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, 2001
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 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 19, 2001, there were 60,142,221 outstanding shares of Common
Stock, $0.01 par value per share.
1
CELLSTAR CORPORATION
INTRODUCTORY NOTE
At the time of this filing, our independent auditors have not completed their
review procedures as established by general accepted auditing standards and
article 10-01(d) of Regulation S-X as of and for the three months ended August
31, 2001.
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION Number
------ --------------------- ------
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (unaudited)
August 31, 2001 and November 30, 2000 3
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three and nine months ended August 31, 2001 and 2000 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (unaudited)
Nine months ended August 31, 2001 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine months ended August 31, 2001 and 2000 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 22
PART II - OTHER INFORMATION
-----------------------------
Item 1. LEGAL PROCEEDINGS 24
Item 2. EXHIBITS AND REPORTS ON FORM 8-K 24
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CellStar Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
(Amounts in thousands, except share data)
August 31, November 30,
2001 2000
------------- -------------
ASSETS
------
Current Assets:
Cash and cash equivalents $ 57,158 77,023
Restricted cash 40,615 42,622
Accounts receivable (less allowance for doubtful accounts of
$60,027 and $75,810, respectively) 199,395 345,996
Inventories 195,409 265,644
Deferred income tax assets 32,074 30,866
Prepaid expenses 22,765 25,470
------------- -------------
Total current assets 547,416 787,621
Property and equipment, net 20,068 22,015
Goodwill (less accumulated amortization of $7,102 and $17,408, respectively) 22,523 23,532
Deferred income tax assets 14,314 16,484
Other assets 6,538 9,172
------------- -------------
$ 610,859 858,824
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 193,932 361,006
Notes payable 50,912 129,970
Accrued expenses 27,309 22,744
Income taxes payable 673 2,948
Deferred income tax liabilities 1,421 6,573
------------- -------------
Total current liabilities 274,247 523,241
Long-term debt 150,000 150,000
------------- -------------
Total liabilities 424,247 673,241
------------- -------------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued - -
Common stock, $.01par value, 200,000,000 shares authorized;
60,142,221 shares issued and outstanding 602 602
Additional paid-in capital 81,944 81,298
Accumulated other comprehensive loss - foreign currency
translation adjustments (12,421) (10,861)
Retained earnings 116,487 114,544
------------- -------------
Total stockholders' equity 186,612 185,583
------------- -------------
$ 610,859 858,824
============= =============
See accompanying notes to unaudited consolidated financial statements.
3
CellStar Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands, except per share data)
Three months Nine months
ended August 31, ended August 31,
-------------------- -------------------------
2001 2000 2001 2000
------- --------- --------- -----------
Revenues $610,496 629,793 1,828,533 1,781,022
Cost of sales 579,427 606,516 1,728,404 1,706,325
-------- --------- --------- ---------
Gross profit 31,069 23,277 100,129 74,697
Selling, general and
administrative expenses 28,684 33,815 80,856 124,113
Impairment of assets - 4,930 - 4,930
Separation agreement 5,680 - 5,680 -
Restructuring charge (credit) - - 750 (157)
-------- --------- --------- ---------
Operating income (loss) (3,295) (15,468) 12,843 (54,189)
-------- --------- --------- ---------
Other income (expense):
Equity in loss of
affiliated companies (122) (408) (822) (789)
Gain on sale of assets - 6,200 933 6,200
Interest expense (3,533) (5,676) (12,497) (14,449)
Impairment of investment (2,215) - (2,215) -
Other, net 794 326 4,349 722
-------- --------- --------- ---------
Total other income (expense) (5,076) 442 (10,252) (8,316)
-------- --------- --------- ---------
Income (loss) before income taxes (8,371) (15,026) 2,591 (62,505)
Provision (benefit) for income taxes (2,531) (1,121) 648 (15,622)
-------- --------- --------- ---------
Net income (loss) $ (5,840) (13,905) 1,943 (46,883)
======== ========= ========= =========
Net income (loss) per share:
Basic $(0.10) (0.23) 0.03 (0.78)
======== ========= ========= =========
Diluted $(0.10) (0.23) 0.03 (0.78)
======== ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
4
CellStar Corporation and Subsidiaries
Consolidated Statement of Stockholders' Equity and Comprehensive Income
Nine months ended August 31, 2001
(Unaudited)
(In thousands)
Accumulated
Common Stock Additional other
---------------- paid-in comprehensive Retained
Shares Amount capital loss earnings Total
------ ------ ---------- ------------- -------- --------
Balance at November 30, 2000 60,142 $602 81,298 (10,861) 114,544 185,583
Comprehensive income:
Net income - - - - 1,943 1,943
Foreign currency translation adjustment - - (1,560) - (1,560)
-------
Total comprehensive income - 383
Stock options compensation expense - 646 - - 646
------ ---- ------ ------- ------- -------
Balance at August 31, 2001 60,142 $602 81,944 (12,421) 116,487 186,612
====== ==== ====== ======= ======= =======
See accompanying notes to unaudited consolidated financial statements.
5
CellStar Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended August 31, 2001 and 2000
(Unaudited)
(In thousands)
2001 2000
------------ -------------
Cash flows from operating activities:
Net income (loss) $ 1,943 (46,883)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation, amortization and impairment of assets 8,824 13,695
Equity in loss of affiliated companies 822 789
Gain on sale of assets (933) (6,200)
Deferred income taxes (4,190) (25,087)
Stock option compensation expense 646 -
Impairment of investment 2,215 -
Changes in operating assets and liabilities
net of effects from disposition of business:
Accounts receivable 142,388 22,350
Inventories 69,006 (45,835)
Prepaid expenses 1,633 197
Other assets 416 (3,616)
Accounts payable (162,353) 42,251
Accrued expenses 5,298 7,171
Income taxes payable (2,275) (6,209)
--------- --------
Net cash provided by (used in) operating activities 63,440 (47,377)
--------- --------
Cash flows from investing activities:
Proceeds from sale of assets 2,237 377
Change in restricted cash 2,007 (15,822)
Purchases of property and equipment (3,270) (4,141)
Acquisition of business, net of cash acquired (195) (176)
Purchase of investment - (4,144)
Investment in joint venture (735) -
--------- --------
Net cash provided by (used in) investing activities 44 (23,906)
--------- --------
Cash flows from financing activities:
Repayments on notes payable (385,802) (288,600)
Net borrowings on notes payable 305,021 357,829
Additions to deferred loan costs (2,568) -
Net proceeds from issuance of common stock - 370
--------- --------
Net cash provided by (used in) financing activities (83,349) 69,599
--------- --------
Net decrease in cash and cash equivalents (19,865) (1,684)
Cash and cash equivalents at beginning of period 77,023 70,498
--------- --------
Cash and cash equivalents at end of period $ 57,158 68,814
========= ========
See accompanying notes to unaudited consolidated financial statements
6
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/A for the year ended November 30, 2000 filed July 6,
2001.
