| BRIGHTPOINT INC Item 1A 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, which 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 |
| 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 |
| — In 2005, 2004 and 2003 Computech Overseas International (Computech), a customer of the Company’s Brightpoint Asia Limited operations, accounted for approximately 11prca, 10prca and 11prca of the Company’s total revenue and 21prca, 19prca and 19prca of the Asia-Pacific division’s revenue |
| At December 31, 2005 and 2004, there were no amounts owed to us from Computech |
| Although Nextel Communications, Inc |
| (Nextel), a fee-based logistic services customer, is less than 10prca of the Company’s total revenue, it is more than 10prca of wireless devices handled in our business in the United States |
| Sprint Corporation (Sprint) is a customer and a supplier within the activation services business in the Company’s North American business |
| On August 12, 2005, Sprint and Nextel completed a merger to form Sprint Nextel Corporation (Sprint Nextel) |
| Many of our 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 provide 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 logistic services customers, we previously have experienced losses of certain of these customers through expiration or cancellation of our contracts with them 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 |
| Our business may be adversely impacted by consolidation of mobile operators |
| — The past several years have witnessed a consolidation within the mobile operator community, and this trend is expected to continue |
| This trend could result in a reduction or elimination of promotional activities by the remaining mobile operators as they seek to reduce their expenditures, which could in turn, result in decreased demand for our products or services |
| Moreover, consolidation of mobile operators reduces the number of potential contracts available to us and other providers of logistic services |
| We could also lose business if mobile operators, which are our customers, are acquired by other mobile operators that are not our customers |
| 11 _________________________________________________________________ [47]Table of Contents 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 devices 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 are generally 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, this may result in a loss of customers and may have a material adverse effect on our results of operations |
| We may become subject to suits alleging medical risks associated with our wireless devices |
| — Lawsuits or claims have been filed or made against manufacturers of wireless devices over the past years alleging possible medical risks, including brain cancer, associated with the electromagnetic fields emitted by wireless communications devices |
| 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 devices has on human cells |
| Substantially all of our revenues are derived, either directly or indirectly, from sales of wireless devices |
| We may become subject to lawsuits filed by plaintiffs alleging various health risks from our products |
| Even an unsubstantiated perception that health risks exist could adversely affect our ability or the ability of our customers to market wireless devices |
| 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 |
| 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 |
| Our future operating results will depend on our ability to continue to increase volumes and maintain margins |
| — A large percentage of our total revenues is derived from sales of wireless devices, 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 voice and data products and our having adequate supply of these products |
| The gross margins that we realize on sales of wireless devices 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 growth strategy includes acquisitions |
| — We have acquired other businesses in the past and plan to continue to do so in the future based on our global business strategy |
| Acquisitions may not meet our expectations at the time of purchase and could adversely affect our operations causing operating losses and subsequent write-downs due to asset impairments |
| 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; repurchases of Common Stock; 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 voice and data industry; changes in governmental regulation and the enforcement of 12 _________________________________________________________________ [48]Table of Contents 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 stock for companies in the global wireless industry or in the distribution or logistic services sectors of the global wireless industry could also affect the market price of our Common Stock |
| 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 |
| — We provide functions such as distribution, inventory management, fulfillment, customized packaging, prepaid and e-commerce solutions, activation management and other outsourced services for many 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 global wireless industry rely on outsourced logistic 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 renewable contractual arrangements |
| Service periods under certain of our contractual arrangements are expiring or will expire in the near future |
| The failure to obtain renewals or otherwise maintain these agreements on terms, including price, consistent with our current terms could have a material adverse effect on our business |
| We depend on third parties to manufacture products that we distribute and, accordingly, rely on their quality control procedures |
| — Product manufacturers typically provide limited warranties directly to the end consumer or to us, which we generally pass through to our customers |
| If a product we distribute for a manufacturer has quality or performance problems, our ability to provide products to our customers could be disrupted |
| 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 that the enhanced functionality of wireless devices and the roll-out of next generation systems 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 mobile 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 |
| A prolonged economic slow-down in the United States or any other region in which we have significant operations could negatively impact our results of operations and financial position |
| Rapid technological changes in the global wireless industry could have a material adverse effect on our business |
| — The technology relating to wireless voice 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 or services which have perceived or actual advantages over our service offerings or products that we handle or which otherwise render those products or services 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 |
| 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 at favorable pricing and on other favorable 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, pledged cash requirements, our payment history with the supplier, the supplier’s 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 are generated outside of the United States 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 13 _________________________________________________________________ [49]Table of Contents 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 |
