SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 2)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
0-23494
(COMMISSION FILE NO.)
BRIGHTPOINT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 35-1778566
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
501 AIRTECH PARKWAY, PLAINFIELD, INDIANA 46168
(Address of principal executive offices including zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (317) 707-2355
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates as of June 28, 2002, which was the last business day of the
registrant's most recently completed second fiscal quarter was approximately
$7,500,000. As of March 17, 2003, there were 8,023,100 shares of the
registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
PART I
ITEM 1. BUSINESS.
GENERAL
Brightpoint, Inc. is one of the largest distributors of wireless
handsets and accessories in the world, with operations centers and/or sales
offices in various countries including Australia, Colombia, France, Germany,
Hong Kong, Ireland, New Zealand, Norway, the Philippines, Sweden and the United
States. In addition, we provide outsourced services including, procurement,
fulfillment, customized packaging, activation management, prepaid and e-business
solutions and inventory management within the global wireless telecommunications
and data industry. Our customers include wireless network operators, resellers,
retailers and wireless equipment manufacturers. We handle wireless products
manufactured by technology companies such as Nokia, Motorola, Sony Ericsson,
Kyocera, Samsung, Siemens, Panasonic, Audiovox, Hewlett-Packard, Mitsubishi,
NEC, Palm, Research In Motion and Toshiba. We also provide integrated logistics
services to wireless equipment manufacturers and wireless network operators
along with their associated service providers, resellers, agents and other
retail channels.
We were incorporated under the laws of the State of Indiana in August
1989 under the name Wholesale Cellular USA, Inc. and reincorporated under the
laws of the State of Delaware in March 1994. In September 1995, we changed our
name to Brightpoint, Inc.
FINANCIAL OVERVIEW AND RECENT DEVELOPMENTS
In 2002, we experienced a net loss of $42.4 million ($5.30 per share)
on revenues of $1.3 billion, which included a cumulative effect of a change in
accounting principle of $40.7 million ($5.09 per share), an extraordinary gain
on the extinguishment of debt of $26.6 million ($3.33 per share) and losses in
discontinued operations of $15.5 million ($1.94 per share). This net loss
compared to a net loss of $53.3 million ($6.68 per share) on revenues of $1.3
billion in 2001, which included losses in discontinued operations of $56.4
million ($7.07 per share) and an extraordinary gain on the extinguishment of
debt of $4.3 million ($0.54 per share). Loss from continuing operations in 2002
was $12.8 million ($1.60 per share) as compared to $1.2 million ($0.15 per
share) in 2001. The loss from continuing operations in 2002 included an $8.3
million non-cash investment impairment charge related to our investment in Hong
Kong based Chinatron Group Holdings Limited ("Chinatron"). The increased loss
from continuing operations in 2002 as compared to 2001 was primarily the result
of the investment impairment charge noted above, and decreases in gross and
operating margins in 2002. Our gross and operating margins in 2002 decreased
when compared to 2001 primarily as a result of a shift in service line revenue
from accessories and integrated logistic services to lower margin handset sales,
pricing pressures related to our integrated logistics services and increased
selling, general and administrative costs in 2002. The increased selling,
general and administrative costs in 2002 as compared to 2001, were primarily
attributable to one-time costs resulting from cost reduction action, increased
legal costs, increased bad debt expenses and severance costs related to
management changes. On June 26, 2002, our
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shareholders approved a 1-for-7 reverse split of our common stock. Per share
amounts for all periods presented in this report have been adjusted to reflect
this reverse stock split which was effective on June 27, 2002.
In 2002, we significantly reduced working capital utilized in our
operations and reduced debt. Working capital was reduced to $61 million at
December 31, 2002 from $184 million at December 31, 2001 and we generated cash
flow from operations of $70 million in 2002 as compared to $51 million in 2001.
We devoted significant amounts of our cash resources in 2002, including
borrowings under our credit facilities, to repurchase 91% of our outstanding
zero-coupon, subordinated convertible notes due in the year 2018 ("Convertible
Notes") pursuant to a plan approved by our Board of Directors in late 2001.
These repurchases resulted in an extraordinary gain on extinguishment of debt,
net of tax, of $26.6 million ($3.33 per share) for the year ended December 31,
2002. As a result of these actions, total debt was decreased to $22 million at
December 31, 2002 from $166 million at December 31, 2001 and our debt to total
capitalization (total debt plus total stockholders' equity) ratio was reduced to
16% at December 31, 2002 from 53% at December 31, 2001. In addition to the
repurchases of the Convertible Notes, we amended our asset-based credit facility
with General Electric Commercial Finance in the United States and entered into a
new asset-based credit facility with General Electric Commercial Finance in
Australia during the fourth quarter of 2002.
During 2002, we also took action to better position ourselves for
long-term and more consistent success by divesting or closing operations in
which potential returns were not likely to generate an acceptable return on
invested capital. The action included: i) the sale, through certain of our
subsidiaries, of our interests in Brightpoint China Limited to Chinatron, ii)
the sale, through certain of our subsidiaries, of our interests in Brightpoint
Middle East FZE, its subsidiary Fono Distribution Services LLC and Brightpoint
Jordan Limited to Persequor Limited, iii) the sale , through certain of our
subsidiaries, of certain operating assets of Brightpoint de Mexico. S.A. de C.V
and our respective ownership interest in Servicios Brightpoint de Mexico, S.A.
de C.V. to Soluciones Inteligentes para el Mercado Movil, S.A. de C.V. (SIMM),
an entity which is wholly-owned and controlled by Brightstar de Mexico S.A. de
C.V, iv) closure of our Miami sales office and v) the continued execution of our
2001 restructuring plan, which called for the elimination of operations in
Brazil, Jamaica, South Africa, Venezuela and Zimbabwe and the consolidation of
our operations and activities in Germany, the Netherlands and Belgium, including
regional management, into a new facility in Germany. Net losses resulting from
these actions and the related losses from the operations of the entities
eliminated by these actions totaled $15.5 million ($1.94 per share) in 2002
compared to $56.4 million ($7.07 per share) in 2001 and have been classified in
discontinued operations for all periods presented. See Note 2 to the
Consolidated Financial Statements for further discussion.
During the second quarter of 2002, we completed the goodwill and other
intangible asset transitional impairment test required by the adoption of
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS No. 142"). Consequently, we recorded in the first
quarter of 2002 an impairment charge totaling $40.7 million relating to this
change in accounting principle, net of tax. See Note 4 to the Consolidated
Financial Statements for further discussion.
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On December 19, 2002, our subsidiary, Brightpoint North America L.P.,
entered into an amendment to its October 29, 2001 distribution agreement with
Nokia Inc. extending its distribution agreement with Nokia in the United States
through December 31, 2004, subject to earlier termination as provided in the
agreement. The amendment, effective January 1, 2003 also resulted in certain
changes in product order processes and procedures with Nokia effective through
June of 2003, which we believe will potentially reduce our inventory levels
therefore improving our liquidity and reducing our inventory carrying costs.
On February 19, 2003, we announced that we will consolidate our
Richmond, California call center operation into our Plainfield, Indiana,
facility to reduce costs and increase productivity and profitability in our
Americas division. By utilizing existing infrastructure in Plainfield, we expect
to realize annual pre-tax cost savings, beginning in the second quarter of 2003,
of approximately $2.0 million to $2.5 million. We also expect to record a
pre-tax charge of approximately $4.0 million to $4.5 million in the first
quarter of 2003, which includes the present value of estimated lease costs, net
of an anticipated sublease; losses on the disposal of assets, severance and
other costs. Total cash outflows on the charge are expected to be approximately
$3.0 million to $3.5 million and cash outflows in the first and second quarters
of 2003 are expected to be approximately $200 thousand and $450 thousand,
respectively.
WIRELESS TELECOMMUNICATIONS AND DATA INDUSTRY
The wireless telecommunications and data industry provides voice and
data communications utilizing various wireless terminals, including mobile
telephones, interactive pagers, personal digital assistants and other mobile
computing devices. Wireless handsets and devices are available in a variety of
form factors and using a variety of technologies including digital, analog,
multi-band and Web-enabled devices. Wireless telecommunications and data
services are available to consumers and businesses through numerous wireless
network operators who utilize digital and analog technological standards, such
as:
AMPS -- 1st Generation Analog
TDMA, CDMA, GSM, iDEN(R) -- 2nd Generation Digital (often
called 2G)
GPRS, EDGE, 1xRTT -- 2.5 Generation Digital (often called
2.5G)
W-CDMA/UMTS, 1xEV-DV - 3rd Generation Digital (often called
3G)
to provide voice and data communication over regional, national and
multi-national networks. Developments within the wireless telecommunications and
data industry have allowed wireless subscribers to talk, send text messages,
send and receive email, capture and transmit digital images, send multimedia
messages, play games and browse the Internet using their wireless devices.
Wireless devices and services are also being used for monitoring services,
point-of-sale transaction processing, inter-device communications, local area
networks, location monitoring, sales force automation and customer relationship
management. Developments in recent years affecting the wireless
telecommunications and data industry and its participants include: the
increasing number of industry participants with highly leveraged financial
positions; declining access to capital to fund capital
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expenditures; participants with declining revenues and continuing operating
losses; the change in focus from subscriber acquisition to subscriber retention
and expansion of service offerings; consolidation among wireless network
operators; the convergence of the telecommunications, data and media domains;
advances in and development of next generation systems technology, including
increasing bandwidth; the increasing variety of terminal form factors; new
manufacturers and wireless service resellers; and the increasing affordability
of wireless airtime.
In 2002, the wireless telecommunications and data industry grew at a
slower rate than in prior years. From 2001 to 2002, the number of worldwide
wireless subscribers increased by approximately 184 million, or 20%, to
approximately 1.1 billion. From 2000 to 2001 the number of worldwide wireless
subscribers increased by approximately 218 million, or 30%. At the end of 2002,
wireless penetration was estimated at approximately 50% of the population within
the United States and less than 18% of the population globally. The number of
worldwide subscribers is expected to grow to approximately 1.6 billion
subscribers by the end of 2004. During 2002, the wireless telecommunications and
data industry saw shipments of wireless handsets increase from approximately 390
million in 2001 to an estimated 400 million units in 2002. Wireless handset
shipments are currently forecasted at approximately 440 million units in 2003
and approximately 460 million units in 2004. The percentage of wireless handset
shipments related to replacement units has continued to grow and is forecasted
to exceed 62% of total wireless handset shipments in 2003. Additionally, the use
of wireless data products, including interactive pagers, personal digital
assistants and other mobile computing devices, has seen recent growth and wider
consumer acceptance, although this continued to be a relatively small portion of
the wireless telecommunications industry. The industry data contained in this
paragraph and elsewhere in this subsection was obtained from a research report
from a leading investment bank dated February 10, 2003.
We believe the following major trends are taking place within the
wireless telecommunications and data industry, although it cannot be assured
that we will be able to take advantage of these trends (see BUSINESS RISK
FACTORS discussed below):
Replacement Handsets. As overall subscriber penetration increases in
certain markets, growth in wireless handset volume may be dependent on the
replacement cycle, which is defined as the period of time that a subscriber will
replace their existing handset or wireless device with a new one. During 2002,
the wireless telecommunications and data industry saw shipments of replacement
handsets increase from approximately 171 million units to an estimated 215
million units in 2002. It is estimated that shipments of replacement handsets
will total approximately 274 million in 2003 and represent approximately 62% of
total wireless handset shipments in 2003. We believe that the key drivers for
the growth in shipments of replacement handsets will be color displays,
camera-enabled handsets, multimedia messaging services (MMS), handsets and
network services with Internet access, handsets with entertainment features such
as audio and gaming, phone number portability and the churning of customers
between wireless network operators, all of which we expect to contribute to the
continued contraction of the replacement cycle. While these features and
enhanced functionalities are anticipated to increase both replacement handset
shipments and total wireless handset shipments, general economic conditions,
consumer acceptance, manufacturing difficulties, supply constraints and other
factors could negatively impact anticipated wireless handset shipments.
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Industry Financial Performance and Consolidation. In recent years many
wireless network operators have sustained significant operating losses and
incurred large amounts of indebtedness. As a result, the financial condition of
many wireless network operators has deteriorated. Consequently, merger and
acquisition activities within the wireless network operator community have
increased and are being driven by improved economies of scale, the opportunity
to expand national or multi-national service areas and efforts to increase
revenue and profitability through additional service offerings. We believe that
this trend may continue in the future and may lead wireless network operators to
focus more closely on their core business of providing wireless
telecommunications and data services, which could in turn increase the demand
for outsourced integrated logistics services. In certain instances, wireless
network operator incompatibilities and/or geographic redundancies may prove to
be obstacles to wireless network operator consolidation and weaker network
operators, which could include our customers, could potentially cease operations
due to the intense competitive environment. However, these same trends could
also increase the demands placed on us and other providers of integrated
logistics services, as wireless network operators will need to meet increasingly
complex and sophisticated customer requirements and provide services over larger
geographic regions while attempting to generate acceptable levels of
profitability. This increased focus on profitability could cause wireless
network operators to reduce promotional programs which could decrease the demand
for our products or services and negatively impact prices we are able to realize
from providing our products and services. The increase in the complexity of
customer requirements could require us to continue to upgrade our information
systems and processes, which could result in significantly increased costs.
Additionally, industry consolidation reduces the number of potential contracts
available to us and other providers of integrated logistics services and could
reduce the degree to which members of the wireless telecommunications and data
industry rely on outsourced services such as the services that we provide. We
could also lose business in the near-term if wireless network operators who are
not our customers acquire wireless network operators who are our customers.
Migration to Next Generation Systems. As wireless network operators
compete to offer anytime/anywhere telecommunications and data services to their
customers through current 2.5G wireless systems and future 3G wireless systems,
they will be increasingly focused on spectrum purchases, infrastructure build
out, customer retention and expansion of service offerings. This could create an
industry environment in which wireless network operators would be more likely to
outsource integrated logistics services that they do not perceive as central to
these core activities. However, the roll-out of 3G systems, which has been
delayed and could further be delayed, could possibly mitigate the need for some
of the integrated logistics services we now offer if the underlying technology
drastically reduces or eliminates certain processes that we currently provide to
program and/or provision handsets. In addition, the emergence of new
technologies is fueling the convergence of the telecommunications, data and
media domains, resulting in significant changes and opportunities in the
wireless telecommunications and data industry. As a result of this convergence,
wireless subscribers may increasingly use their wireless devices to send text
messages, send and receive email, take photographs, send multimedia messages,
play games and browse the Internet. This convergence is being powered by the
development of wireless Web capabilities and new standards such as MMS, Wireless
Application Protocol (WAP), HTML, Java, Bluetooth and 3G. Other new wireless
technologies and enhancements
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have also been introduced into the wireless telecommunications and data market.
These include Wi-Fi (802.11b), wireless local loop and satellite-based
communications, as well as handset feature and network enhancements, such as
increased talk and standby times, smaller and lighter form factors and
multiple-band reception. All of these developments are expected to contribute to
future subscriber growth and accelerate equipment upgrades.
Increasing Penetration of Markets Worldwide. We expect that the demand
for wireless services may continue to drive increased subscriber penetration of
markets worldwide and the continued entry of wireless resellers in certain
markets. Recently, the economic uncertainty in many markets and the high rate of
subscriber penetration in many markets has caused the rate of subscriber growth
to slow, however, economic growth, increased service availability or the lower
cost of service compared to conventional wireline telephone systems (or a
combination of the two) has historically driven market penetration. In addition,
historically, certain markets characterized by higher market penetration have
also grown, primarily as a result of increasing deregulation, the availability
of additional spectrum, increased competition and the emergence of new wireless
technologies and related applications. However, these developments may result in
an increased number of companies providing wireless services in certain markets
and affect the services provided, including seamless roaming, increased
coverage, improved signal quality and greater data handling capabilities through
greater bandwidth. These factors are also expected to intensify the efforts of
the wireless network operators to maintain competitive cost structures which
could place pressure on the prices and service levels demanded of us.
OUR STRATEGY
Our strategy for growth and increasing shareholder value includes the
development and expansion of our product and service offerings, geographic
expansion and reducing our cost structure. This strategy is designed to increase
our market share and capitalize on certain of the current trends in the wireless
telecommunications and data industry. These trends include, but are not limited
to, growth in worldwide wireless handset unit sales; the increasing percentage
of replacement wireless handset unit sales as a percentage of worldwide wireless
handset unit sales; the convergence of telecommunications, data, Internet and
other technologies; the migration to next generation systems; increasing
penetration of worldwide markets; the changing focus of wireless network
operators from subscriber acquisition to subscriber retention and their
expansion of service offerings; increasing outsourcing of certain services by
wireless network operators and wireless equipment manufacturers; and industry
consolidation. Specifics of our strategy include:
DEVELOP AND EXPAND PRODUCT OFFERINGS
As one of the world's largest distributors of wireless handsets and
accessories, our strategy focuses on our efforts to increase our wireless
equipment manufacturer relationships, broaden our product portfolio with
manufacturers we currently have relationships with, and expand and enhance key
supplier relationships within the wireless telecommunications and data industry.
We will seek to accomplish this by attempting to expand the product lines,
brands and technologies handled within the markets we serve, thereby extending
our reach to allow us to provide services to wireless equipment manufacturers in
the markets in which we serve them. In particular, we will focus on adding to
our
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product portfolio new products which provide data, entertainment and imaging
functionality to wireless handset users in order to take advantage of the
convergence of telecommunications, data, Internet and other technologies.
DEVELOP AND EXPAND SERVICE OFFERINGS
As a leading provider of outsourced integrated logistics services to
the wireless telecommunications and data industry, our strategy is to leverage
this position to expand and develop new sales channels and service offerings
enabling wireless equipment manufacturers and wireless network operators to
effectively and efficiently get their products and services to market. We will
focus our efforts on: i) expanding our activation management services, which
provides wireless network operators and their dealers a more efficient way to
manage activations, ii) developing new and unique logistics services offerings,
and iii) strengthening our capabilities and relationships in retail channels. By
expanding and developing these channels and capabilities, we will get closer to
the end-user consumer and take advantage of the increasing outsourcing by
wireless network operators and wireless equipment manufacturers.
GEOGRAPHIC EXPANSION
We plan to expand our operations through internal (organic) expansion,
joint ventures, acquisitions or other corporate transactions. We believe that
these activities will be undertaken primarily through existing operations in
order to leverage our current infrastructure. These activities would expand our
geographic presence, increase our customer base, improve our product portfolio
and add new capabilities and service offerings. Potential expansion areas
include, but are not limited to, Eastern Europe, India and North America.
FOCUS ON REDUCING OUR COST STRUCTURE
We intend to reduce our cost structure in order to improve
profitability and productivity. We will continuously evaluate opportunities to
reduce our costs including, but not limited to, exiting markets in which
potential returns do not generate an acceptable return on invested capital,
reducing our workforce, implementing workforce management programs, centralizing
back-office operations and consolidating facilities.
OUR BUSINESS
We are one of the leading suppliers of distribution and integrated
logistics services that move wireless devices and accessories through market
channels, primarily because of our understanding of the needs within each
distribution channel and our development of the knowledge and resources
necessary to create successful solutions.
Our services are intended to provide value to wireless handset
manufacturers and wireless network operators. Through the authorized
distribution of wireless telecommunications and data products, we intend to help
manufacturers achieve their key business objectives of increasing unit sales
volume, market share and points of sale. Our integrated logistics services are
intended to provide
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outsourcing solutions for the wireless network operators' mission-critical
business requirements. These integrated logistics services are designed to
support wireless network operators in their efforts to add new subscribers and
increase system usage while minimizing wireless network operators' investments
in distribution infrastructure.
DISTRIBUTION. Our distribution activities include the purchasing,
marketing, selling, warehousing, picking, packing, shipping and delivery of a
broad selection of wireless telecommunications and data products from leading
manufacturers. We continually review and evaluate wireless telecommunications
and data products in determining the mix of products purchased for resale and
seek to acquire distribution rights for products which we believe have the
potential for significant market penetration.
The products we distribute include a variety of devices designed to
work on substantially all operating platforms and feature prominent brand names
such as Nokia, Motorola, Sony Ericsson, Kyocera, Samsung, Siemens, Panasonic,
Audiovox, Hewlett-Packard, Mitsubishi, NEC, Palm, Research In Motion and
Toshiba. In 2002, 2001 and 2000, approximately 80%, 78% and 73%, respectively,
of our revenue was derived from handset distribution. In those same years,
handset distribution accounted for approximately 47%, 51% and 47%, respectively,
of the total wireless device units we handled.
We also distribute related wireless accessories, such as batteries,
chargers, cases and "hands-free" products. We purchase and resell original
equipment manufacturer (OEM) and aftermarket accessories, either prepackaged or
in bulk. Our accessory packaging services provide wireless network operators and
retail chains with custom packaged and/or branded accessories based on the
specific requirements of that customer. Additionally, we provide end-user
accessory fulfillment and distribution pursuant to contractual arrangements with
certain wireless network operators whereby the wireless network operators'
subscribers can order their accessories through a call center that we manage on
behalf of the network operator. Accessories typically carry higher gross margins
than handsets. In 2002, 2001 and 2000, sales of accessories accounted for
approximately 7%, 11% and 15%, respectively, of our revenue.
INTEGRATED LOGISTICS SERVICES. Our integrated logistics services
include, among others, inventory management, product procurement, product
fulfillment, kitting and customized packaging, prepaid airtime distribution,
activation management, freight management, credit services and receivables
management, reverse logistics and end-user support services. In many of our
markets we have contracts with wireless network operators and equipment
manufacturers pursuant to which we currently provide our integrated logistics
services. These customers include, but are not limited to, operating companies
or subsidiaries of Cingular Wireless (United States), COMCEL (Colombia),
MetroPCS (United States), NetCom (Norway), Nextel (United States), SFR (France),
Sprint PCS (United States), Tracfone (United States), U.S. Cellular (United
States), Virgin Mobile (United States) and Vodafone (Australia).
During 2002, 2001 and 2000, integrated logistics services accounted for
approximately 13%, 11% and 12%, respectively, of our total revenue. Although
this revenue has remained relatively consistent as a percent of our total
revenue, the mix of customers generating this revenue has changed significantly
over the last three years. We have lost and added relationships in 2002 and
believe these changes in the make up of our integrated logistics services
customer base will continue. In 2002, 2001
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and 2000, integrated logistics services accounted for approximately 53%, 49% and
53%, respectively, of the total wireless device units we handled. Because the
fees for such services have higher gross margins than those associated with
distribution services, we believe they represent a higher than proportionate
percentage of our operating profits. Additionally, since we generally do not
take ownership of the inventory in many of our integrated logistics services
arrangements, we believe that the invested capital requirements in providing
integrated logistics services are less than our distribution business.
CUSTOMERS
We provide our products and services to a customer base of
approximately 25,000 wireless network operators, manufacturers, agents,
resellers, dealers and retailers. For 2002 and 2001, aggregate revenues
generated from our five largest customers accounted for approximately 30% and
23%, respectively, of our total revenue. Computech Overseas International, a
customer of our Brightpoint Asia Limited operations managed by Persequor
Limited, accounted for approximately 12% of our total revenue and 30% of our
Asia-Pacific division's revenue in 2002. At December 31, 2002, there were no
amounts owed to us from Computech. Our Brightpoint Asia Limited operation, which
represented approximately 27% and 14% of our total revenue in 2002 and 2001,
respectively, sells primarily Nokia products to a limited number of resellers
based in Hong Kong and Singapore, predominantly on a cash before delivery basis.
The loss or a significant reduction in business activities by customers in our
Brightpoint Asia Limited operation, including Computech, could have a material
adverse affect on our revenue and results of operations. No single customer
accounted for 10% or more of our total revenue in 2001.
We generally sell our products pursuant to customer purchase orders and
subject to our terms and conditions. We generally ship products on the same day
orders are received from the customer. Unless otherwise requested, substantially
all of our products are delivered by common carriers. Because orders are filled
shortly after receipt, backlog is generally not material to our business. Our
integrated logistics services are typically provided pursuant to agreements with
terms between one and three years that generally may be terminated by either
party subject to a short notice period.
PURCHASING AND SUPPLIERS
We have established key relationships with leading manufacturers of
wireless telecommunications and data equipment. We generally negotiate directly
with manufacturers and suppliers in order to obtain inventories of brand name
products. In 2002, we made purchases from more than 300 wireless mobile device
and accessory suppliers. Inventory purchases are based on quality, price,
service, customer demand, product availability and brand name recognition.
Certain of our suppliers may provide favorable purchasing terms to us, including
price protection, cooperative advertising, volume incentive rebates, stock
balancing and marketing allowances. Product manufacturers typically provide
limited warranties, which we generally pass through to our customers.
Nokia, our largest supplier of wireless handsets and accessories
accounted for approximately 69% and 72% of our product purchases in 2002 and
2001, respectively. None of our other suppliers
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accounted for 10% or more of product purchases in 2002 or 2001. Loss of the
applicable contracts with Nokia or other suppliers, or failure by Nokia or other
suppliers to supply competitive products on a timely basis and on favorable
terms, or at all, would have a material adverse effect on our revenue and
operating margins and our ability to obtain and deliver products on a timely and
competitive basis. See - "Competition."
We maintain agreements with certain of our significant suppliers, all
of which relate to specific geographic areas. Our agreements may be subject to
certain conditions and exceptions including the retention by manufacturers of
certain direct accounts and restrictions regarding our sale of products supplied
by certain other competing manufacturers and to certain wireless network
operators. Most of our agreements with suppliers are non-exclusive. Our supply
agreements may require us to satisfy purchase requirements based upon forecasts
provided by us, a portion of which forecasts may be binding, and generally can
be terminated on short notice by either party. We purchase products from
manufacturers pursuant to purchase orders placed from time to time in the
ordinary course of business. We generally place orders on a regular basis with
our suppliers. Purchase orders are typically filled, subject to product
availability, and shipped to our designated warehouses by common carrier. In
December of 2002, we entered into an amendment to our distribution agreement
with Nokia Inc. in the United States that, among other provisions, changed
certain purchasing and invoicing processes to create a "Just-in-Time" inventory
arrangement that we expect will allow us to reduce the amount of inventories of
Nokia products that we own at any given point in time. This arrangement did not
have a significant impact on our December 31, 2002 inventory carrying value;
however, we believe it will reduce our inventory carrying value during the life
of the arrangement. This arrangement is initially set to expire in June of 2003.
We believe that our relationships with our suppliers are generally good,
however, we have from time to time experienced inadequate product supply from
certain manufacturers and network operators, including an inadequate supply of
CDMA product during 2002 from a key supplier in the United States. Any future
failure or delay by our suppliers in supplying us with products on favorable
terms would severely diminish our ability to obtain and deliver products to our
customers on a timely and competitive basis. If we lose any of our principal
suppliers, or if any supplier imposes substantial price increases or eliminates
favorable terms provided to us and alternative sources of supply are not readily
available, it would have a material adverse effect on our results of operations.
SALES AND MARKETING
We believe that product recognition by customers and consumers is an
important factor in the marketing of the products that we sell. Accordingly, we
promote our capabilities and the benefits of certain of our service lines
through advertising in trade publications and attending various international,
national and regional trade shows, as well as through direct mail solicitation,
broadcast faxing and telemarketing activities. Our suppliers and customers use a
variety of methods to promote their products and services directly to consumers,
including print and media advertising.
Our sales and marketing efforts are coordinated in each of our three
regional divisions by key personnel responsible for that particular division.
Division management devotes a substantial amount of their time to developing and
maintaining relationships with our customers and suppliers, in addition to
10
managing the overall operations of the divisions. Each division's sales and
operations centers are managed by either general or country managers who report
to the appropriate member of divisional management and are responsible for the
daily sales and operations of their particular location. Each country has sales
associates who specialize in or focus on sales of our products and services to a
specific customer or customer category (e.g., network operator, dealer,
reseller, retailer, subscriber, etc.). In addition, we have dedicated a sales
force to manage most of our wireless network operator relationships and to
further our sales of integrated logistics services. Sales and marketing efforts
for our Hong Kong-based Brightpoint Asia Limited operations have been outsourced
to Persequor Limited, to whom we pay a management fee, including performance
based commissions. Including support and retail outlet personnel, we had
approximately 297 employees involved in sales and marketing at December 31,
2002, including 65 in our Asia-Pacific division, 82 in our Europe division and
150 in our Americas division.
SEASONALITY
The operating results of each of our three divisions are influenced by
a number of seasonal factors in the different countries and markets in which we
operate, which may cause our revenue and operating results to fluctuate on a
quarterly basis. These fluctuations are a 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;
- general economic conditions; and
- product availability and pricing.
Consumer electronics and retail sales in many geographic markets tend
to experience increased volumes of sales at the end of the calendar year. This
and other seasonal factors contribute to the usual increase in our sales during
the fourth quarter in certain markets and our operating results may continue to
fluctuate significantly in the future. In addition, if unanticipated events
occur, including delays in securing adequate inventories of competitive products
at times of peak sales or significant decreases in sales during these periods,
it could have a material adverse effect on our operating results.
COMPETITION
We operate in a highly competitive business environment and in highly
competitive markets and believe that such competition may intensify in the
future. The markets for wireless telecommunications and data products are
characterized by intense price competition and significant price erosion over
the
11
lives of products. We compete principally on the basis of value, in terms of
price, time, reliability, service and product availability. We compete with
numerous well-established manufacturers and wholesale distributors of wireless
equipment, including: our customers and suppliers; wireless network operators,
including our customers; logistics service providers; electronics equipment
distribution companies; electronics manufacturing service providers and
export/import and trading companies. These companies may possess substantially
greater financial, marketing, personnel and other resources than we do. In
addition, manufacturers other than those that have historically produced
wireless handsets and accessories are also entering the market to produce
various wireless mobile devices, including wireless data devices. Their entry is
creating new competitors for distribution and provision of integrated logistics
services for these new products. Certain of these competitors have the financial
resources necessary to withstand substantial price competition and implement
extensive advertising and promotional campaigns, both generally and in response
to efforts by additional competitors to enter into new markets or introduce new
products.
The distribution of wireless devices and the provision of integrated
logistics service within the wireless telecommunications and data industry has,
in the past, been characterized by relatively low barriers to entry. Our ability
to continue to compete successfully will be largely dependent on our ability to
anticipate and respond to various competitive and other factors affecting the
industry, including new or changing outsourcing requirements; new information
technology requirements; new product introductions; inconsistent or inadequate
supply of product; changes in consumer preferences; demographic trends;
international, national, regional and local economic conditions; and discount
pricing strategies and promotional activities by competitors.
Competitors in our Americas division include wireless equipment
manufacturers, network operators and other dedicated wireless distributors such
as CellStar Corporation and BrightStar Corporation. We also compete with
logistics service providers and electronics manufacturing service providers in
our Americas division, such as Communications Test Design, Inc., UPS Logistics,
Aftermarket Technologies Inc. and CAT Logistics. In the Asia-Pacific market, our
primary competitors are United States-based and foreign-based exporters, traders
and distributors, including CellStar Corporation and Cellnet Group Ltd. In our
Europe division, our competitors include wireless equipment manufacturers that
sell directly to the region's wireless network operators and retailers, wireless
network operators themselves, and traders and other distributors, such as
Dangaard Telecom Holding A/S, Caudwell Communications Limited, European Telecom
plc, Avenir S.A. and CellStar Corporation, and logistics and transportation
companies such as TPG NV and Bertelsmann AG. Additionally, in certain markets
across all of our divisions we compete with other electronics equipment
distributors, such as Ingram Micro Inc. and Tech Data Corporation.
The markets for wireless communications products are characterized by
rapidly changing technology and evolving industry standards, often resulting in
product obsolescence or short product life cycles. Accordingly, our success is
dependent upon our ability to anticipate technological changes in the industry
and successfully identify these changes and adapt our offering of products and
services, to satisfy evolving industry and customer requirements. The use of
alternative wireless telecommunications technologies or the convergence of
wireless telecommunications and computer technologies may reduce
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demand for existing wireless telecommunications products. Upon widespread
commercial introduction, new wireless communications or convergent technologies
could materially change the types of products sold by us and our suppliers and
result in significant price competition. In addition, products that reach the
market outside of normal distribution channels, such as "gray market" resales
(e.g., unauthorized resales or illegal resales, which may avoid applicable
duties and taxes), may also have an adverse impact on our operations.
INFORMATION SYSTEMS
Our operations are dependent on the functionality, design, performance
and utilization of our information systems. We have implemented multiple
business applications systems throughout the world which are intended to enable
us to provide our customers and suppliers with distribution and service
capabilities. These capabilities include e-commerce solutions; electronic data
interchange; Web-based order entry, account management, reporting and supply
chain management; and various inventory tracking, management and reporting
capabilities. During 2002, 2001 and 2000, we invested approximately $6.2
million, $21.5 million and $5.5 million, respectively, to install and enhance
systems, to continue to develop and enhance our systems to provide electronic
data interchange capabilities, to further automate our customer interfaces and
enhance our overall e-business capabilities, to create solutions for our
customers and to provide a flexible service delivery system in support of our
integrated logistics services. We intend to use additional funds to further
develop and integrate information systems throughout our three divisions, in
part to utilize technology to advance our base of existing service competencies
and develop new capabilities that will attempt to meet the challenges posed by
convergence and consolidation. We intend to invest an aggregate of $6 to $8
million in capital expenditures (related primarily to information technology)
over the next year. At December 31, 2002, there were approximately 68 employees
in our information technology departments worldwide.
During 2001, we encountered difficulties during the installation of new
enterprise and warehouse management software in our operations in the United
States and Australia. These difficulties resulted in business interruption, loss
of customers and significant additional costs. There can be no assurance that
these installations, or any additional such installations, will not result in
additional business interruption or costs.
EMPLOYEES
As of December 31, 2002, we had approximately 1,168 employees; 185 in
our Asia-Pacific division, 205 in our Europe division and 778 in our Americas
division. Of these employees, approximately 6 were in executive positions, 297
were engaged in sales and marketing, 595 were in service operations and 270 were
in finance and administration (including information technology employees). Our
distribution activities and integrated logistics services are labor-intensive
and we utilize temporary laborers, particularly in our Americas division. At
December 31, 2002, we had approximately 397 temporary laborers; 14 in our
Asia-Pacific division, 4 in our Europe division and 379 in our Americas
division. Of these temporary laborers, approximately 8 were engaged in sales and
marketing, 370 were in service operations and 19 were in finance and
administration. None of our United States-
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based employees are covered by a collective bargaining agreement. We believe
that our relations with our employees are good. See Business Risk Factors --
"Our labor force experiences a high rate of personnel turnover" and "We are
subject to a number of regulatory and contractual restrictions governing our
relations with certain of our employees."
BUSINESS RISK FACTORS
There are many important factors that have affected, and in the future
could affect, our business, including the factors discussed below which should
be reviewed carefully, in conjunction with the other information contained in
this Form 10-K. Some of these factors are beyond our control and future trends
are difficult to predict. In addition, various statements, discussions and
analyses throughout this Form 10-K are not based on historical fact and contain
forward-looking statements. These statements are also subject to certain risks
and uncertainties, including those discussed below, that could cause our actual
results to differ materially from those expressed or implied in any
forward-looking statements made by us. Readers are cautioned not to place undue
reliance on any forward-looking statement contained in this Form 10-K and should
also be aware that we undertake no obligation to update any forward-looking
information contained herein to reflect events or circumstances after the date
of this Form 10-K or to reflect the occurrence of unanticipated events.
WE BUY A SIGNIFICANT AMOUNT OF OUR PRODUCTS FROM A LIMITED NUMBER OF
SUPPLIERS, WHO MAY NOT PROVIDE US WITH COMPETITIVE PRODUCTS AT REASONABLE PRICES
WHEN WE NEED THEM IN THE FUTURE -- We purchase wireless handsets and accessories
that we sell from wireless communications equipment manufacturers, distributors
and network operators. We depend on these suppliers to provide us with adequate
inventories of currently popular brand name products on a timely basis and on
favorable pricing and other terms. Our agreements with our suppliers generally
are non-exclusive, require us to satisfy minimum purchase requirements, can be
terminated on short notice and provide for certain territorial restrictions, as
is common in our industry. We generally purchase products pursuant to purchase
orders placed from time to time in the ordinary course of business. In the
future, our suppliers may not offer us competitive products on favorable terms
without delays. From time to time we have been unable to obtain sufficient
product supplies from manufacturers in many markets in which we operate. Any
future failure or delay by our suppliers in supplying us with products on
favorable terms would severely diminish our ability to obtain and deliver
products to our customers on a timely and competitive basis. If we lose any of
our principal suppliers, or if these suppliers are unable to fulfill our product
needs, or if any principal supplier imposes substantial price increases and
alternative sources of supply are not readily available, it would have a
material adverse effect on our results of operations.