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 and convertible notes.
7
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,
2001 and 2000, follows (in thousands, except per share data):
Three months ended
August 31,
----------------------------------
2001 2000
------- -------
Basic:
Net loss $(5,840) (13,905)
======= =======
Weighted average number of shares outstanding 60,142 60,142
======= =======
Net loss per share $ (0.10) (0.23)
======= =======
Diluted:
Net loss $(5,840) (13,905)
Interest on convertible notes, net of tax effect - -
------- -------
Adjusted net loss $(5,840) (13,905)
======= =======
Weighted average number of shares outstanding 60,142 60,142
Effect of dilutive securities:
Stock options - -
Convertible notes - -
------- -------
Weighted average number of shares outstanding including
effect of dilutive securities 60,142 60,142
======= =======
Net loss per share $ (0.10) (0.23)
======= =======
Nine months ended
August 31,
----------------------------------
2001 2000
------- -------
Basic:
Net income (loss) $ 1,943 (46,883)
======= =======
Weighted average number of shares outstanding 60,142 60,128
======= =======
Net income (loss) per share $ 0.03 (0.78)
======= =======
Diluted:
Net income (loss) $ 1,943 (46,883)
Interest on convertible notes, net of tax effect - -
------- -------
Adjusted net income (loss) $ 1,943 (46,883)
======= =======
Weighted average number of shares outstanding 60,142 60,128
Effect of dilutive securities:
Stock options 8 -
Convertible notes - -
------- -------
Weighted average number of shares outstanding including
effect of dilutive securities 60,150 60,128
======= =======
Net income (loss) per share $ 0.03 (0.78)
======= =======
8
Options outstanding at August 31, 2001, to purchase 7.1 million and 6.0
million shares of common stock for the three and nine months ended August
31, 2001 were not included in the computation of diluted earnings per
share (EPS) because their inclusion would have been anti-dilutive.
Options outstanding to purchase 4.7 million shares of common stock for the
three and nine months ended August 31, 2000, respectively were not
included in the computation of diluted 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, 200l and 2000, respectively.
(3) Segment and Related Information
The Company operates predominately 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, North America, Latin America, which includes Mexico and the
Company's Miami, Florida operations ("Miami"), and Europe. Revenues and
operating results of Miami are included in Latin America since Miami's
activities are primarily for export into Latin America. The Corporate
segment includes headquarter operations, primarily general and
administrative costs, and income and expenses not allocated to reportable
segments. Corporate segment assets primarily consist of cash, cash
equivalents and deferred income tax assets. Intersegment sales and
transfers are not significant.
Segment asset information as of August 31, 2001, and November 30, 2000,
follows (in thousands):
Asia- North
Pacific America Latin America Europe Corporate Total
--------------------------------------------------------------------------------------
Total assets
August 31, 2001 $260,604 118,081 123,592 46,190 62,392 610,859
November 30, 2000 289,677 172,527 256,907 56,824 82,889 858,824
9
Segment operations information for the three and nine months ended August
31, 2001 and 2000, follows (in thousands):
Asia- North
Pacific America Latin America Europe Corporate Total
-------- ------- ------------- ------ --------- -------
Three months ended August 31, 2001:
Revenues from external customers $331,720 155,649 69,488 53,639 - 610,496
Income (loss) before
interest and income taxes 6,197 8,235 (6,671) (1,815) (10,922) (4,976)
Three months ended August 31, 2000:
Revenues from external customers 270,787 155,653 136,630 66,723 - 629,793
Income (loss) before
interest and income taxes (278) 927 (6,985) 1,035 (5,259) (10,560)
2001 2000
-------- --------
Loss before interest and income taxes per segment
information......................................................................................... $ (4,976) (10,560)
Interest expense per the consolidated statements of
operations.......................................................................................... (3,533) (5,676)
Interest income included in other, net in the consolidated statements of
operations.......................................................................................... 138 1,210
-------- -------
Loss before income taxes per the consolidated statements of
operations.......................................................................................... $ (8,371) (15,026)
======== =======
Asia- North
Pacific America Latin America Europe Corporate Total
-------- ------- ------------- ------- --------- -------
Nine months ended August 31, 2001:
Revenues from external customers $939,225 407,154 307,686 174,468 - 1,828,533
Income (loss) before
interest and income taxes 19,785 19,302 (5,480) (2,918) (18,135) 12,554
Nine months ended August 31, 2000:
Revenues from external customers 744,093 336,063 452,362 248,504 - 1,781,022
Income (loss) before
interest and income taxes 12,905 (18,190) (30,057) 75 (16,169) (51,436)
2001 2000
-------- --------
Income (loss) before interest and income taxes per segment information............................. $ 12,554 (51,436)
Interest expense per the consolidated statements of operations..................................... (12,497) (14,449)
Interest income included in other, net in the consolidated statements of operations............... 2,534 3,380
-------- -------
Income (loss) before income taxes per the consolidated statements of operations.................... $ 2,591 (62,505)
======== =======
10
(4) Notes Payable
Notes payable consisted of the following at August 31, 2001 and November
30, 2000 (in thousands):
2001 2000
---------- ----------
Multicurrency revolving credit facility $ - 82,700
People's Republic of China ("PRC") credit facilities 39,081 44,428
Taiwan notes payable 8,989 -
Peru note payable 2,842 2,842
---------- ----------
$50,912 129,970
========== ==========
As of January 30, 2001, the Company had negotiated an amendment to its
Multicurrency Revolving Credit Facility, (the "Facility") that reduced the
amount of the Facility from $100.0 million to $86.4 million.
On February 27, 2001, the Company and its banking syndicate negotiated and
executed a Second Amended and Restated Credit Agreement that further
reduced the amount of the Facility to $85.0 million on February 27, 2001,
$74.0 million on July 31, 2001, $65.0 million on September 30, 2001, and
$50.0 million on December 15, 2001. Such Second Amended and Restated Credit
Agreement further (i) increased the applicable interest rate margin by 25
basis points, (ii) shortened the term of the Facility from June 1, 2002 to
March 1, 2002, (iii) provided additional collateral for such Facility in
the form of additional stock pledges and mortgages on real property, (iv)
provides for dominion of funds by the banks for the Company's U.S.
operations, (v) limited the borrowing base, and (vi) tightened restrictions
on the Company's ability to fund its operations, particularly its non-U.S.
operations.
As of July 3, 2001, the Company had negotiated an additional amendment to
its Facility that reduced the borrowing capacity under the Facility from
$85.0 million to $40.0 million and waived compliance with a covenant for
the quarter ended May 31, 2001.