| US 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 |
| In the past, we entered into forward exchange swaps, futures or options contracts as a 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 |
| We have ceased operations or divested several of our foreign operations because they were not performing to acceptable levels |
| These actions resulted in significant losses to us |
| We may in the future, decide to divest certain existing foreign operations |
| This could result in our incurring significant additional losses |
| Natural disasters, epidemics, hostilities and terrorist acts could disrupt our operations |
| — Although we have implemented policies and procedures designed to minimize the effect of a natural disaster, epidemics, 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 that 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 logistic 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 |
| 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 |
| We may 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 logistic 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 are not recoverable through an increase in the price of our services could have a material adverse effect on our results of operations |
| We have debt facilities, which are secured by a portion of our assets and which could prevent us from borrowing additional funds, if needed |
| — Our United States, Australia and New Zealand subsidiaries’ credit facilities are secured by primarily all of their respective assets 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 subsidiaries’ ability to borrow additional funds to adequately finance our operations and expansion strategies |
| The terms of our United States, Australia and New Zealand subsidiaries’ credit facilities also include negative covenants that, among other things, may limit our ability to incur additional indebtedness, 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, Australia and New Zealand |
| If we violate any of these loan covenants, default on these obligations or become subject to a change of control, our subsidiaries’ indebtedness would become immediately due and payable, and the banks could foreclose on its security |
| The global wireless industry is intensely competitive and we may not be able to continue to compete successfully in this industry |
| — We compete for sales of wireless voice and data equipment, and expect that we will continue to compete, with numerous well-established mobile operators, distributors and manufacturers, including our own suppliers |
| As a provider of logistic services, we also compete with other distributors, logistic 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 global wireless 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 14 _________________________________________________________________ [50]Table of Contents 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 |
| 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 |
| Our ability to absorb, through revenue growth, the increasing operating costs that we have incurred and continue to incur in connection with our activities and the execution of our strategy could have a material adverse effect on future earnings |
| In addition, our growth prospects could be adversely affected by a decline in the global wireless 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 with wireless equipment manufacturers, mobile 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 logistic 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 |
| Our operating results frequently vary significantly and respond to seasonal fluctuations in purchasing patterns |
| — The operating results of each of our three divisions may be influenced by a number of seasonal factors in the different countries and markets in which we operate |
| These factors 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 mobile 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, largely because of gift-giving holidays |
| This and other seasonal factors have contributed to increases in our sales during the fourth quarter in certain markets |
| Conversely, we have experienced decreases in demand in the first quarter subsequent to the higher level of activity in the preceding fourth quarter |
| Our operating results may continue to fluctuate significantly in the future |
| 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 |
| In addition, as a result of seasonal factors, interim results may not be indicative of annual results |
| See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional analysis on seasonality |
| We are subject to certain personnel related issues |
| — 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 15 _________________________________________________________________ [51]Table of Contents qualified management |
| Some labor markets are very competitive |
| 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, 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 |
| Our distribution activities and logistic 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 consists 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 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 |
| Concerning other business methods and software we rely on trade secret and copyright laws to protect 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 |
| We have significant future payment obligations pursuant to certain leases and other long-term contracts |
| — We lease our office and warehouse/distribution facilities 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 be unable to obtain and maintain adequate business insurance at a reasonable cost |
| — Although we currently maintain general commercial, property liability and transportation 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 |
| There are amounts of our securities, which are issuable pursuant to our 2004 Long-Term Incentive Plan, our Amended and Restated Independent Director Stock Compensation Plan and our 1996 Stock Option Plan, which, if issued, could result in dilution to existing shareholders, reduce earnings in future periods 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 these plans |
| Grants made under these plans could result in dilution to existing shareholders |
| Moreover, effective January 1, 2006, as required under recently issued accounting pronouncement Statement of Financial Accounting Standards (SFAS) 123(R), Share-Based Payment, the compensation cost relating to share-based payment transactions will be recognized in financial statements |
| Pro forma disclosure is no longer an alternative |
| This requirement will reduce earnings, earnings per share, net operating cash flows and increase net financing cash flows in periods after adoption |
| 16 _________________________________________________________________ [52]Table of Contents We have instituted measures to protect us against a takeover |
| — Certain provisions of our By-laws, shareholders rights and option plans, certain employment agreements and the Indiana Business 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 |