THE LOSS OR REDUCTION IN ORDERS FROM PRINCIPAL CUSTOMERS OR A REDUCTION
IN PRICES WE ARE ABLE TO CHARGE THESE CUSTOMERS COULD MATERIALLY ADVERSELY
AFFECT OUR BUSINESS. - Revenues generated from our five largest customers
accounted for approximately 30% of our total revenues in 2002 and a significant
portion of revenues within certain of our operating divisions. Computech
Overseas International, a distribution services customer in our Asia-pacific
division represented 12% of our total revenue and 30% of the Asia-pacific
division's revenue in 2002. In addition, Nextel Communications, a customer in
our Americas division represents a significant portion of our integrated
logistics services in
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the United States. Many of these principal and other customers in the markets we
serve have experienced severe price competition and for this and other reasons
may seek to obtain products or services from us at lower prices than we have
been able to obtain from these customers in the past. The loss of any of our
principal customers, a reduction in the amount of product or services our
principal customers order from us or the inability to maintain current terms,
including price, with these or other customers could have an adverse effect on
our financial condition, results of operations and liquidity. Although we have
entered into contracts with certain of our largest integrated logistic service
customers, we have experienced losses of certain of these customers through
expiration or cancellation of these contracts and there can be no assurance that
any of our customers will continue to purchase products or services from us or
that their purchases will be at the same or greater levels than in prior
periods.
WE RELY ON A THIRD PARTY TO MANAGE CERTAIN SIGNIFICANT OPERATIONS IN
OUR ASIA PACIFIC DIVISION. - Sales and management services in our Brightpoint
Asia Limited operations are currently provided to us by Persequor Limited, an
entity controlled by the former Managing Director of our operations in the
Middle East and certain members of his management team and to whom we pay
certain management fees, and performance based bonuses. A failure of this entity
to provide us with satisfactory services or if these operations are negatively
impacted by other events could result in a loss of revenue generated from that
division which could adversely affect our revenue.
OUR FUTURE OPERATING RESULTS WILL DEPEND ON OUR ABILITY TO CONTINUE TO
INCREASE OUR SALES SIGNIFICANTLY -- A large percentage of our total revenues is
derived from sales of wireless handsets, a part of our business that operates on
a high-volume, low-margin basis. Our ability to generate these sales is based
upon demand for wireless telecommunications and data products and our having
adequate supply of these products. The gross margins that we realize on sales of
wireless handsets could be reduced due to increased competition or a growing
industry emphasis on cost containment. Therefore, our future profitability will
depend on our ability to maintain our margins or to increase our sales to help
offset future declines in margins. We may not be able to maintain existing
margins for products or services offered by us or increase our sales. Even if
our sales rates do increase, the gross margins that we receive from our sales
may not be sufficient to make our future operations profitable.
OUR BUSINESS DEPENDS ON THE CONTINUED TENDENCY OF WIRELESS EQUIPMENT
MANUFACTURERS AND NETWORK OPERATORS TO OUTSOURCE ASPECTS OF THEIR BUSINESS TO US
IN THE FUTURE -- Our business depends in large part on wireless equipment
manufacturers and network operators outsourcing some of their business functions
to us. We provide functions such as distribution, inventory management,
fulfillment, customized packaging, prepaid and e-commerce solutions, activation
management and other outsourced services for many of these wireless
manufacturers and network operators. Certain wireless equipment manufacturers
and network operators have elected, and others may elect, to undertake these
services internally. Additionally, our customer service levels, industry
consolidation, competition, deregulation, technological changes or other
developments could reduce the degree to which members of the wireless
telecommunications and data industry rely on outsourced integrated logistics
services such as the services we provide. Any significant change in the market
for our outsourced services could have a material adverse effect on our
business. Our outsourced services are generally provided under multi-year
15
renewable contractual arrangements. Service periods under certain of our
contractual arrangements are expiring or will expire in the near future. The
failure to obtain renewal or otherwise maintain these agreements on terms,
including price, consistent with our current terms could have a material adverse
effect on our business.
OUR BUSINESS MAY BE ADVERSELY IMPACTED BY CONSOLIDATION OF WIRELESS
NETWORK OPERATORS -- The past several years have witnessed a consolidation
within the wireless network operator community which trend is expected to
continue. This trend could result in a reduction or elimination of promotional
activities by the remaining wireless network operators as they seek to reduce
their expenditures, which could in turn, result in decreased demand for our
products or services. Moreover, consolidation of wireless network operators
reduces the number of potential contracts available to us and other providers of
integrated logistic services. We could also lose business if wireless network
operators, which are our customers, are acquired by other wireless network
operators which are not our customers.
OUR OPERATIONS MAY BE MATERIALLY AFFECTED BY FLUCTUATIONS IN REGIONAL
DEMAND PATTERNS AND ECONOMIC FACTORS -- The demand for our products and services
has fluctuated and may continue to vary substantially within the regions served
by us. We believe the roll-out of 3G systems and other new technologies, which
has been delayed and could further be delayed, has had and will continue to have
an effect on overall subscriber growth and handset replacement demand. Economic
slow-downs in regions served by us or changes in promotional programs offered by
wireless network operators may lower consumer demand and create higher levels of
inventories in our distribution channels which results in lower than anticipated
demand for the products and services that we offer and can decrease our gross
and operating margins. During 2001 and 2002, we recorded inventory valuation
adjustments to adjust inventories to their estimated net realizable value based
on the then current market conditions. These valuation adjustments were the
result of the over-supply of product in our distribution channel and the
lower-than-anticipated level of demand. We believe our operations were adversely
affected by an economic slow-down in the United States starting in the fourth
quarter of 2000 and continuing through most of 2002. We also believe that this
economic slow-down will continue to impact our operations in 2003. A prolonged
economic slow-down in the United States or any other regions in which we have
significant operations could negatively impact our results of operations and
financial position.
RAPID TECHNOLOGICAL CHANGES IN THE WIRELESS TELECOMMUNICATIONS AND DATA
INDUSTRY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS -- The technology
relating to wireless telecommunications and data equipment changes rapidly
resulting in product obsolescence or short product life cycles. We are required
to anticipate future technological changes in our industry and to continually
identify, obtain and market new products in order to satisfy evolving industry
and customer requirements. Competitors or manufacturers of wireless equipment
may market products which have perceived or actual advantages over products that
we handle or which otherwise render those products obsolete or less marketable.
We have made and continue to make significant capital investments in accordance
with evolving industry and customer requirements including maintaining levels of
inventories of currently popular products that we believe are necessary based on
current market conditions. These concentrations of capital increase our risk of
loss due to product obsolescence.
16
WE MAY HAVE DIFFICULTY COLLECTING OUR ACCOUNTS RECEIVABLE -- We
currently offer and intend to offer open account terms to certain of our
customers, which may subject us to credit risks, particularly in the event that
any receivables represent sales to a limited number of customers or are
concentrated in particular geographic markets. We also enter into certain
securitization transactions with financing organizations with respect to
portions of our accounts receivable in order to reduce the amount of working
capital required to fund such receivables. We are the collection agent on behalf
of the financing organization for many of these arrangements. We have no
significant retained interest or servicing liabilities related to accounts
receivable that we have sold, although in limited circumstances, related
primarily to our performance in the original transactions, we may be required to
repurchase the accounts. The collection of our accounts receivable and our
ability to accelerate our collection cycle through the sale of accounts
receivable is effected by several factors, including, but not limited to, our
credit granting policies, contractual provisions, our customers' and our overall
credit rating as determined by various credit rating agencies, industry and
economic conditions, the ability of the customer to provide security, collateral
or guarantees relative to credit granted by us, the customer's and our recent
operating results, financial position and cash flows and our ability to obtain
credit insurance on amounts that we are owed. Adverse changes in any of these
factors, certain of which may not be wholly in our control, could create delays
in collecting or an inability to collect our accounts receivable which could
have a material adverse effect on our financial position, cash flows and results
of operations.
WE RELY ON OUR SUPPLIERS TO PROVIDE TRADE CREDIT FACILITIES TO
ADEQUATELY FUND OUR ON-GOING OPERATIONS AND PRODUCT PURCHASES -- Our business is
dependent on our ability to obtain adequate supplies of currently popular
product on favorable pricing and other terms. Our ability to fund our product
purchases is dependent on our principal suppliers providing favorable payment
terms that allow us to maximize the efficiency of our capital usage. The payment
terms we receive from our suppliers is dependent on several factors, including,
but not limited to, our payment history with the supplier, the suppliers credit
granting policies, contractual provisions, our overall credit rating as
determined by various credit rating agencies, industry conditions, our recent
operating results, financial position and cash flows and the supplier's ability
to obtain credit insurance on amounts that we owe them. Adverse changes in any
of these factors, certain of which may not be wholly in our control, could have
a material adverse effect on our operations.
A SIGNIFICANT PERCENTAGE OF OUR REVENUES IS GENERATED OUTSIDE OF NORTH
AMERICA IN COUNTRIES THAT MAY HAVE VOLATILE CURRENCIES OR OTHER RISKS -- We
maintain operations centers and sales offices in territories and countries
outside of the United States. The fact that our business operations are
conducted in a wide variety of countries exposes us to increased credit risks,
customs duties, import quotas and other trade restrictions, potentially greater
inflationary pressures, shipping delays, the risk of failure or material
interruption of wireless systems and services, possible wireless product supply
interruption and potentially significant increases in wireless product prices.
Changes may occur in social, political, regulatory and economic conditions or in
laws and policies governing foreign trade and investment in the territories and
countries where we currently have operations. U.S. laws and regulations relating
to investment and trade in foreign countries could also change to our detriment.
Any of these factors could have a material adverse effect on our business and
operations. We purchase and sell products and services in a number of foreign
currencies, many of which have experienced fluctuations in currency exchange
rates. On occasion, we enter into forward exchange swaps, futures or options
contracts as a
17
means of hedging our currency transaction and balance sheet translation
exposures. However, our management has had limited prior experience in engaging
in these types of transactions. Even if done well, hedging may not effectively
limit our exposure to a decline in operating results due to foreign currency
translation. We cannot predict the effect that future exchange rate fluctuations
will have on our operating results. During 1999 and 2001, and pursuant to our
restructuring plans, we terminated or eliminated several of our foreign
operations because they were not performing to acceptable levels. These
terminations resulted in significant losses to us. We may in the future, decide
to terminate certain existing operations. This could result in our incurring
significant additional losses.
HOSTILITIES AND TERRORIST ACTS COULD DISRUPT OUR OPERATIONS. --
Although we have implemented policies and procedures designed to minimize the
effect of an outbreak of hostilities or terrorist attacks in markets served by
us or on our facilities, the actual effect of any such events on our operations
cannot be determined at this time but our operations could be adversely
affected.
WE MAKE SIGNIFICANT INVESTMENTS IN THE TECHNOLOGY USED IN OUR BUSINESS
AND RELY ON THIS TECHNOLOGY TO FUNCTION EFFECTIVELY WITHOUT INTERRUPTIONS -- We
have made significant investments in information systems technology and have
focused on the application of this technology to provide customized integrated
logistics services to wireless communications equipment manufacturers and
network operators. Our ability to meet our customers' technical and performance
requirements is highly dependent on the effective functioning of our information
technology systems. Further, certain of our contractual arrangements to provide
services contain performance measures and criteria that if not met could result
in early termination of the agreement and claims for damages. In connection with
the implementation of this technology we have incurred significant costs and
have experienced significant business interruptions. These business
interruptions can cause us to fall below acceptable performance levels pursuant
to our customers' requirements and could result in the loss of the related
business relationship. In 2001, difficulties with our information systems
implementation contributed to the loss of a new integrated logistics services
customer and also resulted in a claim being filed against us. We may continue to
experience additional costs and periodic business interruptions related to our
information systems as we implement new information systems in our various
operations. Our sales and marketing efforts, a large part of which are
telemarketing based, are highly dependent on computer and telephone equipment.
We anticipate that we will need to continue to invest significant amounts to
enhance our information systems in order to maintain our competitiveness and to
develop new logistics services. Our property and business interruption insurance
may not compensate us adequately, or at all, for losses that we may incur if we
lose our equipment or systems either temporarily or permanently. In addition, a
significant increase in the costs of additional technology or telephone services
that is not recoverable through an increase in the price of our services could
have a material adverse effect on our results of operations.
THERE ARE AMOUNTS OF OUR SECURITIES WHICH ARE ISSUABLE PURSUANT TO OUR
EMPLOYEE STOCK OPTION AND PURCHASE PLANS WHICH COULD RESULT IN DILUTION TO
EXISTING STOCKHOLDERS AND ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK
-- We have reserved a significant number of shares of common stock that may be
issuable pursuant to our employee stock option and purchase plans. These
18
securities, when issued and outstanding, may reduce earnings per share in
periods that they are considered dilutive under Generally Accepted Accounting
Principles and, to the extent that they are exercised and shares of common stock
are issued, dilute percentage ownership to existing stockholders which could
have an adverse effect on the market price of our common stock.
WE HAVE OUTSTANDING INDEBTEDNESS, WHICH IS SECURED BY A PORTION OF OUR
ASSETS AND WHICH COULD PREVENT US FROM BORROWING ADDITIONAL FUNDS, IF NEEDED --
If we violate our loan covenants, default on our obligations or become subject
to a change of control, our indebtedness would become immediately due and
payable, and the banks could foreclose on our assets. Our senior credit
facilities are secured by all of our assets in North America and Australia and
borrowing availability is based primarily on a percentage of eligible accounts
receivable and inventory. Consequently, any significant decrease in eligible
accounts receivable and inventory could limit our ability to borrow additional
funds to adequately finance our operations and expansion strategies. The terms
of our senior credit facilities substantially prohibit us from incurring
additional indebtedness in the United States and Australia, which could limit
our ability to expand our operations. The terms of our senior credit facilities
also include negative covenants that, among other things, limit our ability to
sell certain assets and make certain payments, including but not limited to,
dividends, repurchases of common stock and other payments outside the normal
course of business as well as prohibiting us from merging or consolidating with
another corporation or selling all or substantially all of our assets in the
United States and Australia.
THE WIRELESS TELECOMMUNICATIONS AND DATA INDUSTRY IS INTENSELY
COMPETITIVE AND WE MAY NOT BE ABLE TO CONTINUE TO COMPETE SUCCESSFULLY IN THIS
INDUSTRY -- We compete for sales of wireless telecommunications and data
equipment, and expect that we will continue to compete, with numerous
well-established wireless network operators, distributors and manufacturers,
including our own suppliers. As a provider of integrated logistics services, we
also compete with other distributors, logistics services companies and
electronic manufacturing services companies. Many of our competitors possess
greater financial and other resources than we do and may market similar products
or services directly to our customers. The wireless telecommunications and data
industry has generally had low barriers to entry. As a result, additional
competitors may choose to enter our industry in the future. The markets for
wireless handsets and accessories are characterized by intense price competition
and significant price erosion over the life of a product. Many of our
competitors have the financial resources to withstand substantial price
competition and to implement extensive advertising and promotional programs,
both generally and in response to efforts by additional competitors to enter
into new markets or introduce new products. Our ability to continue to compete
successfully will depend largely on our ability to maintain our current industry
relationships. We may not be successful in anticipating and responding to
competitive factors affecting our industry, including new or changing
outsourcing requirements, the entry of additional well-capitalized competitors,
new products which may be introduced, changes in consumer preferences,
demographic trends, international, national, regional and local economic
conditions and competitors' discount pricing and promotion strategies. As
wireless telecommunications markets mature and as we seek to enter into new
markets and offer new products in the future, the competition that we face may
change and grow more intense.
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WE MAY NOT BE ABLE TO MANAGE AND SUSTAIN FUTURE GROWTH AT OUR
HISTORICAL OR CURRENT RATES -- In prior years we have experienced domestic and
international growth. We will need to manage our expanding operations
effectively, maintain or accelerate our growth as planned and integrate any new
businesses which we may acquire into our operations successfully in order to
continue our desired growth. If we are unable to do so, particularly in
instances in which we have made significant capital investments, it could have a
material adverse effect on our operations. In addition, our growth prospects
could be adversely affected by a decline in the wireless telecommunications and
data industry generally or in one of our regional divisions, either of which
could result in reduction or deferral of expenditures by prospective customers.
OUR BUSINESS STRATEGY INCLUDES ENTERING INTO RELATIONSHIPS AND
FINANCINGS, WHICH MAY PROVIDE US WITH MINIMAL RETURNS OR LOSSES ON OUR
INVESTMENTS -- We have entered into several relationships and joint ventures
with wireless equipment manufacturers, network operators and other participants
in our industry. We intend to continue to enter into similar relationships as
opportunities arise. We may enter into distribution or integrated logistics
services agreements with these parties and may provide them with equity or debt
financing. Our ability to achieve future profitability through these
relationships will depend in part upon the economic viability, success and
motivation of the entities we select as partners and the amount of time and
resources that these partners devote to our alliances. We may receive minimal or
no business from these relationships and joint ventures, and any business we
receive may not be significant or at the level we anticipated. The returns we
receive from these relationships, if any, may not offset possible losses or our
investments or the full amount of financings that we make upon entering into
these relationships. We may not achieve acceptable returns on our investments
with these parties within an acceptable period or at all.
WE HAVE INCURRED SIGNIFICANT LOSSES - For the years ended December 31,
2001 and 2002 we incurred net losses of $53.3 million and $42.4 million,
respectively. The net losses for 2001 and 2002 include approximately $56.4
million and $15.5 million, respectively, of losses related to discontinued
operations. Also included in the net loss in 2002 is the cumulative effect of a
change in accounting principle,, net of tax, of $40.7 million. Several business
factors have contributed to our losses in these periods including costs related
to our restructuring plans, adjustments to the carrying value of certain
inventories, an inadequate supply of products for sale through our distribution
services, inadequate demand for our products and services, costs related to the
implementation of information systems and an impairment loss on a long-term
investment. We may incur additional future losses.
OUR OPERATING RESULTS FREQUENTLY VARY SIGNIFICANTLY AND RESPOND TO
SEASONAL FLUCTUATIONS IN PURCHASING PATTERNS -- The operating results of each of
our three divisions are influenced by a number of seasonal factors in the
different countries and markets in which we operate, which may cause our revenue
and operating results to fluctuate on a quarterly basis. These fluctuations are
a result of several factors, including, but not limited to:
- promotions and subsidies by wireless network operators.
20
- the timing of local holidays and other events affecting
consumer demand;
- the timing of introduction of new products by our suppliers
and competitors;
- purchasing patterns of customers in different markets;
- general economic conditions; and
- product availability and pricing.
Consumer electronics and retail sales have historically experienced
increased volumes of sales at the end of the calendar year. This and other
seasonal factors contribute to the usual increase in our sales during the fourth
quarter of our fiscal year in certain markets. Our operating results may
continue to fluctuate significantly in the future. In addition, if unanticipated
events occur, including delays in securing adequate inventories of competitive
products at times of peak sales or significant decreases in sales during these
periods, it could have a material adverse effect on our operating results.
OUR CONTINUED GROWTH DEPENDS ON RETAINING OUR CURRENT KEY EMPLOYEES AND
ATTRACTING ADDITIONAL QUALIFIED PERSONNEL -- Our success depends in large part
on the abilities and continued service of our executive officers and other key
employees. Although we have entered into employment agreements with several of
our officers and employees, we may not be able to retain their services. We also
have non-competition agreements with our executive officers and some of our
existing key personnel. However, courts are sometimes reluctant to enforce
non-competition agreements. The loss of executive officers or other key
personnel could have a material adverse effect on us. In addition, in order to
support our continued growth, we will be required to effectively recruit,
develop and retain additional qualified management. If we are unable to attract
and retain additional necessary personnel, it could delay or hinder our plans
for growth.
WE ARE SUBJECT TO A NUMBER OF REGULATORY AND CONTRACTUAL RESTRICTIONS
GOVERNING OUR RELATIONS WITH CERTAIN OF OUR EMPLOYEES - We are subject to a
number of regulatory and contractual restrictions governing our relations with
certain of our employees, including national collective labor agreements for
certain of our employees who are employed outside of the United States and
individual employer labor agreements. These arrangements address a number of
specific issues affecting our working conditions including hiring, work time,
wages and benefits, and termination of employment. We could be required to make
significant payments in order to comply with these requirements. The cost of
complying with these requirements may materially adversely affect our business
and financial condition.
WE RELY TO A GREAT EXTENT ON TRADE SECRET AND COPYRIGHT LAWS AND
AGREEMENTS WITH OUR KEY EMPLOYEES AND OTHER THIRD PARTIES TO PROTECT OUR
PROPRIETARY RIGHTS -- Our business success is substantially dependent upon our
proprietary business methods and software applications relating to our
information systems. We currently hold one patent relating to certain of our
business methods. Concerning other business methods and software we rely on
trade secret and copyright laws to protect
21
our proprietary knowledge. We also regularly enter into non-disclosure
agreements with our key employees and limit access to and distribution of our
trade secrets and other proprietary information. These measures may not prove
adequate to prevent misappropriation of our technology. Our competitors could
also independently develop technologies that are substantially equivalent or
superior to our technology, thereby eliminating one of our competitive
advantages. We also have offices and conduct our operations in a wide variety of
countries outside the United States. The laws of some other countries do not
protect our proprietary rights to the same extent as do laws in the United
States. In addition, although we believe that our business methods and
proprietary software have been developed independently and do not infringe upon
the rights of others, third parties might assert infringement claims against us
in the future or our business methods and software may be found to infringe upon
the proprietary rights of others.
OUR LABOR FORCE EXPERIENCES A HIGH RATE OF PERSONNEL TURNOVER -- Our
distribution activities and integrated logistics services are labor-intensive,
and we experience high personnel turnover and can be adversely affected by
shortages in the available labor force in geographical areas where we operate. A
significant portion of our labor force is contracted through temporary agencies,
and a significant portion of our costs consist of wages to hourly workers.
Growth in our business, together with seasonal increases in net revenue,
requires us to recruit and train personnel at an accelerated rate from time to
time. We may not be able to continue to hire, train and retain a significant
labor force of qualified individuals when needed, or at all. An increase in
hourly costs, employee benefit costs, employment taxes or commission rates could
have a material adverse effect on our operations. In addition, if the turnover
rate among our labor force increased further, we could be required to increase
our recruiting and training efforts and costs, and our operating efficiencies
and productivity could decrease.
WE HAVE SIGNIFICANT FUTURE PAYMENT OBLIGATIONS PURSUANT TO CERTAIN
LEASES AND OTHER LONG-TERM CONTRACTS -- We lease our office and
warehouse/distribution facilities as well as certain furniture and equipment
under real property and personal equipment leases. Many of these leases are for
terms that exceed one year and require us to pay significant monetary charges
for early termination or breach by us of the lease terms. We cannot be certain
of our ability to adequately fund these lease commitments from our future
operations and our decision to modify, change or abandon any of our existing
facilities could have a material adverse effect on our operations.
WE MAY BECOME SUBJECT TO SUITS ALLEGING MEDICAL RISKS ASSOCIATED WITH
OUR WIRELESS HANDSETS -- Lawsuits or claims have been filed or made against
manufacturers of wireless handsets over the past years alleging possible medical
risks, including brain cancer, associated with the electromagnetic fields
emitted by wireless communications handsets. There has been only limited
relevant research in this area, and this research has not been conclusive as to
what effects, if any, exposure to electromagnetic fields emitted by wireless
handsets has on human cells. Substantially all of our revenues are derived,
either directly or indirectly, from sales of wireless handsets. We may become
subject to lawsuits filed by plaintiffs alleging various health risks from our
products. If any future studies find possible health risks associated with the
use of wireless handsets or if any damages claim against us is successful, it
could have a material adverse effect on our business. Even an unsubstantiated
perception
22
that health risks exist could adversely affect our ability or the ability of our
customers to market wireless handsets.
WE COULD BE ADVERSELY AFFECTED BY AN ADVERSE OUTCOME IN CERTAIN
EXISTING LAWSUITS IN WHICH WE ARE DEFENDANTS -- We are currently defendants in
certain existing lawsuits including purported class action lawsuits that allege
securities law violations by us and certain of our officers (see Item 3 - Legal
Proceedings). Although we intend to vigorously defend these actions, the outcome
of litigation is uncertain, and we could be adversely affected by an unfavorable
outcome in any of these actions.
WE MAY BE UNABLE TO OBTAIN AND MAINTAIN ADEQUATE BUSINESS INSURANCE AT
A REASONABLE COST. Although we currently maintain general commercial and
property liability insurance in amounts we believe are appropriate it has become
increasingly difficult in recent years to obtain adequate insurance coverage at
a reasonable cost. Our operations could be adversely affected by a loss that is
not covered by insurance due to our inability in the future to obtain adequate
insurance. Moreover, increasing insurance premiums would adversely affect our
future operating results.
WE HAVE INSTITUTED MEASURES TO PROTECT US AGAINST A TAKEOVER -- Certain
provisions of our by-laws, stockholders rights and option plans, certain
employment agreements and the Delaware General Corporation Law are designed to
protect us in the event of a takeover attempt. These provisions could prohibit
or delay mergers or attempted takeovers or changes in control of us and,
accordingly, may discourage attempts to acquire us.
THE MARKET PRICE OF OUR COMMON STOCK MAY CONTINUE TO BE VOLATILE -- The
market price of our common stock has fluctuated significantly from time to time
since our initial public offering in April 1994. The trading price of our common
stock could experience significant fluctuations in the future in response to
certain factors, which could include actual or anticipated variations in our
quarterly operating results or financial position; restatements of previously
issued financial statements; outcome or commencement of litigation; the
introduction of new services, products or technologies by us, our suppliers or
our competitors; changes in other conditions or trends in the wireless
telecommunications and data industry; changes in governmental regulation and the
enforcement of such regulation; changes in the assessment of our credit rating
as determined by various credit rating agencies; or changes in securities
analysts' estimates of our future performance or that of our competitors or our
industry in general. General market price declines or market volatility in the
prices of stocks for companies in the wireless telecommunications and data
industry or in the distribution or integrated logistics services sectors of the
wireless telecommunications and data industry could also affect the market price
of our common stock.
SEGMENT AND GEOGRAPHIC FINANCIAL INFORMATION
Financial information concerning our segments and other geographic
financial information is included in Management's Discussion and Analysis of
Financial Condition and Results of Operations under the heading "Operating
Segments and Geographic Information" on pages A-63 and A-64 of this Annual
Report on Form 10-K.
23
ITEM 2. PROPERTIES.
We provide our distribution and integrated logistics services from our
sales and operations centers located in various countries including Australia,
Colombia, France, Germany, Hong Kong, Ireland, New Zealand, Norway, the
Philippines, Sweden, and the United States. All of these facilities are occupied
pursuant to operating leases. The table below summarizes information about our
sales and operations centers by operating division.
NUMBER OF AGGREGATE APPROXIMATE
LOCATIONS (1) SQUARE FOOTAGE MONTHLY RENT
The Americas........................................................ 4 848,300 $ 529,000
Asia-Pacific........................................................ 4 63,934 37,000
Europe.............................................................. 5 180,080 124,000
-- --------- ------------
13 1,092,314 $ 690,000
== ========= ============
(1) Refers to geographic areas in which we maintain facilities and
considers multiple buildings located in the same area as a single
geographic location.
On February 19, 2003, we announced that we will consolidate our
Richmond, California call center operation into our Plainfield, Indiana,
facility to reduce costs and increase productivity and profitability in our
Americas division. The operating lease for the 58,000 square foot facility in
Richmond, California expires in March of 2009 with the average base rent of
approximately $90,000 per month throughout the remaining lease term. The
property lease related to the Richmond, California call center is included in
the Americas amounts above.
We believe that our existing facilities are adequate for our current
requirements and that suitable additional space will be available as needed to
accommodate future expansion of our operations.
24
ITEM 3. LEGAL PROCEEDINGS
We and several of our executive officers and directors were named as
defendants in two complaints filed in November and December 2001, in the United
States District Court for the Southern District of Indiana, entitled Weiss v.
Brightpoint, Inc., et. al., Cause No. IP01-1796-C-T/K; and Mueller v.
Brightpoint, Inc., et. al., Cause No. IP01-1922-C-M/S. In February 2002, the
Court consolidated the Weiss and Mueller actions and appointed John Kilcoyne as
lead plaintiff in this action which is now known as In re Brightpoint, Inc.
Securities Litigation. A consolidated amended complaint was filed in April 2002.
The action is a purported class action asserted on behalf of all
purchasers of our publicly traded securities between January 29, 1999 and
January 31, 2002 alleging violations of Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder by us and certain of our
officers and directors and violations of Section 20(a) of the Exchange Act by
the individual defendants.
The amended complaint alleges, among other things, that we
intentionally concealed and falsified our financial condition and issued
financial statements which violated generally accepted accounting principles, in
order to prevent being declared in default under certain loan covenants under
our lines of credit. The amended complaint also alleges that due to the false
financial statements our stock was traded at artificially inflated prices.
Plaintiffs seek unspecified compensatory damages, including interest, against
all of the defendants and recovery of their reasonable litigation costs and
expenses. We have moved to dismiss the amended complaint and have been in
negotiations with plaintiffs' counsel in an effort to reach a settlement of this
dispute, but there can be no assurance that a settlement of this matter will be
reached. If a settlement is not reached, then we will defend this matter
vigorously.
In February 2002, Nora Lee, filed a complaint in the Circuit Court,
Marion County, Indiana, Derivatively on Behalf of Nominal Defendant Brightpoint,
Inc., vs. Robert J. Laikin, et. al. and Brightpoint, Inc. as a Nominal
Defendant, Cause No. 49C01-0202-CT-000399.
The plaintiff alleges, among other things, that certain of the
individual defendants, including certain of our current officers and directors,
sold our common stock while in possession of material non-public information
regarding us, that the individual defendants violated their fiduciary duties of
loyalty, good faith and due care by, among other things, causing us to
disseminate misleading and inaccurate financial information, failing to
implement and maintain internal adequate accounting control systems, wasting
corporate assets and exposing us to losses. The plaintiff is seeking to recover
unspecified damages from all defendants, the imposition of a constructive trust
for the amounts of profits received by the individual defendants who sold our
common stock and recovery of reasonable litigation costs and expenses.
The parties have filed a stipulation agreeing to stay all proceedings
in this derivative action pending a decision on the motions to dismiss the
amended complaint in the In Re: Brightpoint, Inc. Securities Litigation action.
We have been in negotiations with plaintiff's counsel in an effort to reach a
settlement of this dispute, but there can be no assurance that a settlement of
this matter will be reached.
25
If a settlement is not reached, then our Board of Directors will consider what
further action to take in this matter.
A complaint was filed on November 23, 2001 against us and 87 other
defendants in the United States District Court for the District of Arizona,
entitled Lemelson Medical, Education and Research Foundation LP v. Federal
Express Corporation, et.al., Cause No. CIV01-2287-PHX-PGR. The plaintiff claims
that we and other defendants have infringed 7 patents alleged to cover bar code
technology. The case seeks unspecified damages, treble damages and injunctive
relief. The Court has ordered the case stayed pending the decision in a related
case in which a number of bar code equipment manufacturers have sought a
declaration that the patents asserted are invalid and unenforceable. That trial
concluded in January 2003, but the Court has not yet issued its decision, and
the decision may not be issued for several months. We dispute these claims and
intend to defend this matter vigorously.
A complaint was filed against us on November 25, 2002 in the United
States District Court for the Southern District of Indiana, entitled Chanin
Capital Partners LLC v. Brightpoint, Inc., Cause No. CV-1834-JDT. The plaintiff
claims we breached a services contract with defendant under which the plaintiff
alleges it was entitled to receive both a monthly advisory fee of $125,000 and
an additional fee, due under certain specified circumstances, of $1.5 million
less the amount of any previously-paid monthly advisory fees. The plaintiff
seeks compensatory damages in an amount including, but not limited to $1.5
million, less advisory fees paid and payable, plus unreimbursed reasonable
expenses, applicable pre-judgment and post-judgment statutory interest, and
reasonable costs of the action. In addition, the plaintiff claims that it is
entitled to recover $125,000 for a monthly advisory fee on a theory of account
stated. We dispute these claims and intend to defend this matter vigorously.
We have responded to requests for information and subpoenas from the
Securities and Exchange Commission (SEC) in connection with an investigation of
certain matters including our accounting treatment of a certain contract entered
into with an insurance company. In addition, certain of our officers, directors
and employees have provided testimony to the SEC.
We are from time to time, also involved in certain legal proceedings in
the ordinary course of conducting our business. While the ultimate liability
pursuant to these actions cannot currently be determined, we believe these legal
proceedings will not have a material adverse effect on our financial position.
Our Certificate of Incorporation and By-laws provide for us to
indemnify our officers and directors to the extent permitted by law. In
connection therewith, we have entered into indemnification agreements with our
executive officers and directors. In accordance with the terms of these
agreements we have reimbursed certain of our former and current executive
officers and intend to reimburse our officers and directors for their personal
legal expenses arising from certain pending litigation and regulatory matters.
26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required by this Item is set forth in "Equity
Compensation Plans" on page 39 and in "Other Information" on page A - 67 of this
Annual Report on Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this Item is set forth in "Selected
Financial Data" on page A - 68 of this Annual Report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this Item is set forth on pages A-40 to A
-66 of this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this Item is set forth in the subsection
"Financial Market Risk Management" of Management's Discussion and Analysis on
page A-66 of this Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item is set forth in our Consolidated
Financial Statements on pages A-2 to A-39 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Our By-laws provide that our Board of Directors is divided into three
classes (Class I, Class II and Class III). At each Annual Meeting of
Stockholders, directors constituting one class are elected for a three-year
term. Each of the directors will be elected to serve until a successor is
elected and qualified or until the director's earlier resignation or removal.
The following table sets forth, for each director, the director's name,
age, principal occupation and length of continuous service as a Brightpoint
director:
CLASS III DIRECTORS
(Term Expires in 2003)
PRINCIPAL OCCUPATION
NAME OF DIRECTOR AGE OR EMPLOYMENT DIRECTOR SINCE
---------------- --- ------------- --------------
Catherine M. Daily 40 Professor, Kelley School of 2002
Business at Indiana University
Eliza Hermann 41 Vice President Human Resources 2003
- Gas Power & Renewables of
BP plc
Marisa E. Pratt 38 Vice President - Finance of Eli 2003
Lilly Canada
Jerre L. Stead 60 Retired Chairman and Chief 2000
Executive Officer of Ingram
Micro Inc.
CLASS I DIRECTORS
(Term Expires in 2004)
PRINCIPAL OCCUPATION
NAME OF DIRECTOR AGE OR EMPLOYMENT DIRECTOR SINCE
---------------- --- ------------- --------------
J. Mark Howell............... 38 President of Brightpoint 1994
Stephen H. Simon............. 37 President and Chief Executive 1994
Officer, Melvin Simon &
Associates, Inc.
Todd H. Stuart............... 37 Vice President and Director of 1997
Stuart's Moving and Storage, Inc..
29
CLASS II DIRECTORS
(Term Expires in 2005)
PRINCIPAL OCCUPATION
NAME OF DIRECTOR AGE OR EMPLOYMENT DIRECTOR SINCE
---------------- --- ------------- --------------
Robert J. Laikin............. 39 Chairman of the Board and Chief 1989
Executive Officer of Brightpoint
Robert F. Wagner............. 68 Partner of Law Firm of Lewis & 1994
Wagner
Richard W. Roedel 53 Retired Chairman and Chief 2002
Executive Officer of BDO Seidman,
LLP
Set forth below is a description of the backgrounds of each of our
directors and executive officers:
Robert J. Laikin, a founder of Brightpoint, has been a director since
our inception in August 1989. Mr. Laikin has been our Chairman of the Board and
Chief Executive Officer since January 1994. Mr. Laikin was our President from
June 1992 until September 1996 and our Vice President and Treasurer from August
1989 until May 1992. From July 1986 to December 1987, Mr. Laikin was Vice
President and, from January 1988 to February 1993, President of Century Cellular
Network, Inc., a company engaged in the retail sale of cellular telephones and
accessories.
J. Mark Howell has been a director since October 1994. Mr. Howell has
been our President since September 1996 and our Chief Operating Officer from
August 1995 to April 16, 1998 and from July 16, 1998 to March 2003. He was our
Executive Vice President, Finance, Chief Financial Officer, Treasurer and
Secretary from July 1994 until September 1996. From July 1992 until joining
Brightpoint, Mr. Howell was Corporate Controller for ADESA Corporation, a
company which owns and operates automobile auctions in the United States and
Canada. Prior thereto, Mr. Howell served as an accountant with Ernst & Young
LLP.
Catherine M. Daily, has been a director since October 2002 and is
currently Chairperson of our Corporate Governance and Nominating Committee.
Since 1997 she has been a Professor at the Kelley School of Business at Indiana
University where she is currently the David H. Jacobs Chair of Strategic
Management. Prior thereto she served on the faculties of Purdue University and
The Ohio State University.
Eliza Hermann, has been a director since January 2003 and is currently
a member of our Compensation and Human Resources Committee. Since 1985 she has
been employed by BP plc where she has served as its the Vice President Human
Resources - Gas Power and Renewables and previously served as its Manager,
Strategy and Business Transformation - Global Aromatics.
