UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 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 April 9, 2001, there were 60,142,221 outstanding shares of Common Stock,
$0.01 par value per share.
1
CELLSTAR CORPORATION
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION Number
------ --------------------- ------
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (unaudited)
February 28, 2001 and November 30, 2000 3
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three months ended February 28, 2001 and February 29, 2000 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (unaudited)
Three months ended February 28, 2001 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three months ended February 28, 2001 and February 29, 2000 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 15
PART II - OTHER INFORMATION
---------------------------
Item 1. LEGAL PROCEEDINGS 16
Item 2. CHANGES IN SECURITIES 17
Item 3. DEFAULTS UPON SENIOR SECURITIES 17
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
Item 5. OTHER INFORMATION 17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 18
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CellStar Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
(Amounts in thousands, except share data)
February 28, November 30,
2001 2000
----------- -----------
Assets
------
Current Assets:
Cash and cash equivalents $ 53,718 77,023
Restricted cash 41,757 42,622
Accounts receivable (less allowance for doubtful accounts of
$61,567 and $75,810, respectively) 249,462 345,996
Inventories 202,401 265,644
Deferred income tax assets 31,389 30,866
Prepaid expenses 20,374 25,470
-------- ---------
Total current assets 599,101 787,621
Property and equipment, net 19,516 22,015
Goodwill (less accumulated amortization of $6,398 and $17,408, respectively) 23,362 23,532
Deferred income tax assets 14,489 14,489
Other assets 9,493 9,172
-------- ---------
$665,961 856,829
======== =========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $192,916 355,463
Notes payable 99,410 129,970
Accrued expenses 24,483 22,744
Income taxes payable 1,954 2,948
Deferred income tax liabilities 4,849 6,573
-------- ---------
Total current liabilities 323,612 517,698
Long-term debt 150,000 150,000
-------- ---------
Total liabilities 473,612 667,698
-------- ---------
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 shares issued and outstanding 602 602
Additional paid-in capital 81,298 81,298
Accumulated other comprehensive loss - foreign currency
translation adjustments (11,835) (10,861)
Retained earnings 122,284 118,092
-------- ---------
Total stockholders' equity 192,349 189,131
-------- ---------
$665,961 856,829
======== =========
See accompanying notes to unaudited consolidated financial statements.
3
CellStar Corporation and Subsidiaries
Consolidated Statements of Operations
Three months ended February 28, 2001 and February 29, 2000
(Unaudited)
(Amounts in thousands, except per share data)
2001 2000
--------- -------
Revenues $ 645,158 589,859
Cost of sales 608,365 541,576
--------- -------
Gross profit 36,793 48,283
Selling, general and
administrative expenses 28,934 32,239
Restructuring charge (credit) - (157)
--------- -------
Operating income 7,859 16,201
--------- -------
Other income (expense):
Equity in income (loss) of
affiliated companies, net (700) 85
Gain on sale of assets 933 -
Interest expense (5,089) (4,071)
Other, net 2,740 214
--------- -------
Total other income (expense) (2,116) (3,772)
--------- -------
Income before income taxes 5,743 12,429
Provision for income taxes 1,551 2,983
--------- -------
Net income $ 4,192 9,446
========= =======
Net income per share:
Basic $0.07 0.16
========= =======
Diluted $0.07 0.16
========= =======
See accompanying notes to unaudited consolidated financial statements.
4
CellStar Corporation and Subsidiaries
Consolidated Statement of Stockholders' Equity and Comprehensive Income
Three months ended February 28, 2001
(Unaudited)
(In thousands)
Accumulated
Additional other comprehensive Retained
Common Stock paid-in capital loss earnings Total
---------------- --------------- ------------------- -------- -----
Shares Amount
------ ------
Balance at November 30, 2000 60,142 $ 602 81,298 (10,861) 118,092 189,131
Comprehensive income:
Net income - - - 4,192 4,192
Foreign currency translation adjustment - - (974) - (974)
-------
Total comprehensive income 3,218
------ ----- ------ -------- ------- -------
Balance at February 28, 2001 60,142 $ 602 81,298 (11,835) 122,284 192,349
====== ===== ====== ======== ======= =======
See accompanying notes to unaudited consolidated financial statements.