At August 31, 2001 the Company had no borrowings under the Facility.
As of September 28, 2001, the Company had negotiated and finalized a new,
five-year, $60.0 million Loan and Security Agreement ("New Facility") with
a bank and terminated its previously-existing Facility. On October 12, 2001
the Company finalized an amendment to the New Facility increasing the
commitment amount from $60.0 million to $85.0 million. The New Facility
lowers the applicable interest rate margin by 25 basis points from its
level at August 31, 2001 of 125 basis points, provides a more extensive
borrowing base, more flexible financial covenants and greater flexibility
in funding foreign operations.
Fundings under the New Facility are limited by a borrowing base test, which
is measured weekly. Interest on borrowings under the New Facility is at the
London Interbank Offered Rate or at the bank's prime lending rate, plus an
applicable margin. The New Facility is also secured by a pledge of 100% of
the outstanding stock of all U.S. subsidiaries and 65% of the outstanding
stock of all first tier foreign subsidiaries. The New Facility is further
secured by the Company's domestic accounts receivable, inventory, property,
plant and equipment and all other domestic real property. The New Facility
contains, among other provisions, covenants relating to the maintenance of
minimum net worth and certain financial ratios, exchanging, refinancing or
extending of the Company's convertible notes, dividend payments, additional
debt, mergers and acquisitions and disposition of assets.
As a result of terminating its previously-existing Facility, the Company
will have an extraordinary loss on early extinguishment of debt in the
fourth quarter of 2001, primarily related to approximately $1.1 million in
deferred loan costs related to the Facility.
At August 31, 2001, the Company's operations in the PRC had two lines of
credit, one for USD $12.5 million and the second for RMB 220 million
(approximately USD $26.6 million), bearing interest at
11
7.16%, and from 5.30% to 5.58% respectively. The loans have maturity dates
through June 2002. Both lines of credit are fully collateralized by U.S.
dollar cash deposits. The cash deposits were made via intercompany loans
from the operating entity in Hong Kong as a mechanism to secure
repatriation of these funds. At August 31, 2001, the U.S. dollar equivalent
of $39.1 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, 2001 reflects USD $40.6 million in
cash that is restricted as collateral on these advances and a corresponding
USD $39.1 million in notes payable.
Assuming the Company is able to successfully complete the exchange offer
(note 5), the Company anticipates that its cash flow from operations, based
on current and anticipated levels of operations and aggressive efforts to
reduce inventories and accounts receivable, together with amounts available
under its new credit facility and existing unrestricted cash balances, will
be adequate to meet its anticipated cash requirements for the foreseeable
future. The Company's New Facility requires that the Company refinance,
exchange or extend the maturity of at least 80% of the $150 million
principal amount of the Company's 5% Convertible Subordinated Notes due
October 2002 (the "Notes") by April 2002, and failure to do so would result
in an event of default under the New Facility. If the Company is unable to
successfully complete the exchange offer or otherwise refinance or pay off
the Notes, it may be faced with the possibility of bankruptcy, because it
anticipates cash flow from operations, unrestricted cash balances and
available borrowings may be insufficient to meet its cash requirements,
including the payment of the Notes.
(5) Exchange Offer
The Company filed a registration statement on September 4, 2001 with the
Securities and Exchange Commission for a proposed exchange offer for its
Notes. The Company is offering to exchange up to 60,142,221 shares of its
common stock and $20 million in cash for up to $150 million of outstanding
Notes. The 60,142,221 shares would represent 50% of the Company's
outstanding common stock on a post-exchange-offer basis. For each $1,000
principal amount of Notes holders tender in the exchange offer, they would
receive approximately 400.94 shares of common stock and $133.33 in cash.
(6) Separation Agreement
The Company announced on July 6, 2001, that Alan H. Goldfield retired
effective immediately from the position of Chairman and CEO and that James
L. "Rocky" Johnson, who has served on the Board of Directors since March
1994 became Chairman of the Board, and Terry S. Parker, a member of the
Board of Directors and a former President and COO of CellStar, rejoined the
Company as Chief Executive Officer. The Company recorded expense of $5.7
million in the third quarter of 2001 related to the separation agreement
between the Company and Alan H. Goldfield. Included in the $5.7 million
charge is a cash payment of $4.3 million and stock option compensation
expense of $0.6 million.
(7) Impairment of Investment
For the three months ended August 31, 2001, the Company recorded an
impairment charge of $2.2 million to reduce the carrying value of its 3.5 %
investment in a Taiwan retailer. Due to the continuing economic and
political turmoil in Taiwan, the Company considered its investment in the
Taiwan retailer to be permanently impaired. As a result the Company reduced
the carrying value of the its 3.5% investment in the retailer to $1.9
million, which represents the Company's estimate of the fair value of its
3.5% interest in the Taiwan retailer.
(8) Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities"
("Statement 133"), amended by Statement 138 issued in June 2000. Effective
December 1, 2000, the Company adopted Statement 133. Given the Company's
current derivative activities, the adoption of Statement 133 did not have a
material effect on the Company's consolidated financial position and
results of operations.
12
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 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 periodically uses foreign currency forward contracts to reduce
exposure to exchange rate risks primarily associated with transactions in
the regular course of the Company's international operations. The Company
consolidates the bulk of its foreign exchange exposure related to
intercompany transactions in its international finance subsidiary. The
forward contracts establish the exchange rates at which the Company
purchases or sells the contracted amount of local currencies for specified
foreign currencies at a future date. The Company uses forward contracts,
which are short-term in nature (45 days to one year), and receives or pays
the difference between the contracted forward rate and the exchange rate at
the settlement date.
At August 31, 2001, the Company had French franc forward contracts with a
contractual amount of $1.1 million. The carrying amount and fair value of
these contracts are not significant. These derivatives are not accounted
for as hedges under Statement 133.
The Company does not hold or issue derivative financial instruments for
trading purposes.
(9) Contingencies
Refer to Part II, Item 1, "Legal Proceedings".
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company reported a net loss of $5.8 million, or $0.10 per diluted
share, for the third quarter of 2001, compared with a net loss of $13.9
million, or $0.23 per diluted share, for the same quarter last year.
Revenues for the quarter ended August 31, 2001, were $610.5 million, a
decrease of $19.3 million compared to $629.8 million in 2000. Excluding
revenues of $34.0 million in the third quarter of 2000 from a major account
in North America that has since been converted to a consignment basis,
revenues increased 2.5% in the current year third quarter. Gross profit
increased from $23.3 million in 2000 to $31.1 million in 2001. Selling,
general and administrative expenses for the third quarter of 2001 were
$28.7 million compared to $33.8 million in 2000.
