UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: __________________ to __________________
Commission file number: 0-23494
BRIGHTPOINT, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1778566
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
501 Airtech Parkway, Plainfield, Indiana 46168
(Address of principal executive offices) (Zip Code)
(317) 707-2355
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act) Yes [X] No [ ]
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
Number of shares of the registrant's common stock outstanding at November 4,
2005: 27,488,278 shares, excluding 3,114,975 treasury shares
BRIGHTPOINT, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2005 and 2004.. 3
Consolidated Balance Sheets
September 30, 2005 and December 31, 2004................. 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2005 and 2004............ 5
Notes to Consolidated Financial Statements.................. 6
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 21
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk.. 41
ITEM 4
Controls and Procedures..................................... 42
PART II. OTHER INFORMATION
ITEM 1
Legal Proceedings........................................... 44
ITEM 2
Unregistered Sales of Equity Securities and Use of
Proceeds................................................. 44
ITEM 6
Exhibits.................................................... 46
Signatures.................................................. 47
Page 2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------------
2005 2004 2005 2004
-------- -------- ---------- ----------
Revenue
Distribution revenue $470,961 $362,831 $1,303,900 $1,120,924
Logistic services revenue 74,014 69,228 205,643 177,405
-------- -------- ---------- ----------
Total revenue 544,975 432,059 1,509,543 1,298,329
Cost of revenue
Cost of distribution revenue 453,956 349,564 1,255,743 1,080,184
Cost of logistic services revenue 59,341 56,628 165,403 146,983
-------- -------- ---------- ----------
Total cost of revenue 513,297 406,192 1,421,146 1,227,167
Gross profit 31,678 25,867 88,397 71,162
Selling, general and administrative expenses 20,657 17,410 59,325 50,865
Facility consolidation charge (benefit) (270) -- 933 (215)
-------- -------- ---------- ----------
Operating income from continuing operations 11,291 8,457 28,139 20,512
Interest expense 497 231 958 813
Interest income (357) (172) (802) (676)
Net other expenses 129 229 531 1,102
-------- -------- ---------- ----------
Income from continuing operations before income taxes 11,022 8,169 27,452 19,273
Income tax expense 2,749 2,547 7,366 5,709
-------- -------- ---------- ----------
Income from continuing operations 8,273 5,622 20,086 13,564
Discontinued operations:
Loss from discontinued operations (15,452) (860) (19,827) (2,415)
Gain (loss) on disposal of discontinued operations 997 (215) 1,331 (4,859)
-------- -------- ---------- ----------
Total discontinued operations (14,455) (1,075) (18,496) (7,274)
-------- -------- ---------- ----------
Net income (loss) $ (6,182) $ 4,547 $ 1,590 $ 6,290
======== ======== ========== ==========
Basic per share:
Income from continuing operations $ 0.31 $ 0.21 $ 0.76 $ 0.48
Discontinued operations (0.54) (0.04) (0.70) (0.26)
-------- -------- ---------- ----------
Net income (loss) $ (0.23) $ 0.17 $ 0.06 $ 0.22
======== ======== ========== ==========
Diluted per share:
Income from continuing operations $ 0.30 $ 0.20 $ 0.73 $ 0.47
Discontinued operations (0.52) (0.04) (0.67) (0.25)
-------- -------- ---------- ----------
Net income (loss) $ (0.22) $ 0.16 $ 0.06 $ 0.22
======== ======== ========== ==========
Weighted average common shares outstanding:
Basic 26,580 26,915 26,545 28,127
======== ======== ========== ==========
Diluted 27,553 27,796 27,420 29,047
======== ======== ========== ==========
See accompanying notes.
Page 3
BRIGHTPOINT, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
SEPTEMBER 30, December 31,
2005 2004
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $112,819 $ 72,120
Pledged cash 166 13,830
Accounts receivable (less allowance for doubtful
accounts of $3,843 and $6,215, respectively) 132,514 148,321
Inventories 98,064 110,089
Contract financing receivable 26,387 14,022
Other current assets 30,463 23,132
Assets held for sale - current 28,212 --
-------- --------
Total current assets 428,625 381,514
Property and equipment, net 26,689 27,503
Goodwill and other intangibles, net 6,245 21,981
Other assets 6,080 6,586
Assets held for sale - non-current 873 --
-------- --------
Total assets $468,512 $437,584
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $188,434 $201,621
Accrued expenses 71,887 61,853
Unfunded portion of contract financing receivable 39,081 23,373
Liabilities held for sale - current 26,318 --
-------- --------
Total current liabilities 325,720 286,847
-------- --------
Total Liabilities $325,720 $286,847
-------- --------
COMMITMENTS AND CONTINGENCIES
Minority interest -- --
Shareholders' equity:
Preferred stock, $0.01 par value: 1,000 shares
authorized; no shares issued or outstanding -- --
Common stock, $0.01 par value: 100,000 shares
authorized; 30,551 and 29,249 issued in 2005
and 2004, respectively; 306 293
Additional paid-in capital 250,816 233,670
Unearned compensation (10,062) --
Treasury stock, at cost, 3,115 and 2,409 shares
in 2005 and 2004, respectively (33,013) (24,010)
Retained deficit (62,378) (63,968)
Accumulated other comprehensive income (loss) (2,877) 4,752
-------- --------
Total shareholders' equity 142,792 150,737
-------- --------
Total liabilities and shareholders' equity $468,512 $437,584
======== ========
See accompanying notes.
Page 4
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine Months Ended
September 30,
-------------------
2005 2004
-------- --------
OPERATING ACTIVITIES
Net income $ 1,590 $ 6,290
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,935 7,473
Discontinued operations 18,496 7,274
Net operating cash flow from discontinued operations (1,484) 997
Pledged cash requirements 13,664 384
Non-cash compensation 1,608 --
Facility consolidation charge (benefit) 933 (215)
Changes in deferred income taxes (863) 94
Income tax benefits from exercise of stock options 2,236 1,435
Changes in operating assets and liabilities, net of
effects from acquisitions and divestitures:
Accounts receivable, net (10,411) 7,640
Inventories, net 3,645 23,255
Other operating assets (13,343) (5,527)
Accounts payable 12,924 (37,238)
Accrued expenses 17,848 (3,813)
-------- --------
Net cash provided by operating activities 54,778 8,049
INVESTING ACTIVITIES
Decrease in funded contract financing receivables, net 3,445 9,005
Capital expenditures (7,932) (5,059)
Net investing cash flow from discontinued operations (1,036) (56)
Purchase acquisitions, net of cash acquired (357) (1,244)
Proceeds from sale of Ireland and Brazil operations -- 576
Decrease in other assets 2,720 133
-------- --------
Net cash provided by (used in) investing activities (3,160) 3,355
FINANCING ACTIVITIES
Purchase of treasury stock (9,004) (19,997)
Net proceeds (payments) on revolving credit facilities -- (16,283)
Net financing cash flow from discontinued operations -- 335
Pledged cash requirements - financing -- 5,000
Proceeds from common stock issuances under employee
stock option and purchase plans 3,253 560
-------- --------
Net cash used in financing activities (5,751) (30,385)
Effect of exchange rate changes on cash and cash
equivalents (5,168) 22
-------- --------
Net increase (decrease) in cash and cash equivalents 40,699 (18,959)
Cash and cash equivalents at beginning of period 72,120 98,879
-------- --------
Cash and cash equivalents at end of period $112,819 $ 79,920
======== ========
See accompanying notes.
Page 5
PART I FINANCIAL INFORMATION
BRIGHTPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(Unaudited)
1. Basis of Presentation
GENERAL
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X of the Securities Exchange Act of 1934.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. The preparation of financial statements requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results are likely to differ
from those estimates, but management does not believe such differences will
materially affect Brightpoint, Inc.'s (the "Company", "we", "our" or similar
pronouns) financial position or results of operations. The Consolidated
Financial Statements reflect all adjustments considered, in the opinion of the
Company, necessary to fairly present the results for the periods. Such
adjustments are of a normal recurring nature.
The Consolidated Financial Statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned, with the exception of the
Brightpoint India Limited subsidiary that is 85% owned by the Company.
Significant intercompany accounts and transactions have been eliminated in
consolidation. Certain amounts in the 2004 Consolidated Financial Statements
have been reclassified to conform to the 2005 presentation.
The Consolidated Balance Sheet at December 31, 2004 has been derived from the
audited Consolidated Financial Statements at that date, but does not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. The unaudited
Consolidated Statements of Operations for the three and nine months ended
September 30, 2005 and the unaudited Consolidated Statement of Cash Flows for
the nine months ended September 30, 2005 are not necessarily indicative of the
operating results or cash flows that may be expected for the entire year.
As announced on May 9, 2005, the Company has been exploring various strategic
alternatives, including, but not limited to, the sale, restructuring, closure or
other corporate action relating to all or a portion of its French operations. On
September 30, 2005, the Company entered into an agreement for the sale of
Brightpoint France to an entity to be formed by Initiative ET Finance
Investissement ("I&F") and the Managing Director of Brightpoint France, the
consummation of which is subject to certain conditions precedent, including, but
not limited to, the approval of the proposed transaction by I&F's investment
committee. In addition, I&F has the right to terminate the agreement without
liability because the EBITDA for Brightpoint France at September 30, 2005 is
less than specified levels as set forth in the purchase and sale agreement. The
Company cannot make any assurances that the sale to I&F will occur. Based on
these events, the Company has applied the provisions of Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144) and has classified its operations in France as
"held for sale" in the Consolidated Balance Sheet as of September 30, 2005. In
addition, SFAS No. 144
Page 6
PART I FINANCIAL INFORMATION
requires the Company to report the operating results of its operations in France
as a component of discontinued operations for all periods presented as its
operations and cash flows will be eliminated from the on-going operations of the
Company. Please refer to Note 3 to the Consolidated Financial Statements for
additional information related to the accounting treatment of Brightpoint
France.
The Company has not changed its significant accounting policies from those
disclosed in its Form 10-K/A for the year ended December 31, 2004. For further
information, reference is made to the audited Consolidated Financial Statements
and the notes thereto included in the Company's Annual Report on Form 10-K/A for
the year ended December 31, 2004, as amended.
NET INCOME (LOSS) PER SHARE
On September 15, 2005, the Company effected a 3-for-2 common stock split in the
form of a 50% stock dividend, which the Company's Board of Directors approved.
Per share amounts for all periods presented in this report have been adjusted to
reflect the 3-for-2 common stock split.
