<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 August 31, 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 75006
Carrollton, Texas --------
-------------------------- (Zip Code)
(Address of principal
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 October 11, 2000 there were 60,142,221 outstanding shares of Common
Stock, $0.01 par value per share.
<PAGE>
CELLSTAR CORPORATION
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION Number
------ --------------------- ------
<S> <C>
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (unaudited)
August 31, 2000 and November 30, 1999 3
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three and nine months ended August 31, 2000 and 1999 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE LOSS (unaudited)
Nine months ended August 31, 2000 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine months ended August 31, 2000 and 1999 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 23
PART II - OTHER INFORMATION
------- -----------------
Item 1. LEGAL PROCEEDINGS 24
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 24
</TABLE>
<PAGE>
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>
August 31, November 30,
2000 1999
--------------- ---------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 68,814 70,498
Restricted cash 40,822 25,000
Accounts receivable (less allowance for doubtful
accounts of $58,599 and $33,152, respectively) 276,657 306,235
Inventories 223,867 189,866
Deferred income tax assets 41,885 15,127
Prepaid expenses 27,978 32,029
--------------- ---------------
Total current assets 680,023 638,755
Property and equipment, net 23,453 27,481
Goodwill (less accumulated amortization of $10,617
and $10,483, respectively) 26,678 32,584
Other assets 13,428 7,618
--------------- ---------------
$ 743,582 706,438
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 232,670 212,999
Notes payable to financial institutions 109,720 50,609
Accrued expenses 28,441 24,864
Income taxes payable 2,437 8,646
Deferred income tax liabilities 12,341 8,796
--------------- ---------------
Total current liabilities 385,609 305,914
Long-term debt 150,000 150,000
--------------- ---------------
Total liabilities 535,609 455,914
--------------- ---------------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; none issued --
Common stock, $.01 par value, 200,000,000 shares
authorized; 60,142,221 and 60,057,096 shares
issued and outstanding, respectively 602 601
Additional paid-in capital 81,298 80,929
Accumulated other comprehensive loss - foreign currency
translation adjustments (7,878) (8,509)
Retained earnings 133,951 177,503
--------------- ---------------
Total stockholders' equity 207,973 250,524
--------------- ---------------
$ 743,582 706,438
=============== ===============
</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 Nine months
ended August 31, ended August 31,
------------------------- -----------------------------
2000 1999 2000 1999
--------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 629,793 560,222 1,781,022 1,645,895
Cost of sales 605,600 512,516 1,701,120 1,505,492
--------- ---------- ------------- ------------
Gross profit 24,193 47,706 79,902 140,403
Selling, general and
administrative expenses 33,815 24,731 124,113 78,653
Impairment of assets 4,930 - 4,930 -
Restructuring charge - 113 (157) 2,981
--------- ---------- ------------- ------------
Operating income (loss) (14,552) 22,862 (48,984) 58,769
Other income (expense):
Equity in income (loss) of
affiliated companies (408) (200) (789) 5,923
Gain on sale of assets 6,200 - 6,200 8,247
Interest expense (5,676) (4,381) (14,449) (14,458)
Other, net 326 947 722 (1,356)
--------- ---------- ------------- ------------
Total other income (expense) 442 (3,634) (8,316) (1,644)
--------- ---------- ------------- ------------
Income (loss) before income taxes (14,110) 19,228 (57,300) 57,125
Provision (benefit) for income taxes (791) 4,230 (13,748) 12,567
--------- ---------- ------------- ------------
Net income (loss) $ (13,319) 14,998 (43,552) 44,558
========= ========= ============ ===========
Net income (loss) per share:
Basic $ (0.22) 0.25 (0.72) 0.75
========= ======== ============ ===========
Diluted $ (0.22) 0.25 (0.72) 0.73
========= ======== ============ ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
CellStar Corporation and Subsidiaries
Consolidated Statement of Stockholders' Equity and Comprehensive Loss
Nine months ended August 31, 2000
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Additional other
Common Stock 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 loss:
Net loss - - - - (43,552) (43,552)
Foreign currency translation
adjustment - - - 631 - 631
--------
Total comprehensive loss (42,921)
Common stock issued under
stock option plans 85 1 369 - - 370
------- ----- --------- ----------- -------- --------
Balance at August 31, 2000 60,142 $ 602 81,298 (7,878) 133,951 207,973
======= ===== ========= =========== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
CellStar Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended August 31, 2000 and 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (43,552) 44,558
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation, amortization, and impairment of assets 13,695 8,335
Equity in (income) loss of affiliated companies, net 789 (5,923)
Gain on sale of assets (6,200) (8,247)
Deferred income taxes (23,213) (636)
Changes in operating assets and liabilities
net of effects from acquisitions of businesses:
Accounts receivable 22,350 69,045
Inventories (45,835) 118,368
Prepaid expenses 197 (6,723)
Other assets (7,760) (1,437)
Accounts payable 37,046 (158,254)
Accrued expenses 7,171 (14,206)
Income taxes payable (6,209) (1,750)
--------- ---------
Net cash provided by (used in) operating activities (51,521) 43,130
Cash flows from investing activities:
Proceeds from sale of assets 377 13,861
Purchases of property and equipment (4,141) (6,302)
Increase in restricted cash (15,822) --
Acquisitions of businesses, net of cash acquired (176) (2,301)
--------- ---------
Net cash provided by (used in) investing activities (19,762) 5,258
Cash flows from financing activities:
Net borrowings on notes payable to financial institutions 69,229 (15,582)
Net proceeds from issuance of common stock 370 2,904
--------- ---------
Net cash provided by (used in) financing activities 69,599 (12,678)
