<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 February 29, 2000
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
Telephone (972) 466-5000
(Address, including zip code and telephone number,
including area code, of registrant's principal executive offices)
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 April 11, 2000, there were 60,135,971 outstanding shares of Common
Stock, $0.01 par value per share.
1
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CELLSTAR CORPORATION
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION Number
- ------ --------------------- ------
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (unaudited)
February 29, 2000 and November 30, 1999 3
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three months ended February 29, 2000 and February 28, 1999 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (unaudited)
Three months ended February 29, 2000 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three months ended February 29, 2000 and February 28, 1999 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
PART II - OTHER INFORMATION
- ------- -----------------
Item 1. LEGAL PROCEEDINGS 14
Item 2. CHANGES IN SECURITIES 14
Item 3. DEFAULTS UPON SENIOR SECURITIES 14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
Item 5. OTHER INFORMATION 14
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 15
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CellStar Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
February 29, November 30,
2000 1999
------------ ------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 97,113 95,498
Accounts receivable (less allowance for doubtful
accounts of $33,965 and $33,152, respectively) 301,455 306,235
Inventories 249,520 189,866
Deferred income tax assets 17,150 15,127
Prepaid expenses 33,689 32,029
------------ ------------
Total current assets 698,927 638,755
Property and equipment, net 27,077 27,481
Goodwill (less accumulated amortization of $10,940
and $10,483, respectively) 31,908 32,584
Other assets 12,304 7,618
------------ ------------
$ 770,216 706,438
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 215,495 212,999
Notes payable to financial institutions 97,756 50,609
Accrued expenses 25,540 24,864
Income taxes payable 9,212 8,646
Deferred income tax liabilities 12,322 8,796
------------ ------------
Total current liabilities 360,325 305,914
Long-term debt 150,000 150,000
------------ ------------
Total liabilities 510,325 455,914
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; none issued - -
Common stock, $.01 par value, 200,000,000 shares
authorized; 60,126,346 and 60,057,096 shares
issued and outstanding, respectively 601 601
Additional paid-in capital 81,208 80,929
Accumulated other comprehensive loss - foreign
currency translation adjustments (8,867) (8,509)
Retained earnings 186,949 177,503
------------ ------------
Total stockholders' equity 259,891 250,524
------------ ------------
$ 770,216 706,438
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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CellStar Corporation and Subsidiaries
Consolidated Statements of Operations
Three months ended February 29, 2000 and February 28, 1999
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Revenues $ 589,859 515,348
Cost of sales 541,576 471,709
------------ ------------
Gross profit 48,283 43,639
Selling, general and
administrative expenses 32,239 25,618
Restructuring charge (credit) (157) -
------------ ------------
Operating income 16,201 18,021
Other income (expense):
Equity in income of
affiliated companies 85 6,023
Gain on sale of assets - 2,200
Interest expense (4,071) (4,681)
Other, net 214 (1,587)
------------ ------------
Total other income (expense) (3,772) 1,955
------------ ------------
Income before income taxes 12,429 19,976
Provision for income taxes 2,983 4,385
------------ ------------
Net income $ 9,446 15,591
============ ============
Net income per share:
Basic $ 0.16 0.26
============ ============
Diluted $ 0.16 0.26
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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CellStar Corporation and Subsidiaries
Consolidated Statement of Stockholders' Equity and Comprehensive Income
Three months ended February 29, 2000
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional other
----------------- paid-in comprehensive Retained
Shares Amount capital loss earnings Total
------ ------ ---------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at November 30, 1999 60,057 $601 80,929 (8,509) 177,503 250,524
Comprehensive income:
Net income - - - - 9,446 9,446
Foreign currency translation
adjustment - - - (358) - (358)
--------
Total comprehensive income 9,088
Common stock issued under
stock option plans 69 - 279 - - 279
------ ------ ---------- ------------- -------- --------
Balance at February 29, 2000 60,126 $601 81,208 (8,867) 186,949 259,891
====== ====== ========== ============= ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
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CellStar Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Three months ended February 29, 2000 and February 28, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,446 15,591
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 2,908 2,886
Equity in income of affiliated companies, net (85) (6,023)
Gain on sale of assets - (2,200)
Deferred income taxes 1,503 (5,539)
Changes in operating assets and liabilities
net of effects from acquisition of business:
Accounts receivable 4,664 100,984
Inventories (59,654) 23,536
Prepaid expenses (1,660) (13,571)
Other assets (4,897) (1,127)
Accounts payable 2,496 (113,838)
Accrued expenses 676 (2,187)
Income taxes payable 566 (2,816)
---------- ----------
Net cash used in operating activities (44,037) (4,304)
---------- ----------
Cash flows from investing activities:
Proceeds from sale of assets - 9,323
Purchases of property and equipment (1,734) (2,179)
Acquisition of business, net of cash acquired (40) -
---------- ----------
Net cash provided by (used in) investing activities (1,774) 7,144
---------- ----------
Cash flows from financing activities:
Net borrowings on notes payable to financial institutions 47,147 3,850
Net proceeds from issuance of common stock 279 588
---------- ----------
Net cash provided by financing activities 47,426 4,438
---------- ----------
Net increase in cash and cash equivalents 1,615 7,278
Cash and cash equivalents at beginning of period 95,498 47,983
---------- ----------
Cash and cash equivalents at end of period $ 97,113 55,261
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
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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, Company
management is of the opinion 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, 1999.