The Company announced on July 6, 2001, that Alan H. Goldfield retired
effective immediately from the position of Chairman and CEO and that James
L. "Rocky" Johnson, who has served on the Board of Directors since March
1994 became Chairman of the Board, and Terry S. Parker, a member of the
Board of Directors and a former President and COO of CellStar, rejoined the
Company as Chief Executive Officer. The Company recorded expense of $5.7
million in the third quarter of 2001 related to the separation agreement
between the Company and Alan H. Goldfield. Included in the $5.7 million
charge is a cash payment of $4.3 million and stock option compensation
expense of $0.6 million.
The Company filed a registration statement on September 4, 2001 with the
Securities and Exchange Commission for a proposed exchange offer for its 5%
Convertible Subordinated Notes due October 2002 (the "Notes"). The Company
is offering to exchange up to 60,142,221 shares of its common stock and $20
million in cash for up to $150 million of outstanding Notes. The 60,142,221
shares would represent 50% of the Company's outstanding common stock on a
post-exchange-offer basis. For each $1,000 principal amount of Notes
holders tender in the exchange offer, they would receive approximately
400.94 shares of common stock and $133.33 in cash.
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, and continued to phase out a major portion of its North America
and Miami redistributor business.
Cautionary Statements
The Company's success will depend upon, among other things, its
ability to maintain its operating margins, continue to secure an adequate
supply of competitive products on a timely basis and on commercially
reasonable terms, service its indebtedness and comply with covenants,
secure adequate financial resources, continually turn its inventories and
accounts receivable, successfully manage growth (including monitoring
operations, controlling costs, maintaining adequate information systems and
effective inventory and credit controls), manage operations that are
geographically dispersed, achieve significant penetration in existing and
new geographic markets, and hire, train and retain qualified employees who
can effectively manage and operate its business.
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
the markets the Company can enter; inflation; changes in laws related to
foreign ownership of businesses abroad; foreign tax laws; changes in cost
of and access to capital; changes in import/export regulations, including
enforcement policies; "gray market" resales; and tariff and freight rates.
Political and other factors beyond the control of the Company, including
trade disputes among nations, internal political or economic instability in
any nation where the Company conducts business, and terrorist acts could
have a material adverse effect on the Company.
Assuming the Company is able to successfully complete the exchange
offer, the Company anticipates that its cash flow from operations, based on
current and anticipated levels of operations and aggressive efforts to
reduce inventories and accounts receivable, together with amounts available
under its new credit facility and existing unrestricted cash balances, will
be adequate to meet its anticipated cash requirements for the foreseeable
future. The Company's New Facility requires that the Company refinance,
exchange or extend the maturity of at least 80% of the $150 million
principal amount of the Notes by April 2002, and failure to do so would
result in an event of default under the New Facility. If the Company is
unable to successfully complete the exchange offer or otherwise refinance
or pay off the Notes, it may be faced with the possibility of bankruptcy,
because it anticipates cash flow from operations, unrestricted cash
balances and available borrowings may be insufficient to meet its cash
requirements, including the payment of the Notes.
14
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 the 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 customer and vendor relationships,
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.
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, 2001 and 2000:
Three months ended Nine months ended
August 31 August 31
---------------------------- ----------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues 100.0 % 100.0 100.0 100.0
Cost of sales 94.9 96.3 94.5 95.8
-------- -------- -------- --------
Gross profit 5.1 3.7 5.5 4.2
Selling, general and administrative expenses 4.7 5.4 4.4 7.0
Impairment of assets - 0.7 - 0.3
Separation agreement 0.9 - 0.3 -
Restructuring charge (credit) - - 0.1 -
-------- -------- -------- --------
Operating income (loss) (0.5) (2.4) 0.7 (3.1)
Other income (expense):
Equity in loss of affiliated companies - - (0.1) -
Gain on sale of assets - 1.0 0.1 0.4
Interest expense (0.6) (0.9) (0.7) (0.8)
Impairment of investment (0.4) - (0.1) -
Other, net 0.1 - 0.2 -
-------- -------- -------- --------
Total other income (expense) (0.9) 0.1 (0.6) (0.4)
-------- -------- -------- --------
Income (loss) before income taxes (1.4) (2.3) 0.1 (3.5)
Provision (benefit) for income taxes (0.4) (0.1) - (0.9)
-------- -------- -------- --------
Net income (loss) (1.0) % (2.2) 0.1 (2.6)
======== ======== ======== ========
Three Months Ended August 31, 2001 Compared to Three Months Ended
August 31, 2000
Revenues. The Company's revenues decreased $19.3 million, or 3.1%,
from $629.8 million to $610.5 million.
Revenues in the Asia-Pacific Region increased $60.9 million, or 22.5%,
from $270.8 million to $331.7 million. The Company's operations in the
People's Republic of China, including Hong Kong ("PRC"), provided $291.0
million in revenues, an increase of $105.4 million, or 56.8%, from $185.6
million. Growth in the PRC, where market penetration of handsets is
approximately 10% of the total population, is being driven by the
addition of new wireless subscribers. Revenues from the Company's
operations in Singapore increased $11.9 million to $24.4 million, or 95.5%,
due to third party subsidies and sales of two products for which the
Company has exclusive rights. Revenues from Taiwan decreased $55.7 million,
or 90.9% to $5.6 million. The Company's operations in Taiwan continue to be
affected by economic and political turmoil in the country. In addition, the
Company's supplier base in Taiwan is limited and there are no compelling
new products from its major supplier.
North American Region revenues were $155.6 million compared to $155.7
million in 2000. Early in the first quarter of 2001, the Company converted
a major U.S. account to a consignment basis with fulfillment fees, which
will reduce revenue potential for the 2001 fiscal year by approximately
$100
15
million. Revenues for the third quarter of 2000 on a comparable basis were
$121.6 million. The conversion to consignment is expected to have minimal
impact on net income, but will reduce inventory risk and the need for
working capital. The increase on a comparable basis was primarily
attributable to market expansion by a regional carrier customer.
The Company's operations in the Latin America Region provided $69.5
million of revenues, compared to $136.6 million in 2000, a 49.1% decrease.
Revenues in Mexico, the region's largest revenue contributor, were $41.5
million compared to $78.2 million in 2000, which benefited from strong
carrier promotions. The decrease was also due to reduced business with
major carrier customers. The Company sold its 51% interest in its Brazil
joint venture in August 2000. Revenues for Brazil were $14.9 million in
last year's third quarter. Revenues from the Venezuela operations were $4.3
million in 2000. The Company sold its Venezuela operations in December
2000. Revenues from the Company's Miami export operations were $14.3
million compared to $20.5 million in the third quarter a year ago. The
increased availability of in-country manufactured products in South America
has reduced exports from Miami. Combined revenues from CellStar's
Argentina, Chile, Colombia and Peru operations were $13.7 million in 2001
and $18.8 million in 2000.