Net increase (decrease) in cash and cash equivalents (1,684) 35,710
Cash and cash equivalents at beginning of period 70,498 47,983
--------- ---------
Cash and cash equivalents at end of period $ 68,814 83,693
========= =========
</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, 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 herein. 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 (Loss) Per Share
Basic net income (loss) per common share is based on the weighted average
number of common shares outstanding for the relevant period. Diluted net
income (loss) 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 nine months ended August 31,
2000 and 1999 follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended
August 31,
----------------------------
2000 1999
---------- ---------
<S> <C> <C>
Basic:
Net income (loss) $ (13,319) 14,998
========== =========
Weighted average number of shares outstanding 60,142 59,848
========== =========
Net income (loss) per share $ (0.22) 0.25
========== =========
Diluted:
Net income (loss) $ (13,319) 14,998
Interest on convertible notes, net of tax effect - 1,125
---------- ---------
Adjusted net income (loss) $ (13,319) 16,123
========== =========
Weighted average number of shares outstanding 60,142 59,848
Effect of dilutive securities:
Stock options and warrant - 183
Convertible notes - 5,422
---------- ---------
Weighted average number of shares outstanding and effect
of dilutive securities 60,142 65,453
========== =========
Net income (loss) per share $ (0.22) 0.25
========== =========
<CAPTION>
Nine months ended
August 31,
----------------------------
2000 1999
---------- ---------
<S> <C> <C>
Basic:
Net income (loss) $ (43,552) 44,558
========== =========
Weighted average number of shares outstanding 60,128 59,659
========== =========
Net income (loss) per share $ (0.72) 0.75
========== =========
Diluted:
Net income (loss) $ (43,552) 44,558
Interest on convertible notes, net of tax effect - 3,375
---------- ---------
Adjusted net income (loss) $ (43,552) 47,933
========== =========
Weighted average number of shares outstanding 60,128 59,659
Effect of dilutive securities:
Stock options and warrant - 465
Convertible notes - 5,422
---------- ---------
Weighted average number of shares outstanding and effect
of dilutive securities 60,128 65,546
========== =========
Net income (loss) per share $ (0.72) 0.73
========== =========
</TABLE>
8
<PAGE>
Options outstanding at August 31, 2000 to purchase 4.7 million shares of
common stock for the three and nine months ended August 31, 2000 were not
included in the computation of diluted earnings per share (EPS) because
their inclusion would have been anti-dilutive. The subordinated convertible
notes were not dilutive for the three and nine month periods ended August
31, 2000.
Options outstanding to purchase 2.5 million shares of common stock for the
three months ended August 31, 1999, and 1.9 million for the nine months
ended August 31, 1999, were not included in the computation of diluted EPS
because their inclusion would have been anti-dilutive.
(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. 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 and expenses, primarily general and administrative
costs, not allocated to reportable segments. Intersegment sales and
transfers are not significant.
Segment asset information at August 31, 2000 and November 30, 1999 follows
(in thousands):
<TABLE>
<CAPTION>
Asia- Latin North
Pacific America Europe America Corporate Total
------------- ------------- ------------ ------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total Assets
August 31, 2000 $ 264,389 199,453 58,634 146,841 74,265 743,582
November 30, 1999 $ 240,523 261,618 56,536 126,208 21,553 706,438
</TABLE>
9
<PAGE>
Segment information for the three and nine months ended August 31, 2000 and
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
August 31, 2000:
Revenues from external customers $ 270,787 136,630 66,723 155,653 - 629,793
Income (loss) before
interest and income taxes (278) (6,985) 1,035 1,843 (5,259) (9,644)
Three months ended
August 31, 1999:
Revenues from external customers $ 204,089 154,577 108,012 93,544 - 560,222
Income (loss) before
interest and income taxes 13,039 4,984 2,461 5,732 (3,662) 22,554
</TABLE>
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Income (loss) before interest and income taxes per segment information......................... $ (9,644) 22,554
Interest expense per the consolidated statements of operations................................. (5,676) (4,381)
Interest income included in other, net in the consolidated statements of operations............ 1,210 1,055
---------- ----------
Income (loss) before income taxes per the consolidated statements of operations................ $(14,110) 19,228
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Asia- Latin North
Pacific America Europe America Corporate Total
------------- ------------- ------------ ------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Nine months ended
August 31, 2000:
Revenues from external customers $ 744,093 452,362 248,504 336,063 - 1,781,022
Income (loss) before
interest and taxes 12,905 (30,057) 75 (12,985) (16,169) (46,231)
Nine months ended
August 31, 1999:
Revenues from external customers $ 531,372 511,706 306,330 296,487 - 1,645,895
Income (loss) before
interest and taxes 30,372 25,521 7,268 18,591 (13,027) 68,725
</TABLE>
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Income (loss) before interest and income taxes per segment information......................... $(46,231) 68,725
Interest expense per the consolidated statements of operations................................. (14,449) (14,458)
Interest income included in other, net in the consolidated statements of operations............ 3,380 2,858
---------- ----------
Income (loss) before income taxes per the consolidated statements of operations................ $(57,300) 57,125
========== ==========
</TABLE>
10
<PAGE>
(4) United Kingdom International Trading Operations
In April 2000, the Company curtailed a significant portion of its U.K.
international trading operations following third party theft and fraud
losses. As a result, the Company experienced a reduction in revenues for
the Europe Region in the quarter and the nine months ended August 31, 2000
and anticipates a reduction in revenues 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.