Certain prior period financial statement amounts have been
reclassified to conform to the current year presentation.
(2) 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 stock options, warrants and
convertible notes.
A reconciliation of the numerators and denominators of the basic and
diluted net income per share computations for the three months ended
February 29, 2000 and February 28, 1999 follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
2000 1999
------------ ----------
<S> <C> <C>
Basic:
Net income $ 9,446 15,591
============ ============
Weighted average number of shares outstanding
60,104 59,513
============ ============
Net income per share $ 0.16 0.26
============ ============
Diluted:
Net income $ 9,446 15,591
Interest on convertible notes, net of tax effect 1,125 1,125
------------ ------------
Adjusted net income $ 10,571 16,716
============ ============
Weighted average number of shares outstanding 60,104 59,513
Effect of dilutive securities:
Stock options and warrant 555 611
Convertible notes 5,422 5,422
----------- ------------
Weighted average number of shares outstanding and effect
of dilutive securities 66,081 65,546
============ =============
Net income per share $ 0.16 0.26
============ =============
</TABLE>
7
<PAGE>
Options to purchase 1.9 million and 2.1 million shares of common stock
for 2000 and 1999, respectively, were not included in the computation
of diluted EPS because the options' exercise price was greater than
the average market price of the common shares.
(3) Segment and Related Information
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:
Asia-Pacific, Latin America, which includes Mexico and the Company's
Miami, Florida operations ("Miami"), Europe and North America,
primarily the United States. Revenues and operating results of Miami
are included in Latin America since Miami's activities are primarily
for exporter customers. The Corporate segment 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.
Segment information for the three months ended February 29, 2000 and
February 28, 1999 follows (in thousands):
<TABLE>
<CAPTION>
Asia- Latin North
Pacific America Europe America Corporate Total
--------- ------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Three months ended February 29, 2000:
Revenues from external customers $ 241,918 155,206 115,278 77,457 - 589,859
Income (loss) before
interest and income taxes 11,722 5,023 2,694 845 (4,665) 15,619
Net income (loss) 9,941 2,514 1,907 523 (5,439) 9,446
Three months ended February 28, 1999:
Revenues from external customers $ 133,703 170,252 109,255 102,138 - 515,348
Income (loss) before
interest and income taxes 8,111 4,882 2,899 11,844 (4,028) 23,708
Net income (loss) 6,796 1,610 2,020 8,024 (2,859) 15,591
</TABLE>
<TABLE>
<CAPTION>
2000 1999
-------- -------
<S> <S> <C>
Income (loss) before interest and income taxes per segment information................................... $ 15,619 23,708
Interest expense per the consolidated statements of operations........................................... (4,071) (4,681)
Interest income included in other, net in the consolidated statements of operations...................... 881 949
-------- -------
Income before income taxes per the consolidated statements of operations................................. $ 12,429 19,976
======== =======
</TABLE>
(4) Contingencies
Refer to Part II, Item 1, "Legal Proceedings."
(5) Subsequent Event
In April 2000 the Company temporarily curtailed a significant portion of
its international trading operations conducted by its United Kingdom
subsidiary due to losses as a result of third party theft and fraud.
Trading activities have been curtailed pending a review of the Company's
business processes to determine what actions need to be taken to minimize
the risk of such losses in the future. As a result, the Company anticipates
a reduction in revenues for the European Region in the quarter ending May
31, 2000 and during the balance of the year ending November 30, 2000.
