<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission File Number 0-22972
CELLSTAR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2479727
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1730 Briercroft Court
Carrollton, Texas 75006
--------------------- -----
(Address of principal (Zip Code)
executive offices)
(972) 466-5000
----------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
---
On July 9, 1999 there were 59,709,596 outstanding shares of Common Stock,
$0.01 par value per share.
<PAGE>
CELLSTAR CORPORATION
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION Number
- ------ --------------------- ------
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (unaudited)
May 31, 1999 and November 30, 1998 3
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three and six months ended May 31, 1999 and 1998 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (unaudited)
Six months ended May 31, 1999 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six months ended May 31, 1999 and 1998 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 22
PART II - OTHER INFORMATION
- ------- -----------------
Item 1. LEGAL PROCEEDINGS 24
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 24
Item 3. DEFAULTS UPON SENIOR SECURITIES 24
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
Item 5. OTHER INFORMATION 24
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 25
2
<PAGE>
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CELLSTAR CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
May 31, November 30,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 66,313 47,983
Accounts receivable (less allowance for doubtful
accounts of $38,224 and $33,361, respectively) 279,203 349,760
Inventories 185,782 274,438
Deferred income tax assets 18,796 18,670
Prepaid expenses 21,865 16,806
------------ -----------
Total current assets 571,959 707,657
Property and equipment, net 27,373 27,858
Goodwill (less accumulated amortization of $5,005
and $4,032, respectively) 33,053 32,910
Other assets 7,378 7,100
------------ -----------
$ 639,763 775,525
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 165,426 311,326
Notes payable to financial institutions 90,647 85,023
Accrued expenses 19,143 39,395
Income taxes payable 6,090 8,601
Deferred income tax liabilities 745 3,389
------------ -----------
Total current liabilities 282,051 447,734
Long-term debt 150,000 150,000
------------ -----------
Total liabilities 432,051 597,734
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; none issued - -
Common stock, $.01 par value, 200,000,000 shares
authorized; 59,614,096 and 58,963,218 shares
issued and outstanding, respectively 596 590
Additional paid-in capital 78,397 76,962
Common stock warrant - 4
Accumulated other comprehensive income - foreign currency
translation adjustments (9,257) (8,181)
Retained earnings 137,976 108,416
------------ -----------
Total stockholders' equity 207,712 177,791
------------ -----------
$ 639,763 775,525
============ ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months Six months
ended May 31, ended May 31,
-------------------------- -----------------------------
1999 1998 1999 1998
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 570,325 445,660 1,085,673 852,405
Cost of sales 521,267 400,758 992,976 766,093
------------ ----------- ------------- ------------
Gross profit 49,058 44,902 92,697 86,312
Selling, general and
administrative expenses 28,304 23,718 53,922 46,455
Restructuring charge 2,868 - 2,868 -
------------ ----------- ------------- ------------
Operating income 17,886 21,184 35,907 39,857
Other income (expense):
Equity in income of
affiliated companies 100 176 6,123 361
Gain on sale of assets 6,047 - 8,247 -
Interest expense (5,396) (2,617) (10,077) (5,137)
Other, net (716) 786 (2,303) 1,210
------------ ----------- ------------- ------------
Total other income (expense) 35 (1,655) 1,990 (3,566)
------------ ----------- ------------- ------------
Income before income taxes 17,921 19,529 37,897 36,291
Provision for income taxes 3,952 2,930 8,337 5,444
------------ ----------- ------------- ------------
Net income $ 13,969 16,599 29,560 30,847
============ =========== ============= ============
Net income per share:
Basic $ 0.23 0.28 0.50 0.52
============ =========== ============= ============
Diluted $ 0.23 0.27 0.48 0.50
============ =========== ============= ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity and Comprehensive Income
Six months ended May 31, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Common other
Common Stock paid-in stock comprehensive Retained
-----------------
Shares Amount capital warrant income earnings Total
------- ------- ------- ------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 30, 1998 58,963 $590 76,962 4 (8,181) 108,416 177,791
Comprehensive income:
Net income - - - - - 29,560 29,560
Foreign currency translation
adjustments - - - - (1,076) - (1,076)
-------
Total comprehensive
income 28,484
Common stock issued under
stock option plans 90 - 1,437 - - - 1,437
Exercise of common stock warrant 561 6 (2) (4) - - -
------- ------- ------- ------ -------- -------- -------
Balance at May 31, 1999 59,614 $596 78,397 - (9,257) 137,976 207,712
======= ======= ======= ====== ======== ======== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six months ended May 31, 1999 and 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 29,560 30,847
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 5,862 3,797
Gain on sale of assets (8,247) -
Deferred income taxes (2,770) (3,639)
Changes in operating assets and liabilities
net of effects from acquisitions of businesses:
Accounts receivable 72,066 (80,363)
Inventories 87,206 (8,454)
Prepaid expenses (5,059) (3,135)
Other assets (896) (811)
Accounts payable (145,900) (21,440)
Accrued expenses (21,665) (240)
Income taxes payable (1,674) 7,394
--------------- ---------------
Net cash provided by (used in) operating activities 8,483 (76,044)
Cash flows from investing activities:
Proceeds from sale of assets 8,025 -
Purchases of property and equipment (4,402) (3,602)
Acquisitions of businesses, net of cash acquired - (12,871)
Acquisitions of minority interests - (250)
--------------- ---------------
Net cash provided by (used in) investing activities 3,623 (16,723)
Cash flows from financing activities:
Net borrowings on notes payable to financial institutions 5,624 10,239
Checks not presented for payment - 44,795
Net proceeds from issuance of common stock 600 3,260
--------------- ---------------
Net cash provided by financing activities 6,224 58,294
Net increase (decrease) in cash and cash equivalents 18,330 (34,473)
Cash and cash equivalents at beginning of period 47,983 74,646
--------------- ---------------
Cash and cash equivalents at end of period $ 66,313 40,173
=============== ===============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
CELLSTAR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
Although the interim consolidated financial statements of CellStar
Corporation and subsidiaries (the "Company") are unaudited, it is the
opinion of the Company's management that all adjustments (consisting of
only normal recurring adjustments) necessary for a fair statement of the
results have been reflected therein. Operating revenues and net income for
any interim period are not necessarily indicative of results that may be
expected for the entire year.
These statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company's Annual
Report on Form 10-K for the year ended November 30, 1998.
Certain prior period financial statement amounts have been reclassified to
conform to the current year presentation.
(2) Investment in Topp Telecom, Inc.
In February 1999, the Company sold part of its equity investment in Topp
Telecom, Inc. ("Topp") to a wholly-owned subsidiary of Telefonos de Mexico
S.A. de C.V. ("TelMex"). At the closing, the Company also sold a portion
of its debt investment to certain other shareholders of Topp. As a result
of these transactions, the Company received cash in the amount of $7.0
million, retained a $22.5 million note receivable and a 19.5% equity
ownership interest in Topp and recorded a pre-tax gain of $5.8 million.
The gain is recorded in equity in income of affiliated companies in the
consolidated statements of operations for the six months ended May 31,
1999.
In June 1999, TelMex made an additional equity investment in Topp which may
cause the Company's percentage ownership interest in Topp to be reduced but
should not have a material effect on the total value of the Company's
investment.
(3) Net Income Per Share
Basic net income per common share is based on the weighted average number
of common shares outstanding for the relevant period. Diluted net income
per common share is based on the weighted average number of common shares
outstanding plus the dilutive effect of potentially issuable common shares
pursuant to a warrant, stock options and convertible notes.