30
Marisa E. Pratt, has been a director since January 2003 and is
currently a member of our Audit Committee. She has been employed by Eli Lilly
Canada in various finance and treasury related positions since 1991 and has been
its Vice President - Finance since October of 2002 and served as a member of its
Senior Management team.
Richard W. Roedel, has been a director and Chairman of our Audit
Committee since October 2002 and currently is a member of our Corporate
Governance and Nominating Committee. From 1999 to 2000, Mr. Roedel was Chairman
and Chief Executive Officer of the accounting firm BDO Seidman, LLP, the United
States member firm of BDO International. Before becoming Chairman and Chief
Executive Officer, he was the Managing Partner of BDO Seidman's New York
Metropolitan Area from 1994 to 1999, the Managing Partner of its Chicago office
from 1990 to 1994 and an Audit Partner from 1985 to 1990. Mr. Roedel is a
co-founder and principal of Pinnacle Ventures LLC, which provides funding and
management expertise to privately held companies. Mr. Roedel received a B.S.
degree in accounting and economics from The Ohio State University and is a
Certified Public Accountant. Mr. Roedel is a director of Take-Two Interactive
Software, Inc. a manufacturer and marketer of video games, and Dade Behring
Holdings, Inc., a medical diagnostics equipment and related product
manufacturer.
Stephen H. Simon has been a director since April 1994 and is currently
a member of our Compensation and Human Resources Committee. Mr. Simon has been
President and Chief Executive Officer of Melvin Simon & Associates, Inc., a
privately-held shopping center development company, since February 1997. From
December 1993 until February 1997, Mr. Simon was Director of Development for an
affiliate of Simon Property Group, a publicly-held real estate investment trust.
From November 1991 to December 1993, Mr. Simon was Development Manager of Melvin
Simon & Associates, Inc.
Jerre L. Stead has been a director since June 2000 and currently serves
as our Lead Independent Director and Chairperson of our Compensation and Human
Resources Committee and currently is a member of the Corporate Governance and
Nominating Committee. From August 1996 to June 2000 he was Chairman of the Board
and from August 1996 to March 2000 he was Chief Executive Officer of Ingram
Micro Inc., a worldwide distributor of information technology products and
services. He served as Chairman, President and Chief Executive Officer of Legent
Corporation, a software development company from January 1995 until its sale in
September 1995. Mr. Stead was Executive Vice President of American Telephone and
Telegraph Company, a telecommunications company and Chairman and Chief Executive
Officer of AT&T Global Information Solutions, a computer and communications
company, formerly NCR Corp. from 1993 to 1994. He was President of AT&T Global
Business Communications Systems, a communications company, from 1991 to 1993.
Mr. Stead was Chairman, President and Chief Executive Officer from 1989 to 1991
and President from 1987 to 1989 of Square D Company, an industrial control and
electrical distribution products company. In addition, he held numerous
positions during a 21-year career at Honeywell. Mr. Stead is a Director of
Thomas & Betts Corp., Conexant Systems, Inc., Armstrong Holdings, Inc. and
Mobility Electronics, Inc.
Todd H. Stuart has been a director since November 1997 and is currently
a member of our Audit Committee. Mr. Stuart has been Vice President, since May
1993, and Director of Transportation, since
31
May 1985, of Stuart's Moving and Storage, Inc., a provider of domestic and
international logistics and transportation services.
Robert F. Wagner has been a director since April 1994 and currently is
a member of the Corporate Governance and Nominating Committee. Mr. Wagner has
been engaged in the practice of law with the firm of Lewis & Wagner since 1973.
Steven E. Fivel, age 42, has been our Executive Vice President, General
Counsel and Secretary since January 1997. From December 1993 until January 1997,
Mr. Fivel was an attorney with an affiliate of Simon Property Group, a
publicly-held real estate investment trust. From February 1988 to December 1993,
Mr. Fivel was an attorney with Melvin Simon & Associates, Inc., a privately-held
shopping center development company.
Frank Terence, age 44, has been our Executive Vice President, Chief
Financial Officer and Treasurer since April 2002. From August 2001 until April
2002 he was Chief Financial Officer of Velocitel, Inc., a wireless
infrastructure company based in Irvine, California. From January 2000 through
January 2001 he was Chief Financial Officer of eTranslate, Inc., a San
Francisco-based web services company. From October 1994 to December 1999 he was
employed in various financial positions by Ingram Micro, Inc., a technology
distribution company, which included Vice President and Chief Financial Officer
for the Frameworks Division and Vice President and Chief Financial Officer for
the Latin America Division. From 1990 to 1994, he held regional controllerships
and financial management roles for Borland International, a software development
company. From 1983 to 1990, he held various financial roles with NCR, Rockwell
International and PepsiCo. Mr. Terence is a Certified Management Accountant.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on a review of Forms 3, 4 and 5 and amendments thereto
furnished to us with respect to our most recent fiscal year, we believe that all
required reports were filed on a timely basis except that Form 4's reporting
grants of options in September 2002 to Mr. Terence and to our Vice President and
Controller, Mr. Gregory Wiles, were filed 5 days late.
32
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table discloses for the periods presented the
compensation for the person who served as our Chief Executive Officer and for
each of our other executive officers (not including the Chief Executive Officer)
whose total individual compensation exceeded $100,000 for our fiscal year ended
December 31, 2002 (the "Named Executives").
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
-------------------------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) OPTIONS(2)
-------------------------------------- ---- ---------- ---------- ---------------- ------------
Robert J. Laikin ..................... 2002 $ 450,000 $ 225,000 $ 5,500 132,857
Chairman of the Board and Chief 2001 450,000 - 88,550 19,999
Executive Officer 2000 350,000 288,750 2,550 48,571
J. Mark Howell ....................... 2002 $ 325,000 $ 162,500 $ 5,500 79,047
President and Chief Operating 2001 325,000 - 76,050 15,714
Officer 2000 250,000 206,250 2,550 37,143(3)
Frank Terence (6) .................... 2002 $ 181,278 $ 97,944 $ 182,578(7) 107,143
Executive Vice President, Chief
Financial Officer and Treasurer
Steven E. Fivel ...................... 2002 $ 275,000 $ 137,500 $ 5,500 61,428
Executive Vice President, General 2001 225,000 - 36,300 10,714
Counsel and Secretary 2000 175,000 108,400 2,550 25,000(3)
Phillip A. Bounsall (5) .............. 2002 $ 96,667 - $1,003,673(4) 14,047
Former Executive Vice President, Chief 2001 290,000 - 44,800 13,571
Financial Officer and Treasurer ...... 2000 225,000 185,625 2,550 32,857(3)
(1) Except as otherwise noted below, represents our matching contributions
to the respective employees 401(k) accounts and includes immaterial
refunds of less than $5,000 per year from the 401(k) Plan paid in 2003,
2002 and 2001, relating to ERISA compliance testing for the years 2002,
2001 and 2000. Also includes payments received by the executive
officers named above
33
pursuant to the offer to exchange certain stock options that we made to
our employees and directors during 2001.
(2) All option amounts and exercise prices have been adjusted to give
retroactive effect to a one for seven reverse split of our Common Stock
effected in June 2002.
(3) Does not include certain options originally granted in fiscal 1996 and
1997 to Messrs. Howell (107,143); Bounsall (17,857) and Fivel (8,929),
the expiration dates of which were extended during fiscal 2000 for
three years from their original expiration dates.
(4) Includes amount paid to Mr. Bounsall during 2002 relating to the
termination of his employment agreement.
(5) Mr. Bounsall resigned in April 2002.
(6) Mr. Terence joined the Company in April 2002.
(7) Represents amounts paid for Mr. Terence's moving and relocation costs
during 2002.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information with respect to individual
stock options granted during fiscal 2002 to each of the Named Executives:
% OF TOTAL POTENTIAL REALIZABLE
OPTIONS VALUE AT ASSUMED
SHARES GRANTED TO ANNUAL RATES OF STOCK
UNDERLYING EMPLOYEES EXERCISE PRICE APPRECIATION FOR
OPTIONS IN FISCAL PRICE EXPIRATION OPTION TERM ($) (2)
------------------------
NAME GRANTED(1) YEAR ($/SH) DATE 5% 10%
-------------------------- ---------- ---------- -------- ---------- ------- -------
Robert J. Laikin.......... 32,857 4.1 6.37 4/18/2007 57,825 127,779
100,000 12.6 8.69 12/11/2007 240,089 530,533
J. Mark Howell............ 29,047 3.7 6.37 4/18/2007 51,120 112,962
50,000 6.3 8.69 12/11/2007 120,044 265,267
Frank Terence............. 42,857 5.4 5.60 4/16/2007 66,307 146,522
14,286 1.8 1.49 9/25/2007 5,881 12,995
50,000 8.7 8.69 12/11/2007 120,044 265,267
34
Steven E. Fivel........... 11,428 1.4 6.37 4/18/2007 20,112 44,443
50,000 6.3 8.69 12/11/2007 120,044 265,267
Phillip A. Bounsall....... 14,047 1.8 6.37 4/18/2007 24,722 54,628
(1) All options were granted under our 1994 Stock Option Plan. All options
are exercisable as to one-third of the shares covered thereby on the
first, second and third anniversaries of the date of grant.
(2) The potential realizable value columns of the table illustrate values
that might be realized upon exercise of the options immediately prior
to their expiration, assuming our Common Stock appreciates at the
compounded rates specified over the term of the options. These numbers
do not take into account provisions of options providing for
termination of the option following termination of employment or
nontransferability of the options and do not make any provision for
taxes associated with exercise. Because actual gains will depend upon,
among other things, future performance of the Common Stock, there can
be no assurance that the amounts reflected in this table will be
achieved.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning each exercise of
stock options by each of the Named Executives during the fiscal year ended
December 31, 2002 and the value of unexercised stock options held by the Named
Executives as of December 31, 2002:
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED OPTIONS AT DECEMBER 31, 2002 DECEMBER 31, 2002 (1)
---------------------------- -----------------------------
ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------- -------- -------- ----------- ------------- ----------- -------------
Robert J. Laikin......... -- $ -- 75,713 155,712 $ -- $ 50,271
J. Mark Howell........... -- -- 158,808 96,664 -- 44,442
Frank Terence............ -- -- - 107,143 -- 190,144
Steven E. Fivel.......... -- -- 39,165 73,331 -- 17,485
Phillip A. Bounsall...... -- -- 91,900 - 21,492 --
(1) Year-end values for unexercised in-the-money options represent the
positive spread between the exercise price of such options and the
year-end market value of the Common Stock.
DIRECTOR COMPENSATION
For the fiscal year ended December 31, 2002, non-employee directors
received annual cash compensation of $ 30,000 for services rendered in their
capacity as Board members. In addition,
35
members of the Executive, Audit and Compensation Committees received annual
payments of $ 6,400, $ 3,600, and $ 3,600, respectively, as members of such
committees. Under our Corporate Governance Principles, subject to stockholder
approval, 30% of Independent Director compensation will be in the form of
restricted stock grants. We have adopted a Non-Employee Director Stock Option
Plan (the "Director Plan") pursuant to which 133,928 shares of Common Stock are
reserved for issuance to non-employee directors. The Director Plan provides that
eligible directors automatically receive a grant of options to purchase 1,428
shares of Common Stock upon first becoming a director and, thereafter, an annual
grant, in January of each year, of options to purchase 571 shares. Effective as
of December 31, 2002 the Board determined to suspend all future grants of
options under the Director Plan. All of the options that were granted under the
Director Plan were granted at fair market value on the date of grant and are
exercisable as to all of the shares covered thereby commencing one year from the
date of grant. In accordance with our Corporate Governance Principles we intend
to implement, subject to stockholder approval, for our Independent Directors a
plan pursuant to which they will be eligible to receive up to 30% of their
compensation in the form of restricted stock. During the year ended December 31,
2002, we granted options to purchase 571 shares of Common Stock, at an exercise
price of $3.92 per share, to each of Messrs. Simon, Stead, Stuart and Wagner.
During the year ended December 31, 2002, we granted options to purchase 10,000
shares of Common Stock, at an exercise price of $2.14 per share, to Mr. Roedel
and Ms. Daily. In connection with our "Offer to Exchange" which expired October
15, 2001 we granted, on April 18, 2002, options to purchase 1,523 shares of
Common Stock, at $6.37 per share, to each of Messrs. Simon, Stuart and Wagner
and options to purchase 476 shares of Common Stock, at $6.37 per share, to Mr.
Stead.
EMPLOYMENT AND SEVERANCE AGREEMENTS
We have entered into five-year "evergreen" employment agreements with
each of Messrs. Laikin and Howell which are automatically renewable for
successive one-year periods and provide for an annual base compensation of
$600,000 and $400,000 respectively, and such bonuses as the Board of Directors
may from time to time determine. If we provide the employee with notice that we
desire to terminate the agreement or terminate the agreement without cause,
there is a final five-year term commencing on the date of such notice. The
employment agreements provide for employment on a full-time basis and contain a
provision that the employee will not compete or engage in a business competitive
with our business during the term of the employment agreement and for a period
of two years thereafter. The employment agreements also provide that if the
employee's employment is terminated by the employee, without Good Reason, as
defined, within 12 months after a "change of control," or if prior to and not as
a result of a change of control, the employee's employment is terminated either
by the employee for Good Reason or by us other than for disability or Cause, as
defined, the employee will be entitled to receive severance pay equal to the
highest of (a) $2,250,000 for Mr. Laikin and $1,625,000 for Mr. Howell or (b)
five times the total compensation (including salary, bonus and the value of all
perquisites) received from us during the twelve months prior to the date of
termination. If after or as a result of a change of control, the employee's
employment is terminated either by the employee for Good Reason or by us other
than for disability or Cause, the employee will be entitled to receive severance
pay equal to ten times the total compensation (including salary, bonus, the
value of all perquisites and the value of all stock options granted to the
employee) received from us
36
during the twelve months prior to the date of termination. In addition, (a) upon
the occurrence of a change of control, (b) if in breach of the agreement, we
terminate the employee's employment other than for disability or Cause, or (c)
if the employee terminates his employment for Good Reason at any time, the
vesting of all options granted to the employee will be accelerated so that the
options become immediately exercisable. For purposes of such agreements, a
"change of control" shall be deemed to occur, unless previously consented to in
writing by the respective employee, upon (i) individuals who constituted our
then current Board of Directors ceasing to constitute a majority of the Board of
Directors, (ii) subject to certain specified exceptions, the acquisition of
beneficial ownership of 15% or more of our voting securities by any person or
entity not affiliated with the respective employee or us, (iii) the commencement
of a proxy contest against management for the election of a majority of our
Board of Directors if the group conducting the proxy contest owns, has or gains
the power to vote at least 15% of our voting securities, (iv) the consummation
under certain conditions by us of a reorganization, merger or consolidation or
sale of all or substantially all of our assets to any person or entity not
affiliated with the respective employee or us, or (v) our complete liquidation
or dissolution. In addition, we have entered into a three-year "evergreen"
employment agreement with Mr. Fivel, which is automatically renewable for
successive one-year periods and provides for an annual base compensation of
$325,000. If we provide the employee with notice that we desire to terminate the
agreement without cause, there is a final three-year term commencing on the date
of such notice. The agreement provides otherwise for substantially the same
terms as the employment agreements described above, except that if the
employee's employment is terminated by the employee, without Good Reason, as
defined, within 12 months after a "change of control," or if prior to and not as
a result of a change of control, the employee's employment is terminated either
by the employee for Good Reason or by us other than for disability or Cause, as
defined, the employee will be entitled to receive the highest of (a) $825,000 or
(b) three times the total compensation (including salary, bonus and the value of
all perquisites ) received from us during the twelve months prior to the date of
termination. If after or as a result of a change of control, the employee's
employment is terminated either by the employee for Good Reason or by us other
than for disability or Cause, the employee will be entitled to receive severance
pay equal to six times the compensation (including, salary, bonus, and the value
of all perquisites and the value of all stock options granted to the employee)
received or earned from us during the twelve months prior to the date of
termination. In addition, (a) upon the occurrence of a change of control, (b) if
in breach of the agreement, we terminate the employee's employment other than
for disability or Cause, or (c) if the employee terminates his employment for
Good Reason at any time, the vesting of all options granted to the employee will
be accelerated so that the options become immediately exercisable.
We have also entered into a three-year "evergreen" employment agreement
with Mr. Terence on April 22, 2002 which is automatically renewable for
successive one-year periods and provides for an annual base compensation of
$350,000, a guaranteed bonus of not less than $86,667 for his first year of
service and such additional bonuses as the Board of Directors may from time to
time determine. The employment agreement provides for employment on a full-time
basis and contains a provision that the employee will not compete or engage in a
business competitive with our business during the term of the employment
agreement and for a period of two years thereafter. The employment agreement
also provides that if the employee's employment is terminated by the employee,
without Good Reason, as defined, within 12 months after a "change of control,"
or if prior to and not as a result of a change of
37
control, the employee's employment is terminated either by the employee for Good
Reason or by us other than for disability or Cause, as defined, the employee
will be entitled to receive severance pay equal to three times the total
compensation (including salary, bonus and the value of all perquisites) received
from us during the twelve months prior to the date of termination provided that
until April 22, 2003 the minimum amount payable under this provision shall be
$1,000,000. For purposes of such agreement, a "change of control" shall be
deemed to occur, unless previously consented to in writing by the employee, upon
(i) individuals who constituted our then current Board of Directors ceasing to
constitute a majority of the Board of Directors, (ii) subject to certain
specified exceptions, the acquisition of beneficial ownership of 15% or more of
our voting securities by any person or entity not affiliated with the respective
employee or us, (iii) the commencement of a proxy contest against management for
the election of a majority of our Board of Directors if the group conducting the
proxy contest owns, has or gains the power to vote at least 15% of our voting
securities, (iv) the consummation under certain conditions by us of a
reorganization, merger or consolidation or sale of all or substantially all of
our assets to any person or entity not affiliated with the respective employee
or us, or (v) our complete liquidation or dissolution. In addition, (a) upon the
occurrence of a change of control, (b) if in breach of the agreement, we
terminate the employee's employment other than for disability or Cause, or (c)
if the employee terminates his employment for Good Reason at any time, the
vesting of all options granted to the employee will be accelerated so that the
options become immediately exercisable.
We entered into an employment agreement with Mr. Bounsall similar in
all respects to the terms and conditions of our agreement with Mr. Fivel except
that (a) the annual base compensation for Mr. Bounsall under the terms of the
agreement was $290,000 and (b) if Mr. Bounsall terminated his employment without
Good Reason, as defined, within 12 months after a "change in control" or if
prior to and not as a result of a change in control, Mr. Bounsall terminated his
employment for Good Reason or his employment was terminated by us other than for
disability or cause, as defined in the agreement, Mr. Bounsall would be entitled
to receive the highest of (i) $870,000 or (ii) three times the total
compensation (including salary, bonus and the value of all perquisites) received
from us during the twelve months prior to the date of termination. Mr. Bounsall
ceased to be our Executive Vice President, Chief Financial Officer and Treasurer
effective as of April 22, 2002. In connection with the termination of Mr.
Bounsall's employment and his employment agreement with us, we entered into a
separation and general release agreement with Mr. Bounsall pursuant to which we
paid Mr. Bounsall a severance payment in the aggregate amount of $1 million of
which $500,000 was paid to Mr. Bounsall on the date of execution of the
severance agreement and the balance of $500,000 was placed in escrow during 2002
and released to him in January of 2003. In addition, pursuant to the separation
and general release agreement with Mr. Bounsall, the vesting of certain options
to purchase our Common Stock was accelerated. All of the options that were
accelerated expire on April 22, 2004.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We have a Compensation Committee and Human Resources of the Board of
Directors comprised of three Independent Directors (as defined in our Corporate
Governance Principles) and currently consisting of Mr. Stead (Chairperson), Mr.
Simon and Ms. Hermann. Decisions as to executive compensation are currently made
by the Compensation Committee. During 2002, prior to the adoption of
38
our Compensation and Human Resources Committee Charter, executive compensation
was determined by the Board of Directors, primarily upon the recommendation of
our prior Compensation Committee. Mr. Wagner, who had been a member of our
Compensation Committee until January of 2003 is a partner in a law firm which
received fees in exchange for services rendered to us during the year ended
December 31, 2002. The Board of Directors which includes Messrs. Laikin and
Howell has not modified or rejected any recommendations of the Compensation
Committee as to the compensation of our executive officers. During the fiscal
year ended December 31, 2002, none of our executive officers have served on the
board of directors or the compensation committee of any other entity, any of
whose officers serves on our Board of Directors or Compensation Committee.
39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of March 17, 2003, based on
information obtained from the persons named below, (i) by each person known by
us to own beneficially more than five percent of our Common Stock, (ii) by each
of the Named Executives, (iii) by each of our directors, and (iv) by all of our
executive officers and directors as a group:
AMOUNT AND
NATURE OF PERCENTAGE OF
BENEFICIAL OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP(2) SHARES OWNED
--------------------------------------------------------------------- ------------- -------------
Robert J. Laikin (3)................................................. 218,927 2.7
J. Mark Howell (4)................................................... 206,713 2.5
Steven E. Fivel (5).................................................. 48,359 *
Frank Terence (6).................................................... 21,429 *
Phillip A. Bounsall (14)............................................. 96,402 1.2
Catherine Daily (11)................................................. - *
Eliza Hermann ....................................................... - *
Stephen H. Simon (7)................................................. 2,364 *
Marisa K. Pratt (12)................................................. 14 *
Richard W. Roedel (13)............................................... - *
Jerre L. Stead (8)................................................... 14,301 *
Todd H. Stuart (9)................................................... 4,507 *
Robert F. Wagner (10)................................................ 8,815 *
Timothy S. Durham (15)............................................... 444,707 5.5
All executive officers and directors
as a group (twelve persons) (16)..................................... 524,573 6.3
----------------------
* Less than 1%.
(1) The address for each of such individuals, unless specified otherwise in
a subsequent footnote, is in care of Brightpoint, Inc., 501 Airtech
Parkway, Plainfield, Indiana 46168.
40
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from March 17, 2003 upon the
exercise of options. Each beneficial owner's percentage ownership is
determined by assuming that options or warrants that are held by such
person (but not those held by any other person) and which are
exercisable within 60 days of March 17, 2003 have been exercised.
Unless otherwise indicated, we believe that all persons named in the
table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them.
(3) Includes 93,333 shares which are exercisable within 60 days of March
17, 2003. Includes 114,707 shares owned by Mr. Laikin. Includes 8,505
shares allocated from the Brightpoint, Inc. 1999 Employee Stock
Purchase Plan ("ESPP") and 2,382 shares allocated from the Brightpoint,
Inc. 401k Plan ("401(k)"). Does not include options to purchase 138,092
shares.
(4) Includes 173,729 shares underlying options which are exercisable within
60 days of the March 17, 2003. Includes 32,755 shares owned by J. Mark
Howell and 229 shares allocated from the 401(k). Does not include
options to purchase 81,743 shares.
(5) Includes 46,546 shares underlying options which are exercisable within
60 days of March 17, 2003. Includes 1,142 shares owned by Mr. Fivel.
Includes 97 shares allocated from the ESPP and 146 shares allocated
from the 401(k). Does not include options to purchase 65,950 shares.
(6) Includes 14,286 shares underlying options which are exercisable within
60 days of March 17, 2003. Includes 3,572 shares owned by Mr. Terence
and 3,571 shares held by the Frank Terence and Katrina Marie Terence
Trust of October 31, 2001. Mr. Terence and his spouse are trustees of
this trust which is for the benefit of his minor child. Does not
include options to purchase 92,857 shares.
(7) Includes (i) 714 shares owned by Mr. Simon and (ii) 1,650 shares
underlying options which are exercisable within 60 days of March 17,
2003. Does not include options to purchase 1,015 shares.
(8) Includes (i) 13,000 shares beneficially owned by Mr. Stead, which
shares are owned of record by JMJS Group LLP, and (ii) 1,301 shares
underlying options which are exercisable within 60 days of March 17,
2003. Does not include options to purchase 317 shares.
(9) Includes (i) 2,857 shares owned by Mr. Stuart and (ii) 1,650 shares
underlying options which are exercisable within 60 days of March 17,
2003. Does not include options to purchase 1,015 shares.
(10) Includes (i) 7,150 shares owned by Mr. Wagner and (ii) 14 shares held
in a joint account by Mr. Wagner and his emancipated son, of which
shares Mr. Wagner disclaims beneficial ownership
41
and (iii) 1,650 shares underlying options which are exercisable within
60 days of March 17, 2003. Does not include options to purchase 1,015
shares.
(11) Does not include options to purchase 10,000 shares.
(12) Represents 14 shares owned by Ms. Pratt.
(13) Does not include options to purchase 10,000 shares.
(14) Includes 91,900 shares underlying options which are exercisable within
60 days of March 17, 2003. Includes 2,428 shares owned by Mr.
Bounsall's wife. Includes 1,136 shares allocated from the ESPP and 126
shares allocated from the 401(k). Includes 812 shares held in the
Howell Family Educational Trust of which Mr. Bounsall is a trustee and
as to which shares Mr. Bounsall, as trustee, has voting and dispositive
power.
(15) Based solely on a joint Schedule 13D filed with the Securities and
Exchange Commission by Timothy S. Durham, Diamond Investments, LLC,
Henri B. Najem, Jr., Shelley Najem, Jeffrey Osler, Neil Lucas, James F.
Cochran, Jonathon B. Swain, Dr. Charles Durham, Mitza Durham and
Shannon Frantz. The address of Mr. Durham is 111 Monument Circle, Suite
4800, Indianapolis, Indiana 46204.
(16) Includes an aggregate of 334,145 shares underlying options which are
exercisable within 60 days of March 17, 2003, including those listed in
notes (3) through (13), above. Does not include options to purchase an
aggregate of 402,004 shares.
42
EQUITY COMPENSATION PLANS
Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options outstanding options issuance under equity
and rights and rights compensation plans
(excluding securities
reflected in column (a))
Plan Category (a) (b) (c)
----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders:
(1994 Stock Option Plan and
Non-Employee Director Stock
Option Plan) 908,543 $22.947 76,109
Equity compensation plans not
approved by security holders (1):
(1996 Stock Option Plan) 456,664 $21.808 67,793
--------- ------- -------
Total 1,365,207 $22.567 143,902
========= ======= =======
(1) Represents the aggregate number of shares of common stock issuable
upon exercise of individual arrangements with option and warrant
holders. These options are 5 to 10 years in duration, expire at various
dates between 10/9/2003 and 11/14/2012, contain anti-dilution
provisions providing for adjustments of the exercise price under
certain circumstances and have termination provisions similar to
options granted under stockholder approved plans. See Note 13 to the
Consolidated Financial Statements for a description of the 1996 Stock
Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We utilize the services of a third party for the purchase of corporate
gifts, promotional items and standard personalized stationery. Mrs. Judy Laikin,
the mother of Robert J. Laikin, our Chief Executive Officer, was an independent
consultant to this third party during 2001 and prior to June 1, 2000 was the
owner of the third party. We purchased approximately $91,382 of services and
products from this third party during 2002. We believe that these purchases were
made on terms no less favorable to us than we could have obtained from an
unrelated party.
During 2002, an entity in which the father of Robert J. Laikin is a
fifty percent (50%) equity owner, provided risk management services to us for
which we paid the entity $30,800 in consulting fees. In the first quarter of
2002, we terminated our relationship with this provider of risk management
services. During the fiscal year ended December 31, 2002 we paid to an insurance
brokerage firm, for
43
which the father of Robert J. Laikin acts as an independent insurance broker,
$205,000 in service fees and certain insurance premiums, which premiums were
forwarded to our respective insurance carriers.
Pursuant to the 2001 Restructuring Plan, the Company completed in
January 2002, through its subsidiary Brightpoint China Limited, the formation of
a joint venture with Hong Kong-based Chinatron Group Holdings Limited
("Chinatron"). Chinatron is involved in the wireless telecommunications and data
industry and, is beneficially owned, in part, by the former managing director of
Brightpoint China Limited and by a former executive of Brightpoint, Inc. In
addition, Jerre L. Stead, a director of Brightpoint, Inc. was and remains a
director of Chinatron. The Company's Chairman of the Board and Chief Executive
Officer, Robert J. Laikin, and the former managing director of Brightpoint China
Limited were founding shareholders of Chinatron. Prior to the Company entering
into the agreement to form the joint venture, Mr. Laikin, disposed of his
interest in Chinatron primarily through the sale of his interest to China World
International Ltd. ("CWI"), a company owned by the former managing director of
Brightpoint China Limited and by a former executive of Brightpoint, Inc. In
exchange, Mr. Laikin, received the unconditional promise from CWI to pay him
$327,019 ($300,000 of which has been paid to date). As a result of this sale,
Mr. Laikin had no interest in Chinatron and currently does not have an interest
in Chinatron. Furthermore, Mr. Laikin had no interest in Brightpoint China
Limited, which we sold to our remaining 50% interest to Chinatron in April 2002,
and the amount owed to him was solely owed by CWI.
Our Certificate of Incorporation and By-laws provide for us to
indemnify our officers and directors to the extent permitted by law. In
connection therewith, we have entered into indemnification agreements with our
executive officers and directors. In accordance with the terms of these
agreements we have reimbursed certain of our current and former executive
officers and intend to reimburse our officers and directors for their personal
legal expenses arising from certain pending litigation and regulatory matters.
During 2002, we paid certain expenses incurred in connection with litigation and
regulatory matters for Mr. John Delaney, former Controller and Chief Accounting
Officer, and Mr. Phillip Bounsall, former Chief Financial Officer, in the amount
of $107,739 and $93,280, respectively.
PART IV
ITEM 14. CONTROLS AND PROCEDURES.
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), of the effectiveness of the Company's disclosure controls and
procedures. Based on that evaluation, the CEO and CFO have concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. Subsequent to the date of their evaluation,
there were no significant changes in the Company's internal controls or in other
factors that could significantly affect the internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
44
45
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a)(1) The following financial statements and information are filed as a part
of our report commencing on page A-1:
Report of Independent Auditors
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2000, 2001 and 2002
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000
Notes to the Consolidated Financial Statements
(a)(2) The following financial statement schedule for the year ended December
31, 2002, is submitted herewith:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(a)(3) Exhibits
46
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Certificate of Incorporation of the Company, as amended through 1992 (5)
3.1.2 Amendment to Certificate of Incorporation of the Company dated June 26, 2002 (18)
3.2 Amended and Restated By-Laws of the Company (5)
3.3 Certificate of Merger of Brightpoint, Inc. into Wholesale Cellular USA, Inc., effective September 15, 1995 (2)
4.1 Indenture between the Company and the Chase Manhattan Bank, as Trustee (6)
4.2 Credit Agreement dated as of October 31, 2001 (as amended) among Brightpoint North America, L.P., Wireless
Fulfillment Services LLC, the other credit parties signatory thereto, the lenders signatory thereto from time to
time and General Electric Capital Corporation (15)
10.1 1994 Stock Option Plan, as amended (11)*
10.2 1996 Stock Option Plan, as amended (14)*
10.3 Non-Employee Directors Stock Option Plan (1)
10.4 Employee Stock Purchase Plan (9)
10.5 Amended and Restated Employment Agreement between the Company and Robert J. Laikin dated July 1, 1999 (10)*
10.6 Amended and Restated Employment Agreement between the Company and J. Mark Howell dated July 1, 1999 (10)*
10.7 Amended and Restated Employment Agreement between the Company and Phillip A. Bounsall dated July 1, 1999 (10)*
10.8 Amended and Restated Employment Agreement between the Company and Steven E. Fivel dated July 1, 1999 (10)*
10.9 Rights Agreement, dated as of February 20, 1997, between the Company and Continental Stock Transfer Trust Company,
as Rights Agent (3)
47
10.10 Lease Agreement between the Company and DP Operating Partnership, L.P., dated as of March 1, 1997 (4)
10.11 Lease Agreement between the Company and New World Partners Joint Venture Number Five, dated July 30, 1998 (7)
10.12 Lease Agreement between the Company and Airtech Parkway Associates, LLC, dated September 18, 1998 (7)
10.13 Form of Indemnification Agreement of certain officers and directors (12)
10.14 Amendment Number 1 to the Rights Agreement (the "Agreement") by and between Brightpoint, Inc. (the "Company") and
Continental Stock Transfer & Trust Company, as Rights Agent, dated as of January 4, 1999 (8)
10.15 Amendment dated January 1, 2001 to the Amended and Restated Agreement between the Company and Robert J. Laikin
dated July 1, 1999 (13)*
10.16 Amendment dated January 1, 2001 to the Amended and Restated Employment Agreement between the Company and J. Mark
Howell dated July 1, 1999 (13)*
10.17 Amendment dated January 1, 2001 to the Amended and Restated Employment Agreement between the Company and Phillip
A. Bounsall dated July 1, 1999 (13)*
10.18 Amendment dated January 1, 2001 to the Amended and Restated Employment Agreement between the Company and Steven E.
Fivel dated July 1, 1999 (13)*
10.19 Lease Agreement between the Company and Harbour Properties, LLC, dated April 25, 2000 (13)
10.20 Amendment dated January 1, 2002 to the Amended and Restated Employment Agreement between the Company and Steven E.
Fivel dated July 1, 1999 (17)*
10.21 Distributor Agreement dated October 29, 2001 between Nokia Inc. and Brightpoint North America L.P. (17)**
10.22 Brightpoint, Inc. 401(k) Plan (2001 Restatement) (17)
10.23 Amendment to the Brightpoint, Inc. 401(k) Plan effective January 1, 2001 (17)
10.24 Separation and General Release Agreement between the Company and Phillip A. Bounsall (18)
48
10.25 Employment Agreement between the Company and Frank Terence dated April 22, 2002 (18)*
10.26 Sale and Purchase Agreement between Brightpoint International (Asia Pacific) PTE Ltd and Chinatron Group Holdings
Limited Dated October 1, 2001 (18)
10.27 Amendment dated January 18, 2002 to Sale and Purchase Agreement between Brightpoint International (Asia Pacific)
PTE Ltd. and Chinatron Group Holding Limited dated October 1, 2001 (18)
10.28 Amendment No. 2 dated September 27, 2002 to Credit Agreement among Brightpoint North America, L.P., Wireless
Fulfillment Services, LLC, the other credit parties signatory thereto, the lenders signatory thereto and General
Electric Capital Corporation (19)
10.29 Amendment No. 3 dated December 13, 2002 to Credit Agreement among Brightpoint North America, L.P., Wireless
Fulfillment Services, LLC, the other credit parties signatory thereto, the lenders signatory thereto and General
Electric Capital Corporation (20)
10.30 Amendment dated December 19, 2002 to distribution agreement dated October 29, 2001 between Brightpoint North
America L.P. and Nokia Inc. (21) ***
10.31 Amendment dated January 1, 2003 to Amended and Restated Employment Agreement between the Company and Robert J.
Laikin dated July 1, 1999 (21)
10.32 Amendment dated January 1, 2003 to Amended and Restated Employment Agreement between the Company and J. Mark
Howell dated July 1, 1999 (21)
10.33 Amendment dated January 1, 2003 to Amended and Restated Employment Agreement between the Company and Steven
E. Fivel dated July 1, 1999 (21)
10.34 Amendment dated January 1, 2003 to the Employment Agreement between the Company and Frank Terence dated April 22,
2002 (21)
10.35 Credit Agreement dated December 24, 2002 between Brightpoint Australia Pty Limited, Advanced Portable Technologies
Limited and GE Commercial Finance (21)
10.36 Agreement dated June 6, 2002 between the Company and Chanin Capital Partners (21)
10.37 Amendment dated July 8, 2002 to the Agreement between the Company and Chanin Capital Partners dated June 6, 2002
(21)
10.38 Brightpoint, Inc. 401(k) Plan, effective October 1, 2002 (21)
21 Subsidiaries (21)
49
23 Consent of Independent Auditors (16)
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(21)
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 (21)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant Section 906 of the Sarbanes-Oxley Act of 2002 (21)
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 (21)
99.1 Cautionary Statements (21)
(1) Incorporated by reference to the applicable exhibit filed with the Company's Registration Statement (33-75148)
effective April 7, 1994.
(2) Incorporated by reference to the applicable exhibit filed with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
(3) Incorporated by reference to the applicable exhibit filed with the Company's Current Report on Form 8-K, dated
March 28, 1997.
(4) Incorporated by reference to the applicable exhibit filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997.
(5) Incorporated by reference to the applicable exhibit filed with the Company's Registration Statement on Form S-3
(333-29533) effective August 6, 1997.
(6) Incorporated by reference to the applicable exhibit filed with the exhibit filed with the Company's Current Report
on Form 8-K dated April 1, 1998 for the event dated March 5, 1998.
(7) Incorporated by reference to the applicable exhibit filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
(8) Incorporated by reference to the applicable exhibit filed with the Company's Form 10-K for the fiscal year ended
December 31, 1998.
50
(9) Incorporated by reference to Appendix B filed with the Company's Proxy Statement dated April 15, 1999 relating to
its Annual Stockholders meeting held May 18, 1999.