Basic net income (loss) per share is based on the weighted average number of
common shares outstanding during each period, and diluted net income (loss) per
share is based on the weighted average number of common shares and dilutive
common share equivalents outstanding during each period. The table below
presents a reconciliation of the income (loss) per share calculations (in
thousands, except per share data):
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
-------- ------- -------- -------
Income from continuing operations $ 8,273 $ 5,622 $ 20,086 $13,564
Discontinued operations (14,455) (1,075) (18,496) (7,274)
-------- ------- -------- -------
Net income (loss) $ (6,182) $ 4,547 $ 1,590 $ 6,290
======== ======= ======== =======
Basic:
Weighted average shares outstanding 26,580 26,915 26,545 28,127
======== ======= ======== =======
Per share amount:
Income from continuing operations $ 0.31 $ 0.21 $ 0.76 $ 0.48
Discontinued operations (0.54) (0.04) (0.70) (0.26)
-------- ------- -------- -------
Net income (loss) per share $ (0.23) $ 0.17 $ 0.06 $ 0.22
======== ======= ======== =======
Diluted:
Weighted average shares outstanding 26,580 26,915 26,545 28,127
Net effect of dilutive stock options,
restricted stock units and restricted
stock awards, based on the treasury
stock method using average market price 973 881 875 920
-------- ------- -------- -------
Total weighted average shares outstanding 27,553 27,796 27,420 29,047
======== ======= ======== =======
Per share amount:
Income from continuing operations $ 0.30 $ 0.20 $ 0.73 $ 0.47
Discontinued operations (0.52) (0.04) (0.67) (0.25)
-------- ------- -------- -------
Net income (loss) per share $ (0.22) $ 0.16 $ 0.06 $ 0.22
======== ======= ======== =======
Page 7
PART I FINANCIAL INFORMATION
STOCK BASED COMPENSATION
The Company uses the intrinsic value method, as opposed to the fair value
method, in accounting for stock options. The table below presents a
reconciliation of the Company's pro forma net income (loss) giving effect to the
estimated compensation expense related to stock based compensation and the
Company's Employee Stock Purchase Plan ("ESPP") that would have been reported if
the Company utilized the fair value method (in thousands, except per share
data):
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
------- ------ ------- ------
Net income (loss) as reported $(6,182) $4,547 $ 1,590 $6,290
Add back; stock compensation included in
net income (loss) 329 -- 1,006 --
------- ------ ------- ------
Stock-based compensation cost, net of
related tax effects, that would have
been included in the determination of
net income (loss) if the fair value
method had been applied (1,321) (666) (2,820) (1,959)
------- ------ ------- ------
Pro forma net income (loss) $(7,174) $3,881 $ (224) $4,331
======= ====== ======= ======
Basic earnings per share:
Net income (loss) as reported $ (0.23) $ 0.17 $ 0.06 $ 0.22
Add back; stock compensation included in
net income (loss) 0.01 -- 0.04 --
------- ------ ------- ------
Stock-based compensation cost, net of
related tax effects, that would have
been included in the determination of
net income (loss) if the fair value
method had been applied (0.05) (0.03) (0.11) (0.07)
------- ------ ------- ------
Pro forma net income (loss) $ (0.27) $ 0.14 $ (0.01) $ 0.15
======= ====== ======= ======
Diluted earnings per share:
Net income (loss) as reported $ (0.22) $ 0.16 $ 0.06 $ 0.22
Add back; stock compensation included in
net income (loss) 0.01 -- 0.04 --
------- ------ ------- ------
Stock-based compensation cost, net of
related tax effects, that would have
been included in the determination of
net income (loss) if the fair value
method had been applied (0.05) (0.02) (0.11) (0.07)
------- ------ ------- ------
Pro forma net income (loss) $ (0.26) $ 0.14 $ (0.01) $ 0.15
======= ====== ======= ======
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123R (Revised 2004), Share-Based Payment ("SFAS No. 123R"), which requires
that the compensation cost relating to share-based payment transactions be
recognized in financial statements based on alternative fair value models. The
share-based compensation cost will be measured based on the fair value of the
equity or liability instruments issued. The Company currently discloses pro
forma compensation expense quarterly and annually by calculating the stock based
compensation's fair value using the Black-Scholes model and disclosing the
impact on net income and net income per share in a Note to the Consolidated
Financial Statements. Upon adoption, pro forma disclosure will no longer be an
alternative. The table above
Page 8
PART I FINANCIAL INFORMATION
reflects the estimated impact that such a change in accounting treatment would
have had on our net income and net income per share if it had been in effect
during the three and nine months ended September 30, 2005 and 2004,
respectively. SFAS No. 123R also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a financing cash flow
rather than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. While the Company cannot estimate what those
amounts will be in the future, the amount of operating cash flows recognized for
such deductions were $2.2 million for the nine months ended September 30, 2005
and $1.4 million for the year ended December 31, 2004. On April 15, 2005, the
United States Securities and Exchange Commission adopted an amendment to rule
4-01(a) of Regulation S-X regarding the compliance date for SFAS No 123R,
Share-Based Payment. The amendment delayed the Company's implementation of SFAS
No. 123R until its first interim or annual reporting period of the registrant's
first fiscal year beginning on or after June 15, 2005. The amendment allows the
Company to adopt the provisions of SFAS No 123R earlier than required. The
Company will adopt SFAS No. 123R on January 1, 2006.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and gains or
losses resulting from currency translations of foreign investments. The details
of comprehensive income (loss) for the three and nine months ended September 30,
2005 and 2004, are as follows (in thousands):
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2005 2004 2005 2004
------- ------ ------- ------
Net income (loss) $(6,182) $4,547 $ 1,590 $6,290
Foreign currency translation gains (losses) (1) (3,217) 2,460 (7,629) 1,738
------- ------ ------- ------
Comprehensive income (loss) $(9,399) $7,007 $(6,039) $8,028
======= ====== ======= ======
(1) Includes $2.8 million realization of foreign currency translation gains for
the disposition of Brightpoint France in the three and nine month periods
ended September 30, 2005.
Page 9
PART I FINANCIAL INFORMATION
2. Facility Consolidation Charge
In September 2004, the Company's Australian subsidiary entered into a new
facility lease arrangement, which commenced in the first quarter of 2005. The
Company vacated its previous location in Australia in the first quarter of 2005
and recorded a pre-tax charge of $1.2 million, which included approximately $968
thousand for the present value of estimated lease costs, net of an anticipated
sublease and non-cash losses on the disposal of assets of approximately $235
thousand. During the third quarter of 2005, the Australian subsidiary entered
into an agreement to surrender its remaining obligations under its old facility
lease. Pursuant to the above, the Company reduced its facility consolidation
reserve by $270 thousand as reflected below. The remaining reserve represents
final costs to be incurred under the settlement. Reserve activity for the
facility consolidation as of September 30, 2005 is as follows (in thousands):
Lease
Termination Fixed
Costs Assets Total
----------- ------ ------
Provisions $ 968 $ 235 $1,203
Cash usage (90) -- (90)
Non-cash usage -- (221) (221)
----- ----- ------
March 31, 2005 $ 878 $ 14 $ 892
Provisions -- -- --
Cash usage (114) -- (114)
Non-cash usage (11) (7) (18)
----- ----- ------
June 30, 2005 $ 753 $ 7 $ 760
Provisions 120 -- 120
Provision release (270) -- (270)
Cash usage (283) -- (283)
Non-cash usage -- (7) (7)
----- ----- ------
SEPTEMBER 30, 2005 $ 320 $ -- $ 320
----- ----- ------
Page 10
PART I FINANCIAL INFORMATION
3. Discontinued Operations
Details of discontinued operations are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
2005 2004 2005 2004
-------- -------- -------- -------
Revenue $ 30,136 $20,987 $ 75,122 $62,038
-------- ------- -------- -------
Loss from discontinued operations
Net operating loss (1) (15,307) (842) (19,578) (2,024)
2001 restructuring plan charges (145) (18) (249) (390)
Other -- -- -- (1)
-------- ------- -------- -------
Total loss from discontinued operations (15,452) (860) (19,827) (2,415)
-------- ------- -------- -------
Gain (loss) on disposal of discontinued operations
2001 restructuring plan charges 9 (211) 354 (496)
Other 4 (4) (7) (28)
Tax items affecting discontinued operations 984 -- 984 --
Sale of Brightpoint (Ireland) Limited -- -- -- (3,751)
Sale of Brightpoint do Brazil Ltda -- -- -- (584)
-------- ------- -------- -------
Total gain (loss) on disposal of discontinued operations 997 (215) 1,331 (4,859)
-------- ------- -------- -------
Total discontinued operations $(14,455) $(1,075) $(18,496) $(7,274)
======== ======= ======== =======
(1) Includes $13.8 million of goodwill and intangible asset impairment charges
for the three and nine months ended September 30, 2005 related to Company's
operations in France.
Page 11
PART I FINANCIAL INFORMATION
Assets and liabilities, including reserves, related to discontinued operations
are classified in the Consolidated Balance Sheets as follows (in thousands):
SEPTEMBER 30, December 31,
2005 2004
------------- ------------
Cash $ 655 $ 5,205
Accounts receivable 22,047
Inventories 4,621
Other current assets 26 4,562
Assets held for sale - current 28,212
------- -------
Total current assets 28,893 36,435
------- -------
Property and equipment, net 876
Goodwill and intangibles, net 15,215
Other non-current assets 528
Assets held for sale - non current 873 --
------- -------
Total assets $29,766 $53,054
======= =======
Accounts payable and accrued expenses 670 25,909
Liabilities held for sale 26,318 --
------- -------
Total liabilities $26,988 $25,909
======= =======
France
As announced on May 9, 2005, the Company has been exploring various strategic
alternatives, including, but not limited to, the sale, restructuring, closure or
other corporate action relating to all or a portion of its French operations. On
September 30, 2005, the Company entered into an agreement for the sale of
Brightpoint France to an entity to be formed by Initiative ET Finance
Investissement ("I&F") and the Managing Director of Brightpoint France, the
consummation of which is subject to certain conditions precedent, including, but
not limited to, the approval of the proposed transaction by I&F's investment
committee. In addition, I&F has the right to terminate the agreement without
liability because the EBITDA for Brightpoint France at September 30, 2005 is
less than specified levels as set forth in the purchase and sale agreement. The
Company cannot make any assurances that the sale to I&F will occur. Based on
these events, the Company has applied the provisions of Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144) and has classified its operations in France as
"held for sale" in the Consolidated Balance Sheet at September 30, 2005. In
addition, SFAS No. 144 requires the Company to report the operating results of
its operations in France as a component of discontinued operations for all
periods presented as its operations and cash flows will be eliminated from the
continuing operations of the Company.
In connection with the preceding, the Company has recorded during the third
quarter of 2005 a $13.8 million non-cash impairment charge to the value of
goodwill and other intangibles, a $700 thousand non-cash impairment of certain
assets and $800 thousand in operating losses for the three months ended
September 30, 2005 related to its operations in France. These items are
classified as a component of "Loss from discontinued operations" in the
Consolidated Statements of Operations.
Page 12
PART I FINANCIAL INFORMATION
The Company cannot make any assurances that conditions precedent to the proposed
sale of Brightpoint France to I&F will be satisfied or that the sale to I&F or
any other party will occur. However, should the proposed sale be completed, the
Company will be required to record a gain or loss to the extent that the current
proposed selling price changes.
The following table presents the detail of assets held for sale for Brightpoint
France as of September 30, 2005.
SEPTEMBER 30,
2005
-------------
Cash $ 2,360
Accounts Receivable 18,579
Inventories 5,389
Other Assets 1,884
-------
Total current assets 28,212
=======
PP&E, net 528
Other non-current assets 345
-------
Total assets $29,085
-------
Accounts payable 18,885
Accrued expenses 3,221
Other liabilities 4,212
-------
Total liabilities $26,318
=======
China divestiture and related investment
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 $10.0 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 $11.0 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 $21.0 million face value of the Chinatron Class B Preference Shares
was $1.6 million at September 30, 2005, and December 31, 2004. Pursuant to these
transactions, Chinatron and the Company entered into a services agreement,
whereby Chinatron provides warehouse management services in Hong Kong supporting
the Company's Brightpoint Asia Limited operations managed by Persequor Limited.
Page 13
PART I FINANCIAL INFORMATION
4. Accounts Receivable Transfers
During the nine months ended September 30, 2005 and 2004, the Company entered
into certain transactions or agreements with banks and other third-party
financing organizations in 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. 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 Operations.