The Company's European Region operations recorded revenues of $53.6
million, a decrease of $13.1 million from $66.7 million in 2000. The
handset market in Europe is highly penetrated and is increasingly driven by
replacement sales, which are depressed due to delays in the rollout of new
handset technologies and services.
Gross Profit. Gross profit increased $7.8 million from $23.3 million
to $31.1 million as a result of increases in the Asia Pacific and North
America Regions. These increase are due to better product mix as the
Company continues to emphasize inventory management. Gross profit in the
Latin America region was lower primarily due to the Company's operations in
Mexico. Gross margins in Mexico were significantly impacted by reduced
revenues to the Company's major carrier customers. Gross profit in 2000 in
Asia was also lower due to the Company's commitment to defend market share.
Gross profit in 2000 was lower in North America due in part to efforts to
improve the quality of its inventory by reducing the level of analog,
satellite, and older model products by selling these products at lower
margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $5.1 million from $33.8 million to $28.7
million. The decrease is principally due to the divestiture of the
Company's operations in Brazil and Venezuela which were sold in August 2000
and December 2000, respectively. In the third quarter of 2000, Brazil and
Venezuela incurred expenses of $3.8 million and $3.1 million, respectively.
These decreases were partially offset by increases due to costs associated
with business expansion activities in payroll and professional fees.
Selling, general and administrative expenses as a percentage of revenues
were 4.7% and 5.4% for 2001 and 2000, respectively.
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").
Separation Agreement. The Company announced on July 6, 2001, that Alan
H. Goldfield retired effective immediately from the position of Chairman
and CEO and that James L. "Rocky" Johnson, who has served on the Board of
Directors since March 1994 became Chairman of the Board, and Terry S.
Parker, a member of the Board of Directors and a former President and COO
of CellStar, rejoined the Company as Chief Executive Officer. The Company
recorded expense of $5.7 million in the third quarter of 2001 related to
the separation agreement between the Company and Alan H. Goldfield.
Included in the $5.7 million charge is a cash payment of $4.3 million and
stock option compensation expense of $0.6 million.
16
Equity in Loss of Affiliated Companies. Equity in loss of affiliated
companies was $0.4 million in 2000 due to losses from the Company's 49%
minority interest in CellStar Amtel. As a result of the continuing
deterioration in the Malaysia market, the Company intends to liquidate its
ownership in CellStar Amtel to limit further exposure. The Company will be
required to recognize future losses, if any, of CellStar Amtel up to the
amount of debt and payables of CellStar Amtel guaranteed by the Company.
The Company currently estimates the remaining exposure to be up to $1.0
million.
Gain on Sale of Assets. In 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. 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 decreased to $3.5 million from $5.7
million. This decrease was primarily related to the elimination of debt of
the Brazil operation, which was sold in August 2000. The decrease was also
a result of lower borrowing levels on the Company's Multicurrency Revolving
Credit Facility, partially offset by an increase in the amortization of
deferred loan costs as a result of the reduction in the amount of the
Facility.
Impairment of Investment. The Company recorded a $2.2 million
impairment charge in the third quarter of 2001 to reduce the carrying value
of its 3.5% investment in a Taiwan retailer. Due to the continuing economic
and political turmoil in Taiwan, the Company considered its investment in
the Taiwan retailer to be permanently impaired. As a result the Company
reduced the carrying value of the its 3.5% investment in the retailer to
$1.9 million which represents the Company's estimate of the fair value of
its 3.5% interest in the Taiwan retailer.
Other, Net. Other, net increased $0.5 million, from income of $0.3
million to income of $0.8 million, primarily due to losses in the second
quarter of 2000 on foreign currencies related to European operations.
Income Taxes. Income tax benefit increased from a benefit of $1.1
million in 2000 to a benefit of $2.5 million in 2001. The Company reduced
its 2001 estimated annual effective tax rate from 29% at the end of the
second quarter to 25% due to changes in the expected geographical mix of
income before tax. Included in the third quarter of 2001 is the benefit
related to this reduction.
Nine Months Ended August 31, 2001 Compared to Nine Months Ended August 31,
2000
Revenues. The Company's revenues increased $47.5 million, or 2.7%,
from $1,781.0 million to $1,828.5 million.
Revenues in the Asia-Pacific Region increased $195.1 million, or
26.2%, from $744.1 million to $939.2 million. The Company's operations in
the PRC provided $817.0 million in revenue, an increase of $310.2 million,
or 61.2%, from $506.8 million. Growth in the PRC, where market penetration
of handsets is approximately 10% of the total population, is being driven
by the addition of new wireless subscribers. Revenues from the Company's
operations in Singapore increased $31.7 million, or 101.6%, to $62.9
million due to third party subsidies and new products, including sales of
two products for which the Company has exclusive rights. Revenues from
Taiwan and The Philippines operations decreased $138.1 million, or 84.4%,
and $8.7 million, or 20.5%, respectively to $25.5 million and $33.8
million, respectively. The Company's operations in Taiwan and The
Philippines continue to be affected by economic and political turmoil in
the respective countries. In addition, the Company's supplier base in
Taiwan is limited and there are no new compelling products from its major
supplier.
North American Region revenues were $407.2 million, an increase of
$71.1 million, or 21.2% when compared to $336.1 million. U.S. revenues
continued to benefit from strong promotional activity by several customers,
as well as from the addition of new customers and expanded markets. Early
in the first quarter of 2001, the Company converted a major U.S. account to
a consignment basis with fulfillment fees, which will reduce revenue
potential for the 2001 fiscal year by approximately $100 million. Revenues
for the nine months ended August 31, 2001 and August 31, 2000, on a
comparable basis were
17
$376.4 million and $284.8 million, respectively. The conversion to
consignment is expected to have minimal impact on net income, but will
reduce inventory risk and the need for working capital.
The Latin American Region provided $307.7 million of revenues,
compared to $452.4 million, or a 32.0% decrease. Revenues in Mexico
decreased $76.5 from $261.0 million in 2000, which benefited from strong
carrier promotions, to $184.5 million in 2001. The decrease was primarily
due to reduced promotional activities by carrier customers and to reduced
business with carrier customers. Revenues for Brazil were $40.6 million in
2000. The Company's sold its Brazil operations in August 2000. Revenues
from the Venezuela operations were $30.6 million in 2000. The Company sold
its Venezuela operations in December 2000. Revenues from the Company's
operations in Miami decreased $24.1 million from 2000 as increased product
availability from in-country manufacturers in Latin America continued to
reduce exports from Miami. The Company phased out a major portion of its
redistributor business in its Miami and North American operations, starting
in the second quarter of 2000, due to the volatility of the redistributor
business, the relatively lower margins, and higher credit risks. As a
result the Company restructured its Miami operation to reduce the size and
cost of these operations, resulting in a charge of $0.8 million in the
second quarter of 2001. Combined revenues from the operations in Argentina,
Chile, Colombia and Peru increased $25.9 million to $83.6 million primarily
due to significant promotional activity by a major carrier in Colombia
during the first quarter of 2001.