For the quarter ended May 31, 2000, the Company recorded a $4.4 million
charge consisting of $3.2 million for third party theft and fraud losses
during the purchase, transfer of title and transport of six shipments of
wireless handsets and $1.2 million in inventory obsolescence expense for
inventory price reductions incurred while the international trading
business was curtailed pending investigation. The Company is negotiating to
obtain an insurance settlement and is pursuing legal action where
appropriate. However, the ultimate recovery, if any, in relation to these
losses cannot be determined at this time.
(5) Brazil
Since 1998, the Company's Brazilian operations were primarily conducted
through a majority-owned joint venture. Following an extensive review of
its operations in Brazil, the Company concluded that its joint venture
structure, together with foreign exchange risk, the high cost of capital in
that country, accumulated losses, and the prospect of ongoing losses, were
not optimal for success in that market. As a result, in the second quarter
of 2000 the Company elected to exit the Brazil market.
On August 25, 2000 the Company completed the divestiture of its 51%
ownership in the joint venture to its joint venture partner, Fontana
Business Corp. Following is a summary of the operations in Brazil (amounts
in thousands):
<TABLE>
<CAPTION>
Three months Nine months
ended August 31, ended August 31,
--------------------- -----------------------
2000 1999 2000 1999
--------- -------- --------- -----------
<S> <C> <C> <C> <C>
Revenues $ 14,937 37,183 40,602 167,841
Cost of sales 13,745 33,224 41,567 154,474
--------- -------- --------- -----------
Gross profit (loss) 1,192 3,959 (965) 13,367
Selling, general and
administrative expenses 4,328 2,639 9,584 7,692
--------- -------- --------- -----------
Operating income (loss) (3,136) 1,320 (10,549) 5,675
--------- -------- --------- -----------
Other income (expense):
Gain on sale of assets 6,047 - 6,047 -
Interest expense (1,557) (1,007) (3,464) (4,011)
Other, net - (311) - (2,260)
--------- -------- --------- -----------
Total other income (expense) 4,490 (1,318) 2,583 (6,271)
--------- -------- --------- -----------
Income (loss) before income taxes $ 1,354 2 (7,966) (596)
========= ======== ========= ===========
</TABLE>
11
<PAGE>
The Company recognized a pre-tax gain on sale of $6.0 million in
conjunction with the disposition of its 51% interest in the joint venture.
The Company had a negative carrying value in its 51% interest in the joint
venture as a result of losses previously recognized. In the disposition,
the Company obtained promissory notes totaling $8.5 million related to the
Company's funding of certain U.S. letters of credit supporting Brazilian
debt obligations. These promissory notes are fully reserved and will remain
reserved pending receipt of payments by the Company.
During the quarter ended May 31, 2000, the Company also fully reserved
certain U.S.-based accounts receivable from Brazilian importers, the
collectibility of which deteriorated significantly in the second quarter of
2000 and which were further affected by the decision, in the second
quarter, to exit Brazil.
(6) Venezuela
During the quarter ended August 31, 2000, the Company decided, based upon
the current and future economic and political climate in Venezuela, to
divest its operations in Venezuela and to focus its resources on more
profitable, lower risk, growth markets. For the quarter ended August 31,
2000, the Company recorded an impairment charge of $4.9 million to reduce
the carrying value of certain Venezuelan assets, primarily goodwill, to
their estimated fair value. Following is a summary of the Venezuela
operations (amounts in thousands):
<TABLE>
<CAPTION>
Three months Nine months
ended August 31, ended August 31,
------------------------ -------------------------
2000 1999 2000 1999
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues $ 4,255 11,804 30,624 62,000
Cost of sales 7,715 10,441 31,543 54,536
---------- ---------- ----------- ---------
Gross profit (loss) (3,460) 1,363 (919) 7,464
Selling, general and
administrative expenses 3,070 894 7,832 2,951
Impairment of assets 4,930 - 4,930 -
---------- ---------- ----------- ---------
Operating income (loss) (11,460) 469 (13,681) 4,513
---------- ---------- ----------- ---------
Other income (expense):
Gain on sale of assets - - - 5,197
Interest expense (3) - (8) (14)
Other, net (98) (136) (707) (426)
---------- ---------- ----------- ---------
Total other income (expense) (101) (136) (715) 4,757
---------- ---------- ----------- ---------
Income (loss) before income taxes $ (11,561) 333 (14,396) 9,270
========== ========== =========== =========
</TABLE>
(7) Redistributor Business
The Company is phasing out a major portion of its redistributor business in
the Miami and North American operations due to the volatility of the
redistributor business, the relatively lower margins and higher credit
risks. Redistributors are distributors that do not have existing direct
relationships with manufacturers and who do not have long-term carrier or
dealer/agent relationships. These distributors purchase product on a spot
basis to fulfill intermittent customer demand and do not have long-term
predictable product demand. Combined revenues for the redistributor
business for the three months ended August 31, 2000 and 1999 were $15.5
million and $35.3 million, respectively, and for the nine months ended
August 31, 2000 and 1999, were $47.0 million and $94.9 million,
respectively.