Net funds received from the sales of accounts receivable for continuing
operations during the nine months ended September 30, 2005 and 2004, totaled
$185 million and $216 million, respectively. Fees, in the form of discounts,
incurred in connection with these sales totaled $185 thousand and $218 thousand
during the three months ended September 30, 2005 and 2004, respectively. Fees,
in the form of discounts, incurred in connection with these sales totaled $566
thousand and $663 thousand during the nine months ended September 30, 2005 and
2004, respectively.
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 nine months ended September 30, 2005 and 2004. These agreements
require the Company's subsidiaries to provide collateral in the form of pledged
assets and/or, in certain situations, a guarantee by the Company of its
subsidiaries' obligations.
Pursuant to these arrangements, approximately $21 million and $27 million of
trade accounts receivable for our continuing operations were sold to and held by
banks and other third-party financing institutions at September 30, 2005 and
2004, respectively. Amounts held by banks or other financing institutions at
September 30, 2005 were for transactions related to the Company's Norway and
Sweden arrangements. All other arrangements have been terminated or expired.
5. Lines of Credit and Long-term Debt
At September 30, 2005 and December 31, 2004, the Company was in compliance with
the covenants in its credit agreements. Interest expense includes fees paid for
unused capacity on credit lines and amortization of deferred financing fees.
Page 14
PART I FINANCIAL INFORMATION
Lines of Credit -Americas Division
On September 14, 2005, the Company's primary North American operating
subsidiaries, Brightpoint North America L.P. and Wireless Fulfillment Services,
LLC (the "Borrowers"), amended their Amended and Restated Credit Facility (the
"Revolver") dated March 18, 2004, between the Borrowers and General Electric
Capital Corporation ("GE Capital"). The amendment allows for, among other
things, increasing the liquidity available under the Revolver by increasing
availability ("Supplemental Advance") by up to $25 million based upon the levels
of EBITDA of the Borrowers and their subsidiaries then in effect for the most
recent 12-month period. The amendment also increases the Borrowers' Letter of
Credit sub-limit from $25 million to $35 million, allows the Borrowers to
guarantee certain indebtedness of up to $20 million on behalf of Brightpoint,
Inc. and provides for a pledge to the lenders of shares of certain foreign
subsidiaries of Brightpoint, Inc. as additional security. The amendment also
provides the Borrowers with a limited waiver from an event of default resulting
from a negative covenant on guaranteed indebtedness under the Revolver relating
to a previously issued Letter of Credit issued under the Revolver. GE Capital
acted as the agent for a syndicate of banks (the "Lenders"). The Revolver
expires in September of 2008. The Revolver provides borrowing availability,
subject to borrowing base calculations, the supplemental advance calculations
and other limitations, of up to a maximum of $70 million and at September 30,
2005, bears interest, at the Borrowers' option, at the prime rate plus 0.25% or
LIBOR plus 1.75%. The applicable interest rate that the Borrowers are subject to
can be adjusted quarterly based upon certain financial measurements defined in
the Revolver. The Revolver is guaranteed by Brightpoint, Inc., and is secured
by, among other things, all of the Borrowers' assets. The Revolver is subject to
certain financial covenants, which include maintaining a minimum fixed charge
coverage ratio. The Revolver is a secured asset-based facility with an
additional supplemental advance based on EBITDA where a borrowing base is
calculated periodically using eligible accounts receivable and inventory,
subject to certain adjustments to determine the borrowing base. EBITDA is
calculated to determine the eligible supplemental advance. Eligible accounts
receivable, inventories and EBITDA 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 September 30, 2005, and December 31, 2004, there
were no amounts outstanding under the Revolver, with available funding, net of
the applicable required availability minimum and letters of credit, of
approximately $42 million and $33 million, respectively.
Lines of Credit - Asia-Pacific
In December of 2002, the Company's primary Australian operating subsidiary,
Brightpoint Australia Pty Ltd, entered into a revolving credit facility (the
"Facility") with GE Commercial Finance in Australia. The Facility, which matures
in December of 2005, provides borrowing availability, subject to borrowing base
calculations and other limitations, of up to a maximum amount of 50 million
Australian dollars (approximately $38 million U.S. dollars at September 30,
2005). Borrowings under the Facility are used for general working capital
purposes. The Facility is subject to certain financial covenants, which include
maintaining a minimum fixed charge coverage ratio and bears interest at the Bank
Bill Swap Reference rate plus 2.9% (8.63% at September 30, 2005). The Facility
is a secured asset-based facility where a borrowing base is calculated
periodically using eligible accounts receivable and inventory, subject to
certain adjustments. Eligible accounts receivable and inventories fluctuate over
time, which can increase
Page 15
PART I FINANCIAL INFORMATION
or decrease borrowing availability. At September 30, 2005, and December 31,
2004, there was no amounts outstanding under the facility with available funding
of $33 million and $32 million, respectively.
In July of 2003, the Company's primary operating subsidiary in the Philippines,
Brightpoint Philippines, Inc. ("Brightpoint Philippines") entered into a credit
facility with Banco de Oro. The facility, which matured in April of 2005,
provided borrowing availability, up to a maximum amount of 50 million Philippine
Pesos. In April of 2005, this facility was amended and renewed for another
one-year term with Banco de Oro and the borrowing availability was increased to
100 million Pesos (approximately $1.8 million U.S. dollars, at September 30,
2005). The facility is guaranteed by Brightpoint, Inc and bears interest at the
Prime Lending Rate (10.75% at September 30, 2005). At September 30, 2005 and
December 31, 2004, the facility had no amounts outstanding, respectively and
available funding of approximately $1.8 million. In April of 2004, Brightpoint
Philippines entered into an additional credit facility with Banco de Oro
allowing for letters of credit to be issued to one of Brightpoint Philippine's
main suppliers up to a total of $4 million. As of September 30, 2005, a $2
million letter of credit was outstanding on the Company's behalf. The facility
had no other amounts outstanding with $2 million of available funding. At
December 31, 2004, no letters of credit had been issued and the additional
credit facility had no other amounts outstanding, with available funding of
approximately $4 million. The facility bears interest at the Prime Lending Rate
(10.75% at September 30, 2005).
In November 2003, the Company's primary operating subsidiary in New Zealand,
Brightpoint New Zealand Limited, entered into a revolving credit facility with
GE Commercial Finance in Australia. This facility, which matures in November of
2006, provides borrowing availability, subject to borrowing base calculations
and other limitations, of up to a maximum amount of 12 million New Zealand
dollars (approximately $8.3 million U.S. dollars at September 30, 2005).
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% (10.18% at September 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 September 30, 2005 and
December 31, 2004, there were no amounts outstanding under the facility, with
available funding of approximately $7.3 million and $8.5 million, respectively.
A $15 million standby letter of credit supporting a credit line issued by a
vendor of the Company's Brightpoint Asia Limited subsidiary had been issued by
financial institutions on the Company's behalf and was outstanding at December
31, 2004; secured by $12 million of cash, the assets of Brightpoint Asia Limited
and a guarantee issued by Brightpoint, Inc. The related cash collateral had been
reported under the heading "Pledged cash" in the December 31, 2004 Consolidated
Balance Sheet. As of September 30, 2005 this facility had been cancelled.
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 $1.9
million U.S. dollars at September 30, 2005) and bears interest at the SEB
Page 16
PART I FINANCIAL INFORMATION
Banken Base plus .75% (2.25% at September 30, 2005). The facility is supported
by a guarantee provided by the Company. At September 30, 2005 and December 31,
2004, there were no amounts outstanding under this facility. Available funding
was approximately $1.9 million and $2.2 million as of September 30, 2005 and
December 31, 2004, respectively.
The Company's primary operating subsidiary in France, Brightpoint France,
entered into a short-term line of credit facility with Banque Natexis in the
first quarter of 2005. The facility has overdraft availability of up to 2.5
million Euro (approximately $3.0 million U.S. dollars at September 30, 2005) and
bears interest at the 3-month Euribor rate plus 2.5% (4.676% at September 30,
2005). The facility also provides for short-term cash advances on certain
accounts receivable. These advances do not meet the requirements for off-balance
sheet financing under generally accepted accounting principles in the United
States and, therefore, amounts advanced under this portion of the facility are
included on the December 31, 2004 Consolidated Balance Sheet under lines of
credit and in liabilities held for sale on the September 30, 2005 Consolidated
Balance Sheet. The facility is supported by a guarantee provided by the Company
and approximately $650 thousand in cash collateral that has been reported under
the heading "Pledged cash" in the December 31, 2004 Consolidated Balance Sheet
and in assets held for sale in the September 30, 2005 Consolidated Balance
Sheet. At September 30, 2005, there was approximately $4.2 million U.S. dollars
outstanding on the facility, with no available funding. Additionally, in April
2004, Brightpoint France, entered into an accounts receivable factoring
arrangement with GE Factofrance. The arrangement does not meet the requirements
of off-balance sheet financing under current United States generally accepted
accounting principles and therefore amounts advanced under this facility against
receivables not yet collected by GE Factofrance are included on the December 31,
2004 Consolidated Balance Sheet under lines of credit. At September 30, 2005,
there were no amounts outstanding under this arrangement.
In June 2005, the Company's primary operating subsidiary in the Slovak Republic,
Brightpoint Slovakia s.r.o., entered into a revolving credit facility with Tatra
banka, a.s. This facility, which matures in May of 2006, provides borrowing
availability, subject to borrowing base calculations and other limitations, of
up to a maximum of 60 million Slovak crowns (approximately $1.9 million U.S.
dollars at September 30, 2005). The facility bears interest at the 1-month
Bribor rate plus 0.65% (3.64% at September 30, 2005). Borrowings under the
facility will be used for general working capital purposes by Brightpoint
Slovakia s.r.o. At September 30, 2005, there were no amounts outstanding under
the facility with available funding of approximately $1.9 million. The facility
is supported by a guarantee from the Company.
6. 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 5 to
the consolidated financial statements.
Page 17
PART I FINANCIAL INFORMATION
In some circumstances, the Company purchases inventory with payment terms
requiring letters of credit. As of September 30, 2005, 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 availability under the
Company's credit facilities. 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 in Note 4. While we do not currently anticipate the funding of
these guarantees, the maximum potential amount of future payments under these
guarantees at September 30, 2005, is approximately $21 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 18
PART I FINANCIAL INFORMATION
7. Operating Segments
The Company's operations are divided into three geographic operating segments.
These operating segments represent its three divisions: The Americas,
Asia-Pacific and Europe. These divisions all derive revenues from sales of
wireless devices, accessory programs and fees from the provision of logistic
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 nine months ended September 30, 2005 and 2004:
Operating
Distribution Integrated Logistic Income (Loss)
Revenue from Services Revenue Total Revenue from
External from External from External Continuing
Customers Customers Customers Operations (1)
------------ ------------------- ------------- --------------
THREE MONTHS ENDED
SEPTEMBER 30, 2005:
THE AMERICAS $ 131,829 $ 41,444 $ 173,273 $ 8,737
ASIA-PACIFIC 274,725 6,538 281,263 2,627
EUROPE 64,407 26,032 90,439 (73)
---------- -------- ---------- --------
$ 470,961 $ 74,014 $ 544,975 $ 11,291
========== ======== ========== ========
Three months ended
September 30, 2004:
The Americas $ 96,452 $ 30,040 $ 126,492 $ 6,882
Asia-Pacific 219,906 11,266 231,172 1,872
Europe 46,473 27,922 74,395 (297)
---------- -------- ---------- --------
$ 362,831 $ 69,228 $ 432,059 $ 8,457
========== ======== ========== ========
NINE MONTHS ENDED
SEPTEMBER 30, 2005:
THE AMERICAS $ 353,471 $112,817 $ 466,288 $ 21,495
ASIA-PACIFIC (2) 765,252 20,453 785,705 6,793
EUROPE 185,177 72,373 257,550 (149)
---------- -------- ---------- --------
$1,303,900 $205,643 $1,509,543 $ 28,139
========== ======== ========== ========
Nine months ended
September 30, 2004:
The Americas $ 289,825 $ 76,936 $ 366,761 $ 13,490
Asia-Pacific 690,906 33,897 724,803 6,650
Europe 140,193 66,572 206,765 372
---------- -------- ---------- --------
$1,120,924 $177,405 $1,298,329 $ 20,512
========== ======== ========== ========
(1) Certain corporate expenses are allocated to the segments based on total
revenue.