The trading business involves the purchase of products from suppliers other
than manufacturers and the sale of those products to customers other than
network operators or their dealers and other representatives. The losses
occurred in late March and April 2000 during the purchase, transfer of
title and transport of six shipments of wireless handsets with a total
value of approximately $3.2 million. The Company is thoroughly
investigating these incidents and pursuing legal and insurance claims to
minimize the loss to the Company. However, the ultimate recovery in
relation to the $3.2 million cannot be determined at this time.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company reported net income of $9.4 million, or $0.16 per diluted
share, for the first quarter of 2000, compared with net income of $15.6 million,
or $0.26 per diluted share, for the same quarter last year. The first quarter of
1999 was impacted by several non-operating items, including (1) a non-recurring
charge of $2.6 million, or $0.04 per diluted share, related to the conversion of
a U.S. dollar-denominated loan into Brazilian reals and (2) after-tax gains
totaling $5.1 million, or $0.08 per diluted share, from the sale of part of the
Company's equity and debt investment in Topp Telecom, Inc. ("Topp") and the sale
of the Company's retail stores in the Dallas-Fort Worth area. Without the
effects of these items, net income for the first quarter of 1999 would have been
$13.1 million, or $0.22 per diluted share.
The Company derives substantially all revenues from net product sales,
which includes sales of handsets and other wireless communications products. The
Company also derives revenues from value-added services, activations, residual
income, and prepaid wireless services. Value-added service revenues include
fulfillment service fees, handling fees and assembly revenues. 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.
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 "estimates", "may",
"intends", "expects", "anticipates", "could", "should", "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.
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 months ended February 29, 2000 and February 28, 1999:
<TABLE>
<CAPTION>
2000 1999
--------- --------
<S> <C> <C>
Revenues 100.0 % 100.0
Cost of sales 91.8 91.5
--------- --------
Gross profit 8.2 8.5
Selling, general and administrative expenses 5.5 5.0
Restructuring charge - -
--------- --------
Operating income 2.7 3.5
Other income (expense):
Equity in income of
affiliated companies - 1.2
Gain on sale of assets - 0.4
Interest expense (0.6) (0.9)
Other, net - (0.3)
--------- --------
Total other income (expense) (0.6) 0.4
--------- --------
Income before income taxes 2.1 3.9
Provision for income taxes 0.5 0.9
--------- --------
Net income 1.6 % 3.0
========= ========
</TABLE>
9
<PAGE>
Three Months Ended February 29, 2000 Compared to Three Months Ended February 28,
1999
Revenues. The Company's revenues increased $74.6 million, or 14.5%,
from $515.3 million to $589.9 million.
Revenues in the Asia-Pacific Region increased $108.2 million, or 80.9%,
from $133.7 million to $241.9 million. The Company's operations in the People's
Republic of China, including Hong Kong ("PRC"), provided $168.0 million in
revenues, an increase of $72.3 million, or 75.5%, from $95.7 million. Demand
continued to increase in PRC due to the build-up of extensive sales channels.
The Company's operations in Taiwan provided $53.6 million in revenue, an
increase of $26.6 million, or 98.5%, from $27.0 million. Demand continued to
increase in Taiwan due to the availability of new high-end digital handsets.
Revenues from the Company's operations in the South Pacific (Singapore and the
Philippines) increased $9.3 million, or 84.5%. This increase was primarily due
to increased demand in the Philippines as a result of the general economic
conditions and the receipt by the Company of certain distribution rights to
Nokia products in the Philippines in the fourth quarter of 1999.
The Company's operations in the Latin American Region provided $155.2
million of revenues, compared to $170.3 million in 1999, or an 8.9% decrease.
Revenues in Mexico increased $54.5 million due primarily to increased carrier
business. Revenues for Brazil were down $59.1 million from last year's first
quarter. In 1999 the recently completed privatization of the telecommunications
industry was driving rapid growth in carrier sales. Also, in 2000, sales to the
Company's major customer in Brazil were greatly reduced due to the increased
availability of in-country manufactured product. Revenues from the Venezuela
operations declined $12.8 million. The decline was a result of the effects of
the torrential floods in late 1999 and the positive impact on last year's first
quarter of a special carrier promotion. Miami's revenues decreased $6.5 million
from the first quarter of 1999 as increased product availability from in-country
suppliers in Latin America continued to reduce export sales from Miami. The
Company is currently evaluating its redistributor business in its Miami and
North American operations due to the volatility of the redistributor business,
the relatively lower margins, and higher credit risks. This evaluation could
result in the Company eliminating or phasing out a portion of the redistributor
business. Combined revenues from the redistributor business were $18.1 million
and $25.6 in the first quarter of 2000 and 1999, respectively. Combined revenues
from the operations in Argentina, Chile, Colombia and Peru increased $9.0
million.