5
CellStar Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Three months ended February 28, 2001 and February 29, 2000
(Unaudited)
(In thousands)
2001 2000
---------- ----------
Cash flows from operating activities:
Net income $ 4,192 9,446
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,871 2,908
Equity in loss (income) of affiliated companies, net 700 (85)
Gain on sale of assets (933) -
Deferred income taxes (2,247) 1,503
Changes in operating assets and liabilities
net of effects of disposition of business:
Accounts receivable 93,152 4,664
Inventories 62,014 (59,654)
Prepaid expenses 4,024 (1,660)
Other assets (861) (753)
Accounts payable (157,826) 2,496
Accrued expenses 2,472 676
Income taxes payable (994) 566
---------- ----------
Net cash provided by (used in) operating activities 6,564 (39,893)
---------- ----------
Cash flows from investing activities:
Proceeds from sale of assets 2,237 -
Change in restricted cash 865 (213)
Purchases of property and equipment (1,676) (1,734)
Acquisition of business, net of cash acquired - (40)
Purchase of investment - (4,144)
Investment in joint venture (735) -
---------- ----------
Net cash provided by (used in) investing activities 691 (6,131)
---------- ----------
Cash flows from financing activities:
Net borrowings (repayments) on notes payable (30,560) 47,147
Net proceeds from issuance of common stock - 279
---------- ----------
Net cash provided by (used in) financing activities (30,560) 47,426
---------- ----------
Net increase (decrease) in cash and cash equivalents (23,305) 1,402
Cash and cash equivalents at beginning of period 77,023 70,498
---------- ----------
Cash and cash equivalents at end of period $ 53,718 71,900
========== ==========
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 for the year ended November 30, 2000.
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.
A reconciliation of the numerators and denominators of the basic and
diluted net income per share computations for the three months ended
February 28, 2001, and February 29, 2000, follows (in thousands, except per
share data):
2001 2000
--------- ---------
Basic:
Net income $ 4,192 9,446
========= =========
Weighted average number of shares outstanding 60,142 60,104
========= =========
Net income per share $ 0.07 0.16
========= =========
Diluted:
Net income $ 4,192 9,446
Interest on convertible notes, net of tax effect - -
--------- ---------
Adjusted net income $ 4,192 9,446
========= =========
Weighted average number of shares outstanding 60,142 60,104
Effect of dilutive securities:
Stock options 4 555
Convertible notes - -
--------- ---------
Weighted average number of shares outstanding including
effect of dilutive securities 60,146 60,659
========= =========
Net income per share $ 0.07 0.16
======= =======
7
Options outstanding at February 28, 2001 and February 29, 2000, to purchase
5.2 million and 2.0 million shares, respectively, of common stock 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 month periods ended February 28, 200l
and February 29, 2000.
(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 customers. 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 at February 28, 2001, and November 30, 2000,
follows (in thousands):
Asia- North
Pacific America Latin America Europe Corporate Total
--------- --------- ------------- ------ --------- -------
Total assets
February 28, 2001 $ 262,908 121,185 190,718 58,931 32,219 665,961
November 30, 2000 289,677 170,532 256,907 56,824 82,889 856,829
Segment operations information for the three months ended February 28,
2001, and February 29, 2000, follows (in thousands):
Asia- North
Pacific America Latin America Europe Corporate Total
--------- --------- ------------- ------ --------- -------
Three months ended
February 28, 2001:
Revenues from external customers $ 298,522 146,522 139,068 61,046 - 645,158
Income (loss) before
interest and income taxes 4,472 4,278 3,189 121 (2,738) 9,322
Three months ended
February 29, 2000:
Revenues from external customers 241,918 77,457 155,206 115,278 - 589,859
Income (loss) before
interest and income taxes 11,722 845 5,023 2,694 (4,665) 15,619
2001 2000
------- ------
Income before interest and income taxes per segment information....................................... $ 9,322 15,619
Interest expense per the consolidated statements of operations........................................ (5,089) (4,071)
Interest income included in other, net in the consolidated statements of operations................... 1,510 881
------- ------
Income before income taxes per the consolidated statements of operations.............................. $ 5,743 12,429
======= ======
8
(4) Notes Payable
Notes payable consisted of the following at February 28, 2001 and November
30, 2000 (in thousands):
2001 2000
---------- ----------
Multicurrency revolving credit facility $ 50,335 82,700
People's Republic of China ("PRC") credit facilities 38,505 44,428
Taiwan note payable 7,728 -
Peru note payable 2,842 2,842
---------- ---------
$ 99,410 129,970
========== =========
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
reduces 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) increases the applicable interest rate margin by 25
basis points, (ii) shortens the term of the Facility from June 1, 2002 to
March 1, 2002, (iii) provides 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) limits the borrowing base, and (vi) tightens restrictions
on the Company's ability to fund its operations, particularly its non-U.S.
