Income per diluted share from
continuing operations $ 0.26 $ 0.28 $ 0.42 $ 0.18
Income from continuing operations, as compared to the second quarter of 2003:
Income from continuing operations decreased by $129 thousand. The decrease
was primarily a result of increased SG&A and income tax expenses, offset
by the 25% increase in revenue and the associated 22% increase in gross
profit. The $4.1 million increase in SG&A expenses was primarily
attributable to the benefit of a $900 thousand legal expense recovery in
2003, which did not recur in 2004, an estimated $700 thousand unfavorable
effect from the strengthening of foreign currencies relative to the U.S.
dollar, our presence in India, which began late in the second quarter of
2003, a 50% increase in expenses related to being a publicly traded
company, which included costs related to compliance with Section 404 of
the Sarbanes-Oxley Act of 2002 and increased insurance premiums, our focus
on business expansion in the European region and the development of
channel services in the Americas division. The increase in income taxes
was a result of a 27% effective income tax rate in 2004 as compared to an
18% effective income tax rate in second quarter of 2003. The increase in
the effective income tax rate was primarily attributable to the increased
profitability in the Americas division in proportion to the other
divisions, which have lower average average statutory tax rates than the
Americas division. The increased SG&A and income tax expenses were
partially offset by the increase in revenue and associated gross profit,
which was primarily attributable to the strong market demand for our
products and services, our presence in India, which began late in the
second quarter of 2003, manufacturer and wireless network promotional
activity and the launch of sales of prepaid wireless airtime in the
Americas division and certain European markets.
Income per diluted share from continuing operations was $0.26 for the
second quarter of 2004, as compared to $0.28 in the second quarter of
2003. The issuance of shares from the exercise of stock options in 2003
and the effect of the increase in Brightpoint's average stock market price
in determining the diluted shares outstanding had a 6% dilutive effect on
weighted average shares outstanding in the second quarter of 2004, as
compared to the second quarter of 2003.
Page 29
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Income from continuing operations, as compared to the six months ended June 30,
2003:
Income from continuing operations increased $5.1 million. The increase in
income from continuing operations was mainly a result of the 29% increase
in revenue, the associated 29% increase in gross profit, the $4.5 million
facility consolidation charge incurred in 2003, which did not recur in
2004, and our recovery of $275 thousand in connection with the settlement
of the shareholder derivative lawsuit in 2003, which did not recur in
2004. The increase in revenue and associated gross profit was mostly
ascribable to the strong market demand for our products, our presence in
India, which began late in the second quarter of 2003, manufacturer and
wireless network promotional activity and the addition of sales of prepaid
wireless airtime in the Americas division and certain European markets.
The increase in revenue and gross profit was partially offset by the $4.5
million increase in SG&A expenses and $2.6 million increase in income tax
expense. The increase in SG&A expenses primarily resulted from an
estimated $1.4 million unfavorable effect from the strengthening of
foreign currencies relative to the U.S. dollar, our presence in India,
which began late in the second quarter of 2003, a 70% increase in expenses
related to being a publicly traded company, which included costs related
to compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and
increased insurance premiums, the benefit of a $900 thousand legal expense
recovery in 2003, which did not recur in 2004. The increase in income
taxes was a result of a 27% effective income tax rate in 2004 as compared
to a 13% effective income tax rate for the six months ended June 30, 2003.
The increase in the effective income tax rate was primarily attributable
to the increased profitability in the Americas division in proportion to
the other divisions, which have lower average statutory tax rates than the
Americas division.
Income per diluted share from continuing operations was $0.42 for the six
months ended June 30, 2004, as compared to $0.18 in 2003. The issuance of
shares from the exercise of stock options in 2003 and the effect of the
increase in Brightpoint's average stock market price in determining the
diluted shares outstanding had a 7% dilutive effect on weighted average
shares outstanding in the 2004, as compared to 2003.
Page 30
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Discontinued Operations
(Amounts in 000s)
Three Months Ended Six Months Ended
------------------------- -------------------------
JUNE 30, June 30, June 30, June 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Loss from discontinued operations $ (416) $ (1,423) $ (757) $ (1,975)
Income (loss) on disposal of discontinued
operations (410) 499 (4,644) 184
---------- ---------- ---------- ----------
Total discontinued operations $ (826) $ (924) $ (5,401) $ (1,791)
As a percent of revenue 0.2% 0.2% 0.6% 0.3%
Diluted shares outstanding 19,622 18,572 19,784 18,528
Loss per diluted share from discontinued
operations $ (0.04) $ (0.05) $ (0.27) $ (0.10)
The loss from discontinued operations in the second quarter of 2004 was
primarily attributable to an unrealizable asset written off and various
professional and liquidation fees. The loss on disposal of discontinued
operations in the second quarter of 2004 was mostly related to a $584 thousand
loss on the sale of the Company's subsidiary, Brightpoint do Brazil Ltda.,
partially offset by unrealized foreign currency translation gains caused by the
strengthening of the U.S. dollar relative to certain foreign currencies.