The Company's European Region operations recorded revenues of $115.3
million, an increase of $6.0 million, or 5.5%, from $109.3 million in 1999. This
improvement reflected growth of $5.6 million in revenues from the U.K.
operations, as well as $8.8 million in revenues from CellStar Netherlands, which
was acquired in the third quarter of 1999. Revenues in Sweden declined $8.2
million, primarily due to product shortages.
North American Region revenues were $77.5 million, a decrease of $24.7
million, or 24.1%, compared to 1999. The decrease was primarily due to lower
sales to Pacific Bell Wireless which is coordinating its distribution directly
with manufacturers, partially offset by a $6.8 million increase in the Company's
core distribution business.
Gross Profit. Gross profit increased $4.7 million, or 10.8%, from $43.6
million to $48.3 million, while gross profit as a percentage of revenues
decreased from 8.5% to 8.2%. The increase in gross profit was principally due to
an increase in the Asia-Pacific Region, which was partially offset by a decrease
in the Latin American Region. The increase in the Asia-Pacific Region was
primarily due to the continued growth of the PRC and Taiwan, and the decrease in
the Latin American Region was primarily due to lower gross profit in Brazil,
Miami, and Venezuela. The decrease in gross profit as a percentage of revenues
was due primarily to a change in the geographic mix of revenues. The Company's
most significant revenue growth was in the Asia-Pacific Region. The Asia-Pacific
Region gross margin percentages are generally lower than the North American and
Latin American Regions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $6.6 million, or 25.8%, from $25.6 million to
$32.2 million. This increase was principally due to costs associated with
business expansion activities, increased bad debt expense, and professional
expenses. Overall selling, general and administrative expenses as a percentage
of revenues increased to 5.5% from 5.0%.
Equity in Income of Affiliated Companies. Equity in income of
affiliated companies decreased $5.9 million to $0.1 million. In February 1999,
the Company sold part of its equity investment in 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
10
<PAGE>
certain other shareholders of Topp. As a result of these transactions, the
Company recorded a pre-tax gain of $5.8 million. In September 1999 the Company
sold its remaining debt and equity interest in Topp to the TelMex subsidiary for
a pre-tax gain of $26.1 million.
Gain on Sale of Assets. The Company recorded a gain of $2.2 million
associated with the sale of all its retail stores in the Dallas-Fort Worth area
in the first quarter of 1999.
Interest Expense. Interest expense decreased to $4.1 million from $4.7
million primarily as a result of cash received from the sale of the Company's
remaining debt and equity interest in Topp in September 1999 and lower interest
rates in Brazil compared to the first quarter of 1999.
Other, Net. Other, net increased $1.8 million, from expense of $1.6
million to income of $0.2 million. This increase 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 in 1999.
Income Taxes. Income tax expense decreased $1.4 million from $4.4
million to $3.0 million. The decrease in tax expense was primarily attributable
to a $7.5 million decrease in income before income taxes, partially offset by an
increase in the Company's effective tax rate to 24.0% from 22.0%. The higher
effective tax rate was attributable to changes in the expected geographical mix
of income before income taxes.
International Operations
The Company's foreign operations are subject to various political and
economic risks including, but not limited to, the following: political
instability, currency controls, currency devaluations, exchange rate
fluctuations, risks related to the Euro conversion, potentially unstable
channels of distribution, increased credit risks, export control laws that might
limit markets the Company can enter, inflation, changes in laws related to
foreign ownership of business abroad, foreign tax laws, changes in import/export
regulations, including enforcement policies, and tariff and freight rates.
Political and other factors beyond the control of the Company, including trade
disputes among nations, currency fluctuations or internal political or economic
instability in any nation where the Company conducts business, could have a
materially adverse effect on the Company.
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 South America, primarily Brazil.
The Company expects to focus its efforts on servicing large, financially sound
carrier partners from the Company's Latin American subsidiaries.
Since 1998 the Company's Brazilian operations have been primarily
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.
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 March 31, 2000, the Company had $6.3
million in accounts receivable due from the importer and the Company's Brazilian
joint venture has accounts payable of $6.4 million to the importer.