12
<PAGE>
(8) Amendment to Multicurrency Revolving Credit Facility
At May 31, 2000, the Company would not have been in compliance with one of
its covenants under its Multicurrency Revolving Credit Facility (the
"Facility"). As of July 12, 2000, the Company had negotiated an amendment
to the Facility following which the Company was in compliance with the
covenant. As a result of the July 12, 2000 amendment to the Facility, the
Facility was reduced from $115.0 million to $100.0 million and interest
rates were increased by 50 basis points. At August 31, 2000, the Company
was not in compliance with another of its covenants and subsequently
received a waiver for this covenant. At August 31, 2000, the outstanding
balance under the Facility was $64.8 million and is included in notes
payable to financial institutions in the accompanying consolidated balance
sheet. The Company has signed a letter of intent with its Agent bank,
Chase Manhattan Bank, to arrange an asset based lending facility ("New
Facility") that will use the Company's domestic assets as well as some
foreign receivables as collateral for the New Facility. This New Facility
is expected to replace the current Facility. However, no assurance can be
given that the Company will enter into the New Facility.
Assuming the Company is successful in closing on the New Facility, the
Company 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
under its existing Facility or the New 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; however, no assurance can be given that any such financing would
be available or, if available, offered on terms acceptable to the Company.
(9) Inventory Obsolescence Expense and Bad Debt Expense
Inventory obsolescence expense of $5.7 million and $2.7 million for the
three months ended August 31, 2000 and 1999, respectively, and $29.2
million and $17.0 million for the nine months ended August 31, 2000 and
1999, respectively, is included in cost of goods sold in the accompanying
consolidated statements of operations.
Bad debt expense of $3.9 million and $0.5 million for the three months
ended August 31, 2000 and 1999, respectively, and $33.3 million and $7.3
million for the nine months ended August 31, 2000 and 1999, respectively,
is included in selling, general and administrative expenses in the
accompanying consolidated statements of operations.
(10) Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and foreign
currency translation adjustment and aggregated $(10.9) million and $(42.9)
million for the three and nine month periods ended August 31, 2000,
respectively. For the three and nine month periods ended August 31, 1999,
comprehensive income aggregated $16.2 million and $44.7 million,
respectively.
(11) Contingencies
Refer to Part II, Item 1, "Legal Proceedings."
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company reported a net loss of $13.3 million, or $0.22 per diluted share,
for the third quarter of 2000 compared with net income of $15.0 million, or
$0.25 per diluted share, for the same quarter last year. In the third quarter of
2000, the Company divested its majority interest in its Brazil joint venture,
announced its intent to divest its Venezuela operations, continued to phase out
a major portion of its North America and Miami redistributor business, and
experienced substantially reduced international trading operations conducted by
its U.K. subsidiary. In addition, the Company experienced a decline in gross
margins primarily due to competitive margin pressures.
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 "should," "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, revaluation, devaluation and fluctuations in relative exchange rates,
political instability, changes in foreign laws, regulations and tariffs, new
technologies, system implementation difficulties, competition, handset shortages
or overages, customer and vendor relationships, unstable channels of
distribution, margin pressures, seasonality, inventory obsolescence and
availability, "gray market" resales, and inflation 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.
14
<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 nine months ended August 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three months Nine months
ended August 31, ended August 31,
---------------- ----------------
2000 1999 2000 1999
------ ------ ------- ------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0 100.0 100.0
Cost of sales 96.2 91.5 95.5 91.5
------ ------ ------- ------
Gross profit 3.8 8.5 4.5 8.5
Selling, general and administrative expenses 5.4 4.4 7.0 4.8
Impairment of assets 0.7 - 0.3 -
Restructuring charge - - - 0.1
------ ------ ------- ------
Operating income (loss) (2.3) 4.1 (2.8) 3.6
Other income (expense):
Equity in income (loss) of
affiliated companies - - - 0.4
Gain on sale of assets 1.0 - 0.4 0.5
Interest expense (0.9) (0.8) (0.8) (0.9)
Other, net - 0.2 - (0.1)
------ ------ ------- ------
Total other income (expense) 0.1 (0.6) (0.4) (0.1)
------ ------ ------- ------
Income (loss) before income taxes (2.2) 3.5 (3.2) 3.5
Provision (benefit) for income taxes (0.1) 0.8 (0.8) 0.8
------ ------ ------- ------
Net income (loss) (2.1)% 2.7 (2.4) 2.7
====== ====== ======= ======
</TABLE>
15
<PAGE>
Three Months Ended August 31, 2000 Compared to Three Months Ended August 31,
1999
Revenues. The Company's revenues increased $69.6 million, or 12.4%, from
$560.2 million to $629.8 million.