Subsequent to the sale of Brightpoint Brazil, the $3.1 million fully reserved
accounts receivable is no longer included as a component of "Accounts
receivable" or "Allowance for doubtful accounts" on the Consolidated Balance
Sheets.
The loss from discontinued operations in the second quarter of 2003 was
primarily attributable to losses incurred in Brightpoint (Ireland) Limited
("Brightpoint Ireland") operations, which were sold in the first quarter of
2004. Net gains on disposal of discontinued operations in the second quarter of
2003 were significantly attributable to the receipt of $1.3 million in
contingent consideration relating to the divestiture of the Company's Middle
East operations in the third quarter of 2002, fractionally offset by unrealized
foreign currency translation losses caused by the strengthening of foreign
currencies relative to the U.S. dollar.
The loss from discontinued operations for the six months ended June 30, 2004 was
mainly ascribable to losses incurred in Brightpoint Ireland's operations, an
unrealizable asset written off and various professional and liquidation fees.
The loss on disposal of discontinued operations for the six months ended June
30, 2004, was primarily attributable to a $3.8 million loss on the sale of
Brightpoint Ireland and a $584 thousand loss on the sale of the Company's
subsidiary, Brightpoint do Brazil Ltda., partially offset by unrealized foreign
currency translation gains caused by the strengthening of the U.S. dollar
relative to certain foreign currencies. On February 19, 2004, the Company's
subsidiary, Brightpoint Holdings B.V., completed the sale of its 100% interest
in Brightpoint Ireland to Celtic Telecom Consultants Ltd. Cash consideration for
the sale was approximately $1.7 million. The $3.8 million loss included the
non-cash write-off of approximately $1.6 million of cumulative currency
translation adjustments.
The loss from discontinued operations for the six months ended June 30, 2003,
was primarily attributable to losses incurred in Brightpoint Ireland's
operations of $1.7 million and various professional and
Page 31
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
liquidation fees. Net gains on disposal of discontinued operations for the six
months ended June 30, 2003, were significantly comprised of the receipt of $1.3
million in contingent consideration relating to the divestiture of the Company's
Middle East operations in the third quarter of 2002, partially offset by
unrealized foreign currency translation losses caused by the strengthening of
foreign currencies relative to the U.S. dollar and various professional and
liquidation fees.
Net Income
(Amounts in 000s)
Three Months Ended Six Months Ended
------------------------ ------------------------
JUNE 30, June 30, June 30, June 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income $ 4,285 $ 4,317 $ 2,969 $ 1,469
As a percent of revenue 0.9% 1.2% 0.3% 0.2%
Diluted shares outstanding 19,622 18,572 19,784 18,528
Earnings per diluted share $ 0.22 $ 0.23 $ 0.15 $ 0.08
Net income, as compared to the second quarter of 2003:
Net income decreased by $32 thousand. The decrease in net income was
primarily a result of increased SG&A and income tax expenses offset by the
25% increase in revenue and the associated 22% increase in gross profit.
The $4.1 million increase in SG&A expenses was primarily caused by the
benefit of a $900 thousand legal expense recovery in 2003, which did not
recur in 2004, an estimated $700 thousand unfavorable effect from the
strengthening of foreign currencies relative to the U.S. dollar, our
presence in India, which began late in the second quarter of 2003, a 50%
increase in expenses related to being a publicly traded company, which
included costs related to compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 and increased insurance premiums, our focus on
business expansion in the European region and the development of channel
services in the Americas division. The increase in income taxes was a
result of a 27% effective income tax rate in 2004 as compared to an 18%
effective income tax rate in second quarter of 2003. The increase in the
effective income tax rate was primarily attributable to the increased
profitability in the Americas division in proportion to the other
divisions, which have lower average statutory tax rates than the Americas
division. The increased SG&A and income tax expenses were partially offset
by the increase in revenue and associated gross profit, which was
primarily attributable to the strong market demand for our products, our
presence in India, which began late in the second quarter of 2003,
manufacturer and wireless network promotional activity and the addition of
sales of prepaid wireless airtime in the Americas division and certain
European markets.
Earnings per diluted share were $0.22 for the second quarter of 2004, as
compared to $0.23 in the second quarter of 2003. The issuance of shares
from the exercise of stock options in 2003 and the effect of the increase
in Brightpoint's average stock market price in determining the diluted
shares outstanding had an 8% dilutive effect on weighted average shares
outstanding in the second quarter of 2004, as compared to the second
quarter of 2003.