The Company's Europe Region recorded revenues of $174.5 million, a
decrease of $74.0 million, or 29.8%, from $248.5 million, primarily due to
the Company's decision to curtail its U.K. international trading operations
in April 2000 (see "International Operations"). The handset market in
Europe is also highly penetrated and is increasingly driven by replacement
sales, which are depressed due to delays in the rollout of new handset
technologies and services.
Gross Profit. Gross profit increased $25.4 million from $74.7 million
to $100.1 million. During 2000, the Company incurred $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. In 2001, the Company
incurred $6.3 million in obsolescence. The increase in gross profit as a
percentage was due to better inventory management and product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $43.2 million from $124.1 million to
$80.9 million. This decrease was principally due to a reduction in bad debt
expense of $29.0 million from $33.3 million to $4.3 million in 2001. The
bad debt expense in 2000 was primarily from certain U.S.-based accounts
receivable, the collectibility of which had deteriorated significantly in
the second quarter of 2000 and which were further affected by the Company's
decision to sell 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. Bad debt expense in 2001, includes a recovery
of $3.9 million related to a receivable from a satellite handset customer
which was reserved in the fourth quarter of 2000. Selling, general and
administrative expenses related to the Brazil and Venezuela operations,
which were sold in August 2000 and December 2000, respectively, were $0.2
million in 2001 and $16.9 million in 2000 and included $2.3 million in bad
debt expense.
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").
Separation Agreement. The Company announced on July 6, 2001, that Alan
H. Goldfield retired effective immediately from the position of Chairman
and CEO and that James L. "Rocky" Johnson, who has served on the Board of
Directors since March 1994 became Chairman of the Board, and Terry S.
Parker, a member of the Board of Directors and a former President and COO
of CellStar, rejoined the Company as Chief Executive Officer The Company
recorded expense of $5.7 million in the third quarter of 2001 related to
the separation agreement between the Company and Alan H. Goldfield.
Included in the $5.7 million charge is a cash payment of $4.3 million and
stock option compensation expense of $0.6 million.
18
Restructuring Charge (Credit). In connection with its previously
announced intent, the Company restructured its Miami facilities in the
second quarter of 2001 to reduce the size and cost of those operations,
resulting in a charge of $0.8 million, primarily related to the impairment
of leasehold improvements.
Equity in Loss of Affiliated Companies. Equity in loss of affiliated
companies was $0.8 million in both 2001 and 2000 primarily due to losses
from the Company's 49% minority interest in CellStar Amtel. As a result of
the continuing deterioration in the Malaysia market, the Company intends to
liquidate its ownership in CellStar Amtel to limit further exposure. The
Company will be required to recognize future losses, if any, of CellStar
Amtel up to the amount of debt and payables of CellStar Amtel guaranteed by
the Company. The Company currently estimates the remaining exposure to be
up to $1.0 million.
Gain on Sale of Assets. The Company recorded a gain on sale of assets
of $0.9 million in 2001 primarily associated with the sale of its Venezuela
operations in December 2000. In 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. 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 decreased to $12.5 million in 2001
from $14.4 million in 2000. This decrease was primarily related to the
elimination of debt of the Brazil operation, which was sold in August 2000.
Impairment of Investment. For the three months ended August 31, 2001,
the Company recorded an impairment charge of $2.2 million to reduce the
carrying value of its 3.5 % investment in a Taiwan retailer. Due to the
continuing economic and political turmoil in Taiwan, the Company considered
its investment in the Taiwan retailer to be permanently impaired. As a
result the Company reduced the carrying value of the its 3.5% investment in
the retailer to $1.9 million which represents the Company's estimate of the
fair value of its 3.5% interest in the Taiwan retailer.
Other, Net. Other, net increased $3.6 million, from income of $0.7
million to income of $4.3 million, primarily due to gains on foreign
currencies related to European operations in 2001 compared with losses in
2000.
Income Taxes. Income tax expense increased from a benefit of $15.6
million in 2000 to expense of $0.6 million in 2001 due to the changes in
pretax income. The Company's annual effective tax rate for both 2001 and
2000 was 25%.
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
the markets the Company can enter; inflation; changes in laws related to
foreign ownership of businesses abroad; foreign tax laws; trade disputes
among nations; changes in cost of capital; changes in import/export
regulations, including enforcement policies, "gray market" resales, 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
material adverse effect on the Company.
During the third quarter ended August 31, 2000, the Company decided,
based on the current and future economic and political outlook in
Venezuela, to divest its operations in Venezuela. For the quarter ended
August 31, 2000, the Company recorded an impairment charge of $4.9 million
to reduce the carrying value of certain Venezuela assets, primarily
goodwill, to their estimated fair value. In December 2000, the Company
completed the sale of its Venezuela operations and recorded a gain of $1.1
million.
The Company's sales from its Miami operations to customers exporting
into South American countries continued to decline as a result of increased
in- country manufactured product availability in South
19
America, primarily Brazil. In the second quarter of 2000, the Company phased out
a major portion of its redistributor business in Miami. In connection with its
previously announced intent, the Company restructured its Miami facilities in
the second quarter of 2001 to reduce the size and cost of those operations,
resulting in a charge of $0.8 million, primarily related to the impairment of
leasehold improvements.
As a result of the continuing deterioration in the Malaysia market, the
Company intends to limit further exposure by divesting its 49% ownership in
CellStar Amtel. The carrying value of the investment at August 31, 2001 was
$35,000. During the quarter ended February 28, 2001, the Company incurred a $0.7
million loss related to the operations of CellStar Amtel. No additional losses
were incurred in the quarters ended May 31, 2001 and August 31, 2001. The
Company will be required to recognize future losses, if any, of CellStar Amtel
up to the amount of debt and payables of CellStar Amtel guaranteed by the
Company. The Company currently estimates the remaining exposure to be up to $1
million.
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. Since then the Company has
experienced operating losses in its U.K. operation.
Liquidity and Capital Resources
During the nine months ended August 31, 2001, the Company relied primarily
on cash available at November 30, 2000, funds generated from operations and
borrowings under its Revolving Credit Facility (the "Facility") to fund working
capital, capital expenditures and expansions. At August 31, 2001, the Company
had no borrowings under the Facility.