(2) Includes $933 thousand in facility consolidation charges for Australia (See
Note 2 to the Consolidated Financial statements)
Page 19
PART I FINANCIAL INFORMATION
SEPTEMBER 30, December 31,
2005 2004
------------- ------------
TOTAL SEGMENT ASSETS:
The Americas (1) $213,509 $152,401
Asia-Pacific 164,901 160,578
Europe 90,102 124,605
-------- --------
$468,512 $437,584
======== ========
(1) Corporate assets are included in the Americas segment
8. 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.
A Complaint was filed on January 4, 2005 against the Company in the Circuit
Court for Baltimore County, Maryland, Case No. 03-C-05-000067 CN, entitled
Iridium Satellite, LLC, Plaintiff v. Brightpoint, Inc., Defendant. The matter
was removed to the United States District Court, District of Maryland, Baltimore
Division. In the Complaint, the Plaintiff alleges claims of trover and
conversion, fraudulent misrepresentation and breach of contract. All claims
relate to the ownership and disposition of 1,500 Series 9500 satellite
telephones. The Plaintiff seeks damages in the amount of $750,000 with interest
and costs. The Company continues to dispute these claims and intends to defend
this matter vigorously.
A Complaint was filed on November 23, 2001, against the Company and 87 other
defendants in the United States District Court for the District of Arizona,
entitled Lemelson Medical, Education and Research Foundation LP v. Federal
Express Corporation, et.al., Cause No. CIV01-2287-PHX-PGR. The plaintiff claims
that the Company and other defendants have infringed seven 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. On September 9, 2005 the U.S. Court of
Appeals for the Federal Circuit affirmed the decision of the trial court holding
that the asserted patents are unenforceable. The Company continues to dispute
these claims and intends to defend this matter vigorously.
The Company's subsidiary in Sweden, Brightpoint Sweden AB, ("BP Sweden") has
received an assessment from the Swedish Tax Agency ("STA") regarding value-added
taxes the STA claims are due, relating to certain transactions entered into by
BP Sweden during 2004. BP Sweden has filed an appeal against the decision.
Although the Company's liability pursuant to this assessment by the STA, if any,
cannot currently be determined, the Company believes the range of the potential
liability is between $0 and $1.4 million (at current exchange rates) including
penalties and interest. The Company continues to dispute this claim and intends
to defend this matter vigorously.
Page 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW AND RECENT DEVELOPMENTS
This discussion and analysis should be read in conjunction with the accompanying
Consolidated Financial Statements and related notes. Our discussion and analysis
of the 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 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/A, for the year ended December 31, 2004, as amended, and
have not changed significantly. Certain statements made in this report may
contain forward-looking statements. For a description of risks and uncertainties
relating to such forward-looking statements, see the cautionary statements
contained in Exhibit 99.1 to this report and our Annual Report on Form 10-K/A
for the year ended December 31, 2004, as amended.
As announced on May 9, 2005, the Company has been exploring various strategic
alternatives, including, but not limited to, the sale, restructuring, closure or
other corporate action relating to all or a portion of its French operations. On
September 30, 2005, the Company entered into an agreement for the sale of
Brightpoint France to an entity to be formed by Initiative ET Finance
Investissement ("I&F") and the Managing Director of Brightpoint France, the
consummation of which is subject to certain conditions precedent, including, but
not limited to, the approval of the proposed transaction by I&F's investment
committee. In addition, I&F has the right to terminate the agreement without
liability because the EBITDA for Brightpoint France at September 30, 2005 is
less than specified levels as set forth in the purchase and sale agreement. The
Company cannot make any assurances that the sale to I&F will occur. Based on
these events, the Company has applied the provisions of Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144) and classified its operations in France as
"held for sale" in the Consolidated Balance Sheet at September 30, 2005. In
addition, SFAS No. 144 requires the Company to report the operating results of
its operations in France as a component of discontinued operations for all
periods presented as its operations and cash flows will be eliminated from the
continuing operations of the Company.
In connection with the preceding, the Company recorded during the third quarter
of 2005 a $13.8 million non-cash impairment charge to the value of goodwill and
other intangibles, a $700 thousand non-cash impairment of certain assets and
$800 thousand in operating losses for the three months ended September 30, 2005
related to its operations in France. These items are classified as a component
of "Loss from discontinued operations" in the Consolidated Statements of
Operations.
Page 21
The Company cannot make any assurances that conditions precedent to the proposed
sale of Brightpoint France to I&F will be satisfied and that the sale to I&F or
any other party will occur. However, should the proposed sale be completed, the
Company will be required to record a gain or loss to the extent that the current
proposed selling price changes.
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 22
RESULTS OF OPERATIONS
REVENUE AND WIRELESS DEVICES HANDLED FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2005
Change
from
September 30, % of September 30, % of 2004 to
2005 Total 2004 Total 2005
------------- ----- ------------- ----- -------
(Amounts in 000s)
REVENUE BY DIVISION:
The Americas $173,273 32% $126,492 29% 37%
Asia-Pacific 281,263 52% 231,172 54% 22%
Europe 90,439 16% 74,395 17% 22%
-------- --- -------- --- ---
Total $544,975 100% $432,059 100% 26%
======== === ======== === ===
REVENUE BY SERVICE LINE:
Distribution $470,961 86% $362,831 84% 30%
Logistic services 74,014 14% 69,229 16% 7%
-------- --- -------- --- ---
Total $544,975 100% $432,059 100% 26%
======== === ======== === ===
WIRELESS DEVICES HANDLED BY
DIVISION:
The Americas 8,510 79% 4,688 71% 82%
Asia-Pacific 1,981 18% 1,669 25% 19%
Europe 320 3% 262 4% 22%
-------- --- -------- --- ---
Total 10,811 100% 6,619 100% 63%
======== === ======== === ===
WIRELESS DEVICES HANDLED BY
SERVICE LINE:
Distribution 3,057 28% 2,430 37% 26%
Logistic services 7,754 72% 4,189 63% 85%
-------- --- -------- --- ---
Total 10,811 100% 6,619 100% 63%
======== === ======== === ===
Globally, the availability of feature rich wireless devices, wireless network
operator promotional activity and compelling pricing by manufacturers continues
to induce subscribers to upgrade their wireless devices. Revenue in the third
quarter of 2005 was $545 million, an increase of 26% from $432 million in the
third quarter of 2004. Wireless devices handled increased by 63% from the third
quarter of 2004 with a continued mix shift from product distribution sales to
fee-based logistic services. Our fee-based logistic services typically generate
less revenue per transaction than our distribution business, which results in a
lower increase in revenue than the increase in units handled. The revenue
increase was attributable to the increased market demand for our products and
services, particularly logistic services which experienced a 85% increase in
volume when compared to the third quarter of 2004. Wireless devices sold in our
distribution business increased 26%, however distribution revenue increased 30%
because of a corresponding 1.6% increase in the average selling price of
wireless devices on a constant currency basis. The strengthening of foreign
currencies relative to the U.S. dollar accounted for approximately 1.7%
percentage points of the increase in distribution revenue.
Page 23
Wireless devices handled, as compared to the third quarter of 2004:
The number of wireless devices sold through our distribution business
increased 26% compared to the third quarter of 2004. Our Americas,
Asia-Pacific and Europe divisions experienced distribution volume increases
of 35%, 21% and 29% respectively, driven by increased demand and improved
product availability for LG, Samsung and Nokia products in North America,
Nokia CDMA in India and High Tech Computer Corporation ("HTC") Qtek branded
smart-phones in our Europe division.
The number of wireless devices handled through our logistic services
business increased 85%, primarily as a result of increased demand from
current logistic services customers in the Americas division, including
Mobile Virtual Network Operators ("MVNOs"). A significant portion of the
unit growth in the Americas division was driven by increased promotional
activity in the Colombia market by our main network operator customer.
Revenue by division, as compared to the third quarter of 2004:
The 37% revenue increase in our Americas division was attributable to an
82% increase in wireless devices handled which generated increased revenue
for both the Americas distribution and integrated logistic services
businesses. Distribution revenue increased 37% and integrated logistic
services revenue increased 38%. Wireless devices sold through distribution
increased 35% and units handled in logistic services increased 90%. The
increase in the Americas division distribution revenue was primarily the
result of increased market demand and improved product availability,
particularly for LG, Samsung and Nokia products in the United States. The
increase in integrated logistic services revenue in the Americas division
was primarily attributable to increased demand experienced by our network
operator customers, including mobile virtual network operators and
expansion of services to existing customers. A significant portion of the
unit growth in the Americas division was driven by increased promotional
activity in the Colombia market by our main network operator customer. The
percentage increase in logistic services revenue in the Americas division
was less than the unit growth rate primarily because of changes in the mix
of services provided to certain customers, changes in the mix of volume
between customers, and a negotiated fee reduction in Colombia related to
the significant increase in volumes.
Revenue in our Asia-Pacific division increased 22% primarily due to
increased handset distribution volumes in India and New Zealand, increased
average selling prices in Australia and a favorable impact of exchange
rates. The volume increase in India was primarily attributable to improved
product availability and market demand for Nokia CDMA products. The volume
increase in New Zealand was primarily the result of the launch of 3G
handsets. Revenue in Australia improved due to a mix shift to higher priced
wireless devices and increased accessory sales. The strengthening of
foreign currencies relative to the U.S. dollar accounted for approximately
1.7% percentage points of the increase in Asia-Pacific revenue.
The 22% revenue increase in our Europe division was primarily due to
increased handset distribution volumes in Germany and Finland, partially
offset by decreased handset distribution volumes in Sweden. The volume
increases in Germany and Finland were primarily due to
Page 24
increased sales of HTC's Qtek branded smart-phones. The volume decline for
our business in Sweden was primarily the result of an overall decline in
the handset distribution market in Sweden. Additionally, revenue in the
Europe division was positively impacted by a 106% increase in logistic
services revenue in Slovakia.
Revenue by service line, as compared to the third quarter of 2004:
Wireless devices sold in our distribution business increased 26%, however
distribution revenue increased 30% because of a corresponding 1.6% increase
in the average selling price of wireless devices on a constant currency
basis. The increase in the units handled was primarily the result of
increased market demand and improved product availability for LG, Samsung
and Nokia products in the United States, Nokia CDMA products in India and
HTC's Qtek smart-phones throughout the Europe division.
We experienced a 7% increase in revenue from fee-based integrated logistic
services. Wireless devices handled increased 85% due to increased demand
experienced by our network operator customers, including MVNOs and
expansion of services to existing customers. A significant portion of the
growth was driven by increased promotional activity in the Colombia market
by our main network operator customer. The percentage increase in logistic
services revenue was less than the unit growth rate primarily because of
changes in the mix of services provided to certain customers, changes in
the mix of volume between customers and a negotiated fee decrease in
Colombia related to the significant increase in volumes.