Revenues in the Asia-Pacific Region increased $66.7 million, or 32.7%, from
$204.1 million to $270.8 million. The Company's operations in the People's
Republic of China, including Hong Kong ("PRC"), provided $185.6 million in
revenue, an increase of $46.8 million or 33.7%, from $138.8 million. This
increase was due to continued strong demand in the PRC and the build-up of sales
channels. The Company's operations in Taiwan provided $61.3 million of revenue,
an increase of $10.2 million, from $51.1 million. This increase is due to the
introduction of high-end handsets in 2000. In the Philippines, revenues for the
quarter increased $9.8 million to $11.4 million due to carrier promotions and
receipt by the Company in the fourth quarter of 1999 of certain distribution
rights to Nokia products in the Philippines.
North America Region revenues were $155.7 million, up 66.4% from $93.5
million for the prior year. The region was the Company's second largest revenue
contributor for the third quarter 2000. North American revenues benefited from
strong promotional activity by several customers, as well as the addition of new
customers and expanded markets in several areas.
Latin America Region revenues were $136.6 million for the third quarter ended
August 31, 2000, an 11.6% decrease from the prior year revenues of $154.6
million. Revenues in Brazil declined $22.2 million from the prior year quarter.
In August 2000, the Company completed its divestiture of its 51% interest in its
Brazilian operations (see "International Operations"). Revenues in Venezuela
declined $7.5 million, reflecting continuing market softness caused by political
and economic instability. In the third quarter 2000, the Company decided to
divest its Venezuela operations (see "International Operations") which the
Company intends to sell. Revenues from the Miami export operations were down
$18.2 million, reflecting the Company's decision to phase out a major portion of
its redistributor channel, and the declining export market due to increasing
availability of in-country manufactured product. The Company began phasing out a
major portion of its redistributor business in the Miami and North American
operations in the second quarter 2000 due to the volatility of the redistributor
business, the relatively lower margins and higher credit risks. Also, supply
shortages in the third and fourth quarters of 1999 significantly weakened the
redistributor channel, reducing the number of financially viable redistributors
and creating operating and financial difficulties for others. Combined revenues
for the third quarter for the redistributor business were $15.5 million in 2000
and $35.3 million in 1999. Revenues in Mexico increased $27.2 million, or 53.4%.
This increase can primarily be attributed to a carrier whose relationship with
the Company has grown significantly from the prior year. Combined revenues from
CellStar's Argentina, Chile, Colombia and Peru operations increased to $18.8
million from $16.0 million in the year-earlier quarter.
Revenues for the Europe Region decreased to $66.7 million, or 38.2%, in the
third quarter from $108.0 million in the prior comparable quarter, due to the
Company's decision to curtail its U.K. international trading operations (see
"International Operations"). Quarterly results included a $6.1 million increase
in revenues from Sweden, as well as an increase in revenues of $5.5 million from
the Company's operations in The Netherlands, which was acquired in the third
quarter of 1999.
Gross Profit. Gross profit decreased $23.5 million, or 49.3%, from $47.7
million to $24.2 million. Gross margins were significantly lower in the third
quarter of the current year primarily due to the Company's commitment to defend
market share in the face of intense industry price competition. Based on last
year's handset shortages and industry forecasts of higher demand, manufacturers
significantly increased production in 2000. However, worldwide handset sales,
while significantly higher this year, are still below industry forecasts. This
has resulted in a surplus of product driving stronger-than-usual competition for
market share, mainly in the Asia-Pacific Region and, to a lesser extent, in
Latin America.
Gross margins also reflected the ongoing execution during the quarter of the
Company's plan to reduce the levels and improve the quality of its inventory. In
particular, this effort focused in the U.S. and Latin America on
16
<PAGE>
sales of analog, satellite and older-model handsets and accessories, often at a
discount, which lowered overall gross margins for the quarter.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $9.1 million, or 36.7% from $24.7 million to
$33.8 million. The increase was principally due to bad debt expense of $3.9
million, up from $0.5 million for the third quarter last year. The increase in
selling, general and administrative expenses was also attributable to costs
associated with business expansion activities. Overall selling, general and
administrative expenses as a percentage of revenues increased to 5.4% from 4.4%.
Impairment of Assets. In the third quarter 2000, the Company decided to exit
its Venezuela operations. The Company recorded a $4.9 million impairment charge
to reduce the carrying value of certain Venezuelan assets, primarily goodwill,
to their estimated fair value (see "International Operations").
Gain on Sale of Assets. In the third quarter of 2000, the Company recorded a
pre-tax gain of $6.0 million from the completion of the divestiture of its 51%
ownership interest in its Brazil joint venture (see "International Operations").
During the third quarter 2000, the Company also completed the sale of its Poland
operations and recognized a pre-tax gain of $0.2 million.
Interest Expense. Interest expense increased to $5.7 million from $4.4
million primarily due to higher interest rates and higher levels of borrowing.
Other, Net. Other, net decreased from income of $0.9 million in the third
quarter of 1999 to income of $0.3 million in 2000. This decrease was primarily
due to the revaluations of foreign currency related to the Company's European
operations.
Income Taxes. Income tax expense decreased from a provision of $4.2 million
in 1999 to a benefit of $0.8 million in 2000 due to the losses incurred in 2000.