At August 31, 2001, the Company's operations in the PRC had two lines of
credit, one for USD $12.5 million and the second for RMB 220 million
(approximately USD $26.6 million), bearing interest at 7.16%, and from 5.30% to
5.58% respectively. The loans have maturity dates through June 2002. Both lines
of credit are fully collateralized by U.S. dollar cash deposits. The cash
deposits were made via intercompany loans from the operating entity in Hong Kong
as a mechanism to secure repatriation of these funds. At August 31, 2001, the
U.S. dollar equivalent of $39.1 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, 2001 reflects USD $40.6 million in
cash that is restricted as collateral on these advances and a corresponding USD
$39.1 million in notes payable.
In addition, the Company has notes payable in Taiwan and Peru totaling
$11.8 million.
As of September 28, 2001, the Company had negotiated and finalized a new,
five-year, $60.0 million Loan and Security Agreement ("New Facility") with a
bank and terminated its previously-existing Facility. On October 12, 2001 the
Company finalized an amendment to the New Facility increasing the commitment
amount from $60.0 million to $85.0 million. The New Facility lowers the
applicable interest rate margin by 25 basis points from its level at August 31,
2001 of 125 basis points, provides a more extensive borrowing base, more
flexible financial covenants and greater flexibility in funding foreign
operations.
Fundings under the New Facility are limited by a borrowing base test, which
is measured weekly. Interest on borrowings under the New Facility is at the
London Interbank Offered Rate or at the bank's prime lending rate, plus an
applicable margin. The New Facility is also secured by a pledge of 100% of the
outstanding stock of all U.S. subsidiaries and 65% of the outstanding stock of
all first tier foreign subsidiaries. The New Facility is further secured by the
Company's domestic accounts receivable, inventory, property, plant and equipment
and all other domestic real property. The New Facility contains, among other
provisions, covenants relating to the maintenance of minimum net worth and
certain financial ratios, exchanging, refinancing or extending of the Company's
convertible notes, dividend payments, additional debt, mergers and acquisitions
and disposition of assets. At October 19, 2001 the Company had no borrowings
under the New Facility.
20
As a result of terminating its previously-existing Facility, the Company
will have an extraordinary loss on early extinguishment of debt in the fourth
quarter of 2001, primarily related to approximately $1.1 million in deferred
loan costs related to the Facility.
The Company filed a registration statement on September 4, 2001 with the
Securities and Exchange Commission for a proposed exchange offer for its 5%
Convertible Subordinated Notes due October 2002 (the "Notes"). The Company is
offering to exchange up to 60,142,221 shares of its common stock and $20 million
in cash for up to $150 million of outstanding Notes. The 60,142,221 shares would
represent 50% of the Company's outstanding common stock on a
post-exchange-offer basis. For each $1,000 principal amount of Notes holders
tender in the exchange offer, they would receive approximately 400.94 shares of
common stock and $133.33 in cash.
Cash, cash equivalents, and restricted cash at August 31, 2001 were $97.8
million, compared to $119.6 million at November 30, 2000, primarily reflecting
the use of the cash to reduce the Facility and accounts payable.
Compared to November 30, 2000, accounts receivable decreased from $346.0
million to $199.4 million. Inventories declined to $195.4 million, from $265.6
million at November 30, 2000. Management has worked aggressively to reduce
accounts receivable and inventory levels through tightening of credit policies,
aggressive collection efforts, and better purchasing and inventory management.
Accounts payable declined to $193.9 million, compared to $361.0 million at
November 30, 2000.
Assuming the Company is able to successfully complete the exchange offer,
the Company anticipates that its cash flow from operations, based on current and
anticipated levels of operations and aggressive efforts to reduce inventories
and accounts receivable, together with amounts available under its new credit
facility and existing unrestricted cash balances, will be adequate to meet its
anticipated cash requirements for the foreseeable future. The Company's New
Facility requires that the Company refinance, exchange or extend the maturity of
at least 80% of the $150 million principal amount of the Notes by April 2002,
and failure to do so would result in an event of default under the New Facility.
If the Company is unable to successfully complete the exchange offer or
otherwise refinance or pay off the Notes, it may be faced with the possibility
of bankruptcy, because it anticipates cash flow from operations, unrestricted
cash balances and available borrowings may be insufficient to meet its cash
requirements, including the payment of the Notes.
Accounting Pronouncement Not Yet Adopted
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.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("Statement") No. 141, "Business
Combinations." Statement No. 141 changes the accounting for business
combinations to eliminate the pooling-of-interests method and requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. This statement also requires intangible assets that arise
from contractual or other legal rights, or that are capable of being separated
or divided from the acquired entity be recognized separately from goodwill.
Existing intangible assets and goodwill that were acquired in a prior purchase
business combination must be evaluated and any necessary reclassifications must
be made in order to conform with the new criteria in Statement No. 141 for
recognition apart from goodwill. The Company does not expect
21
the adoption of this statement to have a material effect on its consolidated
results of operations or financial position.
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." Statement No. 142 addresses the initial recognition and
measurement of intangible assets acquired (other than those acquired in a
business combination, which is addressed by Statement No. 141) and the
subsequent accounting for goodwill and other intangible assets after initial
recognition. Statement No. 142 eliminates the amortization of goodwill and
intangible assets with indefinite lives. Intangible assets with lives restricted
by contractual, legal, or other means will continue to be amortized over their
useful lives. Adoption of this statement will also require the Company to
reassess the useful lives of all intangible assets acquired, and make any
necessary amortization period adjustments. Goodwill and other intangible assets
not subject to amortization will be tested for impairment annually, or more
frequently if events or changes in circumstances indicate that the asset might
be impaired. Statement No.142 requires a two-step process for testing goodwill
for impairment. First, the fair value of each reporting unit will be compared to
its carrying value to determine whether an indication of impairment exists. If
an impairment is indicated, then the fair value of the reporting unit's goodwill
will be determined by allocating the unit's fair value to its assets and
liabilities (including any unrecognized intangible assets) as if the reporting
unit had been acquired in a business combination. The amount of impairment for
goodwill and other intangible assets will be measured as the excess of its
carrying value over its fair value. Goodwill and intangible assets acquired
after June 30, 2001 will be immediately subject to the amortization provisions
of this statement. For goodwill and other intangible assets acquired on or
before June 30, 2001, the Company is required to adopt Statement No. 142 no
later than the beginning of fiscal 2003, with early application permitted during
the first quarter of fiscal 2002. The Company does not expect the adoption of
this statement to have a material effect on its consolidated results of
operations or financial position.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) normal use of the asset.