(10) Incorporated by reference to the applicable exhibit filed with the Company's Quarterly report on Form 10-Q for the
quarter ended June 30, 1999.
(11) Incorporated by reference to the applicable exhibit filed with the Company's Registration Statement on Form S-8
(333-87863) dated September 27, 1999.
(12) Incorporated by reference to the applicable exhibit filed with the Company's Form 10-K for the fiscal year ended
December 31, 1999.
(13) Incorporated by reference to the applicable exhibit filed with Form 10-K/A, Amendment No. 1 to the Company's Form
10-K for the fiscal year ended December 31, 2000.
(14) Incorporated by reference to the applicable exhibit filed with the Company's Tender Offer Statement on Schedule TO
dated August 31, 2001.
(15) Incorporated by reference to the applicable exhibit filed with the Company's Current Report on Form 8-K for the
event dated November 1, 2001.
(16) Filed as page F-1 of this report on Form 10-K.
(17) Incorporated by reference to the applicable exhibit filed with the Company's Annual Report on Form 10-K for the
Year Ended December 31, 2002.
(18) Incorporated by reference to the applicable exhibit filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002.
(19) Incorporated by reference to the applicable exhibit filed with the Company's Current Report on Form 8-K for the
event dated September 27, 2002.
(20) Incorporated by reference to the applicable exhibit filed with the Company's Current Report on Form 8-K for the
event dated December 13, 2002.
(21) Filed herewith.
* Denotes management compensation plan or arrangement.
** Portions of this document have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment which was granted under Rule 24b-2 of the Securities Exchange Act of
1934.
51
*** Portions of this document have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment under Rule 24b-2 of the Securities Exchange Act of 1934.
(b) Reports on Form 8-K:
We filed a Current Report on Form 8-K for the event dated
August 30, 2002 under Item 5 to report that certain of our
subsidiaries had completed the sale of their respective
interests in Brightpoint Middle East FZE and its subsidiary and
Brightpoint Jordan Limited.
We filed a Current Report on Form 8-K for the event dated
September 23, 2002 and a Current Report on Form 8-K for the
event dated September 27, 2002 under Item 5 to announce our
repurchase of convertible, subordinated, zero-coupon
Convertible Notes due 2018.
We filed a Current Report dated December 1, 2002 under Item 5
to report the resignation of Mr. John W. Adams as a director.
We filed a Current Report on Form 8-K for the event dated
September 27, 2002 to report that our primary North American
operating subsidiaries entered into a Second Amendment to the
Revolving Credit Facility with a syndicate of lenders led by
General Electric Capital Corporation (the "Credit Agreement").
We filed a Current Report on Form 8-K for the event dated
November 29, 2001 under Item 5 to report that our primary North
American subsidiaries entered into a Third Amendment to the
Credit Agreement.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
BRIGHTPOINT, INC.
Date: March 8, 2004 /s/Robert J.Laikin
---------------------------------
By: Robert J. Laikin
Chairman of the Board and
Chief Executive Officer
FINANCIAL APPENDIX A
INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
AND MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
A-1
Report of Independent Auditors..................................... A-2
Management's Responsibility for Financial Statements............... A-2
Consolidated Statements of Operations.............................. A-3
Consolidated Balance Sheets........................................ A-4
Consolidated Statements of Cash Flows.............................. A-5
Consolidated Statements of Stockholders' Equity.................... A-6
Notes to Consolidated Financial Statements......................... A-7
Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. A-40
Operating Segments................................................. A-63
Future Operating Results........................................... A-65
Financial Market Risk Management................................... A-66
Other Information.................................................. A-67
A-2
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Brightpoint, Inc.
We have audited the accompanying Consolidated Balance Sheets of Brightpoint,
Inc. as of December 31, 2002 and 2001, and the related Consolidated Statements
of Operations, Stockholders' Equity and Cash Flows for each of the three years
in the period ended December 31, 2002. Our audits also include the financial
statement schedule listed in Item 15. These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Brightpoint, Inc.
at December 31, 2002 and 2001, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the financial information set forth
therein.
As discussed in Notes 4 and 2 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill
and Other Intangible Assets" and No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets," respectively, on January 1, 2002.
/S/ ERNST & YOUNG LLP
Indianapolis, Indiana
January 31 , 2003, except for Notes 5, 11, 15 and 18,
as to which the date is March 12, 2003
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Brightpoint, Inc. is responsible for the preparation and
integrity of the Company's Consolidated Financial Statements and all related
information appearing in this Annual Report. The Company maintains accounting
and internal control systems which are intended to provide reasonable assurance
that assets are safeguarded against loss from unauthorized use or disposition,
transactions are executed in accordance with management's authorization and
accounting records are reliable for preparing financial statements in accordance
with accounting principles generally accepted in the United States.
The financial statements for each of the years covered in this Annual Report
have been audited by independent auditors who have provided an independent
assessment as to the fairness of the financial statements.
The Board of Directors has appointed an Audit Committee whose three members are
not employees of the Company. The Board of Directors has also adopted a written
charter that establishes the roles and responsibilities of the Audit Committee.
Pursuant to its charter, the Audit Committee meets with certain members of
management and the independent auditors to review the results of their work and
satisfy itself that their responsibilities are being properly discharged. The
independent auditors have full and free access to the Audit Committee and have
discussions with the Audit Committee regarding appropriate matters, with and
without management present.
/S/ ROBERT J. LAIKIN /S/ J. MARK HOWELL /S/ FRANK TERENCE
Robert J. Laikin J. Mark Howell Frank Terence
Chairman of the Board and President Executive Vice President, Chief
Chief Executive Officer Financial Officer and Treasurer
A-3
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
YEAR ENDED DECEMBER 31
---------------------------------------------
2002 2001 2000
----------- ----------- -----------
Revenue $ 1,276,067 $ 1,263,700 $ 1,297,164
Cost of revenue 1,204,073 1,189,925 1,163,335
----------- ----------- -----------
Gross profit 71,994 73,775 133,829
Selling, general and administrative expenses 71,247 66,396 72,688
Facility consolidation charge - 605 6,972
----------- ----------- -----------
Operating income from continuing operations 747 6,774 54,169
Interest expense 5,899 8,170 5,757
Impairment loss on long-term investment 8,305 - -
Other expenses 1,936 131 60
----------- ----------- -----------
Income (loss) from continuing operations before income taxes (15,393) (1,527) 48,352
Income tax expense (benefit) (2,569) (325) 16,457
----------- ----------- -----------
Income (loss) from continuing operations (12,824) (1,202) 31,895
Discontinued operations:
Income (loss) from discontinued operations (12,861) (22,098) 953
Gain (loss) on disposal of discontinued operations (2,617) (34,301) 847
----------- ----------- -----------
Total discontinued operations (15,478) (56,399) 1,800
Income (loss) before extraordinary item and cumulative effect (28,302) (57,601) 33,695
Extraordinary gain on debt extinguishment, net of tax 26,629 4,300 9,988
Cumulative effect of a change in accounting principle, net of tax (40,748) - -
----------- ----------- -----------
Net income (loss) $ (42,421) $ (53,301) $ 43,683
=========== =========== ===========
Basic per share:
Income (loss) from continuing operations $ (1.60) $ (0.15) $ 4.02
Discontinued operations (1.94) (7.07) 0.23
Extraordinary gain on debt extinguishment, net of tax 3.33 0.54 1.26
Cumulative effect of a change in accounting principle, net of tax (5.09) - -
----------- ----------- -----------
Net income (loss) $ (5.30) $ (6.68) $ 5.51
=========== =========== ===========
Diluted per share:
Income (loss) from continuing operations $ (1.60) $ (0.15) $ 3.98
Discontinued operations (1.94) (7.07) 0.22
Extraordinary gain on debt extinguishment, net of tax 3.33 0.54 1.25
Cumulative effect of a change in accounting principle, net of tax (5.09) - -
----------- ----------- -----------
Net income (loss) $ (5.30) $ (6.68) $ 5.45
=========== =========== ===========
Weighted average common shares outstanding:
Basic 7,998 7,973 7,923
=========== =========== ===========
Diluted 7,998 7,973 8,015
=========== =========== ===========
See accompanying notes.
A-4
BRIGHTPOINT, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
DECEMBER 31
------------------------
2002 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 43,798 $ 58,295
Pledged cash 14,734 16,657
Accounts receivable (less allowance for doubtful
accounts of $5,328 in 2002 and $6,272 in 2001) 111,771 181,755
Inventories 73,472 137,549
Contract financing receivable 16,960 60,404
Other current assets 12,867 33,115
--------- ---------
Total current assets 273,602 487,775
Property and equipment 35,696 45,047
Goodwill and other intangibles 14,153 61,258
Other assets 12,851 15,340
--------- ---------
Total assets $ 336,302 $ 609,420
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 129,621 $ 194,776
Accrued expenses 48,816 52,743
Unfunded portion of contract financing receivable 22,102 45,499
Lines of credit, short-term 51 10,323
Convertible notes, short-term 12,017 -
--------- ---------
Total current liabilities 212,607 303,341
--------- ---------
Long-term liabilities:
Lines of credit 10,052 24,419
Convertible notes - 131,647
--------- ---------
Total long-term liabilities 10,052 156,066
--------- ---------
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Preferred stock, $0.01 par value: 1,000 shares
authorized; no shares issued or outstanding - -
Common stock, $0.01 par value: 100,000 shares
authorized; 8,021 and 7,980 issued and
outstanding in 2002 and 2001, respectively 80 80
Additional paid-in capital 214,624 214,452
Retained earnings (deficit) (89,466) (47,045)
Accumulated other comprehensive loss (11,595) (17,474)
--------- ---------
Total stockholders' equity 113,643 150,013
--------- ---------
Total liabilities and stockholders' equity $ 336,302 $ 609,420
========= =========
See accompanying notes.
A-5
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
YEAR ENDED DECEMBER 31
-----------------------------------------------
2002 2001 2000
------------ ------------ -----------
OPERATING ACTIVITIES
Net income (loss) $ (42,421) $ (53,301) $ 43,683
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 12,431 12,039 12,201
Amortization of debt discount 3,709 5,182 7,169
Income tax benefits from exercise of stock options - - 2,717
Impairment loss on long-term investment 8,305 - -
Minority interest and deferred taxes 12,852 (6,478) (1,911)
Pledged cash requirements 1,923 (16,657) -
Facilities consolidation charge - 605 6,972
Discontinued operations 15,478 56,399 (1,800)
Extraordinary gain on debt extinguishment, net of tax (26,629) (4,300) (9,988)
Cumulative effect of accounting change, net of tax 40,748 - -
Changes in operating assets and
liabilities, net of effects from acquisitions:
Accounts receivable 70,068 13,981 10,667
Inventories 53,888 77,912 (86,351)
Other operating assets 17,450 4,307 3,190
Accounts payable and accrued expenses (89,163) (27,355) 47,453
Net cash provided (used) by discontinued operations (8,517) (11,695) 2,894
------------ ------------ -----------
Net cash provided by operating activities 70,122 50,639 36,896
INVESTING ACTIVITIES
Capital expenditures (8,671) (27,442) (14,664)
Purchase acquisitions, net of cash acquired - (7,963) (6,215)
Cash effect of divestiture (6,307) - -
Proceeds from Mexico sale 2,758 - -
Decrease (increase) in funded contract financing receivables 20,750 (5,199) (4,210)
Decrease (increase) in other assets 169 (1,638) 108
------------ ------------ -----------
Net cash provided (used) by investing activities 8,699 (42,242) (24,981)
FINANCING ACTIVITIES
Net proceeds (payments) on credit facilities (18,436) (18,934) 7,682
Repurchase of convertible notes (75,015) (10,095) (29,329)
Proceeds from common stock issuances under employee stock
option and purchase plans 173 259 6,724
------------ ------------ -----------
Net cash used by financing activities (93,278) (28,770) (14,923)
Effect of exchange rate changes on cash and cash equivalents (39) (1,050) (2,535)
------------ ------------ -----------
Net decrease in cash and cash equivalents (14,496) (21,423) (5,543)
Cash and cash equivalents at beginning of year 58,295 79,718 85,261
------------ ------------ -----------
Cash and cash equivalents at end of year $ 43,798 $ 58,295 $ 79,718
============ ============ ===========
See accompanying notes.
A-6
BRIGHTPOINT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
2000 Activity:
Accumulated
Additional Retained Other Total
Common Paid-in Earnings Comprehensive Stockholders' Comprehensive
Stock Capital (Deficit) Income (Loss) Equity Income (Loss)
------ ---------- ---------- ------------- ------------- -------------
Balance at January 1, 2000 $ 78 $ 204,752 $ (37,427) $ (18,626) $ 148,777
Net income - - 43,683 - 43,683 $ 43,683
Other comprehensive income (loss):
Currency translation of foreign investments - - - (7,939) (7,939) (7,939)
Unrealized gain on derivatives, net of
income tax - - - 134 134 134
Common stock issued in connection with
employee stock option and purchase
plans and related income tax benefit 2 9,440 - - 9,442
------ ---------- ---------- ------------- ------------- -------------
Balance at December 31, 2000 80 214,192 6,256 (26,431) 194,097 $ 35,878
=============
2001 Activity:
Net loss - - (53,301) - (53,301) $ (53,301)
Other comprehensive income (loss):
Currency translation of foreign
investments - - - 9,097 9,097 9,097
Unrealized loss on derivatives, net of
income tax - - - (140) (140) (140)
Common stock issued in connection with
employee stock option and purchase
plans and related income tax benefit - 260 - - 260
------ ---------- ---------- ------------- ------------- -------------
Balance at December 31, 2001 $ 80 $ 214,452 $ (47,045) $ (17,474) $ 150,013 $ (44,344)
=============
2002 Activity:
Net loss - - (42,421) - (42,421) $ (42,421)
Other comprehensive income (loss):
Currency translation of foreign
investments - - - 5,929 5,929 5,929
Unrealized loss on derivatives, net of
income tax - - - (50) (50) (50)
Common stock issued in connection with
employee stock option and purchase
plans and related income tax benefit - 172 - - 172
------ ---------- ---------- ------------- ------------- -------------
Balance at December 31, 2002 $ 80 $ 214,624 $ (89,466) $ (11,595) $ 113,643 $ (36,542)
====== ========== ========== ============= ============= =============
See accompanying notes.
A-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the Company and
its wholly-owned or controlled subsidiaries. Significant intercompany accounts
and transactions have been eliminated in consolidation. Certain amounts in the
2001 and 2000 Consolidated Financial Statements have been reclassified to
conform to the 2002 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management 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 the Company reviews its estimates and assumptions. The
Company's estimates were based on its historical experience and various other
assumptions that the Company believes to be reasonable under the circumstances.
Actual results are likely to differ from those estimates under different
assumptions or conditions, but management does not believe such differences will
materially affect the Company's financial position or results of operations.
REVENUE RECOGNITION
Revenue is recognized when wireless equipment is sold and shipped or when the
Company's integrated logistics services have been rendered. In arrangements
where the Company both sells wireless equipment and provides integrated
logistics services, revenue is recognized separately for these functions and the
Company consistently applies the above criteria. In certain circumstances the
Company manages and distributes wireless equipment and prepaid recharge cards on
behalf of various wireless network operators and assumes little or no ownership
risk for the product. The Company records revenue for these integrated logistics
services at the amount of the net margin rather than the gross amount of the
transactions. The Company recognizes liabilities for product returns based upon
historical experience and other judgmental factors, evaluates these estimates on
an on-going basis and adjusts its liabilities each period based on actual
product return activity. The Company recognizes freight costs billed to its
customers in revenue and actual freight costs incurred as a component of cost of
revenue.
VENDOR PROGRAMS
The Company receives funds from vendors for price protection, product rebates,
marketing and training and promotion programs which are generally recorded, net
of direct costs, as adjustments to product costs, revenue, or selling, general
and administrative expenses according to the nature of the program. The Company
accrues rebates based on the terms of the program and sales of qualifying
products. Some of these items may extend over one or more quarterly reporting
periods. Actual rebates may vary based on volume, other sales achievement levels
or negotiations with the related vendor, which could result in an increase or
reduction in the estimated amounts previously accrued. The Company also provides
reserves for receivables on vendor programs for estimated losses resulting from
vendors' inability to pay, or rejections of such claims by vendors.
A-8
CASH AND CASH EQUIVALENTS
All highly liquid investments with maturities of three months or less when
purchased are considered to be cash equivalents. Pledged cash represents cash
reserved as collateral for letters of credit issued by financial institutions on
behalf of the Company or its subsidiaries and as collateral for an accounts
receivable sale facility in France.
CONCENTRATIONS OF RISK
Financial instruments that potentially expose the Company to concentrations of
credit risk consist primarily of trade accounts receivable. These receivables
are generated from product sales and services provided to wireless network
operators, agents, resellers, dealers and retailers in the wireless
telecommunications and data industry and are dispersed throughout the world,
including North America, Colombia, Asia and the Pacific Rim and Europe. The
Company performs periodic credit evaluations of its customers and provides
credit in the normal course of business to a large number of its customers.
However, consistent with industry practice, the Company generally requires no
collateral from its customers to secure trade accounts receivable. Computech
Overseas International, a customer of the Company's Brightpoint Asia Limited
operations managed by Persequor Limited, accounted for approximately 12% of the
Company's total revenue and 30% of its Asia-Pacific division's revenue in 2002.
At December 31, 2002, there were no amounts owed to the Company from Computech.
The Company's Brightpoint Asia Limited operation, which represented
approximately 27% and 14% of its total revenue in 2002 and 2001, respectively,
sells primarily Nokia products to a limited number of resellers based in Hong
Kong and Singapore, predominantly on a cash before delivery basis. The loss or a
significant reduction in business activities in the Company's Brightpoint Asia
Limited operation could have a material adverse affect on its revenue and
results of operations. No single customer accounted for 10% or more of the
Company's total revenue in 2001 or 2000.
The Company is dependent primarily on wireless equipment manufacturers for its
supply of wireless telecommunications and data equipment. Products sourced from
the Company's largest supplier accounted for approximately 69%, 72% and 62% of
product purchases in 2002, 2001 and 2000, respectively. The Company is dependent
on the ability of its suppliers to provide an adequate supply of products on a
timely basis and on favorable pricing terms. The loss of certain principal
suppliers or a significant reduction in product availability from principal
suppliers could have a material adverse effect on the Company. The Company also
relies on its suppliers to provide trade credit facilities and favorable payment
terms to adequately fund its on-going operations and product purchases. In
certain circumstances, the Company has issued cash-secured letters of credit on
behalf of certain of our subsidiaries in support of their vendor credit
facilities. The payment terms received from the Company's suppliers is dependent
on several factors, including, but not limited to, the Company's payment history
with the supplier, the suppliers credit granting policies, contractual
provisions, the Company's overall credit rating as determined by various credit
rating agencies, the Company's recent operating results, financial position and
cash flows and the supplier's ability to obtain credit insurance on amounts that
the Company owes them. Adverse changes in any of these factors, certain of which
may not be wholly in the Company's control, could have a material adverse effect
on the Company's operations. The Company believes that its relationships with
its suppliers are satisfactory, however, it has periodically experienced
inadequate supply from certain handset manufacturers.
A-9
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company evaluates the collectibility of its accounts receivable based on a
combination of factors. In circumstances where the Company is aware of a
specific customer's inability to meet its financial obligations, the Company
records a specific allowance against amounts due to reduce the net recognized
receivable to the amount the Company reasonably believes will be collected. For
all other customers, the Company recognizes allowances for doubtful accounts
based on the length of time the receivables are past due, the current business
environment and the Company's historical experience.
ACCOUNTS RECEIVABLE TRANSFERS
The Company from time to time enters into certain transactions with banks and
other third-party financing organizations with respect to a portion of its
accounts receivable in order to reduce the amount of working capital required to
fund such receivables. These transactions have been treated as sales pursuant to
the provisions of FASB Statement No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities (SFAS No. 140). Fees, in
the form of discounts, are recorded as losses on the sale of assets which are
included as a component of "Other expenses" in the Consolidated Statements of
Operations. The Company is the collection agent on behalf of the financing
organization for many of these arrangements and has no significant retained
interests or servicing liabilities related to accounts receivable that it has
sold, although in limited circumstances the Company may be required to
repurchase the accounts. See Note 8 to the Consolidated Financial Statements for
further discussion of these off-balance sheet transactions.
CONTRACT FINANCE RECEIVABLES
The Company offers financing of inventory and receivables to certain wireless
network operator customers and their authorized dealer agents and wireless
equipment manufacturers under contractual arrangements. Under these
arrangements, the Company records the accounts receivable from sales on behalf
of these customers and inventory and accounts payable for product purchased
under these arrangements, however, the Company has the ability to require these
customers, subject to certain limitations, to assume the accounts receivable or
repurchase the inventory that it has purchased on their behalf. Consequently,
the Company is financing these receivables and inventory and has a receivable
from these customers for amounts it has financed. The amount financed pursuant
to these arrangements is recorded as a current asset under the caption "Contract
financing receivables" and any trade accounts payable pursuant to the
arrangements is recorded as a current liability under the heading "Unfunded
portion of contract financing receivable." The Company charges a fee for
providing these contract financing services and records revenue for these
integrated logistics services at the amount of the net margin rather than the
gross amount of the transactions. In addition, the Company has commitments under
certain contracts to provide inventory financing for these customers pursuant to
various limitations and provisions as defined in the applicable service
agreements.
INVENTORIES
Inventories consist of wireless handsets, wireless data devices and accessories
and are stated at the lower of cost (first-in, first-out method) or market. At
each balance sheet date, the Company evaluates its ending inventories for excess
quantities and obsolescence, considering any stock balancing or rights of return
that it may have with certain suppliers. This evaluation includes analyses of
sales levels by product and projections of future demand. The Company writes off
inventories that are considered obsolete. Remaining inventory balances are
adjusted to approximate the lower of cost or market value.
A-10
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts at December 31, 2002 and 2001, of cash and cash
equivalents, pledged cash, trade accounts receivable, contract financing
receivable, other current assets, accounts payable, accrued expenses, unfunded
portion of contract financing receivable and the Company's credit facilities
approximate their fair values. See Note 11 - Lines of Credit and Long-term Debt
for disclosure of the fair value of the Company's Convertible Notes.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
three to fifteen years. Leasehold improvements are stated at cost and
depreciated over the lease term of the associated property. Maintenance and
repairs are charged to expense as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically considers whether indicators of impairment of
long-lived assets are present. If such indicators are present, the Company
determines whether the sum of the estimated undiscounted cash flows attributable
to the assets in question is less than their carrying value. If less, the
Company recognizes an impairment loss based on the excess of the carrying amount
of the assets over their respective fair values. Fair value is determined by
discounted future cash flows, appraisals or other methods. If the assets
determined to be impaired are to be held and used, the Company recognizes an
impairment charge to the extent the present value of anticipated net cash flows
attributable to the asset are less than the asset's carrying value. The fair
value of the asset then becomes the asset's new carrying value, which the
Company depreciates over the remaining estimated useful life of the asset.
GOODWILL AND OTHER INTANGIBLES
The Company adopted the Financial Accounting Standards Board's (FASB) Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142) on January 1, 2002. Prior to SFAS No. 142, purchase price in
excess of the fair value of net assets of businesses acquired was recorded as
goodwill and was amortized on a straight-line basis over 30 years. Pursuant to
the provisions of SFAS No. 142, the Company stopped amortizing goodwill as of
January 1, 2002. During the second quarter of 2002, the Company completed the
transitional impairment test required under SFAS No. 142. As a result of the
transitional impairment test, the Company recorded an impairment charge of
approximately $40.7 million, net of tax, during the first quarter of 2002, which
is presented as a cumulative effect of a change in accounting principle for the
year ended December 31, 2002. On October 1, 2002, the Company performed the
required annual impairment test on its remaining goodwill and incurred no
significant additional impairment charges.
In addition to performing the required transitional impairment test on the
Company's goodwill, SFAS No. 142 required the Company to reassess the expected
useful lives of existing intangible assets including patents, trademarks and
trade names for which the useful life is determinable. The Company's intangible
assets are currently being amortized over three to five years. The Company
incurred no impairment charges as a result of SFAS No. 142 for intangibles with
determinable useful lives which are subject to amortization. (See Note 4 to the
Consolidated Financial Statements for further discussion.)
A-11
FOREIGN CURRENCY TRANSLATION
The functional currency for most of the Company's foreign subsidiaries is the
respective local currency. Revenue and expenses denominated in foreign
currencies are translated to the U.S. Dollar at average exchange rates in effect
during the year and assets and liabilities denominated in foreign currencies are
translated to the U.S. Dollar at the exchange rate in effect at the end of the
period. Foreign currency transaction gains and losses are included in the
Consolidated Statements of Operations as "Other expenses." Currency translation
of assets and liabilities (foreign investments) from the functional currency to
the U.S. Dollar are included as a component of accumulated other comprehensive
loss in stockholders' equity.
INCOME TAXES
The Company accounts for income taxes under the asset and liability approach,
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequence of events that have been recognized in the
Company's financial statements or income tax returns. Income taxes are
recognized during the year in which the underlying transactions are reflected in
the Consolidated Statements of Operations. Deferred taxes are provided for
temporary differences between amounts of assets and liabilities as recorded for
financial reporting purposes and such amounts as measured by tax laws.
DISCONTINUED OPERATIONS
The Company records amounts in discontinued operations (see Note 2 to the
Consolidated Financial Statements for further discussion) as required by the
FASB Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 is more
fully described under "Recently Issued Accounting Pronouncements" below.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is based on the weighted average number of
common shares outstanding during each year, 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 year. The Company's common
share equivalents consist of stock options and the Convertible Notes described
in Note 13 and Note 11, respectively, to the Consolidated Financial Statements.
On June 26, 2002, the Company's shareholders approved a 1-for-7 reverse
split of its common stock. Per share amounts for all periods presented in this
report have been adjusted to reflect this reverse stock split which was
effective on June 27, 2002.
A-12
NET INCOME (LOSS) PER SHARE (CONTINUED)
The following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations for 2002, 2001 and
2000 (in thousands, except per share data):
YEAR ENDED DECEMBER 31
2002 2001 2000
------------ ------------ ------------
Income (loss) from continuing operations $ (12,824) $ (1,202) $ 31,895
Discontinued operations (15,478) (56,399) 1,800
Extraordinary gain on debt extinguishment, net of tax 26,629 4,300 9,988
Cumulative effect of a change in accounting principle,
net of tax (40,748) - -
------------ ------------ ------------
Net income (loss) $ (42,421) $ (53,301) $ 43,683
============ ============ ============
Basic:
Weighted average shares outstanding 7,998 7,973 7,923
============ ============ ============
Per share amount:
Income (loss) from continuing operations $ (1.60) $ (0.15) $ 4.02
Discontinued operations (1.94) (7.07) 0.23
Extraordinary gain on debt extinguishment, net of tax 3.33 0.54 1.26
Cumulative effect of a change in accounting principle,
net of tax (5.09) - -
------------ ------------ ------------
Net income (loss) $ (5.30) $ (6.68) $ 5.51
============ ============ ============
Diluted:
Weighted average shares outstanding 7,998 7,973 7,923
Net effect of dilutive stock options - based on the treasury
stock method using average market price - - 92
------------ ------------ ------------
Total weighted average shares outstanding 7,998 7,973 8,015
============ ============ ============
Per share amount:
Income (loss) from continuing operations $ (1.60) $ (0.15) $ 3.98
Discontinued operations (1.94) (7.07) 0.22
Extraordinary gain on debt extinguishment, net of tax 3.33 0.54 1.25
Cumulative effect of a change in accounting principle,
net of tax (5.09) - -
------------ ------------ ------------
Net income (loss) $ (5.30) $ (6.68) $ 5.45
============ ============ ============
STOCK OPTIONS
As more fully discussed in Note 13 to the Consolidated Financial Statements, the
Company uses the intrinsic value method to account for stock options as opposed
to the fair value method. Under the intrinsic value method, no compensation
expense has been recognized for stock options granted to employees. The table
below presents a reconciliation of the Company's pro forma net income (loss)
giving effect to the estimated compensation expense related to stock options
that would have been reported if the Company utilized the fair value method (in
thousands, except per share data):
A-13
STOCK OPTIONS (CONTINUED)
YEAR ENDED DECEMBER 31
2002 2001 2000
------------ ------------ ------------
Net income (loss) as reported $ (42,421) $ (53,301) $ 43,683
Stock-based employee 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 (871) (667) (4,973)
------------ ------------ ------------
Pro forma net income (loss) $ (43,292) $ (53,968) $ 38,710
============ ============ ============
Basic per share:
Net income (loss) $ (5.30) $ (6.68) $ 5.51
Stock-based employee 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 (0.11) (0.09) (0.66)
------------ ------------ ------------
Pro forma net income (loss) $ (5.41) $ (6.77) $ 4.85
============ ============ ============
Diluted per share:
Net income (loss) $ (5.30) $ (6.68) $ 5.45
Stock-based employee 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 (0.11) (0.09) (0.65)
------------ ------------ ------------
Pro forma net income (loss) $ (5.41) $ (6.77) $ 4.80
============ ============ ============
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income (loss) and other
comprehensive income (loss). Other comprehensive income (loss) includes
unrealized gains or losses on derivative financial instruments and gains or
losses resulting from currency translations of foreign investments.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On December 31, 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure (SFAS No. 148). SFAS No. 148 amends
FASB Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and Accounting Principles Board (APB) Opinion No. 28, Interim
Financial Reporting, to require disclosure in the summary of significant
accounting policies of the effect of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. SFAS No. 148 is applicable to
all companies with stock-based employee compensation, regardless of whether they
account for that compensation using the fair value method of SFAS No. 123 or the
intrinsic value method of APB Opinion No. 25, Accounting for Stock Issued to
Employees. The Company adopted the disclosure provisions of SFAS 148 as of
December 31, 2002.
A-14
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In November of 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. Interpretation No. 45 requires certain
guarantees to be recorded at fair value and requires a guarantor to make
significant new disclosures, even when the likelihood of making any payments
under the guarantee is remote. Interpretation No. 45's initial recognition and
initial measurement provisions are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002; however, its disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. Although the Company has provided indirect
guarantees on behalf of certain of its wholly-owned subsidiaries, the Company
believes that these guarantees are excluded from the scope of Interpretation No.
45. The Company will continue to evaluate what effect, if any, the recognition
and measurement provisions will have on its financial statements and related
disclosures in future periods.
In June of 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS
No.146). SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).
SFAS No. 146 generally requires companies to recognize costs associated with
exit activities when they are incurred rather than at the date of a commitment
to an exit or disposal plan and is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company expects to
apply the provisions of SFAS No. 146 during the first quarter of 2003 based upon
its decision to consolidate its call center activities and close its Richmond,
California call center. See Note 18 to the Consolidated Financial Statements.
In April of 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections ("SFAS No. 145"). SFAS No. 145
rescinds both FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt ("FASB Statement No. 4"), and an amendment to that
Statement, FASB Statement No.64, Extinguishments of Debt Made to Satisfy Sinking
Fund Requirements ("FASB Statement No. 64"). FASB Statement No. 4 required that
all gains and losses from the extinguishment of debt be aggregated and, if
material, be classified as an extraordinary item, net of the related income tax
effect. Upon the adoption of SFAS No. 145, all gains and losses on the
extinguishment of debt for periods presented in the financial statements will be
classified as extraordinary items only if they meet the criteria in APB Opinion
No. 30, Reporting the Results of Operations - Reporting the Effects of disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions (APB No. 30). The provisions of SFAS No. 145
related to the rescission of FASB Statement No. 4 and FASB Statement No. 64
shall be applied for fiscal years beginning after May 15, 2002. Upon adoption in
January of 2003, the Company expects to classify amounts currently reported as
extraordinary gains on debt extinguishment as a separate line item before Income
from Continuing Operations for all periods presented. The provisions of SFAS No.
145 related to the rescission of FASB Statement No. 44, the amendment of FASB
Statement No. 13 and Technical Corrections became effective as of May 15, 2002
and did not have a material impact on the Company.
A-15
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
On October 3, 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
No. 144"). SFAS No. 144 supersedes FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and
also supersedes the accounting and reporting provisions of APB Opinion Number
30, Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions ("APB No. 30"), for segments of a business to be
disposed of. Among its many provisions, SFAS No. 144 retains the fundamental
requirements of both previous standards, however, it resolves significant
implementation issues related to FASB Statement No. 121 and broadens the
separate presentation of discontinued operations in the income statement
required by APB No. 30 to include a component of an entity (rather than a
segment of a business). The provisions of SFAS No. 144 became effective for
financial statements issued for fiscal years beginning after December 15, 2001
with early application encouraged. The Company adopted SFAS No. 144 on January
1, 2002. See Note 2 to the Consolidated Financial Statements for further
discussion.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company records all derivative instruments on the balance sheet at fair
value. On the date derivative contracts are entered into, the Company designates
the derivative as either (i) a hedge of the fair value of a recognized asset or
liability or of an unrecognized firm commitment (fair value hedge), (ii) a hedge
of a forecasted transaction or of the variability of cash flows to be received
or paid related to a recognized asset or liability (cash flow hedge), or (iii) a
hedge of a net investment in a foreign operation (net investment hedge).
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income (loss), depending on whether a derivative
is designated as part of a hedge transaction and, if it is, depending on the
type of hedge transaction. For fair value hedge transactions, changes in the
fair value of the derivative instrument are generally offset in the statement of
operations by changes in the fair value of the item being hedged. For cash flow
hedge transactions, changes in the fair value of the derivative instrument are
reported in other comprehensive income (loss). For net investment hedge
transactions, changes in the fair value are recorded as a component of the
foreign currency translation account, which is also included in other
comprehensive income (loss). The gains and losses on cash flow hedge
transactions that are reported in other comprehensive income (loss) are
reclassified to earnings in the periods in which earnings are impacted by the
variability of the cash flows of the hedged item or the forecasted transactions
are realized. The impact of ineffective hedges is recognized in results of
operations in the periods in which the hedges are deemed to be ineffective.
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 handsets, accessory programs and fees from the provision of integrated
logistics services. However, the divisions are managed separately because of the
geographic locations in which they operate.
A-16
OPERATING SEGMENTS (CONTINUED)
The Company evaluates the performance of, and allocate resources to, these
segments based on operating income (loss) from continuing operations including
allocated corporate selling, general and administrative expenses. As discussed
in Note 2 to the Consolidated Financial Statements, the Company discontinued
several operating entities, which materially affected certain operating
segments. All years presented below have been reclassified to reflect the
reclassification of discontinued operating entities to discontinued operations.
A summary of the Company's operations by segment is presented below (in
thousands) for 2002, 2001 and 2000:
Operating Income Allocated
Revenues from (Loss) from Total Allocated Income
External Continuing Segment Interest Tax Expense
Customers Operations (1) Assets Expense (2) (Benefit) (2)
-------------- ---------------- -------------- -------------- --------------
2002:
THE AMERICAS $ 493,203 $ (2,030) $ 173,371 $ 3,109 $ (1,843)
ASIA-PACIFIC 527,499 6,465 84,920 1,717 476
EUROPE 255,365 (3,688) 78,011 1,073 (1,202)
-------------- -------------- -------------- -------------- --------------
$ 1,276,067 $ 747 $ 336,302 $ 5,899 $ (2,569)
============== ============== ============== ============== ==============
2001:
The Americas $ 650,581 $ (6,481) $ 402,030 $ 4,726 $ (2,378)
Asia-Pacific 339,749 9,285 98,539 2,187 1,541
Europe 273,370 3,970 108,851 1,257 512
-------------- -------------- -------------- -------------- --------------
$ 1,263,700 $ 6,774 $ 609,420 $ 8,170 $ (325)
============== ============== ============== ============== ==============
2000:
The Americas $ 699,913 $ 30,539 $ 420,850 $ 4,638 $ 7,668
Asia-Pacific 330,489 14,653 137,600 (851) 6,609
Europe 266,762 8,977 129,337 1,970 2,180
-------------- -------------- -------------- -------------- --------------
$ 1,297,164 $ 54,169 $ 687,787 $ 5,757 $ 16,457
============== ============== ============== ============== ==============
(1) Includes $7.0 million of facility consolidation charges in The Americas
division in 2000.
(2) These items are allocated using various methods and are not necessarily
indicative of the actual interest expense and income taxes for the
applicable divisions.
Additional segment information is as follows (in thousands):
YEAR ENDED DECEMBER 31
------------------------------------------
2002 2001 2000
------------ ------------ ------------
External revenue by service line:
Wireless handset sales $ 1,017,304 $ 989,209 $ 943,968
Wireless accessory programs 96,343 137,035 201,612
Integrated logistics services 162,420 137,456 151,584
------------ ------------ ------------
$ 1,276,067 $ 1,263,700 $ 1,297,164
============ ============ ============
DECEMBER 31
------------------------------------------
2002 2001 2000
------------ ------------ ------------
Long-lived assets:
The Americas $ 38,274 $ 60,841 $ 60,656
Asia-Pacific 7,479 28,121 29,539
Europe 16,947 32,683 34,786
------------ ------------ ------------
$ 62,700 $ 121,645 $ 124,981
============ ============ ============
A-17
OPERATING SEGMENTS (CONTINUED)
In all periods presented above, the Company's operations in the United States
accounted for 99% or more of The Americas division's revenues generated from
external customers and substantially all of the long-lived assets of the
Americas division.