Page 32
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Net income, as compared to the six months ended June 30, 2003:
Net income increased by $1.5 million. The increase in net income was
primarily a result of the 29% increase in revenue, the associated 29%
increase in gross profit, the $4.5 million facility consolidation charge
incurred in 2003, which did not recur in 2004, and our recovery of $275
thousand in connection with the settlement of the shareholder derivative
lawsuit in 2003, which did not recur in 2004. The increase in revenue and
associated gross profit was primarily attributable to the strong market
demand for our products, our presence in India, which began late in the
second quarter of 2003, manufacturer and wireless network promotional
activity and the addition of sales of prepaid wireless airtime in the
Americas division and certain European markets. The increase in revenue
and gross profit was partially offset by the $4.5 million increase in SG&A
expenses, the $3.6 million increased losses in discontinued operations and
the $2.6 million increase in income tax expenses. The increase in SG&A
expenses primarily resulted from an estimated $1.4 million unfavorable
effect from the strengthening of foreign currencies relative to the U.S.
dollar, our presence in India, which began late in the second quarter of
2003, a 70% increase in expenses related to being a publicly traded
company, which included costs related to compliance with Section 404 of
the Sarbanes-Oxley Act of 2002 and increased insurance premiums, the
benefit of a $900 thousand legal expense recovery in 2003, which did not
recur in 2004. The losses in discontinued operations were primarily
attributable to the loss on sale of Brightpoint Ireland. In accordance
with SFAS 144, a $1.5 million net loss incurred by our former Ireland
operation was reclassified from continuing operations to discontinued
operations in the presentation of the results of the second quarter of
2003. The increase in income taxes was a result of a 27% effective income
tax rate in 2004 as compared to a 13% effective income tax rate for the
six months ended June 30, 2003. The increase in the effective income tax
rate was primarily attributable to the increased profitability in the
Americas division in proportion to the other divisions, which have lower
average statutory tax rates than the Americas division.
Earnings per diluted share were $0.15 for the six months ended June 30,
2004, as compared to $0.08 in 2003. The issuance of shares from the
exercise of stock options in 2003 and the effect of the increase in
Brightpoint's average stock market price in determining the diluted shares
outstanding had a 6% dilutive effect on weighted average shares
outstanding in the 2004, as compared to 2003.
Page 33
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RETURN ON INVESTED CAPITAL FROM OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
RETURN ON INVESTED CAPITAL FROM OPERATIONS ("ROIC")
We believe that it is equally important for a business to manage its balance
sheet as it does its statement of operations. A measurement that ties the
statement of operation performance with the balance sheet performance is Return
on Invested Capital from Operations, or ROIC. We believe if we are able to grow
our earnings while minimizing the use of invested capital, we will be optimizing
shareholder value and concurrently preserving resources in preparation for
potential growth opportunities. We take a straight-forward approach in
calculating ROIC: we apply an estimated average tax rate to the operating income
of our continuing operations with adjustments for unusual items, such as
facility consolidation charges, and apply this tax-adjusted operating income to
our average capital base, which, in our case, is our shareholders' equity and
debt. The Company uses ROIC to measure the effectiveness of its use of invested
capital to generate profits. Returns on invested capital for the quarters and
trailing four quarters ending June 30, 2004, and 2003, were as follows:
Three Months Ended Trailing Four Quarters Ended
------------ ------------ ------------ ------------
JUNE 30, June 30, June 30, June 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Operating income after taxes:
Operating income (loss) from
continuing operations $ 7,649 $ 6,903 $ 30,941 $ 14,505
Plus: Facility consolidation charge (215) 181 785 4,461
Less: Estimated income taxes (1) (2,007) (1,309) (8,509) (3,922)
------------ ------------ ------------ ------------
Operating income after taxes $ 5,427 $ 5,775 $ 23,217 $ 15,044
============ ============ ============ ============
Invested capital:
Debt $ 853 $ 13,464 $ 853 $ 13,464
Shareholders' equity 130,188 120,235 130,188 120,235
------------ ------------ ------------ ------------
Invested capital $ 131,041 $ 133,699 $ 131,041 $ 133,699
============ ============ ============ ============
Average invested capital (2) $ 139,753 $ 127,452 $ 141,970 $ 149,430
============ ============ ============ ============
ROIC (3) 16% 18% 16% 10%
============ ============ ============ ============
(1) Estimated income taxes were calculated by multiplying the sum of operating
income from continuing operations and the facility consolidation charge
by the respective periods' effective tax rate.
(2) Average invested capital for quarterly periods represents the simple
average of the beginning and ending invested capital amounts for the
respective quarter. Average invested capital for the trailing four quarter
periods represents the average of the ending invested capital amounts for
the current and four prior quarter period ends.
(3) ROIC is calculated by dividing operating income after taxes by average
invested capital. ROIC for quarterly periods is stated on an annualized
basis and is calculated by dividing operating income after taxes by
average invested capital and multiplying the result by four (4) to state
ROIC on an annualized basis.