7
<PAGE>
A reconciliation of the numerators and denominators of the basic and
diluted net income per share computations for the three and six months
ended May 31, 1999 and 1998 follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended
May 31
-----------------------------
1999 1998
---------- ---------
<S> <C> <C>
Basic:
Net income $ 13,969 16,599
Weighted average number of shares outstanding 59,614 58,921
---------- ---------
Net income per share $ 0.23 0.28
========== =========
Diluted:
Net income $ 13,969 16,599
Interest on convertible notes, net of tax effect 1,125 1,125
---------- ---------
Adjusted net income $ 15,094 17,724
Weighted average number of shares outstanding 59,614 58,921
Effect of dilutive securities:
Stock options and warrants 653 2,513
Convertible notes 5,422 5,422
---------- ---------
Weighted average number of shares outstanding and effect
of dilutive securities 65,689 66,856
---------- ---------
Net income per share $ 0.23 0.27
========== =========
</TABLE>
<TABLE>
<CAPTION>
Six months ended
May 31
-----------------------------
1999 1998
---------- ---------
<S> <C> <C>
Basic:
Net income $ 29,560 30,847
Weighted average number of shares outstanding 59,564 58,777
---------- ---------
Net income per share $ 0.50 0.52
========== =========
Diluted:
Net income $ 29,560 30,847
Interest on convertible notes, net of tax effect 2,250 2,250
---------- ---------
Adjusted net income $ 31,810 33,097
Weighted average number of shares outstanding 59,564 58,777
Effect of dilutive securities:
Stock options and warrants 632 2,197
Convertible notes 5,422 5,422
---------- ---------
Weighted average number of shares outstanding and effect
of dilutive securities 65,618 66,396
---------- ---------
Net income per share $ 0.48 0.50
========== =========
</TABLE>
8
<PAGE>
(4) Segment and Related Information
Effective November 30, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise
and Related Information." Segment information for the three and six months
ended May 31, 1998 has been restated to conform to the new presentation.
The Company operates predominantly within one industry, wholesale and
retail sales of wireless telecommunications products. The Company's
management evaluates operations primarily on income before interest and
income taxes in the following reportable geographical regions: North
America, primarily the United States, Asia-Pacific, Latin America, which
includes Mexico and the Company's Miami, Florida operations ("Miami"), and
Europe. Revenues and operating results of Miami are included in Latin
America since Miami's activities are primarily for export customers. The
Corporate group includes headquarter operations, income and expenses not
allocated to reportable segments, and interest expense on the Company's
Multicurrency Revolving Credit Facility and long-term debt. Intersegment
sales and transfers are not significant.
9
<PAGE>
Segment information for the three and six months ended May 31, 1999 and 1998
follows (in thousands):
<TABLE>
<CAPTION>
North Asia- Latin
America Pacific America Europe Corporate Total
------------ ------------ ------------- ------------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Three months ended May 31, 1999:
Revenues from external customers $ 100,805 193,580 186,877 89,063 - 570,325
Income (loss) before
interest and taxes 1,015 9,222 15,655 1,908 (5,337) 22,463
Net income (loss) 638 8,081 10,939 1,332 (7,021) 13,969
Three months ended May 31, 1998:
Revenues from external customers $ 117,504 100,151 169,119 58,886 - 445,660
Income (loss) before
interest and taxes 3,715 9,427 10,618 1,053 (3,296) 21,517
Net income (loss) 2,262 8,553 6,637 863 (1,716) 16,599
<CAPTION>
North Asia- Latin
America Pacific America Europe Corporate Total
------------ ------------ ------------- ------------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Six months ended May 31, 1999:
Revenues from external customers $ 202,943 327,283 357,129 198,318 - 1,085,673
Income (loss) before
interest and taxes 12,859 17,333 20,537 4,807 (9,365) 46,171
Net income (loss) 8,662 14,877 12,549 3,352 (9,880) 29,560
Six months ended May 31, 1998:
Revenues from external customers $ 221,674 178,515 358,512 93,704 - 852,405
Income (loss) before
interest and taxes 3,196 18,913 22,547 1,734 (6,478) 39,912
Net income (loss) 2,086 18,667 14,616 1,541 (6,063) 30,847
</TABLE>
10
<PAGE>
(5) Foreign Currency Non-deliverable Forward Contracts
During the second quarter of 1999, the remaining Brazilian real non-
deliverable forward ("NDF") contracts, which were outstanding at February
28, 1999, were settled. These NDF contracts and other NDF contracts of
similar nature were used to manage the Company's foreign currency exposure
to the Brazilian real with respect to certain credit sales made to E.A.
Electronicos e Componentes Ltda. ("E.A."), a Brazilian importer. Foreign
currency rate fluctuations caused bad debt expense of $26.4 million related
to the payments remitted by E.A. This expense was recorded in selling,
general and administrative expenses for the six months ended May 31, 1999,
but this expense was completely offset by gains realized on NDF contract
settlements, which gains also were recorded in selling, general and
administrative expenses.
(6) Restructuring Charge
As part of the Company's strategy to streamline its organizational
structure, the Company reorganized and consolidated the management of the
Company's Latin American and North American Regions and centralized the
management in the Company's Asia-Pacific Region. As a result, the
consolidated statements of operations for the quarter ended May 31, 1999
include a charge of $2.9 million related to the reorganization. Of the
total costs, $0.4 million consisted of non-cash outlays and the remaining
$2.5 million consisted of cash outlays, of which $1.8 million had been paid
through May 31, 1999. The components of the restructuring charge were as
follows (in thousands):
Employee termination costs $2,260
Write-down of assets 406
Other 202
------
$2,868
======
The Company expects to incur approximately $0.3 million of additional
expense related to this restructuring in the third quarter of 1999.
(7) Gain on Sale of Prepaid Operation in Venezuela
During the second quarter of 1999, the Company sold its Movil Amigo prepaid
wireless operation in Venezuela to Telecommunicaciones Movilnet, C.A. and
recognized a pre-tax gain of $5.2 million. In connection with the sale,
the Company was awarded an exclusive two-year contract to supply services
for prepaid phone kits. These services include importing handsets into the
country, warehousing, inventory management, handset programming, packing
and distribution of the kits to points of sale.
11
<PAGE>
(8) Subsequent Event.
In June 1999, TelMex made an additional equity investment in Topp which may
cause the Company's percentage ownership interest in Topp to be reduced but
should not have a material effect on the total value of the Company's
investment.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company reported net income of $14.0 million, or $0.23 per diluted
share, for the second quarter of 1999 compared with net income of $16.6 million
or $0.27 per diluted share, for the same quarter last year. The second quarter
of 1999 was impacted by several non-operating items, including (1) a pre-tax
charge of $2.9 million related to the reorganization and consolidation of the
management for the Company's Latin American and North American Regions and the
centralization of its Asia-Pacific Region's management, and (2) pre-tax gains
totaling $6.0 million from the sale of its prepaid operation in Venezuela and
the sale of the Company's retail stores in the Kansas City area. Without the
effects of these items, net income for the quarter would have been $11.4
million, or $0.19 per diluted share.
The Company derives revenues from three categories: net product sales,
activation income and residual income. Substantially all of the Company's
revenues are net product sales, which include sales of handsets and other
wireless communications products, revenues from fulfillment services and
revenues from other value-added services. Activation income includes
commissions paid by a wireless carrier when a customer initially subscribes for
wireless service through the Company. Residual income includes payments
received from carriers based on the wireless handset usage by a customer
activated by the Company.