operations.
At March 31, 2001 the Company had available $5.7 million of unused
borrowing capacity under the Facility.
At February 28, 2001, the Company's operations in the PRC had two lines of
credit, one for USD $12.5 million and the second for RMB 215 million
(approximately USD $26.0 million), bearing interest at 7.16% and 5.85%,
respectively. The loans have maturity dates through August 2001. The
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.
At February 28, 2001, the U.S. dollar equivalent of $38.5 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
February 28, 2001 reflects USD $41.8 million in cash that is restricted as
collateral on these advances and a corresponding USD $38.5 million in notes
payable.
The note payable in Taiwan matures December 2001 and bears interest at
6.93%.
Based upon current and anticipated levels of operations, and aggressive
efforts to reduce inventories and accounts receivable, the Company
anticipates that its cash flow from operations, together with amounts
available under its Facility and existing unrestricted cash balances, will
be adequate to meet its anticipated cash requirements in the foreseeable
future. In the event that existing unrestricted cash balances, cash flows
and available borrowings under the Facility are not sufficient to meet
future cash requirements, the Company may be required to reduce planned
expenditures or seek additional financing. The Company can provide no
assurances that reductions in planned expenditures would be sufficient to
cover shortfalls in available cash or that additional financing would be
available or, if available, offered on terms acceptable to the Company.
(5) 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
9
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.
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 has not entered into
any interest rate agreements at February 28, 2001.
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 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.
The Company recognized $1.0 million in net transaction gains during the
quarter ended February 28, 2001 related to forward contracts.
At February 28, 2001, the Company had Euro and Swedish Krona forward
contracts with a contractual amount of $3.2 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.
(6) Contingencies
Refer to Part II, Item 1, "Legal Proceedings".
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company reported net income of $4.2 million, or $0.07 per diluted
share, for the first quarter of 2001, compared with net income of $9.4
million, or $0.16 per diluted share, for the same quarter last year. First
quarter revenues for the period ended February 28, 2001, were $645.2
million, an increase of 9.4% when compared to $589.9 million for the same
period of 2000.
Gross margin was 5.7% of revenues compared to 8.2% of revenues for the
first quarter of 2000 primarily due to competitive market conditions.
Selling, general and administrative expenses for the first quarter were
$28.9 million compared to $32.2 million in 2000. The decline is primarily
attributable to the sale of the Company's Brazil and Venezuela operations
in August 2000 and December 2000, respectively. Selling, general and
administrative expenses declined to 4.5% of revenues from 5.5% in the first
quarter of 2000.
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
10
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 or internal political or economic instability in any
nation where the Company conducts business, could have a material adverse
effect on the Company.
Special Cautionary Notice Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements
relating to such matters as anticipated financial performance and business
prospects. When used in the Quarterly Report, the words "estimates", "may",
"intends", "expected", "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 months ended February 28, 2001, and February 29,
2000:
2001 2000
--------- --------
Revenues 100.0% 100.0
Cost of Sales 94.3 91.8
--------- --------
Gross profit 5.7 8.2
Selling, general and administrative expenses 4.5 5.5
Restructuring charge (credit) - -
--------- --------
Operating income 1.2 2.7
Other income (expense):
Equity in income (loss) of
affiliated companies (0.1) -
Gain on sale of assets 0.1 -
Interest expense (0.8) (0.6)
Other, net 0.5 -
--------- --------
Total other income (expense) (0.3) (0.6)
--------- --------
Income before income taxes 0.9 2.1
Provision for income taxes 0.2 0.5
--------- --------
Net income 0.7% 1.6
========= ========
Three Months Ended February 28, 2001 Compared to Three Months Ended
February 29, 2000
Revenues. The Company's revenues increased $55.3 million, or 9.4%,
from $589.9 million to $645.2 million.