Page 25
REVENUE AND WIRELESS DEVICES HANDLED FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2005
Change
from
September 30, % of September 30, % of 2004 to
2005 Total 2004 Total 2005
------------- ----- ------------ ----- -------
(Amounts in 000s)
REVENUE BY DIVISION:
The Americas $ 466,288 31% $ 366,761 28% 27%
Asia-Pacific 785,705 52% 724,803 56% 8%
Europe 257,550 17% 206,765 16% 25%
---------- --- ---------- --- ---
Total $1,509,543 100% $1,298,329 100% 16%
========== === ========== === ===
REVENUE BY SERVICE LINE:
Distribution $1,303,900 86% $1,120,924 86% 16%
Logistic services 205,643 14% 177,405 14% 16%
---------- --- ---------- --- ---
Total $1,509,543 100% $1,298,329 100% 16%
========== === ========== === ===
WIRELESS DEVICES HANDLED BY DIVISION:
The Americas 21,566 77% 12,364 68% 74%
Asia-Pacific 5,438 20% 5,180 29% 5%
Europe 847 3% 587 3% 44%
---------- --- ---------- --- ---
Total 27,851 100% 18,131 100% 54%
========== === ========== === ===
WIRELESS DEVICES HANDLED BY SERVICE LINE:
Distribution 8,305 30% 7,465 41% 11%
Logistic services 19,546 70% 10,667 59% 83%
---------- --- ---------- --- ---
Total 27,851 100% 18,131 100% 54%
========== === ========== === ===
Revenue for the nine months ended September 30, 2005 was $1.5 billion, an
increase of 16% from $1.3 billion in the nine months ended September 30, 2004.
The number of wireless devices handled in the nine months ended September 30,
2005 increased by 54% from the nine months ended September 30, 2004 with a mix
shift from product distribution sales to fee-based logistic services. Our
fee-based logistic services typically generate less revenue per transaction than
a transaction in our distribution business, which is the reason for the larger
increase in units handled as compared to the increase in revenue. The revenue
increase was primarily attributable to increased market demand for our products
and services, particularly fee-based logistic services which experienced an 83%
increase in volume when compared to the nine months ended September 30, 2004.
Units sold in our distribution business in the nine months ended September 30,
2005 increased 11% while average selling price increased 2.4% on a constant
currency basis which resulted in a revenue increase of 16% compared to the nine
months ended September 30, 2004. The strengthening of foreign currencies
relative to the U.S. dollar accounted for approximately 1.7 percentage points of
the increase in revenue.
Wireless devices handled, as compared to the nine months ended September 30,
2004:
The number of wireless devices sold through our distribution business
increased 11%. Our Americas, Europe and Asia-Pacific divisions experienced
volume increases of 22%, 18% and 6% respectively, driven by increased
demand and improved product availability for feature-rich
Page 26
products from LG, Samsung and Nokia in the United States and Australia,
Nokia CDMA in India and HTC's Qtek branded smart-phones in our Europe
division.
The number of wireless devices handled through our integrated logistic
services business increased 85%, primarily as a result of increased demand
from current logistic services customers in the Americas division,
including MVNOs and our entry into the Slovak Republic in July of 2004 as
the provider of logistic services for a major network operator. A
significant portion of the growth in the Americas division was driven by
increased promotional activity in the Colombia market by our main network
operator customer.
Revenue by division, as compared to the nine months ended September 30, 2004:
The 27% revenue increase in the Americas division was primarily
attributable to a 74% increase in wireless devices handled which generated
increased revenue for both the Americas division distribution and
integrated logistic services businesses. Distribution revenue and wireless
devices handled through distribution increased 22%. Fee-based logistic
services revenue increased 46% and units handled in logistic services
increased 85%. The increase in the Americas division distribution revenue
was primarily the result of increased market demand and improved product
availability, particularly for LG, Samsung and Nokia products in the United
States. The increase in integrated logistic services revenue was primarily
attributable to increased demand experienced by our network operator
customers, including MVNOs, and expansion of services to our existing
customers. A significant portion of the unit growth in the Americas
division was driven by increased promotional activity in the Colombia
market by our main network operator customer. Revenue in the Americas
division was also impacted by an increase in sales of prepaid wireless
airtime and an increased level of activations in our channel development
services business in the United States. The percentage increase in logistic
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,
the mix of volume between customers and volume pricing discounts given to
certain key customers.
Revenue in our Asia-Pacific division increased 8% primarily due to a 5%
increase in units handled and a 1% increase in average selling price on a
constant currency basis. The strengthening of foreign currencies relative
to the U.S. dollar accounted for approximately 2.0% percentage points of
the increase in Asia-Pacific revenue. Increased unit volumes in Australia,
New Zealand and India were partially offset by unit declines in wireless
devices sold through our Philippines and Brightpoint Asia Limited business.
The increase in units handled in Australia and New Zealand resulted from
attractive new product offerings from our suppliers and various network
operator promotional programs in certain markets. The increase in units
handled in India was the result of improved product availability and market
demand for Nokia CDMA products. The decline in units handled in our
Brightpoint Asia Limited business was primarily due to competitors'
trans-shipment of product from Europe and the Middle East during the second
quarter of 2005 into the markets we serve, at price points below that which
were available to us from our suppliers.
The revenue increase in our Europe division of 25% was primarily
attributable to an 18% increase in wireless devices sold though
distribution due to increased demand for and availability of HTC's Qtek
branded smart-phones, network operator promotional programs in certain
markets and our
Page 27
entry into Finland during the second half of 2004. In addition, wireless
devices handled in logistic services increased 183% due to our entry into
the Slovak Republic in the second half of 2004.
Revenue by service line, as compared to the nine months ended September 30,
2004:
We experienced a 16% increase in revenue from product distribution,
primarily as a result of an 11% increase in units sold and a 5% increase in
the average selling price of wireless devices on a constant currency basis.
These increases were driven primarily by increased demand and improved
product availability for feature-rich products from LG, Samsung and Nokia
in the United States and Australia, Nokia CDMA in India and HTC's Qtek
branded smart-phones in Europe, partially offset by the decline in units
sold by our Brightpoint Asia Limited business as discussed previously.
We experienced a 16% increase in revenue from fee-based integrated logistic
services primarily as a result of an 83% growth rate in the number of
wireless devices handled resulting from increased demand from current
logistic services customers, including MVNOs and our entry into the Slovak
Republic in July of 2004 as the provider of logistic services for a major
network operator. A significant portion of the unit growth was driven by
increased promotional activity in the Colombia market by our main network
operator customer. The percentage increase in fee-based logistic services
revenue was less than the unit growth rate due to changes in the mix of
services provided to certain customers and the mix of volume between
customers.
Page 28
Gross Profit and Gross Margin
Three Months Ended Nine Months Ended
September 30, September 30, Percent Change
------------------ ----------------- ---------------------
2005 2004 2005 2004 Quarter YTD
------- -------- ------- ------- -------- -------
(Amounts in 000s)
Distribution $17,005 $13,267 $48,157 $40,740 28% 18%
Logistic services 14,673 12,600 40,240 30,422 16% 32%
------- ------- ------- ------- ------- ------
Gross profit $31,678 $25,867 $88,397 $71,162 22% 24%
------- ------- ------- ------- ------- ------
Distribution 3.6% 3.7% 3.7% 3.6% (0.1)pts 0.1pts
Logistic services 19.8% 18.2% 19.6% 17.1% 1.6 pts 2.5pts
------- ------- ------- ------- ------- ------
Gross margin 5.8% 6.0% 5.9% 5.5% (0.2)pts .4pts
------- ------- ------- ------- ------- ------
Gross profit and gross margin by service line, as compared to the third quarter
of 2004:
The overall 22% increase in gross profit was primarily attributable to a
63% increase in wireless devices handled and the related 26% increase in
total revenue. The 0.2 percentage point decrease in gross margin was
primarily the result of the shift in the mix of revenue from higher margin
fee-based logistic services to lower margin distribution. Distribution
revenue grew at a faster rate than logistic services and was 86% of total
revenue in the third quarter of 2005 as compared to 84% in the third
quarter of 2004. The increase in Distribution revenue was primarily due to
increased demand and improved product availability for LG, Samsung and
Nokia products in North America, Nokia CDMA products in India and HTC's
Qtek brand of smart-phones in Europe.
The 28% increase in gross profit from product distribution was primarily
attributable to a 30% increase in distribution revenue and a gross margin
decrease of 0.1 percentage points. During the third quarter of 2005, we
experienced a slight decline in gross profit percentage in our Brightpoint
Asia Limited business primarily due to supply constraints on higher margins
products. In addition, we liquidated certain slow moving Qtek products in
Europe at lower than average margins.
The 16% increase in gross profit from integrated logistic services was
attributable to a 7% increase in logistic services revenue and a gross
margin increase of 1.6 percentage points. The increase in gross margin from
integrated logistic services reflects a change in mix to higher margin
services as well as increased cost efficiencies partially offset by lower
logistic services fees per unit due to tiered pricing based on volume.
Gross profit and margin by service line, as compared to the nine months ended
September 30, 2004:
The overall 24% increase in gross profit was primarily attributable to a
54% increase in wireless devices handled and the related 16% increase in
total revenue. The 0.4 percentage point increase in gross margin was
primarily due to the improvement in the integrated logistic services gross
margin. The integrated logistic services gross margin improved due to a
change in mix to higher margin services as well as increased costs
efficiencies partially offset by lower logistic services fees per unit due
to tiered pricing based on volume.
Page 29
The 18% increase in gross profit from product distribution was primarily
attributable to a 16% increase in revenue and a 0.1% improvement in gross
margin due to the mix of devices sold.
The 32% increase in gross profit from integrated logistic services was
attributable to a 16% increase in logistic services revenue and a gross
margin increase of 2.5 percentage points. The integrated logistic services
gross margin improved due to a change in mix to higher margin services as
well as increased costs efficiencies partially offset by lower logistic
services fees per unit due to tiered pricing based on volume.
Selling, General and Administrative Expenses
Three Months Ended Nine Months Ended
September 30, September 30, Percent Change
------------------ ----------------- --------------
2005 2004 2005 2004 Quarter YTD
------- ------- ------- ------- -------- ---
(Amounts in 000s)
Selling, general and
administrative expenses $20,657 $17,410 $59,325 $50,865 19% 17%
As a percent of revenue 3.8% 4.0% 3.9% 3.9% (0.2)pts 0.0pts
As compared to the third quarter of 2004, SG&A expenses increased 19% in
comparison with a 26% increase in revenue and a 22% increase in gross profit. As
a percent of revenue, SG&A costs declined to 3.8% versus 4.0% in the three
months ended September 30, 2004. The increase of $3.2 million in SG&A was
primarily the result of incremental selling, marketing and administrative costs
due to the overall growth of the Americas division and our investment in
developing the Advance Wireless Division ("AWS") in the Americas. Additionally
SG&A was negatively impacted by a $900 thousand increase in non-cash
compensation related to equity awards under the Company's various long term
compensation plans and $400 thousand related to the unfavorable impact of the
strengthening of foreign currencies relative to the U.S. dollar.