2. DISCONTINUED OPERATIONS
The Company adopted SFAS No. 144 at the beginning of 2002. In connection with
the adoption of SFAS No. 144, the results of operations and related disposal
costs, gains and losses for business units that we have eliminated or sold are
classified in discontinued operations, for all periods presented. See Note 1
under "Recently Issued Accounting Pronouncements" for further discussion.
During the fourth quarter of 2002, the Company and certain of its subsidiaries
sold certain operating assets of Brightpoint de Mexico, S.A. de C.V. and their
respective ownership interests in Servicios Brightpoint de Mexico, S.A. de C.V.
to Soluciones Inteligentes para el Mercado Movil, S.A. de C.V., an entity which
is wholly-owned and controlled by Brightstar de Mexico S.A. de C.V. Pursuant to
the transaction, the Company received cash consideration totaling approximately
$1.7 million and a short-term promissory note from Soluciones Inteligentes para
el Mercado Movil, S.A. de C.V. totaling approximately $1.1 million that matured
in December 2002. The repayment of the promissory note was guaranteed by
Brightstar de Mexico S.A. de C.V. The Company recorded a net loss on the
transaction of $2.2 million in 2002, which included a $3.5 million non-cash
write-off of cumulative foreign currency translation adjustments and $3.4
million in tax benefits to be realized pursuant to the transaction. In addition,
during the fourth quarter of 2002, the Company committed to a plan to sell its
Puerto Rico operations, which sale was completed in February of 2003.
Consequently, the financial results of Puerto Rico are presented in the
Consolidated Statement of Operations as "Discontinued Operations."
During the third quarter of 2002, the Company and certain of its subsidiaries
sold their respective ownership interests in Brightpoint Middle East FZE, and
its subsidiary Fono Distribution Services LLC, and Brightpoint Jordan Limited to
Persequor Limited, an entity controlled by the former Managing Director of the
Company's operations in the Middle East and certain members of his management
team. Pursuant to the transaction, the Company received two subordinated
promissory notes with face values of $1.2 million and $3.0 million that mature
in 2004 and 2006, respectively. The notes bear interest at 4% per annum and were
recorded at a discount to face value for an aggregate carrying amount at
December 31, 2002 of $3.4 million. In addition, under the Sale and Purchase
Agreement, the Company may receive additional proceeds, which are contingent
upon collection of accounts receivable from a certain customer. The Company
received $0.3 million in contingent consideration during the fourth quarter of
2002 related to the transaction. There can be no assurance the Company will
receive any additional proceeds. The Company recorded an initial loss on the
transaction of $1.6 million, including the recognition of accumulated foreign
currency translation gains of $0.3 million. Concurrent with the completion of
this transaction, $5 million of cash, which was pledged by Brightpoint Holdings
B.V. to support letters of credit utilized by the Company's operations in the
Middle East, was released and was classified as unrestricted. The Company has
paid and will pay management fees, including performance based bonuses, to
Persequor for providing management services relating to the Hong Kong-based
sales activities of Brightpoint Asia Limited which the Company retained pursuant
to the transaction. This loss and the results of operations of the Company's
former Middle East operations are reflected in discontinued operations and prior
periods have been reclassified accordingly.
A-18
2. DISCONTINUED OPERATIONS (CONTINUED)
During 2001, the Company's board of directors approved a restructuring plan
(2001 Restructuring Plan) that the Company began to implement in the fourth
quarter of 2001. The primary goal in adopting the 2001 Restructuring Plan was to
better position the Company for long-term and more consistent success by
improving its cost structure and divesting or closing operations in which the
Company believed potential returns were not likely to generate an acceptable
return on invested capital Certain markets in which the Company operated,
including Brazil, Jamaica, South Africa, Venezuela and Zimbabwe, had unusually
high risk profiles due to many factors, including among other things, high
importation duties, currency restrictions and volatile political and economic
environments. The Company determined that the risks of operating in these
markets could no longer be justified given the profitability potential of its
operations in those markets, therefore, these operations were sold or otherwise
discontinued pursuant to the 2001 Restructuring Plan. During the fourth quarter
of 2001, the Company completed the sale of its former operations in Jamaica
(Brightpoint Jamaica Limited) pursuant to the 2001 Restructuring Plan. The
Company incurred a loss on this disposal of approximately $1.3 million ($0.8
million, net of tax).
Additionally, pursuant to the 2001 Restructuring Plan, the Company completed in
January 2002, through certain of its subsidiaries, the formation of a joint
venture with Hong Kong-based Chinatron Group Holdings Limited ("Chinatron").
Chinatron is involved in the wireless telecommunications and data industry and,
is beneficially owned, in part, by the former managing director of Brightpoint
China Limited and by a former executive of Brightpoint, Inc. In addition, Jerre
L. Stead, a director of Brightpoint, Inc. became and remains a director of
Chinatron, pursuant to the transaction. The Company's Chairman of the Board and
Chief Executive Officer, Robert J. Laikin, and the former managing director of
Brightpoint China Limited were founding shareholders of Chinatron. Prior to the
Company entering into the agreement to form the joint venture, Mr. Laikin,
disposed of his interest in Chinatron primarily through the sale of his interest
to a company owned by the former managing director of Brightpoint China Limited
and by a former executive of Brightpoint, Inc. In exchange, Mr. Laikin, received
the unconditional promise from their company to pay him $350,000 ($300,000 of
which has been paid to date). In exchange for a 50% interest in Brightpoint
China Limited pursuant to the formation of the joint venture, the Company
received preference shares in Chinatron with a face value of $10 million. On
April 29, 2002, the Company announced that it had completed the sale of its
remaining 50% interest in Brightpoint China Limited to Chinatron. Pursuant to
this transaction, the Company received additional preference shares in Chinatron
with a face value of $11 million. The Company currently estimates that its
aggregate amount of Chinatron preference shares have a fair value of
approximately $2 million. See Note 3 to the Consolidated Financial Statements
for further discussion regarding the Company's investment in Chinatron
preference shares. Pursuant to these transactions, Chinatron and the Company
entered into a services agreement, whereby Chinatron provides warehouse
management services in Hong Kong supporting the Company's Hong Kong-based
Brightpoint Asia Limited operations managed by Persequor. The Company recorded
losses related to the sale of Brightpoint China Limited to Chinatron of
approximately $8.5 million during the three months ended March 31, 2002. Upon
adoption of SFAS 142, as discussed below, the Company reclassified these losses
to cumulative effect of a change in accounting principle effective January 1,
2002 as they related to goodwill that was required to be written-off pursuant
the transitional impairment test. See "Impairment Loss on Long-Term Investment"
in Management's Discussion and Analysis of Financial Condition and Results of
Operations for further discussion of the divestiture of Brightpoint China
Limited and our Chinatron investment.
A-19
2. DISCONTINUED OPERATIONS (CONTINUED)
The 2001 Restructuring Plan was also intended to improve the Company's cost
structure and, accordingly, the Company's former North America and Latin America
divisions were consolidated in 2001 and are managed as one division, referred to
as the Americas. Warehouse and logistics functions formerly based in Miami were
transferred to Indianapolis and the warehouse in Miami was closed. Additionally
the
Company's operations and activities in Germany, the Netherlands and Belgium,
including regional management, were consolidated into a new facility in Germany.
In total, the 2001 Restructuring Plan resulted in a headcount reduction of
approximately 350 employees across most areas of the Company, including
marketing, operations, finance and administration. In addition, the Miami
business and its sales office were closed during the second quarter of 2002.
This closure is reflected in discontinued operations and prior periods have been
reclassified accordingly.
For 2002 and 2001, discontinued operations experienced net losses of $12.9
million and $22.1 million, respectively, on revenue of $120 million and $561
million, respectively. In addition, these operations also experienced net losses
on disposal of discontinued operations of approximately $2.6 million and $34.3
million in 2002 and 2001, respectively . To date, the Company has recorded
approximately $38.6 million in charges during 2002 and 2001 relative to the
actions called for by the 2001 Restructuring Plan. As of December 31, 2002 the
actions called for by the 2001 Restructuring Plan were substantially complete,
however, the Company expects to continue to record adjustments through
discontinued operations as necessary.
Further details of discontinued operations were as follows:
YEAR ENDED DECEMBER 31
2002 2001 2000
-------- -------- --------
Revenue $ 119.7 $ 561.5 $ 672.1
======== ======== ========
Net operating gain (loss) $ (9.9) $ (19.9) $ 1.0
Restructuring Plan charges (2.1) (36.5) 0.8
Net loss on Middle East sale (1.3) - -
Net loss on Mexico sale (2.2) - -
-------- -------- --------
Total discontinued operations $ (15.5) $ (56.4) $ 1.8
======== ======== ========
At December 31, 2002, the Company had approximately $1.4 million in
restructuring reserves related to the 2001 Restructuring Plan.
Net assets related to discontinued operations are classified in the Consolidated
Balance Sheet at December 31, 2002, as follows (in millions):
Total current assets $ 8.1
Other non-current assets 0.2
------
Total assets $ 8.3
======
Accounts payable $ 0.9
Accrued expenses and other liabilities 5.1
------
Total liabilities $ 6.0
======
A-20
3. IMPAIRMENT LOSS ON LONG-TERM INVESTMENT
As previously discussed, the Company received approximately $21 million face
value of Chinatron preference shares pursuant to its divestiture of Brightpoint
China Limited. The Chinatron preference shares were convertible into ordinary
shares of Chinatron at a ratio of 1:1, which represented approximately a 19.9%
interest in Chinatron at June 30, 2002. Additionally, the provisions of the
Chinatron shareholder agreement and the Chinatron preference shares allow the
Company to participate in certain capital raising activities to protect the
Company against dilution. As of June 30, 2002, the Company estimated that its
investment in Chinatron had a fair value of approximately $10.3 million based on
the Company's indirect ownership interest and the projected discounted free cash
flows of Chinatron. During the third quarter of 2002, Chinatron sought to raise
additional capital to fund its operations and meet its business objectives. In
September of 2002, for liquidity reasons and to provide an incentive for other
parties to invest in Chinatron, the Company waived its rights to participate in
these capital-raising activities and agreed to modify the conversion ratio of
the preference shares. These actions resulted in a significant dilution in the
Company's indirect ownership interest. Due to these changes the Company prepared
a fair market value analysis of its investment. Based on the results of this
analysis and other factors, which included an external valuation, the Company
believes that the preference shares have a current estimated fair value of
approximately $2.0 million and, accordingly, recorded an impairment charge of
approximately $8.3 million during the third quarter of 2002.
4. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
As of January 1, 2002, the Company adopted SFAS No. 142. Pursuant to the
provisions of SFAS 142 the Company stopped amortizing goodwill as of January 1,
2002 and will perform an impairment test on its goodwill at least annually.
During the second quarter of 2002, the Company completed the transitional
impairment test required under SFAS No. 142. The initial step of the impairment
test was to identify potential goodwill impairment by comparing the fair value
of the Company's reporting units to their carrying values including the
applicable goodwill. These fair values were determined by calculating the
discounted free cash flow expected to be generated by each reporting unit taking
into account what the Company considers to be the appropriate industry and
market rate assumptions. If the carrying value exceeded the fair value, then a
second step was performed, which compared the implied fair value of the
applicable reporting unit's goodwill with the carrying amount of that goodwill,
to measure the amount of goodwill impairment, if any. As a result of the initial
transitional impairment test, the Company recorded an impairment charge of
approximately $40.7 million during the first quarter of 2002, which is presented
as a cumulative effect of a change in accounting principle, net of tax, for the
year ended December 31, 2002. On October 1, 2002, the Company performed the
required annual impairment test on its remaining goodwill and incurred no
significant additional impairment charges.
In addition to performing the required transitional impairment test on the
Company's goodwill, SFAS No. 142 required the Company to reassess the expected
useful lives of existing intangible assets including patents, trademarks and
trade names for which the useful life is determinable. At December 31, 2002,
these intangibles total $1.1 million, net of accumulated amortization of $0.8
million and are currently being amortized as required by SFAS 142 over three to
five years at approximately $0.4 million per year. The Company incurred no
impairment charges as a result of SFAS No. 142 for intangibles with determinable
useful lives which are subject to amortization.
A-21
4. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (CONTINUED)
The following table shows the Company's 2002 results presented on a comparable
basis to the 2001 and 2000 results, adjusted to exclude amortization expense
related to goodwill (in thousands, except per share data):
YEAR ENDED DECEMBER 31
---------------------------------------------
2002 2001 2000
------------ ------------ -----------
Income (loss) before extraordinary gain and cumulative
effect of a change in accounting principle - as reported $ (28,302) $ (57,601) $ 33,695
Goodwill amortization - 1,384 1,164
------------ ------------ -----------
Income (loss) before extraordinary gain and cumulative
effect of a change in accounting principle - as adjusted $ (28,302) $ (56,217) $ 34,859
============ ============ ===========
Net income (loss) - as reported $ (42,421) $ (53,301) $ 43,683
Goodwill amortization - 1,384 1,164
------------ ------------ -----------
Net income (loss) - as adjusted $ (42,421) $ (51,917) $ 44,847
============ ============ ===========
Basic per share:
Income (loss) before extraordinary gain and cumulative
effect of a change in accounting principle - as reported $ (3.54) $ (7.22) $ 4.25
Goodwill amortization - 0.17 0.15
------------ ------------ -----------
Income (loss) before extraordinary gain and cumulative
effect of a change in accounting principle - as adjusted $ (3.54) $ (7.05) $ 4.40
============ ============ ===========
Diluted per share:
Income (loss) before extraordinary gain and cumulative
effect of a change in accounting principle - as reported $ (3.54) $ (7.22) $ 4.20
Goodwill amortization - 0.17 0.15
------------ ------------ -----------
Income (loss) before extraordinary gain and cumulative
effect of a change in accounting principle - as adjusted $ (3.54) $ (7.05) $ 4.35
============ ============ ===========
Basic per share:
Net income (loss) - as reported $ (5.30) $ (6.68) $ 5.51
Goodwill amortization - 0.17 0.15
------------ ------------ -----------
Net income (loss) - as adjusted $ (5.30) $ (6.51) $ 5.66
============ ============ ===========
Diluted per share:
Net income (loss) - as reported $ (5.30) $ (6.68) $ 5.45
Goodwill amortization - 0.17 0.15
------------ ------------ -----------
Net income (loss) - as adjusted $ (5.30) $ (6.51) $ 5.60
============ ============ ===========
Weighted average common shares outstanding:
Basic 7,998 7,973 7,923
============ ============ ===========
Diluted 7,998 7,973 8,015
============ ============ ===========
A-22
4. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (CONTINUED)
The changes in the carrying amount of goodwill by operating segment for the year
ended December 31, 2002 are as follows (in thousands):
The Americas Europe Asia-Pacific Total
------------ ------------ ------------ -----------
Balance at December 31, 2001 $ 17,259 $ 21,444 $ 21,081 $ 59,784
SFAS No. 142 impairment (17,259) (10,653) (12,836) (40,748)
Divestiture of Brightpoint China Limited - - (8,023) (8,023)
Effects of foreign currency fluctuation and other - 1,987 58 2,045
------------ ------------ ------------ ------------
Balance at December 31, 2002 $ - $ 12,778 $ 280 $ 13,058
============ ============ ============ ============
5. EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT
During 2002, the Company repurchased 228,068 of its 250,000 outstanding
zero-coupon, subordinated convertible notes due in the year 2018 ("Convertible
Notes"). The repurchases were made under a plan approved by the Company's Board
of Directors on November 1, 2001, which allows it to repurchase the remaining
outstanding Convertible Notes. The aggregate purchase price for the Convertible
Notes was approximately $75.0 million (at an average cost of $329 per
Convertible Note) and was funded by a combination of working capital and a
borrowing of $15 million under the credit facility with General Electric
Commercial Finance and the Company's primary North American operating
subsidiaries, Brightpoint North America L.P. and Wireless Fulfillment Services,
LLC. Approximately $30 million of the working capital funding came from
Brightpoint Holdings B.V., the Company's primary foreign finance subsidiary.
These transactions resulted in an extraordinary gain, net of tax, of
approximately $26.6 million ($3.33 per diluted share). The tax effect of the
Convertible Note repurchases will be largely offset by net operating losses
resulting in no significant cash tax payments. As of December 31, 2002, the
remaining 21,932 Convertible Notes had an accreted book value of approximately
$12.0 million or $548 per Convertible Note.
During 2001, the Company repurchased 36,000 of its then outstanding Convertible
Notes for approximately $10 million (an average cost of $281 per Convertible
Note). These transactions resulted in an extraordinary gain, net of tax, of
approximately $4.6 million ($0.58 per diluted share).
During 2000, the Company repurchased 94,000 Convertible Notes and realized a
gain on the repurchases of approximately $16.6 million ($10.0 million, net of
tax) that was recorded as an extraordinary gain on debt extinguishment in the
Consolidated Statements of Operations.
Between January 1, and February 10, 2003, the Company repurchased an additional
17,602 Convertible Notes for a total cost of $9.7 million ($551 per Convertible
Note), with an accreted value of $9.7 million ($551 per Convertible Note). On
March 11, 2003 the Company purchased 4,201 of the Convertible Notes pursuant to
the exercise of a put option by the bondholders at their accreted value of $2.3
million, which was paid in cash. As of March 12, 2003, there were 129
Convertible Notes outstanding with an accreted value of approximately $71
thousand. The 129 outstanding Convertible Notes may be redeemed by the Company
for cash equal to the issue price plus accrued original issue discount through
the date of redemption. The Company has initiated the redemption of the
remaining Convertible Notes.
A-23
6. FACILITY CONSOLIDATION CHARGE
In 2000, the Company consolidated four Indianapolis, Indiana, locations and a
location in Bensalem, Pennsylvania, into a single, new facility located near the
Indianapolis International Airport and designed specifically for the Company and
its processes. The Company recorded a facility consolidation charge for moving
costs, the disposal of assets not used in the new facility and the estimated
impact of vacating the unused facilities, net of potential subleases. The total
amount of the charge recorded in 2000 was $7.0 million ($4.2 million after
applicable taxes or $0.52 per diluted share) and was comprised of approximately
$3.2 million in non-cash fixed asset disposals and $3.8 million in moving, lease
termination and other costs paid in cash. During 2001, the Company incurred
approximately $0.6 million in additional facility charges.
7. ACQUISITIONS AND DIVESTITURES
See Note 2 to the Consolidated Financial Statements for discussions of the
Company's divestiture activities during 2002 and 2001.
During the second half of 2001, the Company acquired certain net assets of
Dirland SA and Mega-Hertz SARL. Both companies acquired are providers of
activation and other services to the wireless telecommunications industry in
France. The purpose of these acquisitions was to expand the Company's customer
base and geographic presence in France. These transactions were accounted for as
purchases and, accordingly, the Consolidated Financial Statements include the
operating results of these businesses from the effective dates of the
acquisitions. The combined purchase price consisted of $5.3 million in cash and
the assumption of certain liabilities. As a result of these acquisitions, the
Company recorded goodwill and other intangible assets totaling approximately
$5.5 million which, pursuant to the provisions of SFAS No. 142, will not be
amortized, but will be tested for impairment at least annually.
In December of 2000, the Company acquired Advanced Portable Technologies Pty Ltd
located in Sydney, Australia, a provider of distribution and other outsourced
services to the wireless data and portable computer industry in Australia and
New Zealand. This transaction was accounted for as a purchase and, accordingly,
the Consolidated Financial Statements include the operating results of this
business from the effective date of acquisition. The purchase price consisted of
$0.9 million in cash, the assumption of certain liabilities and remaining
contingent consideration of up to $1.0 million based upon the future operating
results of the business over the three years following the acquisition. Goodwill
of approximately $1.3 million resulted from this acquisition, which has been
subsequently written-off pursuant to the implementation of SFAS No. 142, as
discussed in Note 4 to the Consolidated Financial Statements.
The impact of the acquisitions discussed above was not material in relation to
the Company's consolidated results of operations. Consequently, pro forma
information is not presented.
A-24
8. ACCOUNTS RECEIVABLE TRANSFERS
During the years ended December 31, 2002 and 2001, the Company entered into
certain transactions or agreements with banks and other third-party financing
organizations in Brazil, Ireland, Sweden, Australia, Mexico and France with
respect to a portion of its accounts receivable in order to reduce the amount of
working capital required to fund such receivables. These transactions have been
treated as sales pursuant to current accounting principles generally accepted in
the United States and, accordingly, are accounted for as off-balance sheet
arrangements.
Net funds received from the sales of accounts receivable during the years ended
December 31, 2002 and 2001 totaled $215.9 million and $151.6 million,
respectively. Fees, in the form of discounts, incurred in connection with these
sales totaled $1.9 million and $3.2 million during 2002 and 2001, respectively,
and were recorded as losses on the sale of assets. Approximately $1.2 million
and $1.4 million in 2002 and 2001, respectively, of these fees relate to
continuing operations and are included as a component of "Other expenses" in the
Consolidated Statements of Operations. The remainder of the fees in 2002 and
2001 relate to our former Mexico and Brazil operations and are included in net
loss from discontinued operations in the Consolidated Statements of Operations.
The Company is the collection agent on behalf of the 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. In certain circumstances, the Company may be required to repurchase the
corresponding accounts receivable sold, including, but not limited to, the
account receivable is in dispute or is otherwise not collectible, credit
insurance is not maintained, a violation of, the expiration or early termination
of the agreement pursuant to which these arrangements are conducted. These
agreements require our subsidiaries to provide collateral in the form of pledged
assets and/or in certain situations a guarantee its subsidiaries obligations may
be given by the Company. Pursuant to these arrangements, approximately $30.1
million and $27.0 million of trade accounts receivable were sold to and held by
banks and other third-party financing institutions at December 31, 2002 and
2001, respectively. Amounts held by banks or other financing institutions at
December 31, 2002 were for transactions related to our Ireland, France and
Sweden arrangements, all other arrangements have been terminated or allowed to
expire in 2002.
9. CONTRACT FINANCING RECEIVABLE
The Company offers financing of inventory and receivables to certain network
operator customers and their authorized dealer agents and wireless equipment
manufacturers under contractual arrangements. Under these arrangements, the
Company records the accounts receivable from sales on behalf of these customers
and inventory and accounts payable for product purchased under these
arrangements, however, the Company has the ability to require these customers,
subject to certain limitations, to assume the accounts receivable or repurchase
the inventory that we have purchased on their behalf. Consequently, the Company
is financing these receivables and inventory and has a receivable from these
customers for amounts it has financed. The amount financed pursuant to these
arrangements is recorded as a current asset under the caption "Contract
financing receivables" and any trade accounts payable pursuant to the
arrangements is recorded as a current liability under the heading "Unfunded
portion of contract financing receivable." The Company charges a fee for
providing these contract financing services and records revenue for these
integrated logistics services at the amount of the net margin rather than the
gross amount of the transactions. In addition, the Company has commitments under
certain contracts to provide inventory financing for these customers pursuant to
various limitations and provisions as defined in the applicable service
agreements. At December 31, 2002 and 2001, contract financing receivables of
$17.0
A-25
9. CONTRACT FINANCING RECEIVABLE (CONTINUED)
million and $60.4 million, respectively, included $5.8 million and $23.8
million, respectively, of wireless products located at the Company's facilities.
In addition, at December 31, 2002 and 2001, the Company had $22.1 million and
$45.5 million, respectively, in vendor payables related to purchases made for
these arrangements which it considers to be the unfunded portion of these
receivables.
The Company's contract financing activities are provided to wireless network
operators and their authorized dealer agents and wireless equipment
manufacturers located primarily throughout the United States. Decisions to grant
credit under these arrangements are generally at the discretion of the Company,
are made within guidelines established by the wireless network operators and
wireless equipment manufacturers and are subject to the Company's normal credit
granting and ongoing credit evaluation process.
10. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows (in thousands):
DECEMBER 31
----------------------------
2002 2001
------------ ------------
Furniture and equipment $ 15,595 $ 14,557
Information systems equipment and software 59,445 63,206
Leasehold improvements 5,766 7,401
------------ ------------
80,806 85,164
Less accumulated depreciation 45,110 40,117
------------ ------------
$ 35,696 $ 45,047
============ ============
Depreciation expense charged to continuing operations was $12.1 million, $10.4
million and $10.8 million in 2002, 2001 and 2000, respectively.
11. LINES OF CREDIT AND LONG-TERM DEBT
On March 11, 1998, the Company completed the issuance of zero-coupon,
subordinated, convertible notes due in the year 2018 (Convertible Notes) with an
aggregate face value of $380 million ($1,000 per Convertible Note) and a yield
to maturity of 4.00%. The Convertible Notes are subordinated to all existing and
future senior indebtedness of the Company and all other liabilities, including
trade payables of the Company's subsidiaries. The Convertible Notes resulted in
gross proceeds to the Company of approximately $172 million (issue price of
$452.89 per Convertible Note) and require no periodic cash payments of interest.
The proceeds were used initially to reduce borrowings under the Company's
revolving credit facility and to invest in highly-liquid, short-term investments
pending use in operations. On October 30, 2000, the Company announced that its
Board of Directors had approved a plan under which the Company could repurchase
up to 130,000 Convertible Notes. The Company repurchased 94,000 Convertible
Notes during the fourth quarter of 2000 and realized an extraordinary gain, net
of tax, on the repurchases of approximately $10.0 million. During the first
quarter of 2001, the Company repurchased the remaining 36,000 Convertible Notes
under the plan for approximately $10.1 million (prices ranging
A-26
11. LINES OF CREDIT AND LONG-TERM DEBT (CONTINUED)
from $278 to $283 per Convertible Note). These transactions resulted in an
extraordinary gain, net of tax, of approximately $4.6 million ($0.58 per diluted
share) after transaction and unamortized debt issuance costs and applicable
taxes. As of March 31, 2001, the Company's plan to repurchase 130,000
Convertible Notes was completed.
On November 1, 2001, the Company announced that its Board of Directors had
approved another plan under which the Company may repurchase the remaining
250,000 Convertible Notes. During 2002, the Company repurchased 228,068 or 91%
of the 250,000 outstanding Convertible Notes pursuant to the plan. The aggregate
purchase price for the Convertible Notes was approximately $75.0 million (at an
average cost of $329 per Convertible Note) and was funded by a combination of
working capital and a borrowing of $15 million under the credit facility with
General Electric Commercial Finance and the Company's primary North American
operating subsidiaries, Brightpoint North America L.P. and Wireless Fulfillment
Services, LLC discussed below. Approximately $30 million of the working capital
funding came from Brightpoint Holdings B.V., the Company's primary foreign
finance subsidiary. These transactions resulted in an extraordinary gain, net of
tax, of approximately $26.6 million ($3.33 per diluted share). The tax effect of
the Convertible Note repurchases will be largely offset by net operating losses
resulting in no significant cash tax payments. As of December 31, 2002, the
remaining 21,932 Convertible Notes had an accreted book value of approximately
$12.0 million or $548 per Convertible Note, which approximated the fair value.
Between January 1, and February 10, 2003, the Company repurchased an additional
17,602 Convertible Notes for a total cost of $9.7 million ($551 per Convertible
Note), with an accreted value of $9.7 million ($551 per Convertible Note). On
March 11, 2003 the Company purchased 4,201 of the Convertible Notes pursuant to
the exercise of a put option by the bondholders at their accreted value of $2.3
million, which was paid in cash. As of March 12, 2003, there were 129
Convertible Notes outstanding with an accreted value of approximately $71
thousand. The 129 outstanding Convertible Notes may be redeemed by the Company
for cash equal to the issue price plus accrued original issue discount through
the date of redemption. The Company has initiated the redemption of the
remaining Convertible Notes.
On October 31, 2001, the Company's primary North American operating
subsidiaries, Brightpoint North America L.P. and Wireless Fulfillment Services,
LLC (the Borrowers), entered into a new revolving credit facility, with General
Electric Capital Corporation (GE Capital) which was amended on December 21,
2001, September 27, 2002 and December 13, 2002 (the Revolver) to provide capital
for its North American operations. GE Capital acted as agent for a syndicate of
banks (the Lenders). The Revolver replaces the Company's former Bank One
multicurrency facility, does not prohibit the Company from borrowing additional
funds outside of the United States and expires in October of 2004. The Revolver
provides borrowing availability, subject to borrowing base calculations and
other limitations, of up to a maximum of $70 million and currently bears
interest, at the Borrowers' option, at the prime rate plus 1.50% or LIBOR plus
3.00%. The applicable interest rate that the Borrowers are subject to can be
adjusted quarterly based upon certain financial measurements defined in the
Revolver. The Revolver is guaranteed by Brightpoint, Inc. and is secured by,
among other things, all of the Borrowers' assets in North America. The Company
also has pledged certain intellectual property and the capital stock of certain
of its subsidiaries as collateral for the Revolver. The Revolver is a secured
asset-based facility where a borrowing base is calculated periodically using
eligible accounts receivable and inventory, subject to certain adjustments.
Eligible accounts receivable and inventories fluctuate over time which can
increase or decrease borrowing availability. The terms of the Revolver include
negative covenants that, among other
A-27
11. LINES OF CREDIT AND LONG-TERM DEBT (CONTINUED)
things, limit the Borrowers' ability to sell certain assets and make certain
payments outside the normal course of business, as well as prohibit us from
amending the terms of the Convertible Notes or our distribution agreement with
Nokia Inc. in the United States without the prior written consent of GE Capital.
The provisions of the Revolver are such that if the Company's borrowing
availability falls between $12.5 million and $10.0 million, the Company is
subject, during such time, to a minimum fixed charge coverage ratio as defined
in the Revolver . If the Company's borrowing availability falls below $10.0
million, the Company is then subject at all times thereafter to a minimum fixed
charge coverage ratio as defined in the Revolver. The provisions of the Revolver
require the Company to maintain at all times a minimum borrowing availability of
$7 million. Any of the following events could cause the Company to be in default
under the Revolver, including but not limited to, (i) the expiration or
termination of the Company's distribution agreement in the United States with
Nokia Inc., (ii) a change in control of the Company, (iii) failure to maintain a
tangible net worth, subject to certain adjustments, of at least $75 million,
(iv) the borrowing availability under the Revolver falling below $7 million or
(v) the violation of the applicable fixed charge coverage ratio. In the event of
default, the Lenders may (i) terminate all or a portion of the Revolver with
respect to further advances or the incurrence of further letter of credit
obligations, (ii) declare all or any portion of the obligations due and payable
and require any and all of the letter of credit obligations be cash
collateralized, or (iii) exercise any rights and remedies provided to the
Lenders under the loan document or at law or equity. Additionally, the Lenders
may increase the rate of interest applicable to the advances and the letters of
credit to the default rate as defined in the agreement.
Subject to certain restrictions and limitations set forth in the Revolver, the
Company may use certain proceeds under the Revolver to repurchase its
outstanding Convertible Notes. At December 31, 2002, there was no amount
outstanding under the Revolver and available funding, net of the applicable
required availability minimum at December 31, 2002, was $29.5 million. At
December 31, 2001, there was approximately $23.6 million outstanding under the
Revolver at an interest rate of 6.0% and available funding, net of the
applicable required availability minimum at December 31, 2001, was approximately
$36.4 million. At December 31, 2002, 2001 and 2000, the Company was in
compliance with the covenants in its credit agreements and interest payments for
2002, 2001 and 2000 were approximately $1.4 million, $4.3 million and $6.7
million, respectively.
In December of 2002, the Company's primary Australian operating subsidiaries,
Brightpoint Australia Pty Ltd and Advanced Portable Technologies Pty Limited,
entered into a revolving credit facility (the Facility) with GE Commercial
Finance in Australia. The Facility, which matures in December of 2005, provides
borrowing availability, subject to borrowing base calculations and other
limitations, of up to a maximum amount of $50 million Australian Dollars
(approximately $28.2 million U.S. Dollars at December 31, 2002). Borrowings on
the Facility were used to repay borrowings under the Westpac overdraft facility
discussed below and to repay intercompany loans with Brightpoint Holdings B.V.,
the Company's primary foreign finance subsidiary. Future borrowings under the
Facility will be used for general working capital purposes. The Facility is
subject to certain financial covenants, which include maintaining a minimum
fixed charge coverage ratio and bears interest at the Bank Bill Swap Reference
rate plus 2.9%. The Facility is a secured asset-based facility where a borrowing
base is calculated periodically using eligible accounts receivable and
inventory, subject to certain adjustments. Eligible accounts receivable and
inventories fluctuate over time which can increase or decrease borrowing
availability. At December 31, 2002, there was $10.1 million outstanding under
the Facility at an interest rate of approximately 7.8% and available funding
under the Facility was approximately $10.7 million.
A-28
11. LINES OF CREDIT AND LONG-TERM DEBT (CONTINUED)
During 2001, Brightpoint Australia Pty Ltd, entered into a short-term line of
credit facility with Westpac Banking Corporation. The facility, which was due on
demand, had borrowing availability of up to $10 million Australian Dollars
(approximately $5.1 million U.S. Dollars at December 31, 2001) and bore interest
at Westpac's base overdraft rate plus 1.95% to 3.25%. The facility was secured
by a fixed and floating charge over all of the assets of Brightpoint Australia
Pty Ltd and was guaranteed by the Company. At December 31, 2001 there was
approximately U.S. $4.2 million outstanding under this facility at an interest
rate of approximately 8.9%. As discussed above, during the fourth quarter of
2002, the Westpac facility was repaid and terminated.
During 2001, one of the Company's subsidiaries, Brightpoint (France) SARL,
entered into a short-term line of credit facility with Natexis Banque. The
facility had borrowing availability of up to approximately 6.9 million Euros
(approximately $6.2 million U.S. Dollars at December 31, 2001), was guaranteed
by the receivables of one of Brightpoint (France) SARL's customers and bore
interest at EURIBOR plus 2.5%. At December 31, 2001, there was $6.1 million
outstanding under this facility at an interest rate of approximately 5.8%.
During the third quarter of 2002, this facility was terminated by the respective
parties and Brightpoint (France) SARL and Natexis Banque entered into an
agreement whereby Natexis Banque purchases certain accounts receivable from
Brightpoint (France) SARL. See Note 8 to the Consolidated Financial Statements.
Another of the Company's subsidiaries, Brightpoint Sweden AB , has a short-term
line of credit facility with SEB Finans AB. The facility has borrowing
availability of up to $15 million Swedish Krona (approximately $1.7 million U.S.
Dollars at December 31, 2002) and bears interest at 4.6%. The facility is
supported by a guarantee provided by the Company. At December 31, 2002 and 2001,
there were no amounts outstanding under this facility.
In January 2002, in connection with the agreement made with Chinatron as
discussed in Note 2 to the Consolidated Financial Statements, Brightpoint China
Limited entered into two separate credit facilities which were supported by two
cash-secured letters of credit totaling approximately $10 million issued by the
Company. The Company sold its remaining interests in Brightpoint China Limited
in April of 2002 and, consequently, both of the cash-secured letters of credit
supporting these facilities were released.
Cash-secured letters of credits of approximately $13.4 million supporting
certain of our subsidiaries vendor credit lines in the Asia-Pacific division
were issued by financial institutions on behalf of the Company and are
outstanding at December 31, 2002. The related cash collateral has been reported
under the heading "Pledged Cash" in the Consolidated Balance Sheet.
A-29
12. INCOME TAX EXPENSE (BENEFIT)
For financial reporting purposes, income (loss) from continuing operations
before income taxes, by tax jurisdiction, is comprised of the following (in
thousands):
YEAR ENDED DECEMBER 31
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
United States $ (14,417) $ (12,382) $ 3,381
Foreign (976) 10,855 44,971
------------ ------------ ------------
$ (15,393) $ (1,527) $ 48,352
============ ============ ============
The reconciliation for 2002, 2001 and 2000 of income tax expense (benefit)
computed at the U.S. federal statutory tax rate to the Company's effective
income tax rate is as follows:
2002 2001 2000
---- ---- ----
Tax at U.S. federal statutory rate 35.0% 35.0% 35.0%
State and local income taxes, net of U.S. federal benefit 2.7 3.1 1.0
Net benefit of tax on foreign operations (17.4) (17.0) (4.7)
Other (3.6) 0.2 2.7
---- ---- ----
16.7% 21.3% 34.0%
==== ==== ====
Significant components of the provision for income tax expense (benefit) from
continuing operations are as follows (in thousands):
2002 2001 2000
------------ ------------ ------------
Current:
Federal $ (15,810) $ 1,801 $ 6,380
State (2,731) 702 879
Foreign 3,120 3,640 11,112
------------ ------------ ------------
(15,421) 6,143 18,371
------------ ------------ ------------
Deferred:
Federal 11,606 (6,145) (1,216)
State 684 465 (444)
Foreign 562 (788) (254)
------------ ------------ ------------
12,852 (6,468) (1,914)
------------ ------------ ------------
$ (2,569) $ (325) $ 16,457
============ ============ ============
Income tax expense (benefit) for 2002, 2001 and 2000 from discontinued
operations were $(3.4) million, $(15.7) million and $(1.5) million,
respectively.