The annual effective tax rate increased to 24.0% from 22.0%. The higher
effective tax rate was attributable to changes in the geographical mix of income
(loss) before income taxes.
17
<PAGE>
Nine Months Ended August 31, 2000 Compared to Nine Months Ended August 31, 1999
Revenues. The Company's revenues increased $135.1 million, or 8.2%, from
$1,645.9 million to $1,781.0 million.
Revenues in the Asia-Pacific Region increased $212.7 million, or 40.0%,
from $531.4 million to $744.1 million. The Company's operations in the PRC
provided $506.8 million in revenue, an increase of $145.2 million, or 40.2%,
from $361.6 million. This increase was due to continued strong demand in the PRC
and the build-up of sales channels. The Company's operations in Taiwan provided
$163.6 million of revenue, an increase of $32.7 million, or 25.0%, from $130.9
million. Demand in Taiwan increased due to the introduction of new high-end
handsets in the first quarter of 2000, and although there was a slowdown in the
second quarter of 2000 due to political uncertainty and Taiwan's relationship
with the PRC, the third quarter rebounded with a $10.2 million increase over the
prior year quarter. In the Philippines, revenues increased $32.3 million to
$42.5 million due to carrier promotions and receipt by the Company in the fourth
quarter of 1999 of certain distribution rights to Nokia products in the
Philippines.
North American Region revenues were $336.1 million, an increase of $39.6
million, or 13.3% when compared to $296.5 million in 1999. North American
revenues benefited from strong promotional activity by several customers, as
well as the addition of new customers and expanded markets in several areas.
The Latin America Region provided $452.4 million of revenues, compared to
$511.7 million, or an 11.6% decrease. Revenues in Mexico increased $118.4
million due primarily to increased carrier business. Revenues for Brazil were
down $127.2 million from last year. In 1999, the recently completed
privatization of the telecommunications industry was driving rapid growth in
carrier sales. In 2000, sales to the Company's major customer in Brazil were
greatly reduced due to the increased availability of in-country manufactured
product. In August 2000, the Company completed the divestiture of its 51%
interest in its Brazilian operations (see "International Operations"). Revenues
from the Venezuela operations declined $31.4 million. The decline was a result
of the effects of the torrential floods in late 1999, the positive impact on
last year's first quarter of a special carrier promotion, and market softness in
2000 caused by political and economic instability. In the third quarter 2000,
the Company decided to exit its Venezuela operations (see "International
Operations). Revenues from the Company's operations in Miami decreased $37.3
million from 1999 as increased product availability from in-country
manufacturers in Latin America continued to reduce export sales from Miami. The
Company began phasing out a major portion of its redistributor business in its
Miami and North American operations in the second quarter 2000, due to the
volatility of the redistributor business, the relatively lower margins, and
higher credit risks. Also, supply shortages in the third and fourth quarters of
1999 significantly weakened the redistributor channel, reducing the number of
financially viable redistributors and creating operating and financial
difficulties for others. Combined revenues from the redistributor business were
$47.0 million, and $94.9 million in 2000 and 1999, respectively. Combined
revenues from the operations in Argentina, Chile, Colombia and Peru increased
$18.4 million from $39.2 million in 1999 to $57.6 million in 2000.
The Company's Europe Region recorded revenues of $248.5 million, a decrease
of $57.8 million, or 18.9%, from $306.3 million, primarily due to the Company's
decision to curtail its U.K. international trading operations in April 2000 (see
"International Operations"). Revenues from Sweden increased $1.5 million to
$89.6 million in 2000. Revenues from The Netherlands, which was acquired in
the third quarter of 1999, were $22.7 million.
Gross Profit. Gross profit decreased $60.5 million, or 43.1% from $140.4
million to $79.9 million. The decrease in gross profit is due to $29.2 million
in inventory obsolescence primarily as a result of price declines during the
second quarter and $3.2 million in third party theft and fraud losses related to
the U.K. international trading operations, also in the second quarter. The
decrease in gross profit as a percentage of revenues can also be attributed to a
shift in geographic revenue mix, lack of digital handsets in North America,
global industry price competition including an oversupply of analog handsets in
North America and an oversupply of handsets in Asia
18
<PAGE>
Pacific, and to a lesser degree, the Company's inventory improvement actions.
The Company's commitment to defend market share in the face of intense global
industry price competition, particularly in the Asia Pacific Region, negatively
impacted the gross margin percentage. Based on last year's handset shortages and
industry forecasts of higher demand, manufacturers significantly increased
production in 2000. However, worldwide handset sales, while significantly
higher this year, are still below industry forecasts. This has resulted in a
surplus of product driving stronger-than-usual competition for market share,
mainly in the Asia-Pacific Region and to a lesser extent in Latin America.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $45.5 million, or 57.8% from $78.7 million to
$124.1 million. This increase was primarily due to bad debt expense of $33.3
million, up from $7.3 million for the same period last year. The increase was
primarily from certain U.S.-based accounts receivable from Brazilian importers,
the collectibility of which deteriorated significantly in the second quarter of
2000, and which were further affected by the Company's decision to divest its
majority interest in its joint venture in Brazil and the phase out of a major
portion of the redistributor business in its Miami and North America operations.