In April 1999, the Company announced changes to its senior management
team. Both the president and chief operating officer, Richard M. Gozia, and
senior vice president and chief financial officer, Evelyn Henry Miller, resigned
to pursue other interests. Mr. Gozia, president and acting chief financial
officer, intends to remain with the Company during the transition process.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
relating to such matters as anticipated financial performance and business
prospects. When used in this Quarterly Report, the words "may," "intends",
"expects," "anticipates," "will" and similar expressions are intended to be
among the statements that identify forward-looking statements. From time to
time, the Company may also publish forward-looking statements. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for forward-
looking statements. In order to comply with the terms of the safe harbor, the
Company notes that a variety of factors, including foreign currency risks,
political instability, changes in foreign laws, regulations and tariffs, new
technologies, competition, customer and vendor relationships, seasonality,
inventory obsolescence and availability, "gray market" resales, inflation, and
Year 2000 issues and costs could cause the Company's actual results and
experience to differ materially from anticipated results or other expectations
expressed in the Company's forward-looking statements.
13
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated statements of
operations data for the Company expressed as a percentage of revenues for the
three and six months ended May 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three months Six months
ended May 31 ended May 31
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 91.4 89.9 91.5 89.9
-------- -------- -------- --------
Gross profit 8.6 10.1 8.5 10.1
Selling, general and administrative expenses 5.0 5.3 5.0 5.4
Restructuring charge 0.5 - 0.2 -
-------- -------- -------- --------
Operating income 3.1 4.8 3.3 4.7
Other income (expense):
Equity in income of
affiliated companies - - 0.6 -
Gain on sale of assets 1.1 - 0.7 -
Interest expense (1.0) (0.6) (0.9) (0.6)
Other, net (0.1) 0.2 (0.2) 0.2
-------- -------- -------- --------
Total other income (expense) - (0.4) 0.2 (0.4)
-------- -------- -------- --------
Income before income taxes 3.1 4.4 3.5 4.3
Provision for income taxes 0.7 0.7 0.8 0.7
-------- -------- -------- --------
Net income 2.4% 3.7% 2.7% 3.6%
======== ======== ======== ========
</TABLE>
14
<PAGE>
THREE MONTHS ENDED MAY 31, 1999 COMPARED TO THREE MONTHS ENDED MAY 31, 1998
Revenues. The Company's revenues increased $124.6 million, or 28.0%,
from $445.7 million to $570.3 million.
North American Region revenues were $100.8 million, a decrease of $16.7
million, or 14.2%, when compared to $117.5 million. The decrease was primarily a
result of lower product sales to Pacific Bell Mobile Services ("PBMS") in the
second quarter of 1999 as compared to the second quarter of 1998 when PBMS
conducted certain carrier promotions. The decrease was also due to continued
decreases in activation and residual income. The overall decrease in revenues
was partially offset by an increase in wholesale product sales.
Revenues in the Asia-Pacific Region increased $93.4 million, or 93.2%, from
$100.2 million to $193.6 million. The Company's operations in the People's
Republic of China, including Hong Kong ("PRC"), provided $127.0 million in
revenue, an increase of $39.9 million, or 45.8%, from $87.1 million. This
increase was due to continued strong demand in the PRC coupled with a broadened
source of product manufactured there and the impact of its tighter customs
controls on imported products beginning in August 1998. The Company's operations
in Taiwan provided $52.8 million of revenue, an increase of $50.8 million, from
$2.0 million. Demand increased in Taiwan due to the entry of several new
wireless carriers into this market in 1998 and the availability of new high-end
digital handsets.
The Latin American Region provided $186.9 million of revenues, compared to
$169.1 million, or a 10.5% increase. Revenues in Brazil, Mexico, Venezuela and
Peru increased $54.4 million, $18.3 million, $5.3 million and $2.8 million,
respectively. The increase in Brazil was due to revenue growth in the Company's
majority-owned joint venture, which benefited from the privatization of the
telecommunications industry and the entry of additional carriers into the
wireless market during the latter half of 1998. Mexico revenues benefited from
carrier promotions as well as the introduction of the calling-party-pays
billing process. The increase in Venezuela was due to additional carrier sales.
In connection with the sale of its prepaid wireless business in Venezuela,
the Company was awarded an exclusive two-year contract to supply services for
prepaid phone kits. The increase in Peru was due to the Company benefiting from
a full quarter of its operations, which began through an acquisition of a pre-
paid wireless business during the second quarter of 1998. Revenues in the
remainder of the region decreased $63.0 million, primarily in Miami. The
decrease in Miami was due to the increased product availability from in-country
suppliers thereby reducing export sales from Miami.
The Company's European Region recorded revenues of $89.1 million, an
increase of $30.2 million, or 51.3%, from $58.9 million. This increase
reflected continued growth from the Company's U.K. operation, arising primarily
from sales in international markets, as well as increased revenues from the
operation in Sweden.
Gross Profit. Gross profit increased $4.2 million, or 9.4%, from $44.9
million to $49.1 million, while gross profit as a percentage of revenues
decreased from 10.1% to 8.6%. The increase in gross profit was principally due
to an increase in the Asia-Pacific Region. The increase in
15
<PAGE>
the Asia-Pacific Region was due to the increased demand in Taiwan as a result of
the entry of new wireless carriers in 1998 and the availability of new high-end
digital handsets. The decrease in gross profit as a percentage of revenues was
due primarily to a $12 million provision for inventory obsolescence recorded in
the second quarter of 1999 as a result of decreases in market prices of certain
handsets, primarily in Asia, and aggressive management by the Company of its
inventory.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $4.6 million, or 19.4%, from $23.7 million to
$28.3 million. This increase was principally due to an increase in the
provision for doubtful accounts receivable of $4 million, up from $2 million for
the second quarter last year, with the increase resulting primarily from the
write-off of an account receivable in Latin America. The increase in selling,
general and administrative expenses was also attributable to an increase in
costs incurred in connection with the Company's growth in revenues. Overall
selling, general and administrative expenses as a percentage of revenues
decreased to 5.0% from 5.3%.
Restructuring Charge. The Company's results of operations for the second
quarter of 1999 include a pre-tax restructuring charge of $2.9 million
associated with the reorganization and consolidation of the management for the
Company's Latin American and North American Regions as well as the
centralization of the management in the Asia-Pacific Region. The Company expects
to incur approximately $0.3 million of additional expense related to this
reorganization in the third quarter of 1999.
Gain on Sale of Assets. The Company recorded a pre-tax gain of $6.0
million associated with the sale of its prepaid operation in Venezuela and the
sale of the Company's retail stores in the Kansas City area.
Interest Expense. Interest expense increased to $5.4 million from $2.6
million primarily as a result of an increase in debt related to the Company's
operations in Brazil as well as an increase in borrowings under the
Multicurrency Revolving Credit Facility.
Other, Net. Other, net decreased $1.5 million, from income of $0.8 million
in the second quarter of 1998 to expense of $0.7 million in 1999. This decrease
was primarily due to foreign currency translation losses due to the devaluation
of foreign currencies in the Company's European Region.
Income Taxes. Income tax expense increased to $4.0 million from $2.9
million and the Company's effective tax rate increased to 22.0% from 15.0%. The
higher effective tax rate was attributable to an increase in the percentage of
the Company's total income before income taxes from Latin America where the
statutory tax rates are generally comparable to the statutory rates in the
United States and Europe and higher than the statutory rates in Asia. In
addition, the utilization of net operating loss carryforwards to offset 1998
income in certain jurisdictions contributed to the lower effective tax rate for
1998.