A-30
12. INCOME TAX EXPENSE (BENEFIT) (CONTINUED)
Components of the Company's net deferred tax asset after valuation allowance are
as follows (in thousands):
DECEMBER 31
----------------------------
2002 2001
------------ ------------
Deferred tax assets:
Current:
Capitalization of inventory costs $ 489 $ 893
Allowance for doubtful accounts 546 583
Accrued liabilities and other 678 661
Noncurrent:
Depreciation 262 -
Other long-term investments 3,447 3,597
Net operating losses and other carryforwards 8,724 15,726
------------ ------------
14,146 21,460
Valuation allowance (8,682) (7,039)
------------ ------------
5,464 14,421
============ ============
Deferred tax liabilities:
Noncurrent:
Depreciation - (155)
Other assets (9,407) (5,108)
------------ ------------
(9,407) (5,263)
------------ ------------
$ (3,943) $ 9,158
============ ============
Income tax payments (receipts) were ($8.4) million, $6.5 million and $5.6
million in 2002, 2001 and 2000, respectively.
At December 31, 2002, the Company had net operating loss carryforwards of $6.4
million, all of which have no expiration date. Undistributed earnings of the
Company's foreign operations were approximately $21.3 million at December 31,
2002. Those earnings are considered to be indefinitely reinvested and,
accordingly, no provision for U.S. federal or state income taxes or foreign
withholding taxes has been made. Upon distribution of those earnings, the
Company would be subject to U.S. income taxes (subject to a reduction for
foreign tax credits) and withholding taxes payable to the various foreign
countries. Determination of the amount of unrecognized deferred U.S. income tax
liability is not practicable; however, unrecognized foreign tax credit
carryovers may be available to reduce some portion of the U.S. tax liability.
A-31
13. STOCKHOLDERS' EQUITY
All references in the financial statements related to share amounts, per share
amounts, average shares outstanding and information concerning stock option
plans have been adjusted retroactively to reflect stock splits, including the
Company's 1-for-7 reverse split of its common stock effective June 27, 2002.
The Company has a Stockholders' Rights Agreement, commonly known as a "poison
pill," which provides that in the event an individual or entity becomes a
beneficial holder of 15% or more of the shares of the Company's capital stock,
other stockholders of the Company shall have the right to purchase shares of the
Company's (or in some cases, the acquiror's) common stock at 50% of its then
market value.
The Company has authorized 1.0 million shares of preferred stock which remain
unissued. The Board of Directors has not yet determined the preferences,
qualifications, relative voting or other rights of the authorized shares of
preferred stock.
STOCK OPTION PLANS
The Company has three fixed stock option plans, which reserve shares of common
stock for issuance to executives, key employees, directors and others.
The Company maintains the 1994 Stock Option Plan whereby employees of the
Company and others are eligible to be granted incentive stock options or
non-qualified stock options. Under this plan there are 1.5 million common shares
reserved for issuance of which 909,732 were authorized but unissued at December
31, 2002 and 2001. The Company also maintains the 1996 Stock Option Plan whereby
employees of the Company and others are eligible to be granted non-qualified
stock options. Under this plan there are 821,428 common shares reserved for
issuance of which 524,427 were authorized but unissued at December 31, 2002 and
2001. For both plans, a committee of the Board of Directors determines the time
or times at which the options will be granted, selects the employees or others
to whom options will be granted and determines the number of shares covered by
each option, as well as the purchase price, time of exercise (not to exceed ten
years from the date of the grant) and other terms of the option.
The Company also maintains the Non-Employee Directors Stock Option Plan whereby
non-employee directors are eligible to be granted non-qualified stock options.
Under this plan there are 133,928 common shares reserved for issuance of which
74,920 were authorized but unissued at December 31, 2002 and 2001. In years
prior to 2003, options to purchase 10,000 shares of common stock were granted to
each newly elected non-employee director and, on the first day of each year,
each individual elected and continuing as a non-employee director received an
option to purchase 4,000 shares of common stock. Effective as of December 31,
2002, no further grants shall be made under the plan by action of the Board of
Directors of the Company.
A-32
13. STOCKHOLDERS' EQUITY (CONTINUED)
The exercise price of stock options granted may not be less than the fair market
value of a share of common stock on the date of the grant. Options become
exercisable in periods ranging from one to three years after the date of the
grant. Information regarding these option plans for 2002, 2001 and 2000 is as
follows:
2002 2001 2000
-----------------------------------------------------------------------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
--------- ------------ --------- ---------- --------- ------------
Options outstanding,
beginning of year 730,305 $ 46.70 1,048,115 $ 71.47 941,460 $ 65.94
Options granted 802,794 6.62 136,786 26.25 324,329 74.90
Options exercised - - - - (152,180) 43.54
Options canceled (167,892) 51.31 (454,596) 97.58 (65,494) 73.57
--------- ------------ --------- ---------- --------- ------------
Options outstanding,
end of year 1,365,207 $ 22.57 730,305 $ 46.99 1,048,115 $ 71.47
========= ============ ========= ========== ========= ============
Options exercisable,
end of year 496,815 $ 43.84 435,997 $ 51.66 522,053 $ 71.19
========= ============ ========= ========== ========= ============
Option price range at end
of year $1.49 - $122.50 $19.04 - $133.42 $24.50 - $133.42
Option price range for
exercised shares - - $ 26.88 - $78.40
Options available for grant
at year end 143,902 778,608 174,470
Weighted average fair value
of options granted during
the year $ 3.49 $ 12.74 $ 35.63
On August 31, 2001, the Company made an offer (Offer to Exchange), to its
employees and members of the Board of Directors of the Company, to exchange all
options to purchase shares of its common stock outstanding under the Company's
1994 Stock Option Plan, 1996 Stock Option Plan and Non-Employee Directors Stock
Option Plan which options had (i) a grant date prior to March 1, 2001, and (ii)
an exercise price in excess of $70.00 per share. In exchange for the options,
the participants (a) received a cash payment and (b) received the grant of a new
option or new options, as applicable, in the amounts upon the terms and subject
to the conditions as set forth in the Offer to Exchange.
This Offer expired on October 15, 2001. The total amount of cash paid and
recognized as compensation expense in 2001 pursuant to the Offer to Exchange was
approximately $0.4 million. The individuals that were eligible and elected to
participate in the Offer were granted a new option or new options, as
applicable, on the first business day which is at least six months and one day
from the cancellation date. The number of shares subject to the new option or
new options, as applicable, was equal to one-third of the shares subject to the
options tendered and accepted by the Company for cancellation, rounded up to the
nearest whole share.
A-33
13. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about the fixed price stock options
outstanding at December 31, 2002.
Exercisable
Weighted ---------------------------------
Number Average Number
Outstanding at Remaining Weighted Outstanding at Weighted
Range of December 31, Contractual Average December 31, Average
Exercise Prices 2002 Life Exercise Price 2002 Exercise Price
---------------------- -------------- ----------- -------------- -------------- --------------
$ 1.49 - $ 6.37 442,681 5 years $ 4.95 14,047 $ 6.37
$ 8.69 - $ 20.09 344,285 5 years $ 8.83 1,429 $ 20.09
$ 22.75 - $ 43.61 357,166 2 years $ 34.77 293,532 $ 35.97
$ 47.03 - $ 122.50 221,075 2 years $ 59.51 187,807 $ 59.13
Disclosure of pro forma information regarding net income and earnings per share
is required to be presented as if the Company has accounted for its employee
stock options under the fair value method. The fair value for options granted by
the Company is estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions:
2002 2001 2000
---- ---- ----
Risk-free interest rate 2.74% 5.47% 5.46%
Dividend yield 0.00% 0.00% 0.00%
Expected volatility .84 .74 .72
Expected life of the options (years) 2.75 2.76 2.76
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
A-34
13. STOCKHOLDERS' EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
are amortized to expense over the related vesting period. Because compensation
expense is recognized over the vesting period, the initial impact on pro forma
net income for 2002, 2001 and 2000 may not be representative of compensation
expense in future years (including 2002), when the effect of amortization of
multiple awards would be reflected in pro forma net income (loss). The Company's
pro forma information giving effect to the estimated compensation expense
related to stock options is as follows (in thousands, except per share data):
YEAR ENDED DECEMBER 31
-------------------------------------------------
2002 2001 2000
------------ ----------- -------------
Net income (loss) as reported $ (42,421) $ (53,301) $ 43,683
Stock-based employee 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 (871) (667) (4,973)
------------ ----------- -------------
Pro forma net income (loss) $ (43,292) $ (53,968) $ 38,710
============ =========== =============
Basic per share:
Net income (loss) $ (5.30) $ (6.68) $ 5.51
Stock-based employee 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 (0.11) (0.09) (0.66)
------------ ----------- -------------
Pro forma net income (loss) $ (5.41) $ (6.77) $ 4.85
============ =========== =============
Diluted per share:
Net income (loss) $ (5.30) $ (6.68) $ 5.45
Stock-based employee 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 (0.11) (0.09) (0.65)
------------ ----------- -------------
Pro forma net income (loss) $ (5.41) $ (6.77) $ 4.80
============ =========== =============
EMPLOYEE STOCK PURCHASE PLAN
During 1999, the Company's shareholders approved the 1999 Brightpoint, Inc.
Employee Stock Purchase Plan (ESPP). The ESPP, available to substantially all
employees of the Company, is designed to comply with Section 423 of the Internal
Revenue Code for employees living in the United States and eligible employees
may authorize payroll deductions of up to 10% of their monthly salary to
purchase shares of the Company's common stock at 85% of the lower of the fair
market value as of the beginning or ending of each month. Each employee is
limited to a total monthly payroll deduction of $2,000 for ESPP purchases. The
Company reserved 2,000,000 shares for issuance under the ESPP. During 2002, 2001
and 2000, employees made contributions to the ESPP to purchase 41,662, 13,390,
and 8,116 shares, respectively, at a weighted-average price of $2.65, $18.41 and
$40.32 per share, respectively.
A-35
14. DERIVATIVE FINANCIAL INSTRUMENTS
From time to time the Company has entered into derivative contracts to hedge
forecasted future cash flows and net investments in foreign operations. The
Company utilized interest rate swaps to hedge interest rate risk on its
multi-currency borrowings and forward exchange contracts with maturities
generally less than twelve months to hedge a portion of its forecasted
transactions. The fair value of the Company's foreign currency forward contracts
by currency and hedge designation recorded as liabilities was as follows at
December 31, 2000, (in thousands):
2000
--------------------------------
Cash Flow Net Investment
---------- --------------
Euro $ (291) $ (3,819)
Hong Kong Dollar (18) -
Swedish Krona - (1,207)
Australian Dollar - (1,425)
---------- --------------
$ (309) $ (6,451)
========== ==============
There were no open cash flow or net investment hedges at December 31, 2002 and
2001.
Gains and losses recognized in earnings on cash flow hedges and the gains and
losses from net investments hedges included as a component of accumulated other
comprehensive loss in stockholders' equity have not been significant.
15. LEASE ARRANGEMENTS
The Company leases its office and warehouse/distribution space as well as
certain furniture and equipment under operating leases. Total rent expense for
all operating leases was $9.2 million, $13.4 million and $11.5 million for 2002,
2001 and 2000, respectively.
The aggregate future minimum payments on the above leases are as follows (in
thousands):
YEAR ENDING DECEMBER 31
-----------------------
2003 $ 10,470
2004 9,010
2005 6,635
2006 6,176
2007 5,682
THEREAFTER* 52,708
----------
$ 90,681
==========
*Includes approximately $48.1 million related to the Company's 495,000 square
foot facility located in Plainfield, Indiana, which the initial lease term
expires in 2019.
A-36
On February 19, 2003, the Company announced that it will consolidate its
Richmond, California call center operation into its Plainfield, Indiana
facility. The operating lease for the facility in Richmond, California expires
in March of 2009 and future minimum lease payments included above total $6.8
million.
16. EMPLOYEE SAVINGS PLAN
The Company maintains an employee savings plan which permits employees based in
the United States with at least thirty days of service to make contributions by
salary reduction pursuant to section 401(k) of the Internal Revenue Code. After
one year of service, the Company matches 50% of employee contributions, up to 6%
of each employee's salary in cash. Prior to 2002, the Company matched 25% of
employee contributions, up to 6% of each employee's salary in the Company's
common stock. In connection with the required match, the Company's contributions
to the Plan were $0.3 million, $0.2 million and $0.2 million in 2002, 2001 and
2000, respectively. The employee savings plan was restated in 2001 in order to
comply with certain laws that have become effective since the Plan's last
amendment. Effective January 1, 2002, the Plan was amended to allow employees to
direct the investment of their Company matching contributions in any of the
Plan's investment options including Company common stock. Effective May 1, 2002,
the plans investment in the Company's common stock fund was closed to new
contributions and incoming transfers and participating employees were able to
direct their pre-2002 matching contribution accounts either remain invested in
Company stock or be transferred to other Plan investment funds.
17. CONTINGENCIES
The Company and several of its executive officers and directors were named as
defendants in two complaints filed in November and December 2001, in the United
States District Court for the Southern District of Indiana, entitled Weiss v.
Brightpoint, Inc., et. al., Cause No. IP01-1796-C-T/K; and Mueller v.
Brightpoint, Inc., et. al., Cause No. IP01-1922-C-M/S. In February 2002, the
Court consolidated the Weiss and Mueller actions and appointed John Kilcoyne as
lead plaintiff in this action which is now known as In re Brightpoint, Inc.
Securities Litigation. A consolidated amended complaint was filed in April 2002.
The action is a purported class action asserted on behalf of all purchasers of
the Company's publicly traded securities between January 29, 1999 and January
31, 2002 alleging violations of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder by the Company and certain of its
officers and directors and violations of Section 20(a) of the Exchange Act by
the individual defendants.
The amended complaint alleges, among other things, that the Company
intentionally concealed and falsified its financial condition and issued
financial statements which violated generally accepted accounting principles, in
order to prevent being declared in default under certain loan covenants under
its lines of credit. The amended complaint also alleges that due to the false
financial statements the Company's stock was traded at artificially inflated
prices. Plaintiffs seek unspecified compensatory damages, including interest,
against all of the defendants and recovery of their reasonable litigation costs
and expenses. The Company has moved to dismiss the amended complaint and has
been in negotiations with plaintiffs' counsel in an effort to reach a settlement
of this dispute, but there can be no assurance that a settlement of this matter
will be reached. If a settlement is not reached, then the Company will defend
this matter vigorously.
In February 2002, Nora Lee, filed a complaint in the Circuit Court, Marion
County, Indiana, Derivatively on Behalf of Nominal Defendant Brightpoint, Inc.,
vs. Robert J. Laikin, et. al. and Brightpoint, Inc. as a Nominal Defendant,
Cause No. 49C01-0202-CT-000399.
A-37
17. CONTINGENCIES (CONTINUED)
The plaintiff alleges, among other things, that certain of the individual
defendants, including certain of the Company's current officers and directors,
sold the Company's common stock while in possession of material non-public
information regarding the Company, that the individual defendants violated their
fiduciary duties of loyalty, good faith and due care by, among other things,
causing the Company to disseminate misleading and inaccurate financial
information, failing to implement and maintain internal adequate accounting
control systems, wasting corporate assets and exposing the Company to losses.
The plaintiff is seeking to recover unspecified damages from all defendants, the
imposition of a constructive trust for the amounts of profits received by the
individual defendants who sold the Company's common stock and recovery of
reasonable litigation costs and expenses.
The parties have filed a stipulation agreeing to stay all proceedings in this
derivative action pending a decision on the motions to dismiss the amended
complaint in the In Re: Brightpoint, Inc. Securities Litigation action. The
Company has been in negotiations with plaintiff's counsel in an effort to reach
a settlement of this dispute, but there can be no assurance that a settlement of
this matter will be reached. If a settlement is not reached, then the Company's
Board of Directors will consider what further action to take in this matter.
A complaint was filed on November 23, 2001 against the Company and 87 other
defendants in the United States District Court for the District of Arizona,
entitled Lemelson Medical, Education and Research Foundation LP v. Federal
Express Corporation, et.al., Cause No. CIV01-2287-PHX-PGR. The plaintiff claims
that the Company and other defendants have infringed 7 patents alleged to cover
bar code technology. The case seeks unspecified damages, treble damages and
injunctive relief. The Court has ordered the case stayed pending the decision in
a related case in which a number of bar code equipment manufacturers have sought
a declaration that the patents asserted are invalid and unenforceable. That
trial concluded in January 2003, but the Court has not yet issued its decision,
and the decision may not be issued for several months. The Company disputes
these claims and intends to defend this matter vigorously.
A complaint was filed against the Company on November 25, 2002 in the United
States District Court for the Southern District of Indiana, entitled Chanin
Capital Partners LLC v. Brightpoint, Inc., Cause No. CV-1834-JDT. The plaintiff
claims the Company breached a services contract with defendant under which the
plaintiff alleges it was entitled to receive both a monthly advisory fee of
$125,000 and an additional fee, due under certain specified circumstances, of
$1.5 million less the amount of any previously-paid monthly advisory fees. The
plaintiff seeks compensatory damages in an amount including, but not limited to
$1.5 million, less advisory fees paid and payable, plus unreimbursed reasonable
expenses, applicable pre-judgment and post-judgment statutory interest, and
reasonable costs of the action. In addition, the plaintiff claims that it is
entitled to recover $125,000 for a monthly advisory fee on a theory of account
stated. The Company disputes these claims and intends to defend this matter
vigorously.
The Company has responded to requests for information and subpoenas from the
Securities and Exchange Commission (SEC) in connection with an investigation of
certain matters including its accounting treatment of a certain contract entered
into with an insurance company. In addition, certain of the Company's officers,
directors and employees have provided testimony to the SEC.
A-38
17. CONTINGENCIES (CONTINUED)
The Company is from time to time, also involved in certain legal proceedings in
the ordinary course of conducting its business. While the ultimate liability
pursuant to these actions cannot currently be determined, the Company believes
these legal proceedings will not have a material adverse effect on its financial
position.
The Company's Certificate of Incorporation and By-laws provide for it to
indemnify its officers and directors to the extent permitted by law. In
connection therewith, the Company has entered into indemnification agreements
with its executive officers and directors. In accordance with the terms of these
agreements the Company has reimbursed certain of its former and current
executive officers and intends to reimburse its officers and directors for their
personal legal expenses arising from certain pending litigation and regulatory
matters.
The Company's subsidiary in South Africa whose operations were discontinued
pursuant to the 2001 Restructuring Plan has received an assessment from the
South Africa Revenue Service ("SARS") regarding value-added taxes the SARS
claims are due, relating to certain product sale and purchase transactions
entered into by our subsidiary in South Africa from 2000 to 2002. Although the
Company's liability pursuant to this assessment by the SARS, if any, cannot
currently be determined, the Company believes the range of the potential
liability is between $0 and $1.2 million U.S. dollars (at current exchange
rates) including penalties and interest.
The Company has entered into employment agreements with its executive officers
and certain key employees. Pursuant to these agreements, the Company could have
a significant liability upon termination, of these key employees or executive
officers or a change in control of the Company, as defined in the agreements.
For a discussion of the Company's executive officers' employment agreements see
"Employment Agreements" under Item 11 - Executive Compensation in this Annual
Report on Form 10-K.
18. SUBSEQUENT EVENT
On February 19, 2003, The Company announced that it will consolidate its
Richmond, California call center operation into its Plainfield, Indiana,
facility to reduce costs and increase productivity and profitability in its
Americas division. The Company expects to record a pre-tax charge of
approximately $4.0 million to $4.5 million in the first quarter of 2003, which
includes the present value of estimated lease costs, net of an anticipated
sublease; losses on the disposal of assets, severance and other costs.
A-39
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations are as follows (in thousands, except per
share data):
2002 FIRST SECOND THIRD FOURTH
-------------------------------- ------------ ------------ ------------ ------------
REVENUE $ 295,107 $ 302,521 $ 336,761 $ 341,678
GROSS PROFIT 16,230 14,454 19,967 21,343
INCOME (LOSS) FROM CONTINUING
OPERATIONS (3,297) (5,078) (7,543) 3,092
NET INCOME (LOSS) (47,953) (5,224) 9,494 1,261
BASIC PER SHARE:
INCOME (LOSS) FROM CONTINUING
OPERATIONS $ (0.41) $ (0.64) $ (0.94) $ 0.39
NET INCOME (LOSS) $ (6.01) $ (0.65) $ 1.19 $ 0.16
DILUTED PER SHARE:
INCOME (LOSS) FROM CONTINUING
OPERATIONS $ (0.41) $ (0.64) $ (0.94) $ 0.38
NET INCOME (LOSS) $ (6.01) $ (0.65) $ 1.19 $ 0.16
2001 First Second Third Fourth
-------------------------------- ------------ ------------ ------------ ------------
Revenue $ 300,849 $ 296,493 $ 343,310 $ 323,048
Gross profit 21,257 8,931 20,921 22,666
Income (loss) from continuing
operations 1,398 (4,930) 1,098 1,232
Net income (loss) 7,024 (6,866) (6,881) (46,578)
Basic per share:
Income (loss) from continuing
operations $ 0.17 $ (0.62) $ 0.14 $ 0.15
Net income (loss) $ 0.88 $ (0.86) $ (0.86) $ (5.84)
Diluted per share:
Income (loss) from continuing
operations $ 0.17 $ (0.62) $ 0.14 $ 0.15
Net income (loss) $ 0.88 $ (0.86) $ (0.86) $ (5.84)
Note: I nformation in any one quarterly period should not be considered
indicative of annual results due to the effects of seasonality on the Company's
business in certain markets. The information presented above reflects:
- the effects of divestitures and the related change in classification
of discontinued operations as more fully described in Note 2 to the
Consolidated Financial Statements;
- the cumulative effect of a change in accounting principle in the first
quarter of 2002 as more fully described in Note 4 to the Consolidated
Financial Statements;
- extraordinary gains on the extinguishment of debt in the first quarter
of 2001 and the second, third and fourth quarters of 2002 as described
in Note 5 to the Consolidated Financial Statements; and
- a non-cash investment impairment charge in the third quarter of 2002
as described in Note 3 to the Consolidated Financial Statements.
A-40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Brightpoint, Inc. is one of the largest distributors of wireless handsets and
accessories in the world, with operations centers and/or sales offices in
various countries including Australia, Colombia, France, Germany, Hong Kong,
Ireland, New Zealand, Norway, the Philippines, Sweden and the United States. In
addition, we provide outsourced services including, procurement, fulfillment,
customized packaging, prepaid and e-business solutions, activation management,
inventory management and other outsourced services. Our customers include
wireless network operators, resellers, retailers and wireless equipment
manufacturers. We also provide integrated logistics services to wireless
equipment manufacturers and wireless network operators along with their
associated service providers, resellers, agents and other retail channels.
In 2002, we experienced a net loss of $42.4 million ($5.30 per share) on
revenues of $1.3 billion, which included a cumulative effect of a change in
accounting principle of $40.7 million ($5.09 per share), an extraordinary gain
on the extinguishment of debt of $26.6 million ($3.33 per share) and losses in
discontinued operations of $15.5 million ($1.94 per share). This net loss
compared to a net loss of $53.3 million ($6.68 per share) on revenues of $1.3
billion in 2001, which included losses in discontinued operations of $56.4
million ($7.07 per share) and an extraordinary gain on the extinguishment of
debt of $4.3 million ($0.54 per share). Loss from continuing operations in 2002
was $12.8 million ($1.60 per share) as compared to $1.2 million ($0.15 per
share) in 2001. The loss from continuing operations in 2002 included an $8.3
million non-cash investment impairment charge related to our investment in Hong
Kong based Chinatron Group Holdings Limited (Chinatron). The increased loss from
continuing operations in 2002 as compared to 2001 was primarily the result of
the investment impairment charge noted above, and decreases in gross and
operating margins in 2002. Our gross and operating margins in 2002 decreased
when compared to 2001 primarily as a result of a shift in service line revenue
from accessories and integrated logistic services to lower margin handset sales,
pricing pressures related to our integrated logistics services and increased
selling, general and administrative costs in 2002. The increased selling,
general and administrative costs in 2002 compared to 2001, were primarily
attributable to one-time costs resulting from cost reduction action, increased
legal costs, increased bad debt expenses and severance cost related to
management changes.
In 2002, we significantly reduced working capital utilized in our operations and
reduced debt. Working capital was reduced to $61 million at December 31, 2002
from $184 million at December 31, 2001 and we generated cash flow from
operations of $70 million in 2002 as compared to $51 million in 2001. We devoted
significant amounts of our cash resources in 2002, including borrowings under
our credit facilities, to repurchase 91% of our outstanding zero-coupon,
subordinated convertible notes due in the year 2018 (Convertible Notes) pursuant
to a plan approved by the Board of Directors in late 2001. These repurchases
resulted in an extraordinary gain on extinguishment of debt, net of tax, of
$26.6 million ($3.33 per share) for the year ended December 31, 2002. As a
result of these actions, total debt was decreased to $22 million at December 31,
2002 from $166 million at December 31, 2001 and our debt to total capitalization
(total debt plus total stockholders' equity) ratio was reduced to 16% at
December 31, 2002 from 53% at December 31, 2001. In addition to the repurchases
of the Convertible Notes, we amended our asset-based credit facility with
General Electric Commercial Finance in the United States and entered into
A-41
a new asset-based credit facility with General Electric Commercial Finance in
Australia during the fourth quarter of 2002.
During 2002, we also took action to better position ourselves for long-term and
more consistent success by divesting or closing operations in which potential
returns were not likely to generate an acceptable return on invested capital.
The action included; i) the sale, through certain of our subsidiaries, of our
interests in Brightpoint China Limited to Chinatron, ii) the sale, through
certain of our subsidiaries, of our interests in Brightpoint Middle East FZE,
its subsidiary Fono Distribution Services LLC and Brightpoint Jordan Limited to
Persequor Limited, iii) the sale, through certain of our subsidiaries, of
certain operating assets of Brightpoint de Mexico. S.A. de C.V and our
respective ownership interest in Servicios Brightpoint de Mexico, S.A. de C.V.
to Soluciones Inteligentes para el Mercado Movil, S.A. de C.V. (SIMM), an entity
which is wholly-owned and controlled by Brightstar de Mexico S.A. de C.V, iv)
closure of our Miami sales office and v) the continued execution of our 2001
restructuring plan, which called for the elimination of operations in Brazil,
Jamaica, South Africa, Venezuela and Zimbabwe and the consolidation of our
operations and activities in Germany, the Netherlands and Belgium, including
regional management, into a new facility in Germany. Net losses resulting from
these actions and the related losses from the operations of the entities
eliminated by these actions totaled $15.5 million ($1.94 per share) in 2002
compared to $56.4 million ($7.07 per share) in 2001 and have been classified in
discontinued operations for all periods presented. See Note 2 to the
Consolidated Financial Statements for further discussion.
During the second quarter of 2002, we completed the goodwill and other
intangible asset transitional impairment test required by the adoption of
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142). Consequently, we recorded in the first quarter
of 2002 an impairment charge totaling $40.7 million relating to this change in
accounting principle, net of tax. See Note 4 to the Consolidated Financial
Statements for further discussion.
On February 19, 2003, we announced that we will consolidate our Richmond,
California call center operation into our Plainfield, Indiana, facility to
reduce costs and increase productivity and profitability in our Americas
division. By utilizing existing infrastructure in Plainfield, we expect to
realize annual pre-tax cost savings, beginning in the second quarter of 2003, of
approximately $2.0 million to $2.5 million. We also expect to record a pre-tax
charge of approximately $4.0 million to $4.5 million in the first quarter of
2003, which includes the present value of estimated lease costs, net of an
anticipated sublease; losses on the disposal of assets, severance and other
costs. Total cash outflows on the charge are expected to be approximately $3.0
million to $3.5 million and cash outflows in the first and second quarters of
2003 are expected to be approximately $200 thousand and $450 thousand,
respectively.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of any
contingent assets and liabilities at the financial statement date and reported
amounts of revenue and expenses during the reporting period. On an on-going
basis the Company reviews its estimates and assumptions. The Company's estimates
were based on its historical experience and various other assumptions that the
Company believes to be reasonable under the circumstances. Actual results are
likely to differ from those estimates under different assumptions or
A-42
conditions, but we do not believe such differences will materially affect our
financial position or results of operations. All of our significant accounting
policies as outlined in Note 1 to the Consolidated Financial Statements are
important to the presentation of our financial statements, however, we believe
the critical accounting policies that are most important to the presentation of
our financial statements and require the most difficult, subjective and complex
judgments are:
Revenue Recognition
Revenue is recognized when wireless equipment is sold and shipped or when our
integrated logistics services have been rendered. In arrangements where we both
sell wireless equipment and provide integrated logistics services, revenue is
recognized separately for these functions and we consistently apply the above
criteria. In certain circumstances we manage and distribute wireless equipment
and prepaid recharge cards on behalf of various wireless network operators and
assume little or no ownership risk for the product. We record revenue for these
integrated logistics services at the amount of the net margin rather than the
gross amount of the transactions. The Company recognizes liabilities for product
returns based upon historical experience and other judgmental factors, evaluates
these estimates on an on-going basis and adjusts its liabilities each period
based on actual product return activity. The Company recognizes freight costs
billed to its customers in revenue and actual freight costs incurred as a
component of cost of revenue.
Vendor Programs
We receive funds from vendors for price protection, product rebates, marketing
and training and promotion programs which are generally recorded, net of direct
costs, as adjustments to product costs, revenue, or selling, general and
administrative expenses according to the nature of the program. We accrue
rebates based on the terms of the program and sales of qualifying products. Some
of these items may extend over one or more quarterly reporting periods. Actual
rebates may vary based on volume, other sales achievement levels or negotiations
with the vendor, which could result in an increase or reduction in the estimated
amounts previously accrued. In addition, if market conditions were to
deteriorate due to an economic downturn, vendors may change the terms of some or
all of these programs. Such change could lower our gross margins on products we
sell or revenues earned. We also provide reserves for receivables on vendor
programs for estimated losses resulting from vendors' inability to pay, or
rejections of such claims by vendors.
Allowance for Doubtful Accounts
We evaluate the collectibility of our accounts receivable based on a combination
of factors. In circumstances where we are aware of a specific customer's
inability to meet its financial obligations, we record a specific allowance
against amounts due to reduce the net recognized receivable to the amount we
reasonably believe will be collected. For all other customers, we recognize
allowances for doubtful accounts based on the length of time the receivables are
past due, the current business environment and our historical experience. If the
financial condition of our customers were to deteriorate or if economic
conditions worsened, additional allowances may be required in the future.
Inventories
Inventories consist of wireless handsets and accessories and are stated at the
lower of cost (first-in, first-out method) or market. At each balance sheet
date, we evaluate ending inventories for excess
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quantities and obsolescence, considering any stock balancing or rights of return
that we may have with certain suppliers. This evaluation includes analyses of
sales levels by product and projections of future demand. We write off
inventories that are considered obsolete. Remaining inventory balances are
adjusted to approximate the lower of cost or market value. If future demand or
market conditions are less favorable than our projections, additional inventory
write-downs may be required and would be reflected in cost of revenue in the
period the revision is made.
Accounts Receivable Transfers
From time to time, We enter into certain transactions or agreements with banks
and other third-party financing organizations with respect to a portion of our
accounts receivable in order to reduce the amount of working capital required to
fund such receivables. These transactions have been treated as sales pursuant to
the provisions of FASB Statement No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities (SFAS No. 140). Fees, in
the form of discounts, are recorded as losses on the sale of assets which are
included as a component of "Other expenses" in the Consolidated Statements of
Operations. We are the collection agent on behalf of the financing organization
for many of these arrangements and have no significant retained interests or
servicing liabilities related to accounts receivable that we have sold, although
in certain circumstances we may be required to repurchase the accounts. See Note
8 to the Consolidated Financial Statements for further discussion of these
off-balance sheet transactions.
Impairment of Long-Lived Assets
We periodically consider whether indicators of impairment of long-lived assets
are present. If such indicators are present, we determine whether the sum of the
estimated undiscounted cash flows attributable to the assets in question is less
than their carrying value. If less, we recognize an impairment loss based on the
excess of the carrying amount of the assets over their respective fair values.
Fair value is determined by discounted future cash flows, appraisals or other
methods. If the assets determined to be impaired are to be held and used, we
recognize an impairment charge in continuing operations to the extent the
present value of anticipated net cash flows attributable to the asset are less
than the asset's carrying value. The fair value of the asset then becomes the
asset's new carrying value, which we depreciate over the remaining estimated
useful life of the asset. We may incur impairment losses in future periods if
factors influencing our estimates change.
Goodwill and Other Intangibles
We adopted the Financial Accounting Standards Board's (FASB) Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142) on January 1, 2002. Prior to SFAS No. 142, purchase price in
excess of the fair value of net assets of businesses acquired was recorded as
goodwill and was amortized on a straight-line basis over 30 years. Pursuant to
the provisions of SFAS No. 142, we stopped amortizing goodwill as of January 1,
2002. During the second quarter of 2002, we completed the transitional
impairment test required under SFAS No. 142. The initial step of the impairment
test was to identify potential goodwill impairment by comparing the fair value
of our reporting units to their carrying values including the applicable
goodwill. These fair values were determined by calculating the discounted free
cash flow expected to be generated by each reporting unit taking into account
what we consider to be the appropriate industry and market rate assumptions. If
the carrying value exceeded the fair value, then a second step was performed,
which compared the implied fair value of the
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applicable reporting unit's goodwill with the carrying amount of that goodwill,
to measure the amount of goodwill impairment, if any. As a result of the
transitional impairment test, we recorded an impairment charge of approximately
$40.7 million, net of tax, during the first quarter of 2002, which is presented
as a cumulative effect of a change in accounting principle for the year ended
December 31, 2002. On October 1, 2002, we performed the required annual
impairment test on our remaining goodwill and incurred no significant additional
impairment charges.
In addition to performing the required transitional impairment test on our
goodwill, SFAS No. 142 required us to reassess the expected useful lives of
existing intangible assets including patents, trademarks and trade names for
which the useful life is determinable. Our intangible assets are currently being
amortized over three to five years. We incurred no impairment charges as a
result of SFAS No. 142 for intangibles with determinable useful lives which are
subject to amortization. (See Note 4 to the Consolidated Financial Statements
for further discussion.)
Income Taxes
We account for income taxes under the asset and liability approach, which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequence of events that have been recognized in the Company's
financial statements or income tax returns. Income taxes are recognized during
the year in which the underlying transactions are reflected in the Consolidated
Statements of Operations. Deferred taxes are provided for temporary differences
between amounts of assets and liabilities as recorded for financial reporting
purposes and such amounts as measured by tax laws. As a part of the process of
preparing our consolidated financial statements, we have to estimate our income
taxes in each of the taxing jurisdictions in which we operate. This process
involves estimating our actual current tax expense together with assessing any
temporary differences resulting from the different treatment of certain items,
such as the timing for recognizing revenue and expenses, for tax and accounting
purposes. These differences may result in deferred tax assets and liabilities,
which are included in our consolidated balance sheet. We are required to assess
the likelihood that our deferred tax assets, which include net operating loss
and foreign tax carryforwards and temporary differences that are expected to be
deductible in future years, will be recoverable from future taxable income or
other tax planning strategies. If recovery is not likely, we have to provide a
valuation allowance based on our estimates of future taxable income in various
taxing jurisdictions, and the amount of deferred taxes that are ultimately
realizable. The provision for current and deferred tax liabilities involves
evaluations and judgments of uncertainties in the interpretation of complex tax
regulations by various taxing authorities. In situations involving tax related
uncertainties, we provide for deferred tax liabilities unless we consider it
probable that additional taxes will not be due. Actual results could differ from
our estimates.
RESULTS OF OPERATIONS
Our revenues are comprised of sales of wireless handsets (including wireless
data devices), accessory programs and fees generated from the provision of
integrated logistics services. The sale of wireless handsets and related
accessories and the resulting gross profit reflects the compensation we earned
from our distribution activities, which include purchasing, marketing, selling,
warehousing, picking, packing, shipping and delivery. Fees from integrated
logistics services are earned as services are performed. Such services include,
among others, procurement, inventory management, private labeling, kitting and
customized packaging, programming, product fulfillment, activation management,
support for prepaid programs, telemarketing, and end-user support services.