As compared to the nine months ended September 30, 2004, SG&A expenses increased
17% in comparison with a 16% increase in revenue and a 24% increase in gross
profit. As a percent of revenue, SG&A costs remained flat at 3.9% year over
year. The increase of $8.5 million in SG&A expense was primarily the result of;
(i) incremental selling, marketing and administrative costs due to the overall
growth of the Americas division and our investment in developing the Advance
Wireless Division ("AWS") in the Americas, (ii) $1.6 million increase in
non-cash compensation related to equity awards under the Company's various long
term compensation plans, (iii) $1.6 million of the increase was related to the
unfavorable impact of the strengthening of foreign currencies relative to the
U.S. dollar. In addition SG&A for the nine months ended September 30, 2005 was
negatively impacted by $600 thousand in employee severance and settlement
payments primarily related to the resignations of our Senior Vice President,
Corporate Controller and Chief Accounting Officer and Executive Vice President,
Chief Financial Officer and Treasurer and settlement of former employee disputes
in our Corporate headquarters, $500 thousand of professional fees, travel
expenses and other costs pertaining to the evaluation of potential geographic
expansion opportunities in our Europe and Asia-Pacific divisions which we
currently believe will not be consummated, $400 thousand in legal and
professional fees related to our on going evaluation and improvement of our
internal controls in France and Australia and $1.4 million in SG&A expense
associated with our entry into the Slovak Republic and Finland in the second
half of 2004.
Page 30
Facility Consolidation Charge
In September 2004, our Australian subsidiary entered into a new facility lease
arrangement, which commenced in the first quarter of 2005. We vacated our
previous location in Australia in the first quarter of 2005 and recorded a
pre-tax charge of $1.2 million, which included approximately $968 thousand for
the present value of estimated lease costs, net of an anticipated sublease, and
non-cash losses on the disposal of assets of approximately $235 thousand. During
the third quarter of 2005, our Australian subsidiary entered into an agreement
to surrender its remaining obligations under its old facility lease. Pursuant to
the above, the Company reduced its facility consolidation reserve by $270
thousand. See Note 2 to the Consolidated Financial Statements for further
discussion.
Operating Income (Loss) from Continuing Operations
Three Months Ended Nine Months Ended
September 30, September 30, Percent Change
------------------ ----------------- --------------
2005 2004 2005 2004 Quarter YTD
-------- ------- ------- ------- ------- ---
(Amounts in 000s)
OPERATING INCOME (LOSS):
The Americas $ 8,737 $6,882 $21,496 $13,490 27% 59%
Asia-Pacific (1) 2,627 1,872 6,792 6,650 40% 2%
Europe (73) (297) (149) 372 -- --
------- ------ ------- ------- --- ---
Total $11,291 $8,457 $28,139 $20,512 34% 37%
------- ------ ------- ------- --- ---
(1) Includes a facility consolidation charge (benefit) of ($270 thousand) for
the three months ended September 30, 2005 and $933 thousand for the nine
months ended September 30, 2005.
As compared to the third quarter of 2004, operating income from continuing
operations increased $2.8 million. The increase in operating income from
continuing operations was primarily a result of the 26% increase in revenue and
an associated 22% increase in gross profit, partially offset by a 19% increase
in SG&A expenses.
The 27% increase in operating income from continuing operations for the third
quarter of 2005 when compared to the third quarter of 2004 in our Americas
division was primarily due to an 82% increase in wireless devices handled,
partially offset by increased SG&A costs related to the increase in overall
business activities and the increased selling, marketing and administrative
costs associated with the AWS channel.
The increased operating income from continuing operations for the third quarter
of 2005 when compared to the third quarter of 2004 in our Asia-Pacific division
is primarily due to the increased volumes and related profitability of our
Australia, New Zealand and India operations, partially offset by lower gross
profit in our Brightpoint Asia Ltd business as discussed previously.
The decrease in the operating loss for the third quarter of 2005, in the Europe
division, as compared to the third quarter of 2004 was primarily due to increase
volumes and related profitability in Germany, Slovakia and Finland, partially
offset by decreased demand for our products and services in Sweden and Norway.
As compared to the nine months ended September 30, 2004, operating income from
continuing operations increased $7.6 million. The increase in operating income
from continuing operations was primarily a result of the 16% increase in revenue
and an associated 24% increase in gross profit, partially offset by a 17%
increase in SG&A expenses. Operating income from continuing operations was
negatively impacted
Page 31
by $500 thousand of professional fees, travel expenses and other costs
pertaining to the evaluation of potential geographic expansion opportunities in
our Europe and Asia-Pacific divisions which we currently believe will not be
consummated, $400 thousand in legal and professional fees related to our
on-going evaluation and improvement of our internal controls in France and
Australia and the $900 thousand facility consolidation charge in Australia.
Income from Continuing Operations
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2005 2004 2005 2004
------- -------- ------- -------
(Amounts in 000s)
Income from continuing operations $ 8,273 $ 5,622 $20,086 $13,564
As a percent of revenue 1.5% 1.3% 1.3% 1.0%
Diluted shares outstanding 27,553 27,796 27,420 29,047
Income per diluted share from continuing
operations $ 0.30 $ 0.20 $ 0.73 $ 0.47
Income from continuing operations, as compared to the third quarter of 2004:
Income from continuing operations increased by $2.7 million or 47%. The increase
was primarily a result of the 26% increase in revenue and an associated 22%
increase in gross profit, partially offset by a 19% increase in SG&A expenses.
In addition, income from continuing operations was positively impacted by a
decrease in the effective tax rate from 31.2% in the third quarter of 2004 to
24.9% in the third quarter of 2005. The reduction in the effective tax rate is
primarily due to generation of taxable income during the third quarter of 2005
in certain tax jurisdictions where valuation allowances were previously recorded
for losses in prior periods and released in the quarter.
Income per diluted share from continuing operations was $0.30 for the third
quarter of 2005, as compared to $0.20 in the third quarter of 2004. The
reduction in diluted shares outstanding of 1% is attributable to the repurchase
of the Company's common stock pursuant to the previously approved and announced
share repurchase plans, partially offset by increases in options exercised and
new grants under our various stock compensation plans.
Income from continuing operations, as compared to the nine months ended
September 30, 2004:
Income from continuing operations increased by $6.5 million or 48%. The increase
was primarily a result of the 16% increase in revenue and an associated 24%
increase in gross profit, partially offset by a 17% increase in SG&A expenses.
In addition, income from continuing operations was positively impacted by a
decrease in the effective tax rate from 29.6% for the nine months ended
September 30, 2004 to 26.8% for the nine months ended September 30, 2005. The
reduction in the effective tax rate is primarily due to generation of taxable
income during the nine months ended September 30, 2005 in certain tax
jurisdictions where a valuation allowance were recorded for losses in prior
periods and released in 2005.
Income per diluted share from continuing operations was $0.73 for the nine
months ended September 30, 2005, as compared to $0.47 for the nine months ended
September 30, 2004. The reduction in diluted
Page 32
shares outstanding of 6% is attributable to the repurchase of approximately 2.1
million shares of our common stock pursuant to the previously approved and
announced share repurchase plans.
Discontinued Operations
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
-------- ------- -------- -------
(Amounts in 000s)
Loss from discontinued operations $(15,452) $ (860) $(19,827) $(2,415)
Income (loss) on disposal of discontinued
operations 997 (215) 1,331 (4,859)
-------- ------- -------- -------
Total discontinued operations $(14,455) $(1,075) $(18,496) $(7,274)
-------- ------- -------- -------
Loss per diluted share from discontinued
operations $ (0.52) $ (0.04) $ (0.67) $ (0.25)
As announced on May 9, 2005, the Company has been exploring various strategic
alternatives, including, but not limited to, the sale, restructuring, closure or
other corporate action relating to all or a portion of its French operations. On
September 30, 2005, the Company entered into an agreement for the sale of
Brightpoint France to an entity to be formed by Initiative ET Finance
Investissement ("I&F") and the Managing Director of Brightpoint France, the
consummation of which is subject to certain conditions precedent, including, but
not limited to, the approval of the proposed transaction by I&F's investment
committee. In addition, I&F has the right to terminate the agreement without
liability because the EBITDA for Brightpoint France at September 30, 2005 is
less than specified levels as set forth in the purchase and sale agreement. The
Company cannot make any assurances that the sale to I&F will occur. Based on
these events, the Company has applied the provisions of Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144) and classified its operations in France as
"held for sale" in the Consolidated Balance Sheet at September 30, 2005. In
addition, SFAS No. 144 requires the Company to report the operating results of
its operations in France as a component of discontinued operations for all
periods presented as its operations and cash flows will be eliminated from the
continuing operations of the Company.
In connection with the preceding, the Company recorded during the third quarter
of 2005 a $13.8 million non-cash impairment charge to the value of goodwill and
other intangibles, a $700 thousand non-cash impairment of certain assets and
$800 thousand in operating losses for the three months ended September 30, 2005
related to its operations in France. These items are classified as a component
of "Loss from discontinued operations" in the Consolidated Statements of
Operations.
The Company cannot make any assurances that conditions precedent to the proposed
sale of Brightpoint France to I&F will be satisfied and that the sale to I&F or
any other party will occur. However, should the proposed sale be completed, the
Company will be required to record a gain or loss to the extent that the current
proposed selling price changes.
The total loss from discontinued operations in the third quarter of 2004 was
primarily attributable to operating losses experienced by our France operations
and unrealized foreign currency translation losses caused by the strengthening
of foreign currencies relative to the U.S. dollar.
Page 33
The loss from discontinued operations for the nine months ended September 30,
2004 was mainly ascribable to operating losses experienced by our France
operations, 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 nine months ended September 30,
2004, was primarily attributable to a $3.8 million loss on the sale of
Brightpoint Ireland, a $584 thousand loss on the sale of one of our
subsidiaries, Brightpoint do Brazil Ltda., and unrealized foreign currency
translation losses caused by the strengthening of foreign currencies relative to
the U.S. dollar. On February 19, 2004, our 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 realization of
approximately $1.6 million of cumulative currency translation adjustments.
Net Income (Loss)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
------- ------- ------- -------
(Amounts in 000s)
Net income (loss) $(6,182) $ 4,547 $ 1,590 $ 6,290
As a percent of revenue (1.1)% 1.1% 0.1% 0.5%
Diluted shares outstanding 27,553 27,796 27,420 29,047
Earnings (loss) per diluted share $ (0.22) $ 0.16 $ 0.06 $ 0.22
Net loss for the third quarter 2005 was $6.2 million ($0.22 loss per diluted
share) due to the loss from discontinued operations, partially offset by income
from continuing operations as discussed previously. Net income in the third
quarter of 2004 was $4.5 million or $0.16 per diluted share.
Net income for the nine months ended September 30, 2005 was $1.6 million ($0.06
per diluted share) due to the income from continuing operations, partially
offset by the loss from discontinued operations, as discussed previously. Net
income for the nine months ended September 30, 2004 was $6.3 million or $0.22
per diluted share.
Page 34
RETURN ON INVESTED CAPITAL FROM OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
RETURN ON INVESTED CAPITAL FROM OPERATIONS ("ROIC")
We believe that it is important for the business to manage our balance sheet as
well as the statement of operations. A measurement that ties the statement of
operations performance with the balance sheet performance is Return on Invested
Capital from Operations ("ROIC"). We believe if we are able to grow our earnings
while minimizing the use of invested capital, we will be optimizing shareholder
value while concurrently preserving resources in preparation for further
potential growth opportunities. We take a simple approach in calculating ROIC:
we apply an estimated average tax rate to the operating income of our continuing
operations with adjustments for unusual items, such as facility consolidation
charges, and apply this tax-adjusted operating income to our average capital
base, which, in our case, is our shareholders' equity and debt.
The details of this measurement are outlined below.