The increase in selling, general and administrative expenses was also
attributable to costs associated with business expansion activities and
professional expenses. Overall selling, general and administrative expenses as
a percentage of revenues increased to 7.0% from 4.8%.
Impairment of Assets. In the third quarter 2000, the Company decided to
exit its Venezuela operations. The Company recorded a $4.9 million impairment
charge to reduce the carrying value of certain Venezuelan assets, primarily
goodwill, to their estimated fair value (see "International Operations").
Restructuring Charge. The Company's results of operations include a pre-
tax restructuring charge of $3.0 million in 1999 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.
Equity in Income (Loss) of Affiliated Companies. Equity in income (loss) of
affiliated companies decreased from income of $5.9 million in 1999 to a loss of
$0.8 million in 2000. 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 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. In the third quarter of 2000, the Company recorded
a pre-tax gain of $6.0 million, from the completion of the divestiture of its
51% ownership interest in its Brazil joint venture (see "International
Operations"). During the third quarter 2000, the Company also completed the
sale of its Poland operations and recognized a pre-tax gain of $0.2 million. In
1999, the Company recorded a pre-tax gain of $8.2 million associated with the
sale of its prepaid operations in Venezuela and the sale of the Company's retail
stores in the Dallas-Fort Worth and Kansas City areas.
Interest Expense. Interest expense decreased from $14.5 million in 1999 to
$14.4 million in 2000.
Other, Net. Other, net changed from an expense of $1.4 million to income
of $0.7 million. This change was primarily due to a $2.6 million foreign
currency transaction loss realized in 1999 from the conversion of U.S. dollar
denominated debt in Brazil into a Brazilian real denominated credit facility.
Income Taxes. Income tax expense decreased from $12.6 million in 1999 to a
benefit of $13.7 million in 2000 due to the losses incurred in 2000. The
Company's effective tax rate increased to 24.0% from 22.0%. The higher
effective tax rate was attributable to changes in the geographical mix of income
(loss) before income taxes.
19
<PAGE>
International Operations
The Company's foreign operations are subject to various political and
economic risks including, but not limited to, the following: political
instability, economic instability, currency controls, currency devaluations,
exchange rate fluctuations, 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, trade disputes among nations, changes in cost of
capital, changes in import/export regulations, including enforcement policies,
"gray market" resales, and tariff and freight rates. Such risks and other
factors beyond the control of the Company 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 manufactured product availability in South America,
primarily Brazil. The Company expects to focus efforts on servicing large,
financially sound carrier partners from the Company's Latin American
subsidiaries.
Since 1998, the Company's Brazilian operations were primarily conducted
through a majority-owned joint venture. Following an extensive review of its
operations in Brazil, the Company concluded that its joint venture structure,
together with foreign exchange risk, the high cost of capital in that country,
alternative uses of capital, accumulated losses, and the prospect of ongoing
losses, were not optimal for success in that market. As a result, in the second
quarter of 2000 the Company elected to exit the Brazil market and to divest its
51% interest in its joint venture. In August 2000, the Company completed its
divestiture of its 51% interest in its joint venture (see footnote 5 to the
consolidated financial statements for a summary of the results of the Brazil
operations). The Company has also fully reserved certain U.S.- based accounts
receivable from Brazilian importers in the second quarter of 2000, the
collectibility of which significantly deteriorated in the second quarter of
2000, and which were further affected by the decision, in the second quarter, to
exit Brazil.
During the quarter ended August 31, 2000, the Company decided, based upon
the current and future economic and political outlook in Venezuela, to divest
its operations in Venezuela and to focus its resources on more profitable, lower
risk, growth markets. For the quarter ended August 31, 2000, the Company
recorded an impairment charge of $4.9 million to reduce the carrying value of
certain Venezuelan assets, primarily goodwill, to their estimated fair value
(see footnote 6 to the consolidated financial statements for a summary of the
results of the Venezuela operations).
In April 2000, the Company curtailed a significant portion of its U.K.
international trading operations following third party theft and fraud losses.
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 Company experienced a
reduction in revenues for the Europe Region in the second and third quarters of
2000 compared to 1999 and anticipates a reduction in revenues during the balance
of the year ending November 30, 2000. For the quarter ended May 31, 2000, the
Company recorded a $4.4 million charge consisting of $3.2 million from third
party theft and fraud losses during the purchase, transfer of title and
transport of six shipments of wireless handsets, and $1.2 million in inventory
obsolescence expense for inventory price reductions incurred while the
international trading business was curtailed pending investigation. The Company
is negotiating to obtain an insurance settlement and is pursuing legal action
where appropriate. However, the ultimate recovery in relation to these losses,
if any, cannot be determined at this time.
In the third quarter of 2000, the Company completed the sale of its
operations in Poland and recognized a gain of $0.2 million.
20
<PAGE>
Liquidity and Capital Resources
During the nine months ended August 31, 2000, the Company relied primarily
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 October 2, 2000,
the Company had available less than $1.0 million of unused borrowing capacity
under the Facility.
Compared to November 30, 2000, accounts receivable decreased $29.6 million,
inventories increased $34.0 million and accounts payable increased $19.7
million. This decrease in accounts receivable was due to increased collections
and to additions to the allowance for doubtful accounts. The increase in
inventory is primarily to support increased sales activity in the PRC and
Mexico. The increase in accounts payable is primarily due to increased sales
activity in North America.