Our annualized ROIC for the second quarter of 2004 was 16%, as compared to 18%
in the second quarter of 2003. The reduction was a result of slightly lower
operating income and a higher average invested capital base. Since the Company
earned income in 2003, increased its common stock and additional paid-in capital
through the exercise of employee stock options, and experienced a reduction in
accumulated other comprehensive loss due to the general strengthening of foreign
currencies relative to the U.S. dollar,
Page 34
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
the average equity component in this calculation has increased from $127 million
as of June 30, 2003, to $140 million as of June 30, 2004, and has therefore
added to our invested capital base.
For the trailing four quarters, our annualized ROIC increased to 16% from 10%
for the prior period ending June 30, 2003, as a result of higher operating
income and a lower average invested capital base. The lower average invested
capital base was a result of reduced borrowings partially offset by earned
income in 2003, increases in common stock and additional paid-in capital through
the exercise of employee stock options, and experienced a reduction in
accumulated other comprehensive loss.
CASH CONVERSION CYCLE
Management utilizes the cash conversion cycle days metric and its components to
evaluate the Company's ability to manage its working capital and its cash flow
performance. Cash conversion cycle days and its components for the quarters
ending June 30, 2004 and 2003, were as follows:
Three Months Ended
----------------------
JUNE 30, June 30,
2004 2003
--------- --------
Days sales outstanding in accounts receivable 20 24
Days inventory on-hand 24 28
Days payable outstanding (38) (48)
--- ---
Cash Conversion Cycle Days 6 4
=== ===
A key source of our liquidity is our ability to invest in inventory, sell the
inventory to our customers, collect cash from our customers, and pay our
suppliers. We refer to this as the cash conversion cycle. For additional
information regarding this measurement and the detail calculation of the
components of the cash conversion cycle, please refer to our Annual Report on
Form 10-K for the year ended December 31, 2003.
During the second quarter of 2004, the cash conversion cycle increased to 6 days
from 4 days as compared to the second quarter of 2003. The change in the cash
conversion cycle was the result of a 10 day decrease in the days of payable
outstanding, partially offset by a 4 day decrease in the days of sales
outstanding and a 4 day decrease in the days of inventory on-hand. The decrease
in days of payable outstanding was substantially due to the timing of inventory
received in conjunction with related payment terms from certain suppliers and
amounts to be received from certain suppliers for promotional activities. The
decrease in the days of sales outstanding was mostly due to improved collections
in certain divisions and amounts owed to certain customers for promotional
activities. The decrease in the days of inventory on-hand was primarily
attributable to increased sales volume.
Six days is a low number for a distribution company and it is unlikely that we
can sustain this short cycle for an extended period of time. Increases in the
cash conversion cycle would have the effect of consuming our cash, potentially
causing us to borrow from lenders or issuing common stock to fund the related
increase in working capital. Our potential investments in new markets may cause
us to increase our inventory levels in conditions where our customer base is
relatively new and whose
Page 35
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
purchasing behavior is less predictable. This situation can have the effect of
increasing our cash conversion cycle and consequently consume our cash or
increase our debt levels.
The Company was able to attain days of sales outstanding of 20 days by
collecting cash prior to product delivery from certain customers, selling
receivables in certain markets and therefore collecting cash prior to the
customer invoice due dates, focusing on credit and collections, and offering
customers early-pay discounts. The $3.9 million reduction of the allowance for
doubtful accounts from December 31, 2003 was mostly the result of a $3.1 million
fully reserved accounts receivable in the Company's discontinued operation
Brightpoint Brazil, which was sold in May 2004, and other utilizations of the
reserve against accounts receivable in the Americas division. The Company was
able to attain days of inventory on hand of 24 days by monitoring our inventory
levels very closely and consciously striving to keep our investment low while
still holding enough inventory to meet customer demand. From time to time, we
may pay our suppliers prior to the invoice due date in order to take advantage
of early settlement discounts. This may consume our cash or may cause us to
borrow from lenders.
CONSOLIDATED STATEMENTS OF CASH FLOWS
We use the indirect method of preparing and presenting our statements of cash
flows. In our opinion, it is more practical than the direct method and provides
the reader with a good perspective and analysis of the Company's cash flows.
OPERATING ACTIVITIES
For the six months ended June 30, 2004, net cash used in operating activities
was $11.9 million. Net cash used in operating activities was primarily due to a
reduction in accounts payable indicating a higher-level of inventory paid for as
a result of timing of inventory receipts and related payments. The additional
use of cash was partially offset by the cash generated by operations as measured
by earnings before interest, taxes, depreciation and amortization ("EBITDA").