16
<PAGE>
SIX MONTHS ENDED MAY 31, 1999 COMPARED TO SIX MONTHS ENDED MAY 31, 1998
Revenues. The Company's revenues increased $233.3 million, or 27.4%, from
$852.4 million to $1,085.7 million.
North American Region revenues were $202.9 million, a decrease of $18.8
million, or 8.5%, when compared to $221.7 million. The decrease was primarily a
result of lower product sales to PBMS in the second quarter of 1999 as compared
to the second quarter of 1998 when PBMS conducted certain carrier promotions.
The decrease was also due to continued decreases in activation and residual
income. The overall decrease in revenues was partially offset by an increase in
wholesale product sales.
Revenues in the Asia-Pacific Region increased $148.8 million, or 83.4%,
from $178.5 million to $327.3 million. The Company's operations in the PRC
provided $222.7 million in revenue, an increase of $77.8 million, or 53.7%, from
$144.9 million. This increase continues to be driven by the strong demand in the
PRC and the impact of its tighter customs controls on imported products, which
began in the third quarter of 1998. The Company's operations in Taiwan provided
$79.8 million of revenue, an increase of $65.2 million, or 446.6%, from $14.6
million. Demand in Taiwan increased due to the entry of several new wireless
carriers into the market as well as the availability of new high-end digital
handsets.
The Latin American Region provided $357.1 million of revenues, compared to
$358.5 million, or a 0.4% decrease. Revenues in Brazil, Venezuela, Peru and
Mexico increased $125.8 million, $24.0 million, $8.9 million and $8.0 million,
respectively. The increase in Brazil was due to revenue growth in the Company's
majority-owned joint venture, which benefited from the privatization of the
telecommunication industry and the entry of additional carriers into the
wireless market during the latter half of 1998. The increase in Venezuela was a
result of the prepaid wireless business, which the Company sold in March 1999.
In connection with this sale, the Company was awarded an exclusive two-year
contract to supply services for prepaid phone kits. The Company began its
operations in Peru through the acquisition of a prepaid wireless business in the
second quarter of 1998. The increase in Mexico was largely due to carrier
promotions coupled with the introduction of the calling-party-pays billing
process. Revenues in the remainder of the region decreased $168.1 million,
primarily in Miami. The decrease in Miami was due to increased product
availability from in-country suppliers thereby reducing export sales from Miami.
Activation and residual income generated by the Company's operations in the
Latin American Region increased from $16.7 million to $24.9 million. Most of
the increase was due to activation income from the Company's prepaid wireless
businesses in Venezuela and Peru.
The Company's European Region recorded revenues of $198.3 million, an
increase of $104.6 million, or 111.6%, from $93.7 million. This increase
reflected continued growth from the Company's U.K. operation, arising primarily
from sales in international markets, as well as increased revenues from the
operation in Sweden, which was acquired in the first quarter of 1998.
Gross Profit. Gross profit increased $6.4 million, or 7.4%, from $86.3
million to $92.7 million, while gross profit as a percentage of revenues
decreased from 10.1% to 8.5%. The increase in gross profit was principally due
to increases in both the European and Asia-Pacific Regions. The increase in the
European Region was due to the continued growth of the U.K. operation and the
increased revenues
17
<PAGE>
from the Company's operation in Sweden. The overall increase in the Asia-Pacific
Region was primarily due to the increase in Taiwan offset partially by a
decrease in the PRC. The decrease in gross profit as a percentage of revenues
was due primarily to a $12 million provision for inventory obsolescence recorded
in the second quarter of 1999 as a result of decreases in market prices of
certain handsets, primarily in Asia, and aggressive management by the Company of
its inventory. The decrease in gross profit as a percentage of revenues can also
be attributable to an increase in revenues from the European Region, which has
lower margins than the Company's other regions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $7.4 million, or 15.9%, from $46.5 million to
$53.9 million. This increase was primarily due to an increase in the provision
for doubtful accounts receivable of $6.5 million, up from $4.1 million for the
same period last year, with the increase resulting primarily from write-offs in
the Latin American Region and an increase in costs in connection with the
Company's growth in revenues. Overall selling, general and administrative
expenses as a percentage of revenues decreased to 5.0% from 5.4%.
Restructuring Charge. The Company's results of operations include a pre-
tax restructuring charge of $2.9 million associated with the reorganization and
consolidation of the management for the Company's Latin American and North
American Regions as well as the centralization of management in the Asia-Pacific
Region. The Company expects to incur approximately $0.3 million of additional
expense related to this reorganization in the third quarter of 1999.
Equity in Income of Affiliated Companies. Equity in income of affiliated
companies increased $5.7 million to $6.1 million. In February 1999, the Company
sold part is its equity investment in Topp to a wholly-owned subsidiary of
TelMex. At the closing, the Company also sold a portion of its debt investment
to certain other shareholders of Topp. As a result of these transactions, the
Company received cash in the amount of $7.0 million, retained a $22.5 million
note receivable and a 19.5% equity ownership interest in Topp, and recorded a
pre-tax gain of $5.8 million.
Gain on Sale of Assets. The Company recorded a pre-tax gain of $8.2
million associated with the sale of its prepaid operation in Venezuela and the
sale of the Company's retail stores in the Dallas-Fort Worth and Kansas City
areas.
Interest Expense. Interest expense increased to $10.1 million from $5.1
million primarily as a result of an increase in debt related to the Company's
operations in Brazil as well as an increase in borrowings under the
Multicurrency Revolving Credit Facility.
Other, Net. Other, net decreased $3.5 million, from income of $1.2 million
to expense of $2.3 million. This decrease was primarily due to a $2.6 million
foreign currency transaction loss realized from the conversion of U.S. dollar
denominated debt in Brazil into a Brazilian real denominated credit facility,
and a $1.0 million foreign currency loss due to the devaluation of foreign
currencies in the Company's European Region.
18
<PAGE>
Income Taxes. Income tax expense increased $2.9 million and the Company's
effective tax rate increased to 22.0% from 15.0%. The higher effective tax rate
was attributable to an increase in the percentage of the Company's total income
before income taxes from Latin America and Europe where the statutory tax rates
are generally comparable to the statutory rate in the United States and higher
than the statutory rates in Asia. In addition, the utilization of net operating
loss carryforwards to offset 1998 income in certain jurisdictions contributed to
the lower effective tax rate for 1998.
INTERNATIONAL OPERATIONS
The Company's international operations are subject to political and
economic risks, including but not limited to political instability, currency
devaluations and controls, increased credit risks and changing tax and trade
regulations. The Company experienced net foreign currency translation losses of
$1.7 million during the second quarter of 1999, primarily due to the devaluation
of foreign currencies in the Company's European operations, which are included
in other income (expense) in the consolidated statements of operations.
During the second half of 1998, the Company's sales from Miami to customers
exporting into South American countries began to decline as a result of
increased in-country product availability in Latin America, primarily Brazil.
The Company expects to focus its efforts on servicing large, financially sound
carrier partners from the Company's Latin American subsidiaries.
The Company's Brazilian operations are conducted through a majority-owned
joint venture. A primary supplier of handsets to the joint venture is a
Brazilian importer who purchases product from Miami. Sales to the importer are
excluded from the Company's consolidated revenues, and the related gross profit
is deferred until the handsets are sold by the Brazilian joint venture to
customers. In January 1999, the Brazilian government allowed the value of the
real to float freely against other foreign currencies, which resulted in a
significant devaluation of the real against the U.S. dollar. From November 1998
through March 1999, the Company utilized Brazilian real NDF contracts to manage
currency exposure risk related to credit sales made to the Brazilian importer.