The Company is currently evaluating its business model in Brazil due to
the increased availability of in-country product. This evaluation could result
in a change in its operations; a shift in the revenue mix from primarily product
sales to value added services; or a phase down or phase out of the operations in
Brazil.
In the fourth quarter of 1999, based on market conditions in Poland the
Company decided to sell its operation in Poland and recorded an impairment
charge to reduce the carrying value of the assets to their estimated net
realizable value.
In April 2000 the Company temporarily curtailed a significant portion
of its international trading operations conducted by its United Kingdom
subsidiary due to losses as a result of third party theft and fraud. Trading
activities have been curtailed pending a review of the Company's business
processes to determine what actions need to be taken to minimize the risk of
such losses in the future. As a result, the Company anticipates a reduction in
revenues for the European Region in the quarter ending May 31, 2000 and during
the balance of the year ending November 30, 2000.
The trading business involves the purchase of products from suppliers
other than manufacturers and the sale of those products to customers other than
network operators or their dealers and other representatives. The losses
occurred in late March and April 2000 during the purchase, transfer of title and
transport of six shipments of wireless handsets with a total value of
approximately $3.2 million. The Company is thoroughly investigating these
incidents and pursuing legal and insurance claims to minimize the loss to the
Company. However, the ultimate recovery in relation to the $3.2 million cannot
be determined at this time.
11
<PAGE>
Liquidity and Capital Resources
During the quarter ended February 29, 2000, the Company relied on cash
available at November 30, 1999, cash generated from operations, and borrowings
under its Multicurrency Revolving Credit Facility (the "Facility") to fund
working capital, capital expenditures and expansions. At March 31, 2000 the
Company had available $50.8 million of unused borrowing capacity under the
Facility.
Compared to November 30, 1999, accounts receivable decreased $4.8
million, while inventories and accounts payable increased $59.7 million and $2.5
million, respectively. This increase in inventory was primarily in the North
American Region, where the Company is building inventory to support expected
increases in handset sales.
As of February 29, 2000 and March 31, 2000, the Company's Brazilian
operations had borrowed $12.4 million and $12.8 million, respectively, using
credit facilities denominated in Brazilian reals with Brazilian banks. The
Company has $9.15 million of letters of credit outstanding against its Facility
to guarantee the repayment of the principal and accrued interest and all other
contractual obligations of its Brazilian operations to two Brazilian banks.
At February 29, 2000, the Company's operations in the PRC had a $12.5
million loan from a PRC bank bearing interest at 5.52%. The loan matures in
September 2000 and is fully collateralized by a U.S. dollar cash deposit. The
cash deposit was made via an intercompany loan from the operating entity in Hong
Kong as a mechanism to secure the repatriation of these funds. This $12.5
million loan was used to secure an RMB line of credit for the U.S. dollar
equivalent of $12.5 million. At February 29, 2000 and March 31, 2000, $12.2
million and $21.9 million, respectively, had been borrowed against the line of
credit in the PRC and bears interest at 5.85% with maturity dates through
March 2001. As a result of this method of funding operations in the PRC, the
consolidated balance sheet at February 29, 2000 reflects $25.0 million in cash
that is restricted as collateral on these advances and a corresponding $24.5
million in notes payable. Subsequent to the end of the quarter, the Hong Kong
operating entity increased its intercompany advance to the PRC by $10 million
for a total funding of $22.5 million to support the PRC's growth.
The Company anticipates that it should have sufficient cash available
to meet its current capital requirements and 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 should have the ability to expand its
borrowing sources to accommodate expected capital needs in the future.
Year 2000
The Company implemented a plan to assess and resolve Year 2000 issues
that could have affected the Company. The Company has not encountered any
material problems in its critical systems subsequent to December 31, 1999
related to the Year 2000 issue, nor has it encountered any material problems
with critical third party vendors. The Company believes that it is unlikely that
Year 2000 related problems will occur in the future, but there can be no such
assurance. The Company will continue to monitor any new issues or concerns
relative to the Year 2000 issue. The Company's costs of compliance with Year
2000 requirements were immaterial because the Company was in the process of
upgrading or establishing systems to keep pace with its growth.
Accounting Pronouncement Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("Statement 133"), which was amended by Statement 137 issued in July 1999.
Statement 137 delayed the effective date of Statement 133. Statement 133 is now
effective for all interim and annual periods of the Company commencing December
1, 2000. Given the Company's current and anticipanted derivative activities,
management does not believe the adoption of Statement 133 should have a material
effect on the Company's consolidated financial position and results of
operations.