The net changes in operating assets and liabilities consist primarily of a
reduction in accounts receivable, inventories and accounts payable. The
reduction in accounts receivable during the six months ended June 30, 2004 was
attributable to the successful acceleration of our accounts receivable
collection cycle and sales or financing transactions of certain accounts
receivable to banks and other financing organizations. The increase in
inventories was due to the acceleration of certain inventory purchases in order
to take advantage of vendor pricing promotions and preparing for potential
increases in demand. The decrease in accounts payable was due primarily to
timing of inventory receipts and related payments and our determination whether
to utilize certain suppliers' offers of early settlement discounts.
Page 36
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended Six Months Ended
---------- ---------- ---------- ----------
JUNE 30, June 30, June 30, June 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income (loss) $ 4,285 $ 4,317 $ 2,969 $ 1,469
Net interest expense 247 283 515 676
Income taxes (includes income taxes included in
Discontinued Operations) 1,890 1,188 3,095 472
Depreciation and amortization 2,564 3,231 5,225 6,651
---------- ---------- ---------- ----------
EBITDA $ 8,986 $ 9,019 $ 11,804 $ 9,268
========== ========== ========== ==========
During the six months ended June 30, 2004, the Company generated an EBITDA of
approximately $11.8 million as compared to $9.3 million for the same period in
2003. EBITDA provides management with an indicator of how much cash the Company
generates, excluding any changes in working capital. Since the Company has
experienced cash outlays for interest and taxes and has experienced cash inflows
and outflows related to changes in working capital, EBITDA is not a
comprehensive measure of cash flow. It is an indicator, however, of the
business' ability to generate cash by maintaining revenues and related margins
at a higher level than cash operating expenses. Note that EBITDA is a non-GAAP
financial measure.
(Amounts in 000s)
JUNE 30, December 31,
2004 2003
---------- ------------
Working capital $ 74,553 $ 89,345
Current ratio 1.30:1 1.30:1
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 June
30, 2004, compared to December 31, 2003, was primarily comprised of the $20
million repurchase of the Company's common stock, the effect of a decrease in
accounts payable and an increase in inventory partially offset by decreases in
accounts receivable and funded contract financing activities. We believe that
cash flow from operations and available bank borrowings will be sufficient to
continue funding our short-term capital requirements. However, significant
changes in our business model, significant operating losses or expansion of
operations in the future may require us to seek additional and alternative
sources of capital. Consequently, there can be no assurance that we will be able
to obtain any additional funding on terms acceptable to us or at all.
INVESTING ACTIVITIES
For the six months ended June 30, 2004, net cash provided by investing
activities was $3.4 million. Net cash provided by investing activities was
primarily due to a $7.5 million decrease in net funded contract financing
receivables fractionally offset by $3.6 million used for capital expenditures.
We offer financing of inventory and receivables to certain network operator
customers and their agents and manufacturer customers under contractual
arrangements. Under these contracts we manage and finance inventories and
receivables for these customers resulting in a contract financing receivable.
The decrease in contract financing receivables was due to timing of product
receipts at the end of the quarter. Capital expenditures were primarily directed
toward improving our information systems, particularly in the United States, our
Page 37
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
entry into India, which included new office space and basic information systems
infrastructure, and retail development in France.
FINANCING ACTIVITIES
For the six months ended June 30, 2004, net cash used in financing activities
was $30 million. Net cash used in financing activities was primarily comprised
of $20 million repurchase of Brightpoint's common stock and $16 million for
repayment of credit facilities, partially offset by a reduction in pledged cash
of $5 million. On June 4, 2004, the Company announced that its Board of
Directors had approved a share repurchase program authorizing the Company to
repurchase up to $20 million of the Company's common stock. The Company made
such repurchases in June of 2004 through open market and privately negotiated
transactions. Detail of the repurchases is provided in the table below. In
December 2003, the Company pledged $5 million to support a $4.2 million
short-term line of credit in India, due to restrictions on foreign capital,
which precluded us from utilizing our own funds, other than the amount pledged,
to meet these needs. This short-term line of credit was paid in the first
quarter of 2004, thus releasing the pledged cash. We may from time to time
pledge cash to collateralize lines of credit in markets where there are
restrictions of the movement of funds.
Issuer purchases of equity securities:
(Amounts in 000s)
Total number Average Total number of shares Maximum dollar value of
of shares price paid purchased as part of the shares that may yet be
Month of purchase purchased per share publicly announced program purchased under the program
----------------- ------------ ---------- -------------------------- ---------------------------
June 2004 1,397,500 $14.31 1,397,500 none
LINES OF CREDIT
The table below summarizes lines of credit that were available to the Company as
of June 30, 2004:
(Amounts in 000s)
Gross Letters of Credit &
Commitment Availability Outstanding Guarantees Net Availability
---------- ------------ ----------- ------------------- ----------------
North America $ 70,000 $ 39,653 $ - $ 5,200 $ 34,453
Australia 35,709 30,847 - 3,910 26,938
New Zealand 7,547 5,442 - 4,000 1,442
Sweden 1,986 1,986 832 - 1,154
Philippines 892 892 - - 892
---------- ---------- ---------- ---------- ----------
Total $ 116,134 $ 78,821 $ 832 $ 13,110 $ 64,879
========== ========== ========== ========== ==========
Additional details on the above lines of credit are disclosed in Note 6 of the
Notes to Consolidated Financial Statements. Interest payments were approximately
$247 thousand and $515 thousand for the three and six months ended June 30,
2004. Interest expense includes fees paid for unused capacity on credit lines
and amortization of deferred financing fees.