Payment for these sales was remitted by the importer using the Brazilian real
rate of exchange against the U.S. dollar on the day the Company recorded the
sale to the Brazilian importer. Foreign currency rate fluctuations caused bad
debt expense of $26.4 million related to the payments remitted by E.A. This
expense was recorded in selling, general and administrative expenses for the six
months ended May 31, 1999, but this expense was completely offset by gains
realized on NDF contract settlements, which gains also were recorded in selling,
general and administrative expenses.
At July 9, 1999, the Company has no Brazilian real NDF contracts
outstanding. Currently, under agreements made since January 1999, the Brazilian
joint venture is paid by major customers at the current value of the real
against the U.S. dollar on the date of payment. The Company may be exposed to
foreign currency losses from the time the Brazilian joint venture remits payment
to the importer in Brazilian reals and the importer pays the Company in U.S.
dollars. The ability of the importer to remit U.S. dollar payments to the
Company may be restricted if the Brazilian government imposes currency controls.
At July 9, 1999, the Company had $22.3 million in accounts receivable due from
the importer and the Company's Brazilian joint venture has accounts payable of
$14.0 million to the importer.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended May 31, 1999, the Company relied primarily on
cash available at November 30, 1998, cash generated from operations and
borrowings under its Multicurrency Revolving Credit Facility (the "Facility") to
fund working capital, capital expenditures and expansions. On April 8, 1999, the
amount of the Facility was reduced from $135.0 million to $115.0 million due to
the release of a syndication member bank. At July 9, 1999, the Company had
available $28.1 million of borrowing capacity under the Facility.
Compared to November 30, 1998, accounts receivable and inventories
decreased $70.6 million and $88.7 million, respectively. The Company's
continuing focus to aggressively manage its balance sheet resulted in a
reduction in days sales outstanding from 45 to 42 days and an increase in
inventory turns from 8.6 to 9.5 per year.
As of May 31, 1999 and June 30, 1999, the Company's Brazilian operations
had borrowed $14.9 million and $12.7 million, respectively, using credit
facilities denominated in Brazilian reals with Brazilian banks. In conjunction
therewith, the Company has $8.75 million of letters of credit against its
Facility to guarantee the repayment of the principal plus interest and all other
contractual obligations of its Brazilian operations to one of the Brazilian
banks.
The Company anticipates that it will have sufficient cash available to meet
its capital requirements and current expansion plans. Capital is expected to be
provided by available cash on hand, cash generated from operations, amounts
available from the Facility and various other funded debt sources. The Company
believes that it will have the ability to expand its borrowing sources to
accommodate expected capital needs in the future.
MANAGEMENT CHANGES
In April 1999, the Company announced changes to its senior management team.
Both the president and chief operating officer, Richard M. Gozia, and senior
vice president and chief financial officer, Evelyn Henry Miller, resigned to
pursue other interests. Mr. Gozia, president and acting chief financial
officer, intends to remain with the Company during the transition process.
The Company retained the services of Spencer Stuart to assist in the search
of candidates for both the chief operating officer and chief financial officer
positions.
YEAR 2000
Since June 1997, the Company has been implementing a plan to assess and
resolve Year 2000 issues that may affect it. The Company believes that the Year
2000 issues it must address include ensuring (i) that its information technology
systems (hardware and software) enable it to manage and operate its business and
(ii) that its non-information technology systems (including heating and air
conditioning systems and warehouse equipment) will continue to operate and (iii)
that assessments and planning has been conducted related to managing
interruption to its supply and demand chain.
20
<PAGE>
The phases and timetable for the Company's plans are as follows:
Phase I. Create awareness of and identify Year 2000 issues (June 1997 -
July 1997)
Phase II. Assess and renovate existing systems (July 1997 - July 1999)
Phase III. Validate and test systems (July 1998 - July 1999)
Phase IV. Complete Year 2000 compliance (March 1999 - August 1999)
The Company is currently on schedule for implementing this plan. A project
structure is defined, progress and issues are tracked, and management is
provided updates. The Company does not believe it has material, potential
liability to third parties if its systems are not Year 2000 compliant.
The Company has made substantial progress in assessing Year 2000 issues
that affect third parties with which it has material relationships. It has
substantially completed the process of contacting manufacturers of products the
Company sells and reviewing each response. The responses and continuing
informal contact with the primary manufacturers and suppliers of products
indicates that the suppliers believe they are addressing and resolving their
Year 2000 issues and expect minimal operational impacts. The Company has
reviewed all electronic exchanges of data between customers and suppliers for
Year 2000 compliancy. The Company substantially completed all remediation
effort related to exchange of data and is currently testing the processes. Even
though the Company does not believe that its customers' Year 2000 compliance
issues will have a significant impact on the Company, the Company plans to
continue to review and assess the progress of its major customers in each region
as to risk and exposure related to Year 2000 issues. The Company also
recognizes that demand for its products is affected by the ability of carriers
and network operators to continue operation without significant interruption.
These risks are being considered by the Company in developing pertinent business
interruption and contingency plans.
The Company's costs of compliance with Year 2000 requirements are
immaterial because it was in the process of upgrading or establishing systems to
keep pace with its growth.
The Company believes that it and its material suppliers will resolve their
Year 2000 issues in a timely fashion. However, if the Company or its material
suppliers do not become Year 2000 compliant, the Company could suffer a material
adverse effect on its business, results of operations and financial condition.
The Company believes that it is unlikely that any of these events will result,
but there can be no such assurance. The Company has decided to develop a
contingency plan to address potential, unplanned failures within the Company and
external entities that could impact operations. The Company currently
anticipates completing the planned Year 2000 work related to mission critical
applications and contingency planning by August 31, 1999.
21
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE RISK
The Company's international operations are subject to foreign currency
risk. Foreign currency translation adjustments for subsidiaries domiciled in
non-highly inflationary countries are recorded to consolidated stockholders'
equity under accumulated other comprehensive income. In highly inflationary
countries, the Company records remeasurement gains and losses to the
consolidated statements of operations.
For the quarter ended May 31, 1999, the Company recorded a foreign currency
translation loss of $1.7 million primarily due to the devaluation of foreign
currencies in the Company's European operations during the quarter.
The Company manages foreign currency risk by attempting to increase prices
of products sold at or above the anticipated exchange rate of the local currency
relative to the U.S. dollar, by indexing certain of its accounts receivable to
exchange rates in effect at the time of their payment, and by entering into
foreign currency hedging instruments in certain instances.
In January 1999, the Brazilian government allowed the value of the real to
float freely against other foreign currencies, which resulted in a significant
devaluation of the real against the U.S. dollar. Currently, under agreements
made since January 1999, the Brazilian joint venture is paid by major customers
at the current value of the real against the U.S. dollar on the date of payment.
The Company may be exposed to foreign currency losses from the time the
Brazilian joint venture remits payment in Brazilian reals to a Brazilian
importer and the importer pays the Company in U.S. dollars. The ability of the
importer to remit U.S. dollar payments to the Company may be restricted if the
Brazilian government imposes currency controls. At July 9, 1999, the Company
had $22.3 million in accounts receivable due from the importer and the Company's
Brazilian joint venture has accounts payable of $14.0 million to the importer.
See "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation - International Operations."