Effective August 25, 2000, the Company sold its 51% interest in its Brazil
joint venture to its joint venture partner, Fontana Business Corp. To
facilitate the closing of the transaction, the Company repaid certain debt of
the joint venture to the extent it was collateralized by letters of credit
issued under the Company's Facility. The Company received promissory notes
totaling $8.5 million from CellStar do Brasil, Ltda. These notes are fully
reserved and will remain fully reserved pending receipt of payments by the
Company
At August 31, 2000, the Company's operations in the PRC had three lines of
credit, one for USD $12.5 million, the second for RMB 215 million (approximately
USD $25.9 million) and the third for RMB 50 million (approximately USD $6.0
million), bearing interest at 7.16%, 5.85% and 2.34%, respectively. The loans
have maturity dates through June 2001. The first two lines of credit are fully
collateralized by U.S. dollar cash deposits. The cash deposit was made via an
intercompany loan from the operating entity in Hong Kong as a mechanism to
secure repatriation of these funds. The third line of credit is supported by a
RMB 15.0 million cash collateral deposit and a promissory note. At August 31,
2000 and September 30, 2000, USD $44.4 million had been borrowed against the
lines of credit in the PRC. As a result of this method of funding operations in
the PRC, the consolidated balance sheet at August 31, 2000 reflects $40.8
million in cash that is restricted as collateral on these advances and a
corresponding USD $44.4 million in notes payable.
At May 31, 2000, the Company would not have been in compliance with one of
its covenants under its Facility. As of July 12, 2000, the Company had
negotiated an amendment to the Facility following which the Company was in
compliance with the covenant. At August 31, 2000, the Company was not in
compliance with another of its covenants and subsequently received a waiver for
this covenant. At August 31, 2000, the outstanding balance under the Facility
was $64.8 million and is included in notes payable to financial institutions in
the accompanying consolidated balance sheet.
The Company has signed a letter of intent with its Agent bank, Chase
Manhattan Bank, to arrange an asset based lending facility ("New Facility") that
will use the Company's domestic assets as well as some foreign receivables as
collateral for the New Facility. This New Facility is expected to replace the
current Facility. However, no assurance can be given that the Company will
enter into the New Facility.
Assuming the Company is successful in closing on the New Facility, the
Company 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 under
its existing Facility or the New 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; however, no
assurance can be given that any such financing would be available or, if
available, offered on terms acceptable to the Company.
Accounting Pronouncement Not Yet Adopted
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("Statement 133"), which was amended by Statement 137 issued in July 1999 and
Statement 138 issued in June 2000. 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
21
<PAGE>
Company's current and anticipated 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.
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes
certain of the staff's views in applying Generally Accepted Accounting
Principles to revenue recognition and accounting for deferred costs in the
financial statements and is effective no later than the fourth quarter of fiscal
years beginning after December 15, 1999. Based on the Company's current revenue
recognition policies, SAB 101 is not expected to materially impact the Company's
financial position and consolidated results of operations.
22
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Risk
For the quarter ended August 31, 2000, the Company recorded in other income
(expense), net foreign currency losses of $0.9 million primarily due to the
revaluations of foreign currency related to the Company's European operations.
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 Swedish Krona. The carrying amount and fair value of
these contracts are not significant.
Contractual amounts of the Company's forward exchange contracts at August
31, 2000 and September 30, 2000, respectively are $17.1 million and $26.1
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 nine months ended August 31, 2000, the interest rates of
borrowings under the Facility ranged from 7.74% to 10.50%. As a result of the
July 12, 2000 amendment to the Facility, interest rates increased by 50 basis
points. The Company manages its borrowings under the Facility each business day
to minimize interest expense.
The Company has short-term borrowings in the PRC as discussed in Liquidity
and Capital Resources.
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.
23
<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. Each lawsuit 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 lawsuit alleged 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 (the "1934 Act"), and Rule 10b-5
promulgated thereunder. The Court entered an order on September 26, 1999
consolidating the lawsuits and appointing lead plaintiffs and lead plaintiffs'
counsel. On November 8, 1999, the lead plaintiffs filed a consolidated
complaint. The Company filed a Motion to Dismiss the consolidated complaint and
the Court granted that Motion on August 3, 2000. Plaintiffs filed a Second
Amended and Consolidated Complaint on September 1, 2000, essentially re-alleging
the violations of Sections 10(b) and 20(a) of the 1934 Act, and Rule 10b-5
promulgated thereunder. 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 file a Motion to Dismiss plaintiff's Second Amended and Consolidated
Complaint and 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's previous 51% joint venture in Brazil received an assessment
of approximately $4.9 million from the Brazil state tax authorities related to
disallowed ICMS tax credits on purchased products. The Company believes the
joint venture has complied with all applicable tax rules and regulations. The
Company's 51% interest in the joint venture was sold to its joint venture
partner effective August 25, 2000, and the Company believes it no longer has any
liability related to this assessment. Accordingly, an accrual for this
assessment is not reflected in the accompanying financial statements.
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 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)
24
<PAGE>
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.
(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.
25
<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
/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: October 13, 2000
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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,
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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.
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