12
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Risk
For the quarter ended February 29, 2000, the Company recorded in other
income (expense), net foreign currency losses of $0.7 million primarily due to
the revaluations of the foreign currency debt issued by the Company's European
operations.
Since 1998, the Company's Brazilian operations have primarily been
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.
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 March 31,
2000, the Company had $6.3 million in accounts receivable due from the importer
and the Company's Brazilian joint venture has accounts payable of $6.4 million
to the importer.
Regarding the intercompany advances from the Hong Kong entity to the
PRC entity, the Company has foreign exchange exposure on the funds as they have
been effectively converted into RMB.
The Company continues to evaluate foreign currency exposures and
related protection measures.
Derivative Financial Instruments
The Company uses various derivative financial instruments as part of an
overall strategy to manage the Company's exposure to market risk associated with
interest rate and foreign currency exchange rate fluctuations. The Company uses
foreign currency forward contracts to manage the foreign currency exchange rate
risks associated with international operations. The Company evaluates the use of
interest rate swaps and cap agreements to manage its interest risk on debt
instruments, including the reset of interest rates on variable rate debt. The
Company does not hold or issue derivative financial instruments for trading
purposes.
The major currency exposures hedged by the Company are the British
pound, Dutch guilder, Euro and Polish zloty. The carrying amount and fair value
of these contracts are not significant.
Contractual amounts of the Company's forward exchange contracts at
February 29, 2000 and March 31, 2000, respectively are $7.7 million and
$7.7 million.
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 quarter ended February 29, 2000, the interest
rates of borrowings under the Facility ranged from 7.74% to 9.00%. The Company
manages its borrowing 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 February 29, 2000, annual rates
on borrowings by the Brazilian operations ranged from approximately 30% to
36%. The Brazilian operations' borrowings at February 29, 2000 were $12.4
million. The Company continues to evaluate financing alternatives to reduce
interest expense for its Brazilian operations.
The Company has short-term borrowings in the PRC as discussed in
Foreign Exchange Risk.
The Company's $150.0 million in long-term debt has a fixed coupon
interest rate of 5.0% and is due in October 2002.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
During the period from May 1999 through July 1999, seven purported class
action lawsuits were filed in the United States District Court for the Southern
District of Florida, Miami Division, 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; (5) Tony
LaBella v. CellStar Corporation, Alan H. Goldfield, Richard M. Gozia and Mark Q.
Huggins; (6) Thomas F. Petrone v. CellStar Corporation, Alan H. Goldfield,
Richard M. Gozia and Mark Q. Huggins; and (7) Adele Brody v. CellStar
Corporation, Alan H. Goldfield, Richard M. Gozia and Mark Q. Huggins. Each of
the above lawsuits sought 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
alleges that the Company issued a series of materially false and misleading
statements concerning the Company's results of operations and investment in
Topp, resulting in violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder.
The Court entered an order on September 26, 1999 consolidating the above
lawsuits and appointing lead plaintiffs and lead plaintiffs' counsel. On
November 8, 1999, the lead plaintiffs filed a consolidated complaint. The
Company has filed a Motion to Dismiss the consolidated complaint, but the court
has not yet rendered a decision. The Company believes that it has fully complied
with all applicable securities laws and regulations and that it has meritorious
defenses to the allegations made in the consolidated complaint. The Company
intends to vigorously defend the consolidated action if its Motion to Dismiss is
denied.
On August 3, 1998, the Company announced that the Securities and Exchange
Commission is conducting an investigation of the Company relating to its
compliance with federal securities laws. The Company believes that it has fully
complied with all securities laws and regulations and is cooperating with the
Commission staff in its investigation.
The Company is 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 materially adverse effect
on the consolidated financial condition or results of operations of the Company.
Item 2. Changes in Securities
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.
14
<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)
27.1 Financial Data Schedule. (8)
--------------------
(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.
15
<PAGE>
(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.
16
<PAGE>
Signatures
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
/s/ Austin P. Young
-----------------------
By: Austin P. Young
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
/s/ Raymond L. Durham
-----------------------
By: Raymond L. Durham
Corporate Controller
(Principal Accounting Officer)
Date: April 13, 2000
17
<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)
27.1 Financial Data Schedule. (8)
--------------------
(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.
18
<PAGE>
(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.
19
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