Trailing Twelve
Three Months Ended Months Ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
(Amounts in 000s)
OPERATING INCOME AFTER TAXES
Operating income from continuing operations $ 11,291 8,457 $ 43,193 $ 29,612
Plus: Facility consolidation charge (benefit) (270) -- 911 785
Less: Estimated income taxes (1) (2,748) (2,637) (12,487) (8,819)
-------- -------- -------- --------
Operating income after taxes $ 8,273 $ 5,820 $ 31,617 $ 21,578
======== ======== ======== ========
INVESTED CAPITAL
Debt $ -- $ 362 $ -- $ 362
Shareholder's equity 142,792 137,627 142,792 137,627
-------- -------- -------- --------
Invested capital $142,792 $137,989 $142,792 $137,989
======== ======== ======== ========
-------- -------- -------- --------
AVERAGE INVESTED CAPITAL (2) $147,790 $133,900 $147,356 $142,401
-------- -------- -------- --------
ROIC (3) 22.4% 17.4% 21.5% 15.2%
-------- -------- -------- --------
(1) Estimated income taxes were calculated by multiplying the sum of operating
income from continuing operations and the facility consolidation charge by
the respective periods' effective tax rate.
(2) Average invested capital for quarterly periods represents the simple
average of the beginning and ending invested capital amounts for the
respective quarter. Average invested capital for the trailing twelve month
periods represents the average of the ending invested capital amounts for
the current and four prior quarter period ends.
(3) ROIC is calculated by dividing operating income after taxes by average
invested capital. ROIC for quarterly periods is stated on an annualized
basis and is calculated by dividing operating income after taxes by average
invested capital and multiplying the result by four (4) to state ROIC on an
annualized basis.
ROIC in the three month period ended September 30, 2005 improved to 22.4% from
17.4%, as the Company generated $9.8 million of annualized operating profit
after tax from a $13.9 million increase of average invested capital. ROIC in the
trailing twelve month period ended September 30, 2005 improved to 21.5% from
15.2% as the Company generated $10.0 million of operating income from continuing
operations after tax with a $5.0 million increase of average invested capital.
Page 35
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 September 30, 2005 and 2004, were as follows:
Three Months Ended
September 30,
-------------------
2005 2004
-------- --------
Days sales outstanding in accounts receivable 21 19
Days inventory on-hand 18 19
Days payable outstanding (35) (35)
--- ---
Cash Conversion Cycle Days 4 3
=== ===
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 detailed calculation of the
components of the cash conversion cycle, please refer to our Annual Report on
Form 10-K/A, as amended, for the year ended December 31, 2004.
During the third quarters of 2005 and 2004 our cash conversion cycle was 4 days
and 3 days, respectively. On a year over year basis we have been able to manage
our working capital consistently for all the components of cash conversion cycle
days.
There can be no assurances that the Company will maintain these low levels of
cash conversion cycle in the future. 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 purchasing behavior is less predictable. This situation can have the
effect of increasing our cash conversion cycle and consequently consume our cash
or increase our debt levels.
CONSOLIDATED STATEMENTS OF CASH FLOWS
We use the indirect method of preparing and presenting our statements of cash
flows. In our opinion, it is more practical than the direct method and provides
the reader with a good perspective and analysis of the Company's cash flows.
OPERATING ACTIVITIES
For the nine months ended September 30, 2005, net cash provided by operating
activities was $54.8 million. Net cash provided by operating activities was
primarily comprised of cash operating profit from continuing operations of
approximately $28.0 million for the nine months ended September 30, 2005, a
reduction in pledged cash of $13.7 million, tax benefits from the exercise of
stock options of $2.2 million and a $10.7 million decrease in operating assets
and liabilities consisting primarily of changes in inventories, accounts payable
and accrued expenses, partially offset by accounts receivables and other assets.
Page 36
WORKING CAPITAL
SEPTEMBER 30, December 31,
2005 2004
------------- ------------
(Amounts in 000s)
Working capital $102,905 $94,667
Current ratio 1.32:1 1.33:1
We have historically satisfied our working capital requirements principally
through cash flow from operations, vendor financing, bank borrowings and the
issuance of equity and debt securities. We believe that 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.
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 nine months ended September 30, 2005, net cash used by investing
activities was $3.2 million. Net cash used by investing activities was comprised
of $7.9 million used for capital expenditures from continuing operations, $1.0
million of cash used for discontinued operations and $357 thousand of cash used
for acquisitions. These uses of cash were partially offset by a decrease in
funded contract financing receivables of $3.4 million and the receipt of $2.7
million for repayment of a note receivable that was issued as a part of the
divestiture of our former Middle East operations in 2002. Capital expenditures
were primarily directed toward improving our information systems, particularly
in the United States, the expansion of our warranty and non-warranty repair
business in India and moving our operations in Australia into a new facility. We
offer financing of inventory and receivables to certain network operator
customers and their agents and manufacturer customers under contractual
arrangements. Under these contracts, we manage and finance inventories and
receivables for these customers resulting in a contract financing receivable.
The change in contract financing receivables is typically due to timing of
product receipts at the end of each quarter.
FINANCING ACTIVITIES
For the nine months ended September 30, 2005, net cash used in financing
activities was $5.7 million. Net cash used in financing activities was primarily
comprised of $9.0 million of repurchases of our common stock, partially offset
by proceeds from the exercise of options of $3.3 million. On November 30, 2004,
we announced that our Board of Directors had approved a share repurchase program
authorizing the Company to repurchase up to $20 million of the Company's common
stock by December 31, 2005. During the nine months ended September 30, 2005, the
Company repurchased approximately 707 thousand shares of its common stock at an
average price of $12.74 per share, totaling $9.0 million. As of September 30,
2005, approximately $7.0 million may be used to purchase additional shares under
this program.
Page 37
Detail of the 2005 share repurchases is provided in the table below.
Issuer purchases of equity securities:
Total number of
shares purchased Total Maximum dollar
as part of the amount purchased value of
Total number Average publicly as part shares that may
of shares price paid announced of the publicly yet be purchased
Month of purchase purchased per share program announced program under the program
----------------- ------------ ---------- ---------------- ----------------- -----------------
January 2005 225,450 $12.93 225,450 $2,915,706 $13,071,524
February 2005 112,500 $12.85 112,500 1,445,495 11,626,029
March 2005 3,150 $12.04 3,150 37,922 11,588,107
April 2005 -- -- -- -- 11,588,107
May 2005 324,225 $12.56 324,225 4,073,923 7,514,184
June 2005 41,250 $12.86 41,250 530,580 6,983,604
July 2005 -- -- -- -- 6,983,604
August 2005 -- -- -- -- 6,983,604
September 2005 -- -- -- -- 6,983,604
------- ------ ------- ---------- -----------
Total/Average 706,575 $12.74 706,575 $9,003,626 $ 6,983,604
------- ------ ------- ---------- -----------
LINES OF CREDIT
The table below summarizes lines of credit that were available to the Company as
of September 30, 2005:
Gross Letters of Credit Net
Commitment Availability Outstanding & Guarantees Availability
---------- ------------ ----------- ----------------- ------------
(Amounts in 000s)
North America $ 70,000 $ 63,000 $-- $21,500 $41,500
Australia 38,100 37,700 -- 4,711 32,989
New Zealand 8,297 7,249 -- 21 7,228
France -- -- -- -- --
Sweden 1,937 1,937 -- -- 1,937
Slovak Republic 1,855 1,855 -- -- 1,855
Philippines 5,785 5,785 -- 2,000 3,785
-------- -------- --- ------- -------
Total $125,974 $117,526 $-- $28,232 $89,294
======== ======== === ======= =======
Additional details on the above lines of credit are disclosed in Note 5 of the
Notes to Consolidated Financial Statements. Interest expense includes fees paid
for unused capacity on credit lines and amortization of deferred financing fees.
OFF-BALANCE SHEET ARRANGEMENTS - ACCOUNTS RECEIVABLES TRANSFERS
During the nine months ended September 30, 2005 and 2004, we entered into
certain transactions or agreements with banks and other third-party financing
organizations in Norway and Sweden, with respect to a portion of our accounts
receivable in order to reduce the amount of working capital required to fund
such receivables. These transactions have been treated as sales pursuant to
current accounting principles generally accepted in the United States and,
accordingly, are accounted for as off-balance sheet arrangements. Net funds
received reduced the accounts receivable outstanding while increasing cash.
Page 38
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 nine months ended September 30, 2005 and 2004, totaled
$185 million and $216 million, respectively. Fees, in the form of discounts,
incurred in connection with these sales totaled $566 thousand and $663 thousand
during the nine months ended September 30, 2005 and 2004, respectively. These
fees are included as a component of "Net other expenses" 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. We 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
nine months ended September 30, 2005 and 2004. These agreements require our
subsidiaries to provide collateral in the form of pledged assets and/or, in
certain situations, a guarantee by us of our subsidiaries' obligations.
Pursuant to these arrangements, approximately $21 million and $27 million of
trade accounts receivable were sold to and held by banks and other third-party
financing institutions at September 30, 2005 and 2004, respectively. Amounts
held by banks or other financing institutions at September 30, 2005 were for
transactions related to our Norway and Sweden arrangements. All other
arrangements have been terminated or expired.
LIQUIDITY ANALYSIS
Our measurement for liquidity is the summation of total unrestricted cash and
unused borrowing availability. We use this measurement as an indicator of how
much access to cash we have to either grow the business through investment in
new markets, acquisitions, or through expansion of existing service or product
lines or to contend with adversity such as unforeseen operating losses
potentially caused by reduced demand for our products and services, a material
uncollectible accounts receivable, or a material inventory write-down, as
examples.
The table below shows this calculation.
SEPTEMBER 30, December 31,
2005 2004 % Change
------------- ------------ --------
(Amounts in 000s)
Unrestricted cash $112,819 $ 72,120 56.4%
Borrowing availability 89,294 77,146 15.7%
-------- -------- ----
Liquidity $202,113 $149,266 35.4%
======== ======== ====
As of September 30, 2005, our liquidity increased $52.8 million from December
31, 2004. The increase was driven by increases in both operating cash flow,
which includes the release of restricted cash and borrowing availability. Cash
increased by 56% while borrowing availability increased by 16%.
Page 39
We routinely make large payments, in certain occasions, in excess of $10
million, to suppliers and routinely collect large payments from customers, in
certain occasions, in excess of $10 million. The timing of these payments or
collections can cause our cash balances and borrowings to fluctuate throughout
the year. During the nine months ended September 30, 2005 our largest
outstanding borrowings on a given day were approximately $36 million with an
average outstanding balance of approximately $15 million.
While it is difficult to quantify the adequacy of our liquidity for future
needs, with our unrestricted cash balance and unused borrowing availability,
totaling $202 million on September 30, 2005, 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
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject us to concentrations of credit
risk consist principally of cash investments, forward currency contracts and
accounts receivable. We maintain cash investments primarily in AAA rated money
market mutual funds and overnight repurchase agreements, which have minimal
credit risk. We place forward currency contracts with high credit-quality
financial institutions in order to minimize credit risk exposure. Concentrations
of credit risk with respect to accounts receivable are limited due to the large
number of geographically dispersed customers. We perform ongoing credit
evaluations of our customers' financial condition and generally do not require
collateral to secure accounts receivable.
EXCHANGE RATE RISK MANAGEMENT
A substantial portion of our revenue and expenses are transacted in markets
worldwide and may be denominated in currencies other than the U.S. dollar.
Accordingly, our future results could be adversely affected by a variety of
factors, including changes in specific countries' political, economic or
regulatory conditions and trade protection measures.