Page 38
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OFF-BALANCE SHEET ARRANGEMENTS - ACCOUNTS RECEIVABLES TRANSFERS
During the six months ended June 30, 2004 and 2003, the Company entered into
certain transactions or agreements with banks and other third-party financing
organizations in France, Norway and Sweden, with respect to a portion of its
accounts receivable in order to reduce the amount of working capital required to
fund such receivables. During the three and six months ended June 30, 2003, the
Company also entered into certain transactions or agreements with banks and
other third-party financing organizations in Ireland with respect to the sale of
a portion of its accounts receivable. These transactions have been treated as
sales pursuant to current accounting principles generally accepted in the United
States and, accordingly, are accounted for as off-balance sheet arrangements.
Net funds received reduced the accounts receivable outstanding while increasing
cash. Fees incurred are recorded as losses on the sale of assets and are
included as a component of "Net other expenses" in the Consolidated Statements
of Income.
Net funds received from the sales of accounts receivable for continuing
operations during the six months ended June 30, 2004 and 2003, totaled $184
million and $113 million, respectively. Fees, in the form of discounts, incurred
in connection with these sales totaled $542 thousand and $655 thousand during
the six months ended June 30, 2004 and 2003, respectively.
For discontinued operations, net funds received from the sales of accounts
receivable during the three and six months ended June 30, 2003, totaled $8.0
million and $12.4 million, respectively. Fees, in the form of discounts,
incurred in connection with these sales totaled $53 thousand and $111 thousand
during the three and six months ended June 30, 2003, respectively. These fees
were originally recorded as a component of "Net other expenses" in the
Consolidated Statements of Income, but have now been reclassified as a component
of "Loss from discontinued operations" in the Consolidated Statements of Income.
The Company is the collection agent on behalf of the bank or other third-party
financing organization for many of these arrangements and has no significant
retained interests or servicing liabilities related to accounts receivable that
it has sold. The Company may be required to repurchase certain accounts
receivable sold in certain circumstances, including, but not limited to,
accounts receivable in dispute or otherwise not collectible, accounts receivable
in which credit insurance is not maintained and a violation of, the expiration
or early termination of the agreement pursuant to which these arrangements are
conducted. There were no significant repurchases of accounts receivable sold
during the six months ended June 30, 2004 and 2003. These agreements require the
Company's subsidiaries to provide collateral in the form of pledged assets
and/or, in certain situations, a guarantee by the Company of its subsidiaries'
obligations.
Pursuant to these arrangements, approximately $36 million and $27 million of
trade accounts receivable were sold to and held by banks and other third-party
financing institutions at June 30, 2004 and 2003, respectively. Amounts held by
banks or other financing institutions at June 30, 2004 were for transactions
related to the Company's Norway, Sweden and France arrangements. All other
arrangements have been terminated or expired.
Page 39
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY ANALYSIS
Our measurement for liquidity is the summation of total unrestricted cash and
unused borrowing availability. We use this measurement as an indicator of how
much access to cash we have to either grow the business through investment in
new markets, acquisitions, or through expansion of existing service or product
lines or to contend with adversity such as unforeseen operating losses
potentially caused by reduced demand for our products and services, a material
uncollectible accounts receivable, or a material inventory write-down, as
examples. The table below shows this calculation.
(Amounts in 000s)
JUNE 30, December 31,
2004 2003 % Change
---------- ---------- ----------
Unrestricted cash $ 57,964 $ 98,879 (41%)
Borrowing availability 64,879 45,361 43%
---------- ---------- ---
Liquidity $ 122,843 $ 144,240 (15%)
========== ========== ===
As of June 30, 2004, our liquidity decreased $21 million from December 31, 2003.
The predominant cause for the $21 million reduction was the initiation and
completion of the $20 million repurchase of the Company's common stock within
the period. Cash decreased by 41% while borrowing availability increased by 43%.
Our net cash used in financing activities of $30 million during the six months
ended June 30, 2004, was to repurchase 1.4 million shares of Brightpoint's
common stock and to repay credit facilities, which consequently increased our
borrowing availability.