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REVENUE
(In thousands) 2002 2001 CHANGE 2000 Change
------------- ----------- ----------- ------ ----------- ------
Revenue $ 1,276,067 $ 1,263,700 1% $ 1,297,164 (3%)
=========== =========== = =========== ==
The 1% increase in our revenue in 2002 when compared to 2001 was primarily
attributable to increases in handset demand in certain developing Asia-Pacific
markets, in which we experienced higher growth rates due to increases in
subscriber growth. These increases in 2002 were partially offset by declines in
accessory program and handset distribution demand in our Americas and Europe
divisions, in which we experienced during 2002 a service line shift from
distribution services to integrated logistics services and a general reduction
in handset subsidies and the number of promotional programs sponsored by
wireless network operators for both handsets and accessories. The 3% decline in
our revenue in 2001 when compared to 2000 resulted primarily from lower demand
for our products and services due to i) slowing economic growth in many of the
markets in which we operate, ii) an excess supply of products in many of the
distribution channels through which we sell our products, iii) a reduction in
the number of promotions offered by or fulfilled for certain network operator
customers and iv) business interruptions due to difficulties encountered with
enterprise software implementations. We believe that improvement in current
economic trends and the introduction of new products expected in 2003 could
result in subscribers replacing handsets with new not-yet-introduced products
and cause revenue growth slightly above recent historical periods. However,
growth in revenue over the last 5 years has fluctuated significantly due to a
variety of factors, including fluctuating industry growth rates, changes in our
acquisition and expansion activities, changes in the mix of services we offer
and economic changes in the markets in which we operate.
REVENUE BY DIVISION
We operate in various markets worldwide and business activities are managed in
three divisions: The Americas, Asia-Pacific and Europe.
(In thousands) 2002 2001 2000
-------------- ------------ ------------ ------------
The Americas $ 493,203 39% $ 650,581 51% $ 699,913 54%
Asia-Pacific 527,499 41% 339,749 27% 330,489 25%
Europe 255,365 20% 273,370 22% 266,762 21%
------------ --- ------------ --- ------------ ---
Total $ 1,276,067 100% $ 1,263,700 100% $ 1,297,164 100%
============ === ============ === ============ ===
The Americas division conducts its operations within the United States and
Colombia. Revenue in the Americas division declined 24% in 2002 when compared to
2001. The decrease was due primarily to; i) a service line mix shift in 2002
from distribution services which have average selling prices of over $100 per
unit handled to logistics services which have average selling prices of under
$20 per unit, ii) pricing pressures related to our integrated logistics
services, iii) lower average selling prices in 2002 for handsets in the United
States, and iv) declines in accessory program demand during 2002. The shift in
service line mix resulted from, among other factors, the loss of certain
distribution customers due to industry consolidation, lack of availability of
certain CDMA-based handsets in our product offering, the shift of certain
customers from distribution services to integrated logistics services,
acquisition of new integrated logistics services customers and expansion of our
logistics services product offerings partially offset by the loss of certain
logistics services contracts. The decline in handset average selling prices in
the United States was primarily attributable to product availability from our
suppliers and demand for lower-priced
A-46
handset models. The decline in accessory program demand was primarily due to
reduced network operator promotions, technological advancement in handsets, and
bundling of accessories with handsets by certain suppliers and wireless network
operators. We believe that these trends will continue in 2003. Revenue in the
Americas division declined 7% in 2001 when compared to 2000, due primarily to i)
slowing economic growth in the United States, ii) an excess supply of products
in the United States distribution channels, iii) a reduction in the number of
promotions offered by or fulfilled for certain network operator customers, iv)
the loss of certain customers due to industry consolidation and v) business
interruptions due to difficulties encountered with enterprise software
implementations in the United States.
Our Asia-Pacific division maintains operations in Australia, New Zealand and the
Philippines. The Asia-Pacific division also distributes handsets to certain Hong
Kong-based exporters through its Brightpoint Asia Limited operation, which
pursuant to a divestiture in 2002 (discussed below) is now managed by Persequor
Limited, an entity controlled by the former Managing Director of our operations
in the Middle East and certain members of his management team. Revenue in the
Asia-Pacific division in 2002 increased by 55% when compared to 2001 and
increased by 3% when comparing 2001 to 2000. The increase in revenue in 2002
when compared to 2001 was across all markets, but was most significant in the
Brightpoint Asia Limited operation which experienced higher growth rates due to
increases in subscriber growth in certain developing Asia markets. Our
Brightpoint Asia Limited operation, which represented approximately 27% and 14%
of our total revenue in 2002 and 2001, respectively, sells Nokia products to a
limited number of resellers based in Hong Kong and Singapore, predominantly on a
cash before delivery basis. The loss or a significant reduction in business
activities by customers in our Brightpoint Asia Limited operation could have a
material adverse affect on our revenue and results of operations. We expect the
revenue growth trend for the Asia-Pacific division to slow in 2003 due to
competition and a trend toward certain CDMA product offerings which we have only
limited access to at the current time. The revenue increase in 2001 when
compared to 2000 was also driven by the strong growth in the Brightpoint Asia
Limited operation but was partially offset by declines in all of our other
Asia-Pacific operations in 2001 due primarily to i) slowing economic growth in
certain Asia-Pacific markets, ii) an excess supply of products in the
distribution channels in this region, iii) a reduction in the number of
promotions offered by or fulfilled for certain network operator customers and
iv) business interruptions due to difficulties encountered with an enterprise
software implementation in Australia.
Our Europe division has operations in France, Germany, Ireland, Norway and
Sweden. Revenue in the Europe division decreased by 7% in 2002 when compared to
2001 and increased by 2% in 2001 when compared to 2000. The decrease in revenue
during 2002 was primarily the result of decreased demand in Ireland and France
resulting from fewer network operator promotions and subsidies, as well as, the
expiration in the fourth quarter of 2002 of our exclusive agreement with a
network operator in Ireland to provide distribution and logistics services.
These declines were partially offset by increased revenues for our Sweden
operation (including its Norway branch which initiated operations in the second
quarter of 2002) which experienced increased demand for its services supporting
prepaid programs during 2002. The slight increase in revenue within the Europe
division in 2001 compared to 2000 was primarily the result of growth in France
through local market development initiatives and acquisition activities,
partially offset by lower demand in Ireland during 2001.
A-47
REVENUE BY SERVICE LINE
(In thousands) 2002 2001 2000
----------------------------- ----------- ------------ ------------
Wireless handset sales $ 1,017,304 80% $ 989,209 78% $ 943,968 73%
Wireless accessory programs 96,343 7% 137,035 11% 201,612 15%
Integrated logistics services 162,420 13% 137,456 11% 151,584 12%
----------- --- ------------ ---- ------------ ---
Total $ 1,276,067 100% $ 1,263,700 100% $ 1,297,164 100%
=========== === ============ ==== ============ ===
In 2002 and 2001, our revenue reflects a greater proportion of total revenues
from wireless handset sales than that of the immediately preceding year. This
change in mix was primarily the result of growth in handset sales in the
Asia-Pacific division discussed above, combined with the declines in revenue
from wireless accessory programs in 2001 and 2002. In 2002, the overall change
in mix was partially offset by the shift in our Americas division from wireless
handset sales to integrated logistics services, also discussed above. As a
result of the increase in demand for our integrated logistics services in the
Americas division, our total wireless device units handled increased 8% in 2002
to approximately 15.2 million units from 14.0 million in 2001. We believe the
current trends in our revenue by service line will continue in 2003.
GROSS PROFIT
(In thousands) 2002 2001 Change 2000 Change
------------- ---------- ---------- ------ ----------- ------
Gross profit $ 71,994 $ 73,775 (2%) $ 133,829 (45%)
Gross margin 5.6% 5.8% 10.3%
========== ========== ===========
Gross profit in 2002 decreased 2% from 2001 and gross margin decreased by 20
basis points to 5.6% in 2002 as compared to 5.8% in 2001. Gross profit was
negatively impacted in both 2002 and 2001 by certain significant items
including; i) inventory valuation adjustments during 2002 of approximately $3.6
million to adjust inventories to their net realizable value based on the then
current market conditions, ii) the recognition of a loss in the second quarter
of 2002 of approximately $2.5 million, related to a purchase obligation to an
accessory vendor and iii) inventory valuation adjustments of approximately $13.7
million in the second quarter of 2001 as discussed below. In addition to these
items, gross profit was also negatively impacted in 2002 when compared to 2001
by; i) the shift in our revenue to a greater proportion of wireless handset
sales (80% of total revenues in 2002 compared to 78% in 2001) which generally
have a lower gross margin (approximately 4.6% in 2002) than accessories or
integrated logistic services (over 10% gross margin), (ii) pricing concessions
for certain integrated logistic services customers in our Americas division
(average integrated logistic services fees per unit in this division declined
over 40% in 2002 from 2001 while phone units handled for integrated logistic
service customers increased in 2002 compared to 2001) and iii) reduced margins
in the Asia-Pacific region (4.4% in 2002 compared to 6.3% in 2001) due to
changes in vendor incentive and rebate programs (incentive rebates from a
primary supplier for our Brightpoint Asia Limited operations declined to 3.5% of
Brightpoint Asia's gross revenues in 2002 from 4.5% of Brightpoint Asia's gross
revenues in 2001) and increased cost (approximately $1.4 million) for outsourced
warehouse management services related to our Brightpoint Asia Limited
operations. These warehouse services are provided by Chinatron pursuant to our
divestiture of Brightpoint China Limited and discussed under the heading
"Discontinued Operations" below.
A-48
The 45% decrease in gross profit in 2001 when compared to 2000 was due primarily
to price pressures created by the oversupply of product in the supply channels
and price pressures related to our integrated logistics services caused
primarily by slowing economic and industry conditions in certain markets in
which we operate. We also recorded inventory valuation adjustments of
approximately $13.7 million in the second quarter of 2001 to adjust inventories
to their estimated net realizable value based on the then current market
conditions. These valuation adjustments were the result of the over-supply of
product in the industry's supply channels, including our channels, and the
lower-than-anticipated level of demand experienced in the United States during
2001. The write-downs were related to our United States operations and a
significant portion of the write-downs were related to wireless accessories. In
addition, the shift in service line mix from higher margin accessories to lower
margin handset sales also reduced the gross profit in 2001. Lastly, as
previously discussed, we experienced business interruptions and increased costs
during 2001 in connection with enterprise and warehouse management software
implementations in the United States and Australia. The increased costs had a
negative impact on our gross margin as a portion of these costs are considered
direct costs and are classified in cost of revenue. We expect pricing pressures,
partially offset by industry trends and our expected service line mix in 2003,
to cause gross margins to not vary significantly from 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(In thousands) 2002 2001 Change 2000 Change
------------------------------------------- --------- --------- ------ --------- ------
Selling, general and administrative expenses $ 71,247 $ 66,396 7% $ 72,688 (9%)
As a percent of revenue 5.6% 5.3% 5.6%
========= ========= =========
Selling, general and administrative expenses increased 7% in 2002 compared to
2001 and also increased slightly as a percent of revenue in 2002 to 5.6% from
5.3% in 2001. The increase was the result of one-time costs related to cost
reduction action taken in 2002, increased legal costs, increased bad debt
expenses and severance costs related to management changes. The increase in
legal costs was primarily the result of certain class action litigation and the
SEC inquiry more fully discussed in Note 17 to the Consolidated Financial
Statements. On a quarterly basis in 2002, selling, general and administrative
expenses declined from 6.3% of revenue in the first quarter of 2002 to 4.8% of
revenue in fourth quarter of 2002 as cost reduction action taken in the first
half of the year was realized in the second half of 2002. We expect selling,
general and administrative expenses as a percent of revenue to remain relatively
flat with the level that we experienced in the third and fourth quarters of
2002. Selling, general and administrative expenses decreased 9% in 2001 compared
to 2000 and improved as a percent of revenue in 2001 to 5.3% from 5.6% in 2000.
The decrease was comprised primarily of a decrease in our Americas division
costs in 2001 as compared to 2000 offset by slight increases during 2001 in
selling, general and administrative expenses incurred in our Europe and
Asia-Pacific divisions. Savings realized in selling, general and administrative
expenses in 2001 compared to 2000, which were partially offset by increases in
other components of selling, general and administrative expenses, included i) a
reduction in commissions paid by us to network operator customers pursuant to
certain accessory programs in the United States as the related sales activity
decreased significantly and ii) lower performance-based compensation to key
employees.
FACILITIES CONSOLIDATION CHARGE
During the first quarter of 2000, we began the process of consolidating four
Indianapolis, Indiana, locations and a location in Bensalem, Pennsylvania, into
a single, new facility located near the
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Indianapolis International Airport and designed specifically for us and our
processes. We recorded a facility consolidation charge for moving costs, the
disposal of assets not used in the new facility and the estimated impact of
vacating the unused facilities, net of potential subleases. The total amount of
the charge recorded in 2000 was $7.0 million and was comprised of approximately
$3.2 million in non-cash fixed asset disposals and $3.8 million in moving, lease
termination and other costs paid in cash. In September of 2001, we entered into
an agreement to terminate our financial obligations with respect to the last of
the unused, or partially used, facilities and accordingly recorded an additional
charge of $0.6 million. We had no remaining facility consolidation reserves at
December 31, 2001.
OPERATING INCOME FROM CONTINUING OPERATIONS
(In thousands) 2002 2001 Change 2000 Change
------------------------- --------- ---------- ------ ----------- ------
Operating income from
continuing operations $ 747 $ 6,774 (88%) $ 54,169 (87%)
As a percent of revenue 0.1% 0.5% 4.2%
========= ========== ===========
In 2002, operating income from continuing operations decreased 88% to $0.7
million when compared to 2001, and the operating margin (income from operations
as a percent of revenue) also decreased to 0.1% in 2002 from 0.5% in 2001. The
decrease is primarily the result of the decrease in gross margin and the
increase in selling, general and administrative expenses as a percent of revenue
as discussed above. We expect the trend of decreasing operating income from
continuing operations to reverse in 2003 due to improving economic and industry
conditions in the markets in which we operate and as a result of cost reduction
action taken in 2001 and 2002. In 2001, operating income from continuing
operations decreased by 87% to approximately $6.8 million, and the operating
margin also decreased to 0.5% in 2001 from 4.2% in 2000. The 2001 decrease in
operating income is due primarily to the decrease in gross margins.
IMPAIRMENT LOSS ON LONG-TERM INVESTMENT
During the second half of 2001, we experienced lower than desired operating
results and returns on invested capital in our Brightpoint China Limited
operation primarily due to: i) continuing migration of Brightpoint China's
business from Hong Kong to mainland China ii) continuing reliance on a single
supplier for products within China with no exclusive product lines and iii) the
level of invested capital required to conduct this business was substantial
considering the risk of operating in China. As a result, a number of
alternatives were considered with respect to decreasing Brightpoint's financial
and economic exposure to the China market.
In January 2002, we formed a joint venture with Chinatron through their purchase
of a 50% interest in Brightpoint China Limited, which was at the time our
wholly-owned subsidiary, and granted Chinatron the option to purchase an
additional 30% interest in this subsidiary in exchange for 6,414,607 Chinatron
Class B Preference Shares with a face value of $10 million convertible into 10%
of the issued and outstanding ordinary shares of Chinatron. At the formation of
the joint venture, Brightpoint China Limited had a net book value of $18.8
million. In March of 2002, rather than exercising its option, Chinatron offered
to purchase our remaining interest in Brightpoint China Limited for 7,928,166
Chinatron Class B Preference Shares with a face value of $11 million that were
convertible into 11% of the issued and outstanding ordinary shares in Chinatron.
This transaction closed in April 2002, bringing our aggregate holdings in
Chinatron to 14,342,773 Class B Preference Shares with an aggregate face value
of $21 million that were
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convertible into 19.9% of the issued and outstanding ordinary shares of
Chinatron. Based on internal valuations and analyses, we initially estimated the
fair market value of the Chinatron Class B Preference Shares to be approximately
$10.3 million. As of June 30, 2002, we believed the preference shares continued
to have an estimated fair market value of approximately $10.3 million. The net
book value of Brightpoint China Limited at the time of the sale of the remaining
50% interest in Brightpoint China Limited was $5.2 million.
At the time of the formation of the joint venture, we were not aware that the
actual value of the Chinatron Class B Preference Shares was significantly below
the face value because we had not yet completed a valuation of the shares.
When our internal valuations and analyses were completed (which did not include
an independent valuation), we initially estimated a fair market value of $10.3
million for our aggregate holdings of 14,342,773 Chinatron Class B Preference
Shares with a face value of $21 million. As of June 30, 2002, we believed the
preference shares continued to have an estimated fair market value of
approximately $10.3 million.
During the third quarter of 2002, Chinatron sought to raise additional capital
to fund its operations and meet its business objectives. In September and
October of 2002, because of our own liquidity constraints and to help Chinatron
secure funding from other parties, which we believed would improve Chinatron's
ability to honor its remaining debt obligations of the Preference Shares owned
by us, we waived our right to participate in these capital-raising activities,
waived our right to require Chinatron to redeem a portion of the Class B
Preference Shares and agreed to modify the conversion ratio of the preference
shares. Collectively, these actions reduced our ownership interest in Chinatron
from 19.9% to less than 1%. However, all other rights of the Preference Shares,
including our right to require Chinatron to redeem all or a portion of the
Preference Shares under certain circumstances, remained.
As more fully discussed in Note 3 to the Consolidated Financial Statements, we
recorded a non-cash impairment charge during the third quarter of 2002 of $8.3
million relating to our investment in the Chinatron Class B Preference Shares.
Management is responsible for estimating the value of the Chinatron Class B
Preference Shares. Based on our evaluations and other factors, which included an
external valuation, our total investment in Chinatron Class B Preference Shares
has a fair market value of approximately $2 million. See Notes 2 and 3 to the
Consolidated Financial Statements for further discussion of the divestiture of
Brightpoint China Limited and our Chinatron investment.
INCOME (LOSS) FROM CONTINUING OPERATIONS
(In thousands) 2002 2001 Change 2000 Change
-------------------------------------------------- ---------- ---------- ------ --------- ------
Income (loss) from continuing operations $ (12,824) $ (1,202) (967%) $ 31,895 (104%)
Income (loss) from continuing operations per share
- Basic $ (1.60) $ (0.15) $ 4.02
- Diluted $ (1.60) $ (0.15) $ 3.98
========== ========== =========
The increase in loss from continuing operations in 2002 as compared to 2001 was
primarily attributable to the factors discussed above in the analyses of
revenue, gross profit, selling, general and administrative
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expenses and impairment loss on long-term investment. However, we did experience
a 28% decrease in interest expense in 2002 as total debt was decreased to $22
million at December 31, 2002 compared to $166 million at December 31, 2001. This
reduction was partially offset by an increase in other expenses during 2002,
primarily resulting from foreign exchange losses experienced in 2002 compared to
foreign exchange gains experienced in 2001. This change was due primarily to the
relative weakness of the U.S. Dollar compared to other foreign currencies
including the Euro in 2002. The loss from continuing operations in 2001 as
compared to the income from continuing operations in 2000 was the result of the
gross and operating margin decreases discussed above. Loss from continuing
operations per share was $1.60 for 2002 compared to a loss from continuing
operations per share of $0.15 in 2001 and income from continuing operations per
diluted share of $3.98 in 2000.
A-52
DISCONTINUED OPERATIONS
As more fully discussed below under the heading, "Recently Issued Accounting
Pronouncements," we adopted Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144) at
the beginning of 2002. In connection with the adoption of SFAS No. 144, the
results of operations and related disposal costs, gains and losses for business
units that we have eliminated or sold are classified in discontinued operations,
for all periods presented.
During the fourth quarter of 2002, we and certain of our subsidiaries sold
certain operating assets of Brightpoint de Mexico, S.A. de C.V. and their
respective ownership interests in Servicios Brightpoint de Mexico, S.A. de C.V.
to Soluciones Inteligentes para el Mercado Movil, S.A. de C.V., an entity which
is wholly-owned and controlled by Brightstar de Mexico S.A. de C.V. Pursuant to
the transaction, we received cash consideration totaling approximately $1.7
million and a short-term promissory note from Soluciones Inteligentes para el
Mercado Movil, S.A. de C.V. totaling approximately $1.1 million that matured in
December 2002. The repayment of the promissory note was guaranteed by Brightstar
de Mexico S.A. de C.V. We recorded a net loss on the transaction of $2.2 million
in 2002, which included a $3.5 million non-cash write-off of cumulative foreign
currency translation adjustments and $3.4 million in tax benefits to be realized
pursuant to the transaction. In addition, during the fourth quarter, we
committed to a plan to sell our Puerto Rico operations which sale was completed
in February of 2003. Consequently, the financial results of Puerto Rico are
presented in the Consolidated Statement of Operations as "Discontinued
Operations."
During the third quarter of 2002, we and certain of our subsidiaries sold their
respective ownership interests in Brightpoint Middle East FZE, and its
subsidiary Fono Distribution Services LLC, and Brightpoint Jordan Limited to
Persequor Limited, an entity controlled by the former Managing Director of our
operations in the Middle East and certain members of his management team.
Pursuant to the transaction, we received two subordinated promissory notes with
face values of $1.2 million and $3.0 million that mature in 2004 and 2006,
respectively. The notes bear interest at 4% per annum and were recorded at a
discount to face value for an aggregate carrying amount at December 31, 2002 of
$3.4 million. In addition, under the Sale and Purchase Agreement, we may receive
additional proceeds, which are contingent upon collection of accounts receivable
from a certain customer. We received $0.3 million in contingent consideration
during the fourth quarter of 2002 related to the transaction. There can be no
assurance we will receive any additional proceeds. We recorded an initial loss
on the transaction of $1.6 million, including the recognition of accumulated
foreign currency translation gains of $0.3 million. Concurrent with the
completion of this transaction, $5 million of cash, which was pledged by
Brightpoint Holdings B.V. to support letters of credit utilized by our
operations in the Middle East, was released and was classified as unrestricted.
We have paid and will pay management fees, including performance based bonuses,
to Persequor for providing management services relating to the Hong Kong- based
sales activities of Brightpoint Asia Limited which we retained pursuant to the
transaction.
During 2002, we continued the execution of our 2001 restructuring plan, which
called for the elimination of operations in Brazil, Jamaica, South Africa,
Venezuela and Zimbabwe and the consolidation of our operations and activities in
Germany, the Netherlands and Belgium, including regional management, into a new
facility in Germany. Additionally, during the first and second quarters of 2002,
we completed, through certain of our subsidiaries, the divestiture of our
interests in Brightpoint China Limited to Hong Kong based Chinatron. Pursuant to
the transaction with Chinatron, we received preference shares in Chinatron with
an aggregate face value of $21 million. We currently estimate that our total
investment in
A-53
Chinatron preference shares has a fair market value of approximately $2 million.
See Notes 2 and 3 to the Consolidated Financial Statements for further
discussion of the 2001 restructuring plan, the divestiture of Brightpoint China
Limited and our Chinatron investment.
In 2002, aggregate losses in discontinued operations were approximately $15.5
million ($1.94 per diluted share) compared to $56.4 million ($7.07 per diluted
share) in 2001 and income of $1.8 million ($0.23 per diluted share) in 2000. The
aggregate loss in discontinued operations during 2002 was comprised primarily of
the losses on disposal of our former Mexico and Middle East operations discussed
above. The aggregate loss in discontinued operations in 2001 includes $46.4
million ($34.3 million, net of tax benefits) in costs and non-cash charges
related to the execution of the 2001 restructuring plan, a $3.4 million ($2.8
million, net of tax benefits) one-time charge resulting from the settlement of
disputed amount due to us from a handset manufacturer and with which we severed
our relationship and $19.3 million in net operating losses from discontinued
entities. For 2000, discontinued operations included $0.8 million in adjustments
to charges from our restructuring plans and net income from discontinued
entities of $1.0 million.
For 2002 and 2001, discontinued operations experienced net losses of $12.9
million and $22.1 million, respectively, on revenue of $120 million and $561
million, respectively. In addition, these operations also experienced net losses
on disposal of discontinued operations of approximately $2.6 million and $34.3
million in 2002 and 2001, respectively . To date, we have recorded approximately
$38.6 million in charges during 2002 and 2001 relative to the actions called for
by the 2001 Restructuring Plan. As of December 31, 2002, the actions called for
by the 2001 Restructuring Plan were substantially complete; however, we expect
to continue to record adjustments through discontinued operations as necessary.
Further details of discontinued operations were as follows:
YEAR ENDED Year Ended Year Ended
DECEMBER 31 December 31 December 31
2002 2001 2000
----------- ----------- -----------
Revenue $ 119.7 $ 561.5 $ 672.1
=========== =========== ===========
Net operating gain (loss) $ (9.9) $ (20.0) $ 1.0
Restructuring plan charges (2.1) (36.4) 0.8
Net loss on Middle East sale (1.3) - -
Net loss on Mexico sale (2.2) - -
----------- ----------- -----------
Total discontinued operations $ (15.5) $ (56.4) $ 1.8
=========== =========== ===========
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
During the second quarter of 2002, we completed the goodwill and other
intangible asset impairment testing required by the adoption of SFAS 142.
Consequently, we recorded in the first quarter of 2002 an impairment charge
totaling $40.7 million, net of tax, relating to this change in accounting
principle. Approximately $8.5 million of this charge related to the sale of
Brightpoint China Limited to Chinatron Group Holdings Limited which was
previously classified in discontinued operations in our March 31, 2002 financial
statements and has now been reclassified to the cumulative effect of an
accounting change as a part of the adoption of SFAS 142. See Note 4 to the
Consolidated Financial Statements for further discussion.
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EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT
During 2002, we repurchased 228,068 of our 250,000 outstanding zero-coupon,
subordinated convertible notes due in the year 2018 ("Convertible Notes"). The
repurchases were made under a plan approved by our Board of Directors on
November 1, 2001, which allows us to repurchase the remaining outstanding
Convertible Notes. The aggregate purchase price for the Convertible Notes was
approximately $75.0 million (at an average cost of $329 per Convertible Note)
and was funded by a combination of working capital and a borrowing of $15
million under the credit facility with General Electric Commercial Finance and
our primary North American operating subsidiaries, Brightpoint North America
L.P. and Wireless Fulfillment Services, LLC. Approximately $30 million of the
working capital funding came from Brightpoint Holdings B.V., our primary foreign
finance subsidiary. These transactions resulted in an extraordinary gain, net of
tax, of approximately $26.6 million ($3.33 per diluted share). The tax effect of
the Convertible Note repurchases will be largely offset by net operating losses
resulting in no significant cash tax payments. As of December 31, 2002, the
remaining 21,932 Convertible Notes had an accreted book value of approximately
$12.0 million or $548 per Convertible Note.
During 2001, we repurchased 36,000 of our then outstanding Convertible Notes for
approximately $10 million (an average cost of $281 per Convertible Note). These
transactions resulted in an extraordinary gain, net of tax, of approximately
$4.6 million ($0.58 per diluted share).
During 2000, we repurchased 94,000 Convertible Notes and realized a gain on the
repurchases of approximately $16.6 million ($10.0 million, net of tax) that was
recorded as an extraordinary gain on debt extinguishment in the Consolidated
Statements of Operations.
Between January 1, and February 10, 2003, we repurchased an additional 17,602
Convertible Notes for a total cost of $9.7 million ($551 per Convertible Note),
with an accreted value of $9.7 million ($551 per Convertible Note). On March 11,
2003 the Company purchased 4,201 of the Convertible Notes pursuant to the
exercise of a put option by the bondholders at their accreted value of $2.3
million, which was paid in cash. As of March 12, 2003, there were 129
Convertible Notes outstanding with an accreted value of approximately $71
thousand. The 129 outstanding Convertible Notes may be redeemed by the Company
for cash equal to the issue price plus accrued original issue discount through
the date of redemption. The Company has initiated the redemption of the
remaining Convertible Notes.
NET INCOME (LOSS)
(In thousands, except per share data) 2002 2001 Change 2000 Change
------------------------------------- ---------- ---------- ------ ------- ------
Net income (loss) $ (42,421) $ (53,301) 20% $43,683 *
As a percent of revenue (3.3%) (4.2%) 3.4%
Net income (loss) per share
- Basic ($ 5.30) ($ 6.68) 21% $ 5.51 *
- Diluted ($ 5.30) ($ 6.68) 21% $ 5.45 *
Weighted average shares outstanding
- Basic 7,998 7,973 0% 7,923 1%
- Diluted 7,998 7,973 0% 8,015 (1%)
* Percentage change between periods not considered meaningful
A-55
Net loss during 2002 decreased 20% compared to 2001, primarily as a result of
the decrease in losses in discontinued operations in 2002, the extraordinary
gain on extinguishment of debt in 2002, partially offset by the increased loss
from continuing operations in 2002. See discussions above for detailed analysis
of these items. The net loss experienced 2001 when compared to net income
generated in 2000 was primarily the result of the decrease in income from
continuing operations and the increased losses experienced in discontinued
operations in 2001 compared to 2000. Our effective income tax rate has
fluctuated over the last 3 years primarily as a result of the changes and the
geographic dispersion of pretax income.
LIQUIDITY AND CAPITAL RESOURCES
We have historically satisfied our working capital requirements principally
through cash provided by operating activities, vendor financing, bank borrowings
and the issuance of equity and debt securities. We believe that cash provided by
operating activities 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 raise additional capital.
(dollars in thousands) 2002 2001 2000
---------------------------------------- -------- -------- --------
Working capital $ 60,995 $184,434 $267,557
Cash provided by operating activities 70,122 50,639 36,896
Bank borrowings 10,103 34,742 53,685
Convertible Notes 12,017 131,647 144,756
Current ratio 1.29:1 1.61:1 1.91:1
---------------------------------------- -------- -------- --------
WORKING CAPITAL
The decrease in working capital in 2002 compared to 2001 is comprised primarily
of the effect of decreases in cash and cash equivalents, accounts receivable,
inventories, accounts payable and accrued expenses and funded contract financing
receivables. The decrease in working capital in 2001 compared to 2000 is
comprised primarily of the net effect of decreases in cash and cash equivalents,
accounts receivable, inventories, accounts payable and accrued expenses and
increases in funded contract financing receivables. These changes in working
capital, particularly the reductions of accounts receivable and inventories,
resulted in incremental increases in cash provided by operating activities in
2002 and 2001. These changes were partially offset by the reduction of the net
loss in 2002 compared to 2001 and the decrease in net income in 2001 compared to
2000.
Additionally, as of December 31, 2002, average days revenue in accounts
receivable were approximately 30 days, compared to days revenue outstanding of
approximately 40 days for 2001. During 2002, average days inventory on-hand
decreased from 38 days to 24 days, which equates to average inventory turns
increasing from 9 times to 15 times. Average days payables outstanding were 42
days for 2002, compared to 58 days in 2001. These changes combined to create a
decrease in cash conversion cycle days to 12 days in 2002 from 20 days in 2001.
During 2002 we modified the way that we calculate the components of our cash
conversion cycle. We believe the new calculation has a higher correlation with
cash provided (used) by operating activities. All cash conversion cycle days
presented in this Form 10-K reflect application of the new calculation to all
periods presented. The calculation is as follows:
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- Days sales outstanding in accounts receivable = Period end accounts
receivable for continuing operations divided by average daily revenue
(inclusive of value-based taxes for foreign operations) for the period.
- Days inventory on-hand = Period end inventory for continuing operations
divided by average daily cost of revenue (excluding indirect product
and service costs) for the period.
- Days payables outstanding = Period end accounts payable for continuing
operations divided by average daily cost of revenue (excluding indirect
product and service costs) for the period.
(in thousands) 2002 2001
----------------------------- -----------------------------
DAYS SALES OUTSTANDING IN ACCOUNTS RECEIVABLE: Annual Q4 Annual Q4
------------ ------------ ------------ ------------
Continuing operations revenue $ 1,276,037 $ 341,677 $ 1,263,700 $ 323,047
Value-based tax invoiced for continuing operations 71,166 20,037 64,435 17,626
------------ ------------ ------------ ------------
Total continuing operations revenue and value-based tax 1,347,233 361,715 1,328,135 340,673
Daily Sales including value-based tax 3,742 4,019 3,689 3,785
Ending accounts receivable (including value-based tax) 111,770 111,770 184,567 184,567
Exclude discontinued operations - - (37,734) (37,734)
------------ ------------ ------------ ------------
Continuing operations ending accounts receivable $ 111,770 $ 111,770 $ 146,832 $ 146,832
Days sales outstanding in Accounts Receivable 30 28 40 39
============ ============ ============ ============
DAYS INVENTORY ON-HAND
Continuing operations cost of revenue $ 1,204,073 $ 320,335 $ 1,189,928 $ 300,383
Indirect product and service costs (91,182) (23,399) (84,906) (24,830)
------------ ------------ ------------ ------------
Total continuing operations cost of products sold 1,112,891 296,936 1,105,022 275,553
Daily cost of products sold 3,091 3,299 3,070 3,062
Ending inventory 73,472 73,472 137,549 137,549
Exclude discontinued operations - - (21,170) (21,170)
------------ ------------ ------------ ------------
Continuing operations ending inventory $ 73,472 $ 73,472 $ 116,379 $ 116,379
Days inventory on-hand 24 22 38 38
============ ============ ============ ============
DAYS PAYABLES OUTSTANDING IN ACCOUNTS PAYABLE
Daily cost of products sold $ 3,091 $ 3,299 $ 3,070 $ 3,062
Ending accounts payable 129,621 129,621 196,938 196,938
Exclude discontinued operations (251) (251) (17,589) (17,589)
------------ ------------ ------------ ------------
Continuing operations ending account payable $ 129,370 $ 129,370 $ 179,349 $ 179,349
Days payable outstanding 42 39 58 59
============ ============ ============ ============
Cash Conversion Cycle Days 12 11 20 18
============ ============ ============ ============
Total cash and cash equivalents decreased by approximately $16.4 million during
2002 when compared to 2001 and pledged cash decreased by approximately $1.9
million during 2002 when compared to 2001. As of December 31, 2002, we had
pledged cash totaling $14.7 million, of which approximately $13.4 represented
cash-secured letters of credits supporting certain vendor credit lines in our
Asia-Pacific division and $1.3 million which was pledged to a bank pursuant to
an accounts receivable sale arrangement in France as discussed below.
A-57
The reduction in accounts receivable in 2002 was attributable to the elimination
of certain operations, successful acceleration of our accounts receivable
collection cycle and sales or financing transactions of certain accounts
receivable to banks and other third-party financing organizations. During 2002
and 2001, we entered into certain transactions or agreements with financing
organizations in Brazil, Ireland, Sweden, Australia, Mexico and France with
respect to a portion of our accounts receivable in order to reduce the amount of
working capital required to fund such receivables. Certain of these transactions
qualify as sales pursuant to current accounting principles generally accepted in
the United States and, accordingly, are accounted for as off-balance sheet
arrangements. Net funds received from the sales of accounts receivable during
2002 and 2001 totaled $215.9 million and $151.6 million, respectively. We are
the collection agent on behalf of the financing organization for many of these
arrangements. We have no significant retained interests or servicing liabilities
related to accounts receivable that we have sold, although in certain
circumstances, we may be required to repurchase the accounts including, but not
limited to, the account receivable is in dispute or is otherwise not
collectible, credit insurance is not maintained, a violation of, the expiration
or early termination of the agreement pursuant to which these arrangements are
conducted. These agreements require our subsidiaries to provide collateral in
the form of pledged assets and/or in certain situations a guarantee its
subsidiaries obligations may be given by the Company. Pursuant to these
arrangements, approximately $30.1 million and $27.0 million of trade accounts
receivable were sold to and held by banks and other third-party financing
institutions at December 31, 2002 and 2001, respectively. Amounts held by banks
or other financing institutions at December 31, 2002 were for transactions
related to our Ireland, France and Sweden arrangements, all other arrangements
have been terminated or allowed to expire in 2002. For more information on our
accounts receivable transfers, see Note 8 to the Consolidated Financial
Statements. The collection of our accounts receivable and our ability to
accelerate our collection cycle through the sale of accounts receivable is
affected by several factors, including, but not limited to, our credit granting
policies, contractual provisions, our customers' and our overall credit rating
as determined by various credit rating agencies, industry and economic
conditions, the ability of the customer to provide security, collateral or
guarantees relative to credit granted by us, the customer's and our recent
operating results, financial position and cash flows and our ability to obtain
credit insurance on amounts that we are owed. Adverse changes in any of these
factors, certain of which may not be wholly in our control, could create delays
in collecting or an inability to collect our accounts receivable which could
have a material adverse effect on our financial position cash flows and results
of operations.
At December 31, 2002, our allowance for doubtful accounts was $5.3 million
compared to $6.3 million at December 31, 2001, which we believe was adequate for
the size and nature of our receivables at those dates. Bad debt expense as a
percent of revenues was less than 1.0% for 2002 and 2001. However, we have
incurred significant accounts receivable impairments in connection with our 1999
and 2001 restructuring plans because we ceased doing business in certain
markets, significantly reducing our ability to collect the related receivables.