Our foreign currency risk management program is designed to reduce, but not
eliminate, unanticipated fluctuations in earnings and cash flows caused by
volatility in currency exchange rates by hedging. Generally, through purchase of
forward contracts, we hedge transactional currency risk, but do not hedge
foreign currency revenue or future operating income. Also, we do not hedge our
investment in foreign subsidiaries, where fluctuations in foreign currency
exchange rates may affect our comprehensive income or loss. At September 30,
2005 and December 31, 2004, the face amount of outstanding forward currency
contracts to buy U.S. dollars to hedge those currency exposures associated with
certain assets and liabilities denominated in non-functional currencies was $11
million and $23 million, respectively. An adverse change (defined as a 10%
strengthening of the U.S. dollar) in all exchange rates, relative to our foreign
currency risk management program, would have had no material impact on our
results of operations for 2005 or 2004. At September 30, 2005, 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.
INTEREST RATE RISK MANAGEMENT
We are exposed to potential loss due to changes in interest rates. Investments
with interest rate risk include short-term marketable securities. Debt with
interest rate risk includes the fixed and variable rate debt. To mitigate
interest rate risks, we have, in the past, utilized interest rate swaps to
convert certain portions of our variable rate debt to fixed interest rates.
We are exposed to changes in interest rates on our variable interest rate
revolving lines of credit. A 10% increase in short-term borrowing rates during
the quarter would have resulted in only a nominal increase in interest expense.
We did not have any interest rate swaps outstanding at September 30, 2005.
Page 41
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, including the Company's Principal Executive Officer,
and its Chief Financial Officer ("Principal Financial Officer"), has evaluated
the effectiveness of its disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this quarterly report. Based on that evaluation, the Principal
Executive Officer and Principal Financial Officer have concluded that, solely
due to the material weaknesses with respect to our operations in France
described in the latest amendment our Form 10-K for the fiscal year ended
December 31, 2004 ("Amended Form 10-K"), as to which the process of remediation
was ongoing as of September 30, 2005, the Company's disclosure controls and
procedures were not effective as of September 30, 2005.
As previously reported in our Amended Form 10-K, the Company's management
revised its assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2004, originally included in
Management's Report on Internal Control Over Financial Reporting in the
Company's annual report on Form 10-K filed on February 3, 2005. In that report,
management concluded that the Company's internal control over financial
reporting was effective as of December 31, 2004, notwithstanding the existence
of significant deficiencies that were deemed by the Company's management not to
be material weaknesses. Subsequent to filing its initial annual report on Form
10-K, the Company identified errors in its 2004 financial statements and has
restated those annual financial statements in our Amended Form 10-K, which was
filed on September 1, 2005. Management concluded that these errors resulted from
control deficiencies that represent material weaknesses in internal control over
financial reporting. As a result, management revised its assessment of the
effectiveness of the Company's internal control over financial reporting due to
the following identified material weaknesses:
- The Company's operations in France receive mobile operator commission,
subsidy, bonus and residual airtime revenues as a result of subscriber
activations or subscriber upgrades generated by the Company's network
of independent authorized retailers and the Company's directly owned
retail stores. The financial reporting control procedures for certain
account receivable reconciliations and revenue recognition control
procedures for proper pricing and invoicing of these transactions
failed to operate effectively and in a timely fashion as of December
31, 2004. In addition, revenue recognition control procedures for
invoicing and cash application of receipts related to these
transactions were ineffectively designed as of December 31, 2004. Due
to errors made in recording these transactions, the Company's
operations in France overstated revenue resulting in a related
overstatement of accounts receivable. In addition, certain other
related adjustments were made in error, which did not have an impact
on net income, but resulted in an overall understatement of accounts
receivable and accounts payable during the year ended December 31,
2004.
- The Company's operations in Australia failed to identify certain
rebates that were not recorded related to a 2004 program, which
resulted in an error in the December 31, 2004 financial statements.
The communications process whereby new contracts are forwarded to
regional finance personnel did not include communicating significant
modifications to contracts. Accordingly, internal control in relation
to the communication of rebate arrangements (between the product
manager/country manager and the finance team) and assessments as to
whether the terms and
Page 42
conditions for rebates have been achieved did not operate effectively.
This error resulted in an overstatement of cost of revenue and the
understatement of vendor receivables that would have reduced accounts
payable, resulting in an overstatement of accounts payable in the 2004
financial statements.
SUBSEQUENT CONTROL CHANGES
The Company has implemented changes in procedures for the reporting of mobile
operator commissions, subsidies and bonuses in its France operations and rebates
earned on non-financial key performance metrics in its Australia operations and
believes that these changes will assure proper recognition of these items. As
part of the assessment of its internal control over financial reporting, the
Company has initiated changes in processes in our France and Australia
operations to correct the errors that occurred and to reduce the likelihood that
similar errors could occur in the future. In addition, management of the
Company, with the assistance of certain members of the Board of Directors, is
reviewing the regional financial organizational structure, instituting new
financial reporting and revenue recognition controls at all Brightpoint
locations, performing supplementary detailed monthly review of accounts by
regional and corporate management and executing more frequent internal audits.
In France, the Company has implemented a change in reporting structure for
personnel as well as a change in personnel, enhanced its balance sheet
reconciliation procedures, developed month-end reporting checklists and
processes to review and revise certain critical balance sheet accounts,
implemented quarter-end reconciliation procedures of significant customer and
vendor accounts, and enhanced its operating controls. In Australia, the Company
has enhanced the dissemination of written communications with significant
vendors relating to rebates, volume bonuses and other incentives and has
established a monthly meeting between the Finance Director of our Australia
operations, the CFO of our Asia Pacific Division and product sales and
operations management to discuss data related to vendor rebates, volume bonuses
and other incentives.
Certain of the changes in the Company's internal controls over financial
reporting described in the previous paragraph are still on-going. Management
believes that the changes previously implemented had alleviated the material
weaknesses in internal control with respect to our operations in Australia as of
June 30, 2005 and for the period ended September 30, 2005.
As a result of the Company's ongoing review of its internal control over
financial reporting, Brightpoint Germany is in the process of implementing new
software that will affect all the significant processes in that entity including
Order to Cash, Procure to Pay and General Accounting. These system changes are
designed to enhance operational effectiveness and efficiencies and are also
expected to further improve internal control. In addition to the implementation
of the new software, Brightpoint Germany has taken steps to improve the control
structure by making changes in local management personnel and providing for
additional oversight by regional and corporate management.
Page 43
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.
A Complaint was filed on January 4, 2005 against the Company in the Circuit
Court for Baltimore County, Maryland, Case No. 03-C-05-000067 CN, entitled
Iridium Satellite, LLC, Plaintiff v. Brightpoint, Inc., Defendant. The matter
was removed to the United States District Court, District of Maryland, Baltimore
Division. In the Complaint, the Plaintiff alleges claims of trover and
conversion, fraudulent misrepresentation and breach of contract. All claims
relate to the ownership and disposition of 1,500 Series 9500 satellite
telephones. The Plaintiff seeks damages in the amount of $750,000 with interest
and costs. The Company continues to dispute these claims and intends to defend
this matter vigorously.
A Complaint was filed on November 23, 2001, against the Company and 87 other
defendants in the United States District Court for the District of Arizona,
entitled Lemelson Medical, Education and Research Foundation LP v. Federal
Express Corporation, et.al., Cause No. CIV01-2287-PHX-PGR. The plaintiff claims
that the Company and other defendants have infringed seven 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. On September 9, 2005, the U.S. Court of
Appeals for the Federal Circuit affirmed the decision of the trial court holding
that the asserted patents are unenforceable. The Company continues to dispute
these claims and intends to defend this matter vigorously.
The Company's subsidiary in Sweden, Brightpoint Sweden Ab, ("BP Sweden") has
received an assessment from the Swedish Tax Agency ("STA") regarding value-added
taxes the STA claims are due, relating to certain transactions entered into by
BP Sweden during 2004. BP Sweden has filed an appeal against the decision.
Although the Company's liability pursuant to this assessment by the STA, if any,
cannot currently be determined, the Company believes the range of the potential
liability is between $0 and $1.4 million (at current exchange rates) including
penalties and interest. The Company continues to dispute this claim and intends
to defend this matter vigorously.
Page 44
PART II OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On November 30, 2004, we announced that our Board of Directors had approved a
share repurchase program authorizing the Company to repurchase up to $20 million
of the Company's common stock by December 31, 2005. During the nine months ended
September 30, 2005, the Company repurchased approximately 707 thousand shares of
its own common stock at an average price of $12.74 per share, totaling $9.0
million. As of September 30, 2005, approximately $7.0 million may be used to
purchase shares under this program. Detail of the 2005 repurchases is provided
in the table below.
Issuer purchases of equity securities:
Total number
of shares Total amount
purchased as purchased as Maximum dollar
part of the part of value of shares
Total number Average publicly the publicly that may yet be
of shares price paid announced announced purchased under
Month of purchase purchased per share program program the program
----------------- ------------ ---------- ------------ ------------ ---------------
January 2005 225,450 $12.93 225,450 $2,915,706 $13,071,524
February 2005 112,500 $12.85 112,500 1,445,495 11,626,029
March 2005 3,150 $12.04 3,150 37,922 11,588,107
April 2005 -- -- -- -- 11,588,107
May 2005 324,225 $12.56 324,225 4,073,923 7,514,184
June 2005 41,250 $12.86 41,250 530,580 6,983,604
July 2005 -- -- -- -- 6,983,604
August 2005 -- -- -- -- 6,983,604
September 2005 -- -- -- -- 6,983,604
------- ------ ------- ---------- -----------
Total/Average 706,575 $12.74 706,575 $9,003,626 $ 6,983,604
------- ------ ------- ---------- -----------
Page 45
PART II OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits
The list of exhibits is hereby incorporated by reference to the
Exhibit Index on page 48 of this report.
Page 46
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: November 7, 2005 /s/ Robert J. Laikin
----------------------------------------
Robert J. Laikin
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
Date: November 7, 2005 /s/ Anthony W. Boor
----------------------------------------
Anthony W. Boor
Chief Financial Officer
(Principal Financial Officer)
Date: November 7, 2005 /s/ Vincent Donargo
----------------------------------------
Vincent Donargo
Chief Accounting Officer
(Principal Accounting Officer)
Page 47
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.1 Employment Term Sheet between Brightpoint, Inc and Vincent Donargo
dated as of August 25, 2005
10.2 Amendment No. 2 and Limited Waiver to Amended and Restated Credit
Agreement dated September 30, 2005 among Brightpoint North America
L.P., a Delaware limited partnership, and Wireless Fulfillment
Services LLC, a California limited liability company, General
Electric Capital Corporation, a Delaware corporation, for itself,
as Lender and as Agent for Lenders, and the other Lenders and the
other Credit Parties Signatory to the Amended and Restated Credit
Agreement. *
10.3 Employment Agreement between Brightpoint, Inc. and Anthony W. Boor
dated October 17, 2005. **
10.4 Agreement dated as of September 30, 2005 between Brightpoint
Holdings BV as Seller and Initiative ET Finance Investissement in
the name and on behalf of NEWCO as Purchaser for the Sale and
Purchase of 100% of the securities of Brightpoint France and
transfer of a shareholder loan.
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
* Incorporated by reference to the Registrant's Form 8-K for the event dated
August 25, 2005, which was filed on August 31, 2005
** Incorporated by reference to the Registrant's Form 8-K for the event dated
October 17, 2005, which was filed on October 18, 2005
Page 48