Revenues in the Asia-Pacific Region increased $56.6 million, or 23.4%,
from $241.9 million to $298.5 million. The Company's operations in the
People's Republic of China, including Hong Kong ("PRC"), provided $254.3
million in revenues, an increase of $86.3 million, or 51.4%, from $168.0
million. Demand continued to increase in the PRC due to the build-up of
extensive sales channels. Revenues from Taiwan operations decreased $39.3
million to $14.3 million from $53.6 million in the first quarter of 2000.
Taiwan operations continue to be affected by economic and political
uncertainty. Revenues from the Company's operations in Singapore and The
Philippines increased $9.6 million, or 47.1%. This increase was primarily
due to increased demand in Singapore as a result of third party subsidies.
11
North American Region revenues were $146.5 million, an increase of $69.0
million, or 89.0%, when compared to $77.5 million in 2000. 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. 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 Company's operations in the Latin America Region provided $139.1
million of revenues, compared to $155.2 million in 2000, a 10.4% decrease.
Revenues in Mexico, the region's largest revenue contributor, were $76.1 million
compared to $82.8 million in 2000, which benefited from strong carrier
promotions. The Company sold its 51% interest in its Brazil joint venture in
August 2000. Revenues for Brazil were $13.2 million in last year's first
quarter. Revenues from the Venezuela operations declined $16.3 million from
$17.5 million to $1.2 million. The Company sold its Venezuela operations for a
gain of $1.1 million in December 2000. Revenues from the Company's Miami export
operations were $10.6 million compared to $21.6 million in the first quarter a
year ago, reflecting the Company's decision last year to phase out a major
portion of its redistributor channel and the increased availability of in-
country manufactured products in South America, which has reduced sales to
exporters by Miami. As a result, the Company intends to restructure the Miami
operation this fiscal year. Combined revenues from CellStar's Argentina, Chile,
Colombia and Peru operations were up 154.2% to $51.1 million from $20.1 million
in 2000 as a result of significant promotional activity during the quarter by a
major carrier in Colombia.
The Company's European Region operations recorded revenues of $61.0
million, a decrease of $54.3 million, or 47.1%, from $115.3 million in 2000.
This decrease is primarily due to the Company's decision in the second quarter
of 2000 to curtail its U.K.-based international trading operations. Sweden and
The Netherlands had revenues of $25.4 million and $8.9 million, respectively,
compared to $25.8 million and $8.8 million, respectively, in 2000.
Gross Profit. Gross profit decreased $11.5 million, or 23.8%, from $48.3
million to $36.8 million, and gross profit as a percentage of revenues decreased
from 8.2% in 2000 to 5.7% in 2001. The decrease in gross profit was due to
decreases in Latin America, Asia-Pacific and Europe. The decline in Latin
America is primarily due to Mexico, which experienced strong carrier promotions
in 2000 and due to the sale of the Company's operations in Brazil and Venezuela
in August 2000 and December 2000, respectively. The decline in Asia-Pacific is
primarily due to Taiwan where the operation continues to be affected by economic
and political uncertainty. The decline in the European Region was primarily due
to lower revenues as a result of the curtailment of the U.K. based international
trading operations. The declines in Latin America, Asia-Pacific and Europe were
partially offset by an increase in North America where revenues increased
substantially in 2001 compared to 2000. The decline in gross profit as a percent
of revenues was primarily due to competitive market conditions, particularly in
the Asia-Pacific Region.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $3.3 million, or 10.2%, from $32.2 million to
$28.9 million. This decrease was principally due to the sale of Brazil and
Venezuela operations in August 2000 and December 2000, respectively. Overall
selling, general and administrative expenses as a percentage of revenues
decreased to 4.5% from 5.5%.
Equity in Income (Loss) of Affiliated Companies. Equity in income (loss) of
affiliated companies decreased $0.8 million to a loss of $0.7 million 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 in the second quarter of 2001 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 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.