On February 18, 1999, the Company's $5.7 million U.S. dollar denominated
debt in Brazil was converted into a Brazilian real denominated credit facility
by the Company's majority-owned Brazilian joint venture. Upon conversion, the
joint venture realized a foreign currency transaction loss of $2.6 million due
to the devaluation of the Brazilian real against the U.S. dollar. The Company's
$12.7 million of debt at June 30, 1999 in Brazil is denominated in Brazilian
reals.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not use derivative instruments for trading purposes and
the Company has procedures in place to monitor and control derivative use. The
Company's Brazilian real NDF contracts, which totaled $13.7 million at February
28, 1999, matured as of March 10, 1999. At May 31, 1999, the Company had
realized a cumulative gain of $0.2 million with respect to the settlement of all
the Brazilian NDF contracts since their inception in November 1998. At May 31,
1999 the Company had no derivative instruments outstanding. When the Company
uses contracts of this nature, it monitors the credit rating of counterparties
on a regular basis.
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<PAGE>
INTEREST RATE RISK
The interest rate of the Company's Facility is an index rate at the time of
borrowing plus an applicable margin on certain borrowings. The interest rate is
based on either the agent bank's prime lending rate or the London Interbank
Offered Rate. Additionally, the applicable margin is subject to increases as
the Company's ratio of consolidated funded debt to consolidated cash flow
increases. During the twelve months ended June 30, 1999, the interest rates of
borrowings under the Facility ranged from 6.45% to 8.50%. The Company manages
its borrowings under the Facility each business day to minimize interest
expense.
The borrowings of the Company's Brazilian operations are short-term in
nature, typically less than six months. Through November 30, 1998, annual rates
on borrowings by the Brazilian joint venture operations ranged from
approximately 36% to 48%. As a result of the recent devaluation of the
Brazilian real against the U.S. dollar, annual interest rates for the Company
have increased to approximately 49% to 56% in Brazil at June 30, 1999. The
Brazilian operations' borrowings, including accrued interest, at June 30, 1999
were $12.7 million. The Company continues to evaluate financing alternatives to
reduce interest expense for its Brazilian operations.
The Company's $150.0 million in long-term debt has a fixed coupon interest
rate of 5.0%.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the period from May 1999 through June 1999, five purported class
action lawsuits were filed in the United States District Court for the Southern
District of Florida, styled as follows: (1) Elfie Echavarri v. CellStar
Corporation, Alan H. Goldfield, Richard M. Gozia, and Mark Q. Huggins; (2) Mark
Krug v. CellStar Corporation, Alan H. Goldfield, Richard M. Gozia and Mark Q.
Huggins; (3) Jewell Wright v. CellStar Corporation, Alan H. Goldfield, Richard
M. Gozia and Mark Q. Huggins; (4) Theodore Weiss v. CellStar Corporation, Alan
H. Goldfield, Richard M. Gozia and Mark Q. Huggins; and (5) Tony LaBella v.
CellStar Corporation, Alan H. Goldfield, Richard M. Gozia and Mark Q. Huggins.
Each of the above lawsuits seeks certification as a class action to represent
those persons who purchased the publicly traded securities of the Company during
the period from March 19, 1998 to September 21, 1998. Each of these lawsuits
allege that the Company issued a series of materially false and misleading
statements concerning the Company's results of operations and the Company's
investment in Topp Telecom, Inc. ("Topp"), resulting in violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule
10(b)(5) promulgated thereunder. The Company believes that it has complied with
all reporting requirements with respect to its results of operations and
investment in Topp and that it has meritorious defenses to these allegations and
intends to vigorously defend these actions.
The Company is also a party to various other claims, legal actions and
complaints arising in the ordinary course of business. Management believes that
the disposition of these other matters will not have a material adverse effect
on the consolidated financial condition or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
24
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
3.1 Amended and Restated Certificate of Incorporation of CellStar
Corporation ("Certificate of Incorporation"). (1)
3.2 Certificate of Amendment to Certificate of Incorporation. (7)
3.3 Amended and Restated Bylaws of CellStar Corporation. (3)
4.1 The Certificate of Incorporation, Certificate of Amendment to
Certificate of Incorporation and Amended and Restated Bylaws of
CellStar Corporation filed as Exhibits 3.1, 3.2 and 3.3 are
incorporated into this item by reference. (1)(7)(3)
4.2 Specimen Common Stock Certificate of CellStar Corporation. (2)
4.3 Rights Agreement, dated as of December 30, 1996, by and between
CellStar Corporation and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent ("Rights Agreement"). (4)
4.4 First Amendment to Rights Agreement, dated as of June 18, 1997. (5)
4.5 Form of Certificate of Designation, Preferences and Rights of Series A
Preferred Stock of CellStar Corporation ("Certificate of Designation").
(4)
4.6 Form of Rights Certificate. (4)
4.7 Certificate of Correction of Certificate of Designation. (5)
4.8 Indenture, dated as of October 14, 1997, by and between CellStar
Corporation and the Bank of New York, as Trustee. (6)
10.1 Separation Agreement and Release Agreement between Richard M. Gozia and
CellStar, Ltd., CellStar Corporation, and all affiliated entities,
dated April 21, 1999. (8)
27.1 Financial Data Schedule. (8)
____________________
25
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(1) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended August 31, 1995, and incorporated herein by
reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended November 30, 1995, and incorporated herein by
reference.
(3) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended February 29, 1996, and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Company's Registration Statement on
Form 8 - A (File No. 000-22972), filed January 3, 1997, and incorporated
herein by reference.
(5) Previously filed as an exhibit to the Company's Registration Statement on
Form 8 -A/A, Amendment No. 1 (File No. 000-22972), filed June 30, 1997, and
incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated October 8, 1997, filed October 24, 1997, and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended May 31, 1998, and incorporated herein by
reference.
(8) Filed herewith.
(B) REPORTS ON FORM 8-K.
None.
26
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CELLSTAR CORPORATION
By: /s/ Richard M. Gozia
-------------------------------------
Richard M. Gozia,
President and Chief Financial Officer
(On behalf of the Registrant and as
Principal Financial Officer)
Date: July 15, 1999
27
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
No. Description
- ------- ------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of CellStar
Corporation ("Certificate of Incorporation"). (1)
3.2 Certificate of Amendment to Certificate of Incorporation. (7)
3.3 Amended and Restated Bylaws of CellStar Corporation. (3)
4.1 The Certificate of Incorporation, Certificate of Amendment to
Certificate of Incorporation and Amended and Restated Bylaws of
CellStar Corporation filed as Exhibits 3.1, 3.2 and 3.3 are
incorporated into this item by reference. (1)(7)(3)
4.2 Specimen Common Stock Certificate of CellStar Corporation. (2)
4.3 Rights Agreement, dated as of December 30, 1996, by and between
CellStar Corporation and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent ("Rights Agreement"). (4)
4.4 First Amendment to Rights Agreement, dated as of June 18, 1997. (5)
4.5 Form of Certificate of Designation, Preferences and Rights of Series A
Preferred Stock of CellStar Corporation ("Certificate of Designation").
(4)
4.6 Form of Rights Certificate. (4)
4.7 Certificate of Correction of Certificate of Designation. (5)
4.8 Indenture, dated as of October 14, 1997, by and between CellStar
Corporation and the Bank of New York, as Trustee. (6)
10.1 Separation Agreement and Release Agreement between Richard M. Gozia and
CellStar, Ltd., CellStar Corporation, and all affiliated entities,
dated April 21, 1999. (8)
27.1 Financial Data Schedule. (8)
____________________
28
<PAGE>
(1) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended August 31, 1995, and incorporated herein by
reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended November 30, 1995, and incorporated herein by
reference.