Also, our accounts receivable are concentrated with wireless network operators,
agent dealers and retailers operating in the wireless telecommunications and
data industry and delays in collection or the uncollectibility of accounts
receivable could have an adverse effect on our liquidity and working capital
position. We believe that during 2001 and 2002 many participants in the wireless
telecommunications and data industry, including certain of our customers,
experienced operating results that were below previous expectations, decreases
in overall credit ratings and increasing costs to obtain additional capital. We
believe this trend may continue into 2003 and could have an adverse effect on
our financial position and results of operations. We intend to offer open
account terms to additional customers, which subjects us to further credit
risks, particularly in the event that receivables are
A-58
concentrated in particular geographic markets or with particular customers. We
seek to minimize losses on credit sales by closely monitoring our customers'
credit worthiness and by obtaining, where available, credit insurance or
security on open account sales to certain customers.
The decrease in inventories and corresponding increase in average inventory
turns during 2002 are due primarily to the elimination or divestiture of certain
operations, better management of our overall inventory levels, particularly in
the United States and the transition of certain customers in the United States
from a distribution model where we own the inventory to integrated logistics
services models, in which we do not own the inventories Additionally, during
2002, we recorded inventory valuation adjustments of approximately $3.6 million
to adjust inventories to their estimated net realizable value based on the then
current market conditions. These write-downs were the result of the
lower-than-anticipated level of demand experienced in certain operations during
2002. The write-downs were primarily related to our Europe and Americas division
and a significant portion of the impacted inventories were wireless accessories.
In December of 2002, we entered into an amendment to our distribution agreement
with a significant vendor in the United States that, among other provisions,
changed certain purchasing and invoicing processes to create a just-in-time
inventory arrangement that we expect will allow us to reduce the amount of
inventories of this vendor's products that we own at any given point in time.
This arrangement did not have a significant impact on our December 31, 2002
inventory carrying value, however, we believe it will reduce our inventory
carrying value during the life of the arrangement. This arrangement is initially
set to expire in June of 2003.
We offer financing of inventory and receivables to certain network operator
customers and their agents and manufacturer customers under contractual
arrangements. Under these contracts we manage and finance inventories and
receivables for these customers resulting in a contract financing receivable.
Contract financing receivables decreased to $17.0 million at December 31, 2002
from $60.4 million at December 31, 2001. In addition, we have vendor payables of
$22.1 million and $45.5 million at December 31, 2002 and December 31, 2001,
respectively that represent the unfunded portion of these contract financing
receivables. The decrease in contract financing receivables is due to the
overall lower demand being experienced by some of these customers and the
conversion of certain of these customers to a consignment arrangement, whereby
we do not finance the related inventory and accounts receivable. These
receivables included $5.8 million and $23.8 million, of wireless products
located at our facilities at December 31, 2002 and December 31, 2001
respectively. In addition, we have commitments under these contracts to provide
inventory financing for these customers pursuant to various limitations defined
in the applicable service agreements. See Note 9 to the Consolidated Financial
Statements.
The reduction in accounts payable at December 31, 2002 when compared to December
31, 2001 is due primarily to the elimination or divestiture of certain
operations, the reduced business activity in 2002, including inventory purchases
and the reduction in average days costs in accounts payable days. We rely on our
suppliers to provide trade credit facilities and favorable payment terms to
adequately fund our on-going operations and product purchases. The payment terms
received from our suppliers is dependent on several factors, including, but not
limited to, our payment history with the supplier, the suppliers credit granting
policies, contractual provisions, our overall credit rating as determined by
various credit rating agencies, our recent operating results, financial position
and cash flows and the supplier's ability to obtain credit insurance on amounts
that we owe them. Adverse changes in any of these factors, certain of which may
not be wholly in our control, could have a material adverse effect on our
operations. We have from time to time obtained extended payment terms from
certain significant vendors at the end of each quarter. Consequently, our
accounts payable and cash balances at quarter end may be higher than what is
A-59
experienced throughout the quarter. For 2002 and 2001 our average cash balances
were $63.2 million and $57.3 million, respectively.
We lease our office and warehouse/distribution space as well as certain
furniture and equipment under operating leases. Total rent expense for all
operating leases was $9.2 million, $13.4 million and $11.5 million for 2002,
2001 and 2000, respectively.
The aggregate future minimum payments on the above leases are as follows (in
thousands):
YEAR ENDING
DECEMBER 31
-----------
2003 $ 10,470
2004 9,010
2005 6,635
2006 6,176
2007 5,682
THEREAFTER* 52,708
----------
$ 90,681
==========
*Includes approximately $48.1 million related to the Company's 495,000 square
foot distribution center located in Plainfield, Indiana, which the initial lease
term expires in 2019.
On February 19, 2003, we announced that we will consolidate our Richmond,
California call center operation into our Plainfield, Indiana facility. The
operating lease for the facility in Richmond, California expires in March of
2009 and future minimum lease payments included above total $6.8 million.
CAPITAL EXPENDITURES AND OTHER INVESTING ACTIVITIES
The decrease in net property and equipment during 2002 is due primarily to the
effect of the divestiture of Brightpoint China Limited, the Middle East
operations and Mexico and depreciation expense in excess of capital
expenditures. Capital expenditures totaled $8.7 million in 2002, a significant
decrease from the $27.4 million in capital expenditures during 2001. The high
level of capital expenditures in 2001 was primarily the result of investments
totaling approximately $21.5 million to install and enhance systems, to continue
to develop and enhance our systems to provide electronic data interchange
capabilities, to further automate our customer interfaces and enhance our
overall e-business capabilities, to create solutions for our customers and to
provide a flexible service delivery system in support of our integrated
logistics services. We intend to invest an aggregate of $6 to $8 million in
capital expenditures (related primarily to information technology) over the next
year.
The decrease in goodwill and other intangibles at December 31, 2002 as compared
to December 31, 2001 is primarily the result of the non-cash impairment of
approximately $40.7 million of goodwill and other intangibles recorded pursuant
to our adoption of SFAS No. 142 effective January 1, 2002 and approximately $8.0
million of goodwill sold pursuant to the Chinatron transaction discussed
previously. See Note 4 to the Consolidated Financial Statements for further
discussion regarding our adoption of SFAS No. 142.
A-60
Net cash provided by investing activities in 2002 was $8.7 million compared to
net cash used by investing activities of $42.2 million in 2001 and $25.0 million
in 2000. The increase in 2002 when compared to 2001 is due primarily to the
decrease in our funded contract financing activities discussed above and a
reduction in our capital expenditures of approximately $18.8 million to $8.7
million in 2002 from $27.4 million in 2001. The increase in net cash used by
investing activities in 2001 as compared to 2000 is due primarily to the
increase in information technology related capital expenditures discussed above.
BANK BORROWINGS AND OTHER FINANCING ACTIVITIES
On March 11, 1998, we completed the issuance of zero-coupon, subordinated,
convertible notes due in the year 2018 (Convertible Notes) with an aggregate
face value of $380 million ($1,000 per Convertible Note) and a yield to maturity
of 4.00%. The Convertible Notes are subordinated to all of our existing and
future senior indebtedness and all other liabilities, including trade payables
of our subsidiaries. The Convertible Notes resulted in gross proceeds of
approximately $172 million (issue price of $452.89 per Convertible Note) and
require no periodic cash payments of interest. The proceeds were used initially
to reduce borrowings under our revolving credit facility and to invest in highly
liquid, short-term investments pending use in operations. On October 30, 2000,
we announced that our Board of Directors had approved a plan under which we
could repurchase up to 130,000 Convertible Notes. We repurchased 94,000
Convertible Notes during the fourth quarter of 2000 and realized a gain on the
repurchases of approximately $16.6 million ($10.0 million, net of tax) that was
recorded as an extraordinary gain on debt extinguishment in the Consolidated
Statements of Operations. During the first quarter of 2001, we repurchased
36,000 Convertible Notes for approximately $10 million (prices ranging from $278
to $283 per Convertible Note), resulting in an extraordinary gain of
approximately $4.6 million ($0.58 per diluted share) after transaction and
unamortized debt issuance costs and applicable taxes. As of March 31, 2001, our
plan to repurchase 130,000 Convertible Notes was completed.
On November 1, 2001, we announced that our Board of Directors had approved
another plan under which we may repurchase the remaining 250,000 Convertible
Notes. During 2002, we repurchased 228,068 or 91% of the 250,000 outstanding
Convertible Notes pursuant to this plan. The aggregate purchase price for the
Convertible Notes was approximately $75.0 million (at an average cost of $329
per Convertible Note) and was funded by a combination of working capital and a
borrowing of $15 million under the credit facility with General Electric
Commercial Finance and our primary North American operating subsidiaries,
Brightpoint North America L.P. and Wireless Fulfillment Services, LLC discussed
below. Approximately $30 million of the working capital funding came from
Brightpoint Holdings B.V., our primary foreign finance subsidiary. These
transactions resulted in an extraordinary gain, net of tax, of approximately
$26.6 million ($3.33 per diluted share). The tax effect of the Convertible Note
repurchases was largely offset by net operating losses resulting in no
significant cash tax payments. As of December 31, 2002, the remaining 21,932
Convertible Notes had an accreted book value of approximately $12.0 million or
$548 per Convertible Note, which approximated the fair value. Between January 1,
and February 10, 2003, we repurchased an additional 17,602 Convertible Notes for
a total cost of $9.7 million ($551 per Convertible Note), with an accreted value
of $9.7 million ($551 per Convertible Note). On March 11, 2003 we purchased
4,201 of the Convertible Notes pursuant to the exercise of a put option by the
bondholders at their accreted value of $2.3 million, which was paid in cash. As
of March 12, 2003, there were 129 Convertible Notes outstanding with an accreted
value of approximately $71 thousand. The 129 outstanding Convertible Notes may
be redeemed by us for cash equal to the issue price plus accrued original issue
discount through the date of redemption. We have initiated the redemption of the
remaining Convertible Notes.
A-61
On October 31, 2001, our primary North American operating subsidiaries,
Brightpoint North America L.P. and Wireless Fulfillment Services, LLC ("the
Borrowers"), entered into a new revolving credit facility with General Electric
Capital Corporation ("GE Capital"), which was amended on December 21, 2001,
September 27, 2002 and December 13, 2002 ("the Revolver"), to provide capital
for its North American operations. GE Capital acted as agent for a syndicate of
banks ("the Lenders").
The Revolver replaced our former Bank One multicurrency facility, does not
prohibit us from borrowing additional funds outside of the United States and
expires in October of 2004. The Revolver provides borrowing availability,
subject to borrowing base calculations and other limitations, of up to a maximum
of $70 million and currently bears interest, at the Borrowers' option, at the
prime rate plus 1.50% or LIBOR plus 3.00%. The applicable interest rate that the
Borrowers are subject to, can be adjusted quarterly based upon certain financial
measurements defined in the Revolver. The Revolver is guaranteed by Brightpoint,
Inc. and is secured by, among other things, all of the Borrowers' assets in
North America. We also have pledged certain intellectual property and the
capital stock of certain of our subsidiaries as collateral for the Revolver. The
Revolver is a secured asset-based facility where a borrowing base is calculated
periodically using eligible accounts receivable and inventory, subject to
certain adjustments.. Eligible accounts receivable and inventories fluctuate
over time which can increase or decrease borrowing availability. The terms of
the Revolver include negative covenants that, among other things, limit the
Borrowers' ability to sell certain assets and make certain payments, including
but not limited to, dividends, repurchases of common stock, payments to us and
other payments outside the normal course of business, as well as prohibit us
from amending the terms of the Convertible Notes or our distribution agreement
with Nokia Inc. in the United States without the prior written consent of GE
Capital. The provisions of the Revolver are such that if our borrowing
availability falls between $12.5 million and $10.0 million, we are subject,
during such time, to a minimum fixed charge coverage ratio as defined in the
Revolver. If our borrowing availability falls below $10.0 million, we are then
subject at all times thereafter to a minimum fixed charge coverage ratio as
defined in the Revolver. The provisions of the Revolver require us to maintain
at all times a minimum borrowing availability of $7 million. Any of the
following events could cause us to be in default under the Revolver, including
but not limited to, (i) the expiration or termination of our distribution
agreement in the United States with Nokia Inc., (ii) a change in control of
Brightpoint, Inc., (iii) failure to maintain a tangible net worth, subject to
certain adjustments, of at least $75 million, (iv) the borrowing availability
under the Revolver falling below $7 million or (v) the violation of the
applicable fixed charge coverage ratio. In the event of default, the Lenders may
(i) terminate all or a portion of the Revolver with respect to further advances
or the incurrence of further letter of credit obligations, (ii) declare all or
any portion of the obligations due and payable and require any and all of the
letter of credit obligations be cash collateralized, or (iii) exercise any
rights and remedies provided to the Lenders under the loan document or at law or
equity. Additionally, the Lenders may increase the rate of interest applicable
to the advances and the letters of credit to the default rate as defined in the
agreement.
Subject to certain restrictions and limitations set forth in the Revolver, we
may use certain proceeds under the Revolver to repurchase our outstanding
Convertible Notes. At December 31, 2002, there were no amounts outstanding under
the Revolver and available funding, net of the applicable required availability
minimum at December 31, 2002, was $29.5 million. At December 31, 2001, there was
approximately $23.6 million outstanding under the Revolver at an interest rate
of 6.0% and available funding, net of the applicable required availability
minimum at December 31, 2001, was approximately $36.4 million. At December 31,
2002, 2001 and 2000, we were in compliance with the covenants in our credit
agreements.
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In December of 2002, our primary Australian operating subsidiaries, Brightpoint
Australia Pty Ltd and Advanced Portable Technologies Pty Limited, entered into a
revolving credit facility (the Facility) with GE Commercial Finance in
Australia. The Facility, which matures in December of 2005, provides borrowing
availability, subject to borrowing base calculations and other limitations, of
up to a maximum amount of $50 million Australian Dollars (approximately $28.2
million U.S. Dollars at December 31, 2002). Borrowings on the Facility were used
to repay borrowings under the Westpac overdraft facility discussed below and to
repay intercompany loans with Brightpoint Holdings B.V., our primary foreign
finance subsidiary. Future borrowings under the Facility will be used for
general working capital purposes. The Facility is subject to certain financial
covenants, which include maintaining a minimum fixed charge coverage ratio and
bears interest at the Bank Bill Swap Reference rate plus 2.9%. The Facility is a
secured asset-based facility where a borrowing base is calculated periodically
using eligible accounts receivable and inventory, subject to certain
adjustments. Eligible accounts receivable and inventories fluctuate over time
which can increase or decrease borrowing availability. At December 31, 2002,
there was $10.1 million outstanding under the Facility at an interest rate of
approximately 7.8% and available funding under the Facility was approximately
$10.7 million.
During 2001, Brightpoint Australia Pty Ltd, entered into a short-term line of
credit facility with Westpac Banking Corporation. The facility, which was due on
demand, had borrowing availability of up to $10 million Australian Dollars
(approximately $5.1 million U.S. Dollars at December 31, 2001) and bore interest
at Westpac's base overdraft rate plus 1.95% to 3.25%. The facility was secured
by a fixed and floating charge over all of the assets of Brightpoint Australia
Pty Ltd and was guaranteed by Brightpoint, Inc. At December 31, 2001 there was
approximately U.S. $4.2 million outstanding under this facility at an interest
rate of approximately 8.9%. As discussed above, during the fourth quarter of
2002, the Westpac facility was repaid and terminated.
During 2001, one of our subsidiaries, Brightpoint (France) SARL, entered into a
short-term line of credit facility with Natexis Banque. The facility had
borrowing availability of up to approximately 6.9 million Euros (approximately
$6.2 million U.S. Dollars at December 31, 2001), was guaranteed by the
receivables of one of Brightpoint (France) SARL's customers and bore interest at
EURIBOR plus 2.5%. At December 31, 2001, there was $6.1 million outstanding
under this facility at an interest rate of approximately 5.8%. During the third
quarter of 2002, this facility was terminated by the respective parties and
Brightpoint (France) SARL and Natexis Banque entered into an agreement whereby
Natexis Banque purchases certain accounts receivable from Brightpoint (France)
SARL. See Note 8 to the Consolidated Financial Statements.
Another of our subsidiaries, Brightpoint Sweden AB, has a short-term line of
credit facility with SEB Finans AB. The facility has borrowing availability of
up to $15 million Swedish Krona (approximately $1.7 million U.S. Dollars at
December 31, 2002) and bears interest at 4.6%. The facility is supported by a
guarantee provided by Brightpoint, Inc. At December 31, 2002 and 2001, there
were no amounts outstanding under this facility.
In January 2002, in connection with the agreement made with Chinatron as
discussed in Note 2 to the Consolidated Financial Statements, Brightpoint China
Limited entered into two separate credit facilities which were supported by two
cash-secured letters of credit totaling approximately $10 million issued by
Brightpoint, Inc. We sold our remaining interests in Brightpoint China Limited
in April of 2002 and, consequently, both of the cash-secured letters of credit
supporting these facilities were released.
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Net cash used by financing activities in 2002 and 2001 was primarily the result
of the Convertible Note repurchases discussed above and repayments on our credit
facilities. Net cash used by financing activities in 2000 was also primarily the
result of the Convertible Note repurchases, partially offset by borrowings on
our line of credit and proceeds from the issuance of common stock pursuant to
our employee stock option and purchase plans.
The decrease in shareholders' equity in 2002 of $36.4 million from December 31,
2001 resulted primarily from a net loss in 2002 of $42.4 million and a decrease
in accumulated other comprehensive loss of $5.9 million. The decrease in
accumulated other comprehensive loss was primarily the result of accumulated
foreign currency translation adjustments that were written-off for operations
that were terminated and the effects of current year foreign currency
translation adjustments, due particularly to the strengthening of the Euro
against the U.S. Dollar in 2002. These adjustments are recorded in accumulated
other comprehensive income (loss) when we translate our foreign currency
denominated assets and liabilities to the U.S. Dollar at the end of each
accounting period.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On December 31, 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure (SFAS No. 148). SFAS No. 148 amends
FASB Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and Accounting Principles Board (APB) Opinion No. 28, Interim
Financial Reporting, to require disclosure in the summary of significant
accounting policies of the effect of an entity's accounting policy with respect
to stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements. SFAS No. 148 is applicable to
all companies with stock-based employee compensation, regardless of whether they
account for that compensation using the fair value method of SFAS No. 123 or the
intrinsic value method of APB Opinion No. 25, Accounting for Stock Issued to
Employees. We adopted the disclosure provisions of SFAS 148 as of December 31,
2002.
In November of 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. Interpretation No. 45 requires certain
guarantees to be recorded at fair value and requires a guarantor to make
significant new disclosures, even when the likelihood of making any payments
under the guarantee is remote. Interpretation No. 45's initial recognition and
initial measurement provisions are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002; however, its disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. Although we have provided indirect guarantees on
behalf of certain of our wholly-owned subsidiaries, we believe that these
guarantees are excluded from the scope of Interpretation No. 45. We will
continue to evaluate what effect, if any, the recognition and measurement
provisions will have on our financial statements and related disclosures in
future periods.
In June of 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS
No.146). SFAS No. 146 nullifies Emerging Issues Task Force (EITF) Issue No,
94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).
SFAS No. 146
A-64
generally requires companies to recognize costs associated with exit activities
when they are incurred rather than at the date of a commitment to an exit or
disposal plan and is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. We expect to apply the provisions of SFAS No.
146 during the first quarter of 2003 based upon our decision to consolidate our
call center activities and close our Richmond, California call center. See Note
18 to the Consolidated Financial Statements.
In April of 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections ("SFAS No. 145"). SFAS No. 145
rescinds both FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt ("FASB Statement No. 4"), and an amendment to that
Statement, FASB Statement No.64, Extinguishments of Debt Made to Satisfy Sinking
Fund Requirements ("FASB Statement No. 64"). FASB Statement No. 4 required that
all gains and losses from the extinguishment of debt be aggregated and, if
material, be classified as an extraordinary item, net of the related income tax
effect. Upon the adoption of SFAS No. 145, all gains and losses on the
extinguishment of debt for periods presented in the financial statements will be
classified as extraordinary items only if they meet the criteria in APB Opinion
No. 30, Reporting the Results of Operations - Reporting the Effects of disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions (APB No. 30). The provisions of SFAS No. 145
related to the rescission of FASB Statement No. 4 and FASB Statement No. 64
shall be applied for fiscal years beginning after May 15, 2002. Upon adoption in
January of 2003, we expect to classify amounts currently reported as
extraordinary gains on debt extinguishment as a separate line item before Income
from Continuing Operations for all periods presented. The provisions of SFAS No.
145 related to the rescission of FASB Statement No. 44, the amendment of FASB
Statement No. 13 and Technical Corrections became effective as of May 15, 2002
and did not have a material impact on us.
On October 3, 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
No. 144"). SFAS No. 144 supersedes FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and
also supersedes the accounting and reporting provisions of APB Opinion Number
30, Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions ("APB No. 30"), for segments of a business to be
disposed of. Among its many provisions, SFAS No. 144 retains the fundamental
requirements of both previous standards, however, it resolves significant
implementation issues related to FASB Statement No. 121 and broadens the
separate presentation of discontinued operations in the income statement
required by APB No. 30 to include a component of an entity (rather than a
segment of a business). The provisions of SFAS No. 144 became effective for
financial statements issued for fiscal years beginning after December 15, 2001
with early application encouraged. We adopted SFAS No. 144 on January 1, 2002.
See Note 2 to the Consolidated Financial Statements for further discussion.
OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION
Our operations are divided into three operating segments. These operating
segments represent our three divisions: The Americas, Asia-Pacific and Europe.
These divisions all derive revenues from sales of wireless handsets, accessory
programs and fees from the provision of integrated logistics services. However,
the divisions are managed separately because of the geographic locations in
which they operate.
A-65
We evaluate the performance of, and allocate resources to, these segments based
on operating income (loss) from continuing operations including allocated
corporate selling, general and administrative expenses. As discussed in Note 2
to the Consolidated Financial Statements, we discontinued several operating
entities, which materially affected certain operating segments. All years
presented below have been reclassified to reflect the reclassification of
discontinued operating entities to discontinued operations. A summary of our
operations by segment is presented below (in thousands) for 2002, 2001 and 2000:
Operating Income Allocated
Revenues from (Loss) from Total Allocated Income
External Continuing Segment Interest Tax Expense
Customers Operations (1) Assets Expense (2) (Benefit) (2)
-------------- -------------- -------------- -------------- --------------
2002:
THE AMERICAS $ 493,203 $ (2,030) $ 173,371 $ 3,109 $ (1,843)
ASIA-PACIFIC 527,499 6,465 84,920 1,717 476
EUROPE 255,365 (3,688) 78,011 1,073 (1,202)
-------------- -------------- -------------- -------------- --------------
$ 1,276,067 $ 747 $ 336,302 $ 5,899 $ (2,569)
============== ============== ============== ============== ==============
2001:
The Americas $ 650,581 $ (6,481) $ 402,030 $ 4,726 $ (2,378)
Asia-Pacific 339,749 9,285 98,539 2,187 1,541
Europe 273,370 3,970 108,851 1,257 512
-------------- -------------- -------------- -------------- --------------
$ 1,263,700 $ 6,774 $ 609,420 $ 8,170 $ (325)
============== ============== ============== ============== ==============
2000:
The Americas $ 699,913 $ 30,539 $ 420,850 $ 4,638 $ 7,668
Asia-Pacific 330,489 14,653 137,600 (851) 6,609
Europe 266,762 8,977 129,337 1,970 2,180
-------------- -------------- -------------- -------------- --------------
$ 1,297,164 $ 54,169 $ 687,787 $ 5,757 $ 16,457
============== ============== ============== ============== ==============
(3) Includes $7.0 million of facility consolidation charges in the Americas
division in 2000.
(4) These items are allocated using various methods and are not necessarily
indicative of the actual interest expense and income taxes for the
applicable divisions.
Additional segment information is as follows (in thousands):
YEAR ENDED DECEMBER 31
----------------------------------------------
2002 2001 2000
------------ ------------ ------------
External revenue by service line:
Wireless handset sales $ 1,017,304 $ 989,209 $ 943,968
Wireless accessory programs 96,343 137,035 201,612
Integrated logistics services 162,420 137,456 151,584
------------ ------------ ------------
$ 1,276,067 $ 1,263,700 $ 1,297,164
============ ============ ============
DECEMBER 31
----------------------------------------------
2002 2001 2000
------------ ------------ ------------
Long-lived assets:
The Americas $ 38,274 $ 60,841 $ 60,656
Asia-Pacific 7,479 28,121 29,539
Europe 16,947 32,683 34,786
------------ ------------ ------------
$ 62,700 $ 121,645 $ 124,981
============ ============ ============
A-66
In all periods presented above, the Company's operations in the United States
accounted for 99% or more of The Americas division's Revenues generated from
external customers and substantially all of the long-lived assets of the
Americas division.
FUTURE OPERATING RESULTS
Various statements, discussions and analyses throughout this Annual Report on
Form 10-K are not based on historical fact and contain forward-looking
statements. Actual future results may differ materially from the forward-looking
statements in this Annual Report on Form 10-K. Future trends for revenue and
profitability are difficult to predict due to a variety of known and unknown
risks and uncertainties, including, without limitation, (i) dependence upon
principal suppliers and availability and price of wireless products; (ii) loss
of significant customers or a reduction in prices we charge these customers;
(iii) reliance on third party to manage significant operations in our Asia
Pacific division; (iv) lack of demand for our products and services in certain
markets and our inability to maintain margins; (v) our ability to absorb,
through revenue growth, the increasing operating costs that we have incurred and
continue to incur in connection with our activities; (vi) uncertainty whether
wireless equipment manufacturers and network operators will continue to
outsource aspects of their business to us; (vii) possible adverse effect on
demand for our products resulting from consolidation of wireless network
operator customers; (viii) economic conditions in our markets; (ix)ability to
respond to rapid technological changes in the wireless communications and data
industry; (x) possible difficulties collecting our accounts receivable; (xi)
access to or the cost of increasing amounts of capital, trade credit or other
financing; (xii) risks of foreign operations, including currency, trade
restrictions and political risks in our foreign markets; (xiii) effect of
hostilities or terrorist attacks on our operations; (xiv) reliance on
sophisticated information systems technologies; (xv) dilution of the percentage
ownership of existing shareholders due to significant outstanding convertible
securities; (xvi) our significant outstanding indebtedness; (xvii) ability to
meet intense industry competition; (xviii) ability to manage and sustain future
growth at our historical or industry rates; (xix) success of relationships with
wireless equipment manufacturers, network operators and other participants in
the wireless telecommunications and data industry; (xx) our recent history of
losses; (xxi) seasonality; (xxii) ability to attract and retain qualified
management and other personnel; (xxiii) cost of complying with labor agreements;
(xxiv) ability to protect our proprietary information; (xxv) high rate of
personnel turnover; (xxvi) our significant payment obligations under certain
lease and other contractual arrangements; (xxvii) possible adverse effects of
future medical claims regarding the use of wireless handsets; (xxviii)
uncertainties regarding the outcome of pending litigation and regulatory
investigations; (xxix) ability to maintain adequate business insurance at
reasonable cost and (xxx) existence of anti-takeover measures. Because of the
aforementioned uncertainties affecting our future operating results, past
performance should not be considered to be a reliable indicator of future
performance, and investors should not use historical trends to anticipate future
results or trends.
A-67
FINANCIAL MARKET RISK MANAGEMENT
INTEREST RATE AND FOREIGN CURRENCY EXCHANGE RATE RISKS
We are exposed to financial market risks, including changes in interest rates
and foreign currency exchange rates. To mitigate interest rate risks, we have
periodically utilized interest rate swaps to convert certain portions of our
variable rate debt to fixed interest rates. To mitigate foreign currency
exchange rate risks, we periodically utilize derivative financial instruments
under the Foreign Currency Risk Management Policy approved by our Board of
Directors. We do not use derivative instruments for speculative or trading
purposes.
We are exposed to changes in interest rates on our variable interest rate
revolving lines of credit. A 10% increase in short-term borrowing rates during
2002 would have resulted in only a nominal increase in interest expense. We did
not have any interest rate swaps outstanding at December 31, 2002.
A substantial portion of our revenue and expenses are transacted in markets
worldwide and are denominated in currencies other than the U.S. Dollar.
Accordingly, our future results could be adversely affected by a variety of
factors, including changes in specific countries' political, economic or
regulatory conditions and trade protection measures.
Our foreign currency risk management program is designed to reduce but not
eliminate unanticipated fluctuations in earnings, cash flows and the value of
foreign investments caused by volatility in currency exchange rates by hedging,
where believed to be cost-effective, significant exposures with foreign currency
exchange contracts, options and foreign currency borrowings. Our hedging
programs reduce, but do not eliminate, the impact of foreign currency exchange
rate movements. An adverse change (defined as a 10% strengthening of the U.S.
Dollar) in all exchange rates would not have had a negative impact on our
results of operations for 2002, due to the aggregate losses experienced in our
foreign operations. At December 31, 2002, there were no cash flow or net
investment hedges open. Our sensitivity analysis of foreign currency exchange
rate movements does not factor in a potential change in volumes or local
currency prices of our products sold or services provided. Actual results may
differ materially from those discussed above. For further discussion see Note 14
to the Consolidated Financial Statements entitled "Derivative Financial
Instruments."
Certain of our foreign entities are located in countries that are members of the
European Union (EU) and, accordingly, have adopted the Euro, the EU's new single
currency, as their legal currency effective January 1, 1999. From that date, the
Euro has been traded on currency exchanges and available for non-cash
transactions. Local currencies remained legal tender until December 31, 2001 at
which time participating countries issued Euro-denominated bills and coins for
use in cash transactions. By no later than July 1, 2002, participating countries
will withdraw all bills and coins denominated in local currencies. During 2001,
our operations that are located in EU countries (France, Germany, Ireland and
the Netherlands) transacted business in both the Euro and their local currency
as appropriate to the nature of the transaction under the EU's "no compulsion,
no prohibition principle." We made significant investments in information
technology in Europe and experienced no significant information technology or
operational problems as a result of the Euro conversion. In addition, we
continue to evaluate the effects on our business of the Euro conversion for the
affected operations and believe that the
A-68
completion of the Euro conversion during 2001 and 2002 did not have a material
effect on our financial position or results of operations.
OTHER INFORMATION
COMMON STOCK INFORMATION (UNAUDITED)
Our Common Stock is listed on the NASDAQ Stock Market(R) under the symbol CELL.
The following tables set forth, for the periods indicated, the high and low sale
prices for the Common Stock as reported by the NASDAQ Stock Market(R).
2002 HIGH LOW
-------------- ------- ------
FIRST QUARTER $ 26.18 $ 4.62
SECOND QUARTER 6.86 1.26
THIRD QUARTER 2.74 1.19
FOURTH QUARTER 8.95 1.61
2001 High Low
-------------- ------- -------
First quarter $ 36.32 $ 16.84
Second quarter 31.36 14.28
Third quarter 27.79 19.60
Fourth quarter 26.88 18.90
At March 25, 2003, there were approximately 229 stockholders of record.
We have not paid cash dividends on our Common Stock other than S corporation
distributions made to stockholders during periods prior to the rescissions of S
corporation elections by us or our predecessors. In addition, our bank
agreements limit or prohibit us , subject to certain exceptions, from declaring
or paying cash dividends, making capital distributions or other payments to
stockholders See Note 11 - Lines of Credit and Long-Term Debt. The Board of
Directors intends to continue a policy of retaining earnings to finance the
growth and development of our business and does not expect to declare or pay any
cash dividends in the foreseeable future.
We have declared the following forward and reverse stock splits, all of the
forward stock splits which were affected in the form of stock dividends:
DIVIDEND PAYMENT OR
DECLARATION DATE STOCK SPLIT EFFECTIVE DATE SPLIT RATIO
----------------- -------------------------- -----------
August 31, 1995 September 20, 1995 5 for 4
November 12, 1996 December 17, 1996 3 for 2
January 28, 1997 March 3, 1997 5 for 4
October 22, 1997 November 21, 1997 2 for 1
June 26, 2002 June 27, 2002 1 for 7
A-69
SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Revenue (2) $ 1,276,067 $ 1,263,700 $ 1,297,164 $ 1,193,347 $ 1,031,548
Gross profit (2) 71,994 73,775 133,829 98,552 73,167
Operating income from continuing operations (2) 747 6,774 54,169 (44,681) 15,053
Income (loss) from continuing operations (2) (12,824) (1,202) 31,895 (70,530) 6,441
Total discontinued operations(2) (15,478) (56,399) 1,800 (4,039) 1,088
Income (loss) before extraordinary item and
cumulative effect (28,302) (57,601) 33,695 (74,443) 7,529
Net income (loss) $ (42,421) $ (53,301) $ 43,683 (87,847) 7,529
Basic per share:
Income (loss) from continuing operations $ (1.60) $ (0.15) $ 4.02 $ (9.26) $ 0.87
Discontinued operations (1.94) (7.07) 0.23 (0.52) 0.14
Cumulative effect of accounting change,
net of tax (5.09) - - (1.76) -
Extraordinary gain on debt extinguishment,
net of tax 3.33 0.54 1.26 - -
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (5.30) $ (6.68) $ 5.51 $ (11.54) $ 1.01
=========== =========== =========== =========== ===========
Diluted per share:
Income (loss) from continuing operations $ (1.60) $ (0.15) $ 3.98 $ (9.26) $ 0.84
Discontinued operations (1.94) (7.07) 0.22 (0.52) 0.14
Cumulative effect of accounting change,
net of tax (5.09) - - (1.76) -
Extraordinary gain on debt extinguishment,
net of tax 3.33 0.54 1.25 - -
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (5.30) $ (6.68) $ 5.45 $ (11.54) $ 0.98
=========== =========== =========== =========== ===========
DECEMBER 31
----------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Working capital $ 60,995 $ 184,434 $ 267,557 $ 261,037 $ 349,248
Total assets 336,302 609,420 687,787 617,500 699,340
Long-term obligations 10,052 156,066 198,441 230,886 286,706
Total liabilities 222,659 459,407 493,690 468,723 472,719
Stockholders' equity 113,643 150,013 194,097 148,777 226,621
(1) Operating data includes certain items that were recorded in the years
presented as follows: investment gains on marketable equity securities in 1998;
restructuring and other unusual charges in 1998 and 1999; facility consolidation
charges in 2001 and 2000; the cumulative effect of an accounting change in 2002
and 1999 and an extraordinary gain on debt extinguishment in 2002, 2001 and
2000. See Management's Discussion and Analysis of Financial Condition and
Results of Operations and Notes to Consolidated Financial Statements.
(2) We have reclassified certain prior year amounts to conform to the 2002
presentation primarily to reflect certain classification requirements of
accounting pronouncements issued in 2002 The amounts reclassified had no effect
on net income or earnings per share.
A-70
BRIGHTPOINT, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULE
PAGE
Consent of Independent Auditors................................................. F-1
Financial Statement Schedule for the years 2002, 2001 and 2000:
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS........................... F-2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-87863) pertaining to the Brightpoint, Inc. 1994 Stock Option Plan,
as amended, the 1996 Brightpoint, Inc. Stock Option Plan, as amended, the
Brightpoint, Inc. Non-employee Director Stock Option Plan, and the Brightpoint,
Inc. Employee Stock Purchase Plan, in the Registration Statement (Form S-8 No.
333-108496) pertaining to the Brightpoint, Inc. Independent Director Stock
Compensation Plan, of our report dated January 31, 2003, except for Notes 5, 11,
15 and 18, as to which the date is March 12, 2003 with respect to the
Consolidated Financial Statements and Schedule of Brightpoint, Inc. included in
the Annual Report on Form 10-K/A for the year ended December 31, 2002.
/s/ ERNST & YOUNG LLP
Indianapolis, Indiana
March 1, 2004
F-1
BRIGHTPOINT, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E
-------------- -------------- -------------- -------------- --------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES(1) ACCOUNTS DEDUCTIONS OF PERIOD
----------- -------------- -------------- -------------- -------------- --------------
Year ended December 31, 2002:
Deducted from asset accounts:
Allowance for doubtful
accounts .................. $ 6,272,000 $ 5,560,000 $ -- $ 6,504,000(2) $ 5,328,000
-------------- -------------- -------------- -------------- --------------
Total ......................... $ 6,272,000 $ 5,560,000 $ -- $ 6,504,000 $ 5,328,000
============== ============== ============== ============== ==============
Year ended December 31, 2001:
Deducted from asset accounts:
Allowance for doubtful
accounts .................. $ 6,548,000 $ 8,389,000 $ -- $ 8,665,000(2) $ 6,272,000
-------------- -------------- -------------- -------------- --------------
Total ......................... $ 6,548,000 $ 8,389,000 $ -- $ 8,665,000 $ 6,272,000
============== ============== ============== ============== ==============
Year ended December 31, 2000:
Deducted from asset accounts:
Allowance for doubtful
accounts .................. $ 6,220,000 $ 6,328,000 $ -- $ 6,000,000(2) $ 6,548,000
-------------- -------------- -------------- -------------- --------------
Total ......................... $ 6,220,000 $ 6,328,000 $ -- $ 6,000,000 $ 6,548,000
============== ============== ============== ============== ==============
(1) Does not include impairments of accounts receivable recognized in
connection with the Company's discontinued operations. See notes to
Consolidated Financial Statements.
(2) Uncollectible accounts written off.
F-2