Statement No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, the
Company will recognize a gain or loss on settlement. The Company is required to
adopt the provisions of Statement No. 143 no later than the beginning of fiscal
year 2003, with early adoption permitted. The Company does not expect the
adoption of this statement to have a material effect on its consolidated results
of operations or financial position.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While Statement No. 144 supersedes FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it
retains many of the fundamental provisions of that Statement. Statement No. 144
becomes effective for fiscal years beginning after December 15, 2001, with early
applications encouraged. The Company does not expect the adoption of this
statement to have a material effect on its consolidated results of operations or
financial position.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Risk
For the quarters ended August 31, 2001 and 2000, the Company recorded in
other income (expense), net foreign currency gains and (losses) of $92,000 and
$(0.9) million, respectively. The losses in 2000 were primarily due to the
revaluations of foreign currency related to the Company's European operations.
22
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 manages foreign currency risk by attempting to increase
prices of products sold at or above the anticipated exchange rate of the
local currency relative to the U.S. dollar, by indexing certain of its
accounts receivable to exchange rates in effect at the time of their
payment and by entering into foreign currency hedging instruments in
certain instances. The Company consolidates the bulk of its foreign
exchange exposure related to intercompany transactions in its international
finance subsidiary. These transactional exposures are managed using various
derivative alternatives depending on the length and size of the exposure.
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 periodically 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 risk of loss to the Company in the event of non-performance by any
counterparty under derivative financial instrument agreements is not
significant. Although the derivative financial instruments expose the
Company to market risk, fluctuations in the value of the derivatives are
mitigated by expected offsetting fluctuations in the matched instruments.
The Company uses foreign currency forward contracts to reduce exposure
to exchange rate risks primarily associated with transactions in the
regular course of the Company's international operations. The forward
contracts establish the exchange rates at which the Company purchases or
sells the contracted amount of local currencies for specified foreign
currencies at a future date. The Company uses forward contracts, which are
short-term in nature (45 days to one year), and receives or pays the
difference between the contracted forward rate and the exchange rate at the
settlement date.
At August 31, 2001, the Company had French franc forward contract with
a contractual amount of $1.1 million. The carrying amount and fair value of
theses contracts are not significant. These derivatives are not accounted
for as hedges under Statement 133.
Interest Rate Risk
The interest rate of the Company's previous Facility and New 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 August 31, 2001, the interest rates of borrowings under the
Facility ranged from 7.75% to 8.50%. A one percent change in variable
interest rates will not have a material impact on the Company. The Company
manages its borrowings under the Facility each business day to minimize
interest expenses.
The Company has short-terms borrowings in the PRC as discussed in
Liquidity and Capital Resources. The notes payable in Taiwan bear interest
at 5.98% and 7.2%, respectively, and the note payable in Peru does not bear
interest.
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
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 Telecom, Inc. ("Topp"), resulting in violations of Section 10(b) and
20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), 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 filed a Motion to Dismiss the consolidated complaint and the
Court granted that motion on August 3, 2000. The 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 Exchange Act,
and Rule 10b-5 promulgated thereunder. The Company filed a Motion to
Dismiss plaintiffs' Second Amended and Consolidated Complaint on November
2, 2000. On September 28, 2001, the Court entered an order and judgement to
dismiss the consolidated complaint with prejudice, and closed the
consolidated action for administrative purposes.
On August 3, 1998, the Company announced that the Securities and
Exchange Commission (SEC) was conducting an investigation of the Company
relating to its compliance with federal securities laws. On June 28, 2001,
the Company announced that the SEC has terminated the investigation with no
enforcement action recommended.
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 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 Incorporations"). (1)
3.2 Certificate of Amendment to Certificate of Incorporation.
(7)
3.3 Amended and Restated Bylaws of CellStar Corporation. (8)
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)(8)
4.2 Specimen Common Stock Certificate of CellStar Corporation. (2)
24
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, Preference and Rights of Series A
Preferred Stock of CellStar Corporation ("Certificate of
Designations"). (4)
4.6 Form of Rights Certificate. (4)
4.7 Certificate of Correction of Certificate of Designations. (5)
4.8 Indenture, dated as of October 14, 1997, by and between CellStar
Corporation and the Bank of New York, as Trustee. (6)
10.1 Loan and Security Agreement, dated as of September 28, 2001, by and
among CellStar Corporation and Each Of It's Subsidiaries That Are
Signatories Thereto, as Borrowers, The Lenders That Are Signatories
Thereto, as the Lenders and Foothill Capital Corporation, as the
Arranger and Administrative Agent. (9)
10.2 First Amendment To Loan Agreement, dated as of October 12, 2001, by
and among CellStar Corporation and Each Of It's Subsidiaries That Are
Signatories Thereto, as Borrowers, The Lenders That Are Signatories
Thereto, as the Lenders and Foothill Capital Corporation, as the
Arranger and Administrative Agent. (9)
10.3 Exhibit A to Consulting Agreement, dated as of July 5, 2001, by and
among CellStar Corporation and Alan H. Goldfield. (9) (10)
-----------------------------------
(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) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended May 31, 2001.
25
(9) Filed herewith.
(10) The exhibit is a management contract or compensatory plan or
agreement.
(B) Reports on Form 8-K
None.
26
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
Vice President, Corporate Controller
(Principal Accounting Officer)
Date: October 22, 2001
27
EXHIBIT INDEX
-------------
Exhibit
No. Description
------- --------------------------------------
3.1 Amended and Restated Certificate of Incorporation of CellStar
Corporation ("Certificate of Incorporations"). (1)
3.2 Certificate of Amendment to Certificate of Incorporation. (7)
3.3 Amended and Restated Bylaws of CellStar Corporation. (8)
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)(8)
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, Preference and Rights of Series A
Preferred Stock of CellStar Corporation ("Certificate of
Designations"). (4)
4.6 Form of Rights Certificate. (4)
4.7 Certificate of Correction of Certificate of Designations. (5)
4.8 Indenture, dated as of October 14, 1997, by and between CellStar
Corporation and the Bank of New York, as Trustee. (6)
10.1 Loan and Security Agreement, dated as of September 28, 2001, by and
among CellStar Corporation and Each Of It's Subsidiaries That Are
Signatories Thereto, as Borrowers, The Lenders That Are Signatories
Thereto, as the Lenders and Foothill Capital Corporation, as the
Arranger and Administrative Agent. (9)
10.2 First Amendment To Loan Agreement, dated as of October 12, 2001, by
and among CellStar Corporation and Each Of It's Subsidiaries That Are
Signatories Thereto, as Borrowers, The Lenders That Are Signatories
Thereto, as the Lenders and Foothill Capital Corporation, as the
Arranger and Administrative Agent. (9)
10.3 Exhibit A to Consulting Agreement, dated as of July 5, 2001, by and
among CellStar Corporation and Alan H. Goldfield. (9) (10)
-----------------------------------
(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.
28
(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) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended May 31, 2001.
(9) Filed herewith
(10) The exhibit is a management contract or compensatory plan or
agreement.
29