(3) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended February 29, 1996, and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Company's Registration Statement on
Form 8 - A (File No. 000-22972), filed January 3, 1997, and incorporated
herein by reference.
(5) Previously filed as an exhibit to the Company's Registration Statement on
Form 8 -A/A, Amendment No. 1 (File No. 000-22972), filed June 30, 1997, and
incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated October 8, 1997, filed October 24, 1997, and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended May 31, 1998, and incorporated herein by
reference.
(8) Filed herewith.
29
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EXHIBIT 10.1
SEPARATION AGREEMENT AND RELEASE
--------------------------------
This Separation Agreement and Release (hereinafter the "Agreement") dated
as of the 21st day of April, 1999, contains all terms and compromises reached
between Richard M. Gozia ("Mr. Gozia"), CellStar Ltd. (hereinafter the
"Employer"), CellStar Corporation ("CellStar"), and all affiliated entities, in
connection with Mr. Gozia's separation from employment with the Employer. It is
the intent of the parties, by entering into this Agreement, to resolve any and
all disputes, claims or causes of action which might now exist or arise in the
future between them.
IT IS THEREFORE AGREED THAT:
1. a. Employer and Mr. Gozia hereby mutually agree that Mr. Gozia's
employment with Employer, CellStar and their affiliated entities will
automatically terminate effective upon the earlier to occur of (i) December 31,
1999, or (ii) upon written notice from the Employer advising Mr. Gozia that his
services are no longer required (hereinafter the "Termination Date").
Furthermore, effective upon the Termination Date, Mr. Gozia resigns from all of
his positions as an officer of CellStar and its affiliated entities. Mr. Gozia
shall remain on the payroll as an employee from the date of this Agreement to
the Termination Date and perform the duties reasonably assigned to him from time
to time by the Chief Executive Officer and Board of Directors of CellStar,
including the duties of President, Chief Operating Officer and Chief Financial
Officer of CellStar. Mr. Gozia will devote substantially all of his time,
energy, skill and best efforts to the performance of his duties, and will
faithfully and diligently perform such duties. During such time, Mr. Gozia's
actions shall be subject to the direction of the Chief Executive Officer and the
Board of Directors of CellStar.
b. Effective on the date set forth in the first paragraph of this
Agreement, Mr. Gozia hereby resigns from all of his positions as a director of
CellStar and its affiliated entities.
2. In consideration for Mr. Gozia's promises and covenants in this
Agreement, the Employer agrees:
a. to pay Mr. Gozia's current salary through the Termination Date.
b. to pay Mr. Gozia an amount equal to the product of (A) the sum of Mr.
Gozia's Base Salary (as such term is defined in the Employment
Agreement dated May 24, 1996 between Mr. Gozia and the Employer (the
"Employment Agreement")) at the rate in effect on the Termination
Date, plus the average of the Annual Incentive Payments (as such term
is defined in the Employment Agreement) paid to Mr. Gozia during the
preceding two (2) years (or such shorter period for which any Annual
Incentive Payment has been paid), divided by 365, and multiplied by
(B) the number of days from the Termination Date to May 24, 2001,
(less required withholding), payable fifteen (15) days following the
Termination Date.
c. that it will, pursuant to paragraphs 1.4(d), and (e), and (f) of the
Employment Agreement, continue such medical expense coverage, life
insurance and disability
1
<PAGE>
policies currently in effect for Mr. Gozia and, if applicable, his
wife and children, until May 24, 2001 (which sections are incorporated
herein by reference).
d. to allow Mr. Gozia to retain the laptop computer, 2 monitors, 2
docking stations and other miscellaneous computer related accessories
currently used by Mr. Gozia in connection with the performance of his
job duties.
e. to pay Mr. Gozia for accrued, but unused, vacation upon the
Termination Date.
f. that the unvested portion of the Initial Option (as defined in
paragraph 1.4(c) of the Employment Agreement) shall fully vest as of
the Termination Date, as required by Section 1.4(c) of the Employment
Agreement, which section is incorporated herein by reference.
g. to pay Mr. Gozia the Annual Incentive Payment (less required
withholding) pursuant to the last sentence of paragraph 1.6(d) of the
Employment Agreement (which section is incorporated herein by
reference) promptly after the amount of such payment is determined, if
such payment is earned in accordance with the terms of its grant.
The provisions of paragraph 1.7 of the Employment Agreement are
incorporated herein and shall apply if Mr. Gozia dies prior to the Termination
Date.
The provisions of paragraphs 1.4(c), (g), (h) and (i) of the Employment
Agreement are incorporated herein and shall remain in effect until the
Termination Date.
3. In consideration for the promises, payments and benefits provided
herein by Employer, and in order to fully compromise and settle any and all
claims and causes of action of any kind whatsoever relating to or arising out of
Mr. Gozia's employment with Employer, including any claim arising under common
law, contractual claim (except for and as set forth in this Separation Agreement
and Release or in any stock option agreement existing at the Termination Date
between Mr. Gozia and CellStar), or any other federal, state or local statute or
ordinance, Mr. Gozia agrees:
a. that Mr. Gozia will and hereby does unconditionally release, acquit
and forever discharge Employer, all of its parent, subsidiary and
affiliated companies, and all of their officers, directors,
representatives, employees and agents from any and all charges,
complaints, claims, causes of action, suits and expenses (including
attorney fees and costs actually incurred) of any nature whatsoever,
known or unknown, regarding any matter existing on or prior to the
date hereof, including without limitation those obligations or matters
relating to or arising out of the Employment Agreement which is hereby
terminated and Mr. Gozia's employment or separation thereof from
Employer, except as specifically expressed in this instrument or under
any stock option agreement existing at the Termination Date between
Mr. Gozia and CellStar. THIS RELEASE INCLUDES, BUT IS NOT LIMITED TO,
ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF THE EMPLOYMENT
2
<PAGE>
AGREEMENT (EXCEPT FOR AND AS SET FORTH IN THIS SEPARATION AGREEMENT,
AND IN ANY STOCK OPTION AGREEMENT EXISTING AT THE TERMINATION DATE
BETWEEN MR. GOZIA AND EMPLOYER), MR. GOZIA'S EMPLOYMENT WITH EMPLOYER
AND THE SEPARATION THEREOF, OR ANY BENEFITS ASSOCIATED WITH SUCH
EMPLOYMENT, INCLUDING ANY CLAIM UNDER TITLE VII OF THE CIVIL RIGHTS
ACTS OF 1964, THE AGE DISCRIMINATION IN EMPLOYMENT ACT, OR ANY OTHER
COMMON LAW, CONTRACTUAL OR STATUTORY CLAIM; and
b. that Mr. Gozia will not file any charges or complaints against
Employer or any of its affiliates with the Equal Employment
Opportunity Commission, the Texas Commission on Human Rights, or any
other local, state or federal agency or court, and that if Mr. Gozia
filed or has filed any such complaint or charge, and/or if any such
agency or court assumes jurisdiction of any complaint or charge
against Employer or any of its affiliates on behalf of Mr. Gozia, Mr.
Gozia will request such agency or court to withdraw from the matter
and dismiss said action.
4. Employer releases Mr. Gozia from any and all claims related to, or
arising out of, Mr. Gozia's performance of his job duties; provided, however,
that Employer does not release Mr. Gozia from any claim related to, or arising
out of, any act performed or committed by Mr. Gozia in bad faith, which was not
in the best interests of the company or for which he had reasonable cause to
believe was unlawful or illegal.