We routinely make large payments, in certain occasions, in excess of $10
million, to suppliers and routinely collect large payments from customers, in
certain occasions, in excess of $10 million. The timing of these payments or
collections can cause our cash balances and borrowings to fluctuate throughout
the year.
A cash-secured standby letter of credit of $15 million supporting our
Brightpoint Asia Limited's vendor credit line has been issued by financial
institutions on our behalf and was outstanding at December 31, 2003 and June 30,
2004. The related cash collateral has been reported under the heading "Pledged
Cash" in the Consolidated Balance Sheet.
In December 2003, the Company pledged $5 million to support a $4.2 million
short-term line of credit in India primarily due to restrictions on foreign
capital, which precluded us from utilizing our own funds, other than the amount
pledged, to meet these needs. This short-term line of credit was paid in the
first quarter of 2004, thus releasing the pledged cash. The related cash
collateral has been reported under the heading "Pledged Cash" in the
Consolidated Balance Sheet.
While it is difficult to quantify the adequacy of our liquidity for future
needs, with our unrestricted cash balance and unused borrowing availability,
totaling $123 million on June 30, 2004, no significant debt obligations, and a
positive quarterly EBITDA, we believe we have adequate liquidity to operate the
business with our own resources for the next 12 months and to invest in
potential growth opportunities.
Page 40
PART I FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE AND FOREIGN CURRENCY EXCHANGE RATE RISKS
We are exposed to financial market risks, including changes in interest rates
and foreign currency exchange rates. To mitigate interest rate risks, we have
historically utilized interest rate swaps to convert certain portions of our
variable rate debt to fixed interest rates. To mitigate foreign currency
exchange rate risks, we periodically utilize derivative financial instruments
under the Foreign Currency Risk Management Policy approved by our Board of
Directors. We do not use derivative instruments for speculative or trading
purposes.
We are exposed to changes in interest rates on our variable interest rate
revolving lines of credit. A 10% increase in short-term borrowing rates during
the quarter would have resulted in only a nominal increase in interest expense.
We did not have any interest rate swaps outstanding at June 30, 2004.
A substantial portion of our revenue and expenses are transacted in markets
worldwide and may be denominated in currencies other than the U.S. dollar.
Accordingly, our future results could be adversely affected by a variety of
factors, including changes in specific countries' political, economic or
regulatory conditions and trade protection measures.
Our foreign currency risk management program is designed to reduce, but not
eliminate, unanticipated fluctuations in earnings and cash flows caused by
volatility in currency exchange rates by hedging. Generally, through purchase of
forward contracts, we hedge transactional currency risk, but do not hedge
foreign currency revenue or operating income. Also, we do not hedge our
investment in foreign subsidiaries, where fluctuations in foreign currency
exchange rates may affect our comprehensive income or loss. An adverse change
(defined as a 10% strengthening of the U.S. dollar) in all exchange rates,
relative to our foreign currency risk management program, would have had no
material impact on our results of operations for 2004 or 2003. At June 30, 2004,
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.
Page 41
PART I FINANCIAL INFORMATION
ITEM 4. CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of its management,
including its principal executive officer and principal financial officer,
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures as of the end of the period covered by this report.
Based on this evaluation, the principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective in reaching a reasonable level of assurance that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time period specified in the Securities and Exchange
Commission's rules and forms.
The principal executive officer and principal financial officer also conducted
an evaluation of the Company's internal control over financial reporting (as
defined in Exchange Act Rule 13a-15(f)) ("Internal Control") to determine
whether any changes in Internal Control occurred during the quarter ended June
30, 2004, that have materially affected or which are reasonably likely to
materially affect Internal Control. Based on that evaluation, there has been no
such change during such period.
Page 42
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time involved in certain legal proceedings in the
ordinary course of conducting its business. While the ultimate liability
pursuant to these actions cannot currently be determined, the Company believes
these legal proceedings will not have a material adverse effect on its financial
position.
The Company's subsidiary in South Africa, whose operations were discontinued
pursuant to the 2001 Restructuring Plan, has received an assessment from the
South Africa Revenue Service ("SARS") regarding value-added taxes the SARS
claims are due, relating to certain product sale and purchase transactions
entered into by the Company's subsidiary in South Africa from 2000 to 2002.
Although the Company's liability pursuant to this assessment by the SARS, if
any, cannot currently be determined, the Company believes the range of the
potential liability is between $0 and $1.5 million U.S. dollars (at current
exchange rates) including penalties and interest. The potential assessment is
not estimable and, therefore, is not reflected as a liability or recorded as an
expense.