Interest Expense. Interest expense increased to $5.1 million from $4.1
million primarily as a result of higher borrowing levels on the Company's
Multicurrency Revolving Credit Facility. This
12
increase was partially offset by a decrease in interest expense related to the
Brazil operation, which was sold in August 2000.
Other, Net. Other, net increased $2.5 million, from income of $0.2 million
to income of $2.7 million, primarily due to gains on foreign currencies related
to European operations and increased interest income.
Income Taxes. Income tax expense decreased $1.4 million from $3.0 million
to $1.6 million. The decrease in income tax expense was primarily attributable
to a $6.7 million decrease in income before income taxes, partially offset by an
increase in the Company's effective tax rate to 27.0% from 24.0% The higher
effective tax rate was attributable to changes in the expected geographical mix
of income before income taxes.
International Operations
The Company's foreign operations are subject to various political and
economic risks including, but not limited to, the following: political
instability; 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 continue to decline as a result of increased in-
country manufactured product availability in South America, primarily Brazil. In
the second quarter of 2000, the Company phased out a major portion of its
redistributor business in Miami. Revenues for the quarter ended February 28,
2001 were $10.6 million. As a result, the Company intends to restructure the
Miami operation during fiscal 2001.
As a result of the continuing deterioration in the Malaysia market, the
Company intends to limit further exposure by divesting, in the second quarter of
2001, its 49% ownership in CellStar Amtel. The carrying value of the investment
at February 28, 2001 was $35 thousand. During the quarter ended February 28,
2001, the Company incurred a $0.7 million loss related to the operations of
CellStar Amtel. 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. As a result of the
curtailment, the Company experienced a reduction in revenues for the U.K.
operation for the first quarter of 2001 compared to 2000.
Liquidity and Capital Resources
During the quarter ended February 28, 2001, the Company relied primarily on
cash available at November 30, 2000, funds generated from operations and
borrowings under its Multicurrency Revolving Credit Facility (the "Facility") to
fund working capital, capital expenditures and expansions. At February 28, 2001,
the Company had borrowed $50.3 million under the Facility.
13
As of January 30, 2001, the Company had negotiated an amendment to its
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 reduces 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)
increases the applicable interest rate margin by 25 basis points, (ii) shortens
the term of the Facility from June 1, 2002 to March 1, 2002, (iii) provides
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) limits the borrowing base, and (vi)
tightens restrictions on the Company's ability to fund its operations,
particularly its non-U.S. operations.
At March 31, 2001 the Company had available $5.7 million of unused
borrowing capacity under the facility.
At February 28, 2001, the Company's operations in the PRC had two lines of
credit, one for USD $12.5 million and the second for RMB 215 million
(approximately USD $26.0 million), bearing interest at 7.16% and 5.85%,
respectively. The loans have maturity dates through August 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. At February 28, 2001, the
U.S. dollar equivalent of $38.5 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 February 28, 2001 reflects USD $41.8 million
in cash that is restricted as collateral on these advances and a corresponding
USD $38.5 million in notes payable.
In addition, the Company has notes payable in Taiwan and Peru totaling
$10.6 million.
Cash, cash equivalents, and restricted cash for the first quarter were
$95.5 million, compared to $119.6 million at November 30 2000, primarily
reflecting the use of the cash to reduce the Facility on February 27, 2001 in
conjunction with the amendment.
Compared to November 30, 2000, accounts receivable decreased from $346.0
million to $249.5 million. Inventories declined to $202.4 million, from $265.6
million at November 30, 2000. Accounts payable declined to $192.9 million,
compared to $355.5 million at November 30, 2000. The reduction in accounts
receivable and inventory was primarily due to 1) lower sales volume in the first
quarter of 2001 compared to the fourth quarter of 2000; 2) large transactions in
late fiscal 2000 which increased receivables and inventory; and 3) aggressive
efforts by the Company to reduce accounts receivable and inventories. The
decline in accounts payable corresponded to the decline in accounts receivable
and inventory.