5. Notwithstanding anything herein contained to the contrary, Mr. Gozia
shall have full rights as described in Article 3 of the Employment Agreement,
such rights, with respect to actions taken or omitted by him on behalf of the
Employer during his employment and also with respect to any third-party claims,
as set forth in Article 3 of the Employment Agreement, which provisions are
incorporated herein and remain in effect as if set forth herein in its entirety.
6. Except as required by law, all parties agree that they will keep the
terms, amount and existence of this Agreement completely confidential and that
neither party hereto will make any disparaging statements or allegations about
the other to any person or governmental agency, including comments about
Employer's employees, officers, directors or agents or about the reputations of
Employer or any such person. It is recognized that CellStar may be required to
file a copy of this Agreement with the Securities and Exchange Commission, issue
a press release relating to Mr. Gozia's separation, and make other disclosures
required of a public company pursuant to applicable law, and any such filing,
press release or disclosure shall not be deemed to violate the provisions of
this Agreement.
7. The provisions of Article 2 of the Employment Agreement are
incorporated herein and remain in effect as if set forth herein in their
entirety, for a period of 2 years following Mr. Gozia's termination. In
addition, with respect to any information or data, whatever its nature and form
and whether obtained orally, by observation, from written material or otherwise
obtained by Mr. Gozia during or as the result of Mr. Gozia's employment by the
Employer and relating to any
3
<PAGE>
marketing techniques, business plans, customer lists, financial information,
financing arrangements, products, product prices or costs or plans of the
Employer or any of its affiliated entities, Mr. Gozia agrees:
a. To hold all such information in strict confidence, and not publish or
otherwise disclose any thereof except to or with the prior consent of
any authorized representative of the Employer.
b. To use all reasonable precautions to assure that all such information
is properly protected and kept from unauthorized persons.
c. To make no use of any such information.
d. To deliver to the Employer all written materials containing or
relating to such information, all of which written materials and other
things shall be and remain the sole property of the Employer. For
this purpose, "written materials" shall be deemed to mean and include
letters, memoranda, reports, notes, notebooks, books of account, data
and all other documents or writings, and all copies thereof.
Mr. Gozia's agreement not to disclose information concerning this Agreement, the
Employer or any person connected with the Employer shall not apply to compulsory
disclosure pursuant to subpoena, deposition or other legal process. Mr. Gozia
shall promptly notify the Employer of the service of any subpoena or demand for
compulsory disclosure and shall refrain from making such disclosure for the
maximum period of time permitted by law, to permit the Employer to take such
actions as it may deem appropriate to have such service or demand set aside or
to protect the confidential nature of the information being sought.
8. During the period of time that Mr. Gozia remains employed with the
Employer, the provisions of 1.5(b) and 1.6(c) of the Employment Agreement remain
in effect; provided, however, that section 1.5(b) shall be amended as follows:
a. 1.5(b)(iii) is amended by adding the following language at the end of
that section: "where such failure causes or is likely to cause
material economic harm to Parent and its affiliated entities on a
consolidated basis or that brings or is likely to bring substantial
discredit to the reputation of Employer, Parent or any of their
affiliated entities taken as a whole."
b. 1.5(b)(v) is deleted.
In the event that Mr. Gozia breaches any provision of this Agreement after his
employment has ended, all future obligations of Employer under Section 2 of this
Agreement shall cease. As a further material inducement to enter into this
Agreement, any party who breaches this Agreement must reimburse the non-
breaching party for any and all loss, cost, damage or expense, including,
without limitation, attorneys fees incurred as a result of any effort, action or
lawsuit to enforce this Agreement. In addition, any breach of the Agreement
will entitle the non-breaching party to seek
4
<PAGE>
injunctive relief to enforce this Agreement and to recover any actual damages
incurred as a result of said breach. In the event of litigation, the losing
party must pay the attorneys fees of the prevailing party.
9. Mr. Gozia represents and acknowledges that in executing the Agreement
he does not rely and has not relied upon any representation made by Employer or
its agents, representatives or attorneys with regard to the subject matter,
basis or fact of said Agreement, except on those contained in this Agreement.
The parties agree that this Agreement represents a resolution of various matters
and shall not be construed to be an admission of any liability or obligation by
either party to the other party.
10. This Agreement shall be binding upon and inure to the benefit of Mr.
Gozia and, upon Mr. Gozia's death, his heirs, administrators, representatives,
executors, successors and assigns. This Agreement shall be binding upon and
inure to the benefit of the Employer, all of its parent, subsidiary and
affiliated companies, and any corporation or other entity into which or with
which any thereof shall be liquidated, merged or consolidated.
11. This Agreement is made within the State of Texas and shall in all
respects be interpreted, enforced and governed under the laws thereof, and shall
in all cases be construed as a whole (according to its fair meaning and not
strictly for or against any of the parties).
12. Should any provision of this Agreement be declared or be determined
illegal and invalid, the validity of the remaining parts will not be affected.
13. The parties, by their signatures below, represent and agree that (a)
each has read this Agreement carefully and completely, and understands all
provisions contained therein; (b) Mr. Gozia has been given a period of at least
twenty-one (21) days to consider and review this Agreement; (c) Mr. Gozia has
seven (7) days after he signs this Agreement to revoke it ("the revocation
period"), in which case this Agreement and all obligations contained herein are
null and void; and (d) Mr. Gozia is aware of his right to consult with legal
counsel and has ample opportunity to do so if he so desires.
14. No change or modification of this Agreement shall be valid unless in
writing and signed by all parties hereto.
15. Mr. Gozia will cooperate with Employer in response to requests for
information or assistance by Employer in connection with all matters relating to
or arising out of his employment with Employer.
16. Mr. Gozia represents that he has not disclosed, and agrees that he
will not disclose material non-public information about Employer or any of its
parent, subsidiary or affiliate companies to anyone other than Employer's
officers, directors, attorneys and accountants.
17. Parent (CellStar Corporation) guarantees the payment and performance
of all obligations of Employer under this Separation Agreement and Release and
agrees it will pay or
5
<PAGE>
perform those obligations if for any reason Employer fails to do so. This
guarantee is absolute, continuing, irrevocable and not conditional or
contingent. Any notice given hereunder to either Employer or Parent will be
deemed to be notice to Parent for purposes of this guaranty.
18. MY SIGNATURE BELOW INDICATES THAT I HAVE READ THE ABOVE AGREEMENT AND
VOLUNTARILY AGREE AND CONSENT TO THE TERMS AND CONDITIONS THEREIN.
/s/ R M GOZIA Signed in Carrollton, Texas
- --------------------------------- on 4/21 1999.
Richard M. Gozia
SUBSCRIBED AND SWORN to before me, the undersigned Notary Public on this
the 21 day of April 1999.
/s/ LINDA L STAUDT
-----------------------------------------
[NOTARY SEAL APPEARS HERE] Notary Public in and for the
State of Texas
CELLSTAR LTD.
By: National Auto Center, Inc.
By: /s/ ALAN H. GOLDFIELD Signed in Carrollton, Texas
- ----------------------------------- on 4-21 1999.
Alan H. Goldfield
Chairman and CEO
CELLSTAR CORPORATION
By: /s/ ALAN H. GOLDFIELD Signed in Carrollton, Texas
- ----------------------------------- on 4-21 1999.
Alan H. Goldfield
Chairman and CEO
SUBSCRIBED AND SWORN to before me, the undersigned Notary Public on this
the 21 day of April 1999.
/s/ LINDA L STAUDT
-----------------------------------------
[NOTARY SEAL APPEARS HERE] Notary Public in and for the
State of Texas
6
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