A complaint was filed on November 23, 2001, against us and 87 other defendants
in the United States District Court for the District of Arizona, entitled
Lemelson Medical, Education and Research Foundation LP v. Federal Express
Corporation, et.al., Cause No. CIV01-2287-PHX-PGR. The plaintiff claims that we
and other defendants have infringed 7 patents alleged to cover bar code
technology. The case seeks unspecified damages, treble damages and injunctive
relief. The Court has ordered the case stayed pending the decision in a related
case in which a number of bar code equipment manufacturers have sought a
declaration that the patents asserted are invalid and unenforceable. That trial
concluded in January 2003. In January 2004, the Court rendered its decision that
the patents asserted by Lemelson were found to be invalid and unenforceable.
Lemelson filed an appeal to the Court of Appeals for the Federal Circuit on June
23, 2004. We continue to dispute these claims and intend to defend this matter
vigorously.
Page 43
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 3, 2004, the Company held its Annual Meeting of Shareholders at which
time the following matters were approved by the Company's shareholders by the
votes indicated:
1) Election of two Class I Directors:
Director Votes Cast "For" Votes Withheld
-------- ---------------- --------------
V. William Hunt 16,500,878 1,502,083
Stephen H. Simon 15,983,727 2,219,234
2) Approval of the Company's Amended and Restated Independent Director
Stock Compensation Plan:
Votes Cast "For" Votes Cast "Against" Votes "Abstaining"
---------------- -------------------- ------------------
8,790,979 2,123,575 121,133
In addition, there were 6,967,274 "broker non-votes" with respect to
the proposal to approve the Company's Independent Director Stock
Compensation Plan.
3) Approval of the Company's 2004 Long-Term Incentive Plan:
Votes Cast "For" Votes Cast "Against" Votes "Abstaining"
---------------- -------------------- ------------------
7,991,272 2,926,982 117,433
In addition, there were 6,967,274 "broker non-votes" with respect to
the proposal to approve the Company's 2004 Long-Term Incentive Plan.
4) Changing the Company's State of Incorporation from Delaware to
Indiana:
Votes Cast "For" Votes Cast "Against" Votes "Abstaining"
---------------- -------------------- ------------------
10,661,284 246,060 128,348
In addition, there were 6,967,272 "broker non-votes" with respect to
the proposal to change the Company's State of Incorporation from
Delaware to Indiana.
5) Ratification of the Appointment of Ernst & Young LLP as the Company's
Independent Accountants for the Fiscal Year ending December 31, 2004:
Votes Cast "For" Votes Cast "Against" Votes "Abstaining"
---------------- -------------------- ------------------
17,747,282 153,595 102,083
Page 44
PART II OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits
The list of exhibits is hereby incorporated by reference to the
Exhibit Index on page 46 of this report.
(b) Reports on Form 8-K
(i) On June 4, 2004, we furnished a Form 8-K under Item 5 "Other
Events and Regulation FD Disclosure." The Company announced
that its Board of Directors had approved a share repurchase
program authorizing the Company to repurchase up to $20
million of the Company's Common Stock.
(ii) On June 3, 2004, we furnished a Form 8-K under Item 5 "Other
Events." Brightpoint, Inc., a Delaware corporation
("Brightpoint Delaware"), merged with and into its
wholly-owned subsidiary, Brightpoint Indiana Corp., an Indiana
corporation. The purpose of the merger was to change the state
of incorporation of Brightpoint Delaware from Delaware to
Indiana. The merger was effected pursuant to that certain Plan
and Agreement of Merger (the "Merger Agreement"), dated April
23, 2004, which was approved and adopted by the stockholders
of Brightpoint Delaware at the Annual Meeting of Shareholders
held on June 3, 2004. Articles of Merger were filed with the
Secretary of State of Indiana on June 3, 2004, and a
Certificate of Merger was filed with the Secretary of State of
Delaware on that same date.
Page 45
PART II OTHER INFORMATION
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: July 27, 2004 /s/ Frank Terence
---------------------------------------
Frank Terence
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: July 27, 2004 /s/ Lisa M. Kelley
---------------------------------------
Lisa M. Kelley
Sr. Vice President,
Chief Accounting Officer and Corporate Controller
(Principal Accounting Officer)
Page 46
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
2.1 Plan and Agreement of Merger between Brightpoint, Inc. and
Brightpoint Indiana Corp. dated April 23, 2004. Incorporated by
reference to Appendix E to Brightpoint, Inc.'s Proxy Statement
dated April 26, 2004 relating to its Annual Stockholders meeting
held June 3, 2004.
3.1 Restated Articles of Incorporation of Brightpoint, Inc.
(formerly Brightpoint Indiana Corp.) Incorporated by reference
to the applicable exhibit filed with the Company's Form 8-K
dated June 3, 2004.
3.2 Amended and Restated By-Laws of Brightpoint, Inc. (formerly
Brightpoint Indiana Corp.) Incorporated by reference to the
applicable exhibit filed with the Company's Form 8-K dated June
3, 2004.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, implementing
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934 implementing
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant To Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1 Cautionary Statements
Page 47