Based upon current and anticipated levels of operations, and aggressive
efforts to reduce inventories and accounts receivable, the Company anticipates
that its cash flow from operations, together with amounts available under its
Facility and existing unrestricted cash balances, will be adequate to meet its
anticipated cash requirements in the foreseeable future. In the event that
existing unrestricted cash balances, cash flows and available borrowings under
the Facility are not sufficient to meet future cash requirements, the Company
may be required to reduce planned expenditures or seek additional financing. The
Company can provide no assurances that reductions in planned expenditures would
be sufficient to cover shortfalls in available cash or that additional financing
would be available or, if available, offered on terms acceptable to the Company.
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.
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Risk
For the quarter ended February 28, 2001, and February 29, 2000, the Company
recorded in other income (expense), net foreign currency gains and (losses) of
$1.1 million and ($0.7) million, respectively. These gains and losses were
primarily due 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 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 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. All counterparties are rated A or higher by Moody's and Standard
and Poor's. 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 should purchase or sell 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 February 28, 2001, the Company had Euro and Swedish Krona forward
contracts with a contractual amount of $3.2 million. The carrying amount and
fair value of these 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 Facility is an index rate at the time of
borrowing plus an applicable margin on certain borrowings. The interest rate is
based on either the agent bank's prime lending rate or the London Interbank
Offered Rate. Additionally, the applicable margin is subject to increases as the
Company's ratio of consolidated funded debt to consolidated cash flow increases.
During the quarter ended February 28, 2001, the interest rates of borrowings
under the Facility ranged from 8.3% to 10.0%. As a result of the February 27,
2001 amendment to the Facility, interest rates will increase by 25 basis points.
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.
15
The Company has short-terms borrowings in the PRC as discussed in Liquidity
and Capital Resources. The note payable in Taiwan bears interest at 6.93% 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.
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, but the Court has not
yet rendered a decision. The Company believes that is has fully complied with
all applicable securities laws and regulations and that it has meritorious
defenses to the allegations made in the Second Amended and Consolidated
Complaint. The Company intends to vigorously defend the consolidated action if
its Motion to Dismiss is denied.
On August 3, 1998, the Company announced that the Securities and Exchange
Commission is conducting an investigation of the Company relating to its
compliance with federal securities laws. The Company believes that it has fully
complied with all securities laws and regulations and is cooperating with the
Commission staff in its investigation.
The Company is a party to various other claims, legal actions and
complaints arising in the ordinary course of business.
Management believes that the disposition of these matters will not have a
materially adverse effect on the consolidated financial condition or results of
operations of the Company.
16
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
17
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. (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, 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 Second Amended and Restated Credit Agreement, dated February 27,
2001, by and among CellStar Corporation, the Financial
Institutions Signatory Thereto, and The Chase Manhattan Bank, as
Agent for such Financial Institutions. (8)
10.2 Form of Revolving Credit Promissory Note. (8)
10.3 Amendment, Ratification and Confirmation, dated as of February 27,
2001, by and between CellStar Corporation and The Chase Manhattan
Bank, as Agent for Financial Institutions Signatory to the Second
Amended and Restated Credit Agreement. (8)
10.4 Deed of Trust, dated February 27, 2001, granted by CellStar, Ltd.
to David L. Mendez, Trustee. (8)
10.5 First Amendment to Second Amended and Restated Credit Agreement
and Post Closing Matters Agreement, dated as of March 15, 2001, by
and among CellStar Corporation and the Financial Institutions
Signatory Thereto. (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.
18
(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.
19
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: April 11, 2001
20
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. (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, 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 Second Amended and Restated Credit Agreement, dated February 27, 2001,
by and among CellStar Corporation, the Financial Institutions Signatory
Thereto, and The Chase Manhattan Bank, as Agent for such Financial
Institutions. (8)
10.2 Form of Revolving Credit Promissory Note. (8)
10.3 Amendment, Ratification and Confirmation, dated as of February 27,
2001, by and between CellStar Corporation and The Chase Manhattan Bank,
as Agent for Financial Institutions Signatory to the Second Amended and
Restated Credit Agreement. (8)
10.4 Deed of Trust, dated February 27, 2001, granted by CellStar, Ltd. to
David L. Mendez, Trustee. (8)
10.5 First Amendment to Second Amended and Restated Credit Agreement and
Post Closing Matters Agreement, dated as of March 15, 2001, by and
among CellStar Corporation and the Financial Institutions Signatory
Thereto. (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.
21
(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.
22