UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2002
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 July 5, 2002, there were 12,305,331 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)
May 31, 2002 and November 30, 2001 3
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three and six months ended May 31, 2002 and 2001 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (unaudited)
Six months ended May 31, 2002 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six months ended May 31, 2002 and 2001 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 25
PART II - OTHER INFORMATION
------- -----------------
Item 1. LEGAL PROCEEDINGS 26
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 26
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CellStar Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
(Amounts in thousands, except share data)
May 31, November 30,
2002 2001
---------- ------------
Assets
------
Current assets:
Cash and cash equivalents $ 70,749 47,474
Restricted cash 33,899 41,820
Accounts receivable (less allowance for doubtful accounts of
$59,245 and $57,359, respectively) 181,168 216,002
Inventories 162,927 218,927
Deferred income tax assets 34,640 35,915
Prepaid expenses 21,620 18,614
--------- ---------
Total current assets 505,003 578,752
Property and equipment, net 17,344 19,340
Goodwill (less accumulated amortization of $8,186 and $7,423, respectively) 21,446 22,060
Deferred income tax assets 18,102 18,102
Other assets 6,336 7,816
--------- ---------
Total assets $ 568,231 646,070
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Notes payable $ 82,856 52,644
5% Senior subordinated convertible notes 39,117 -
5% Convertible subordinated notes 19,560 150,000
Accounts payable 170,719 228,958
Accrued expenses 33,698 21,804
Income taxes payable 11,794 4,767
Deferred income tax liabilities 709 3,687
--------- ---------
Total current liabilities 358,453 461,860
12% Senior subordinated notes 12,374 -
Other long-term liabilities 5,419 -
--------- ---------
Total liabilities 376,246 461,860
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued - -
Common stock, $.01 par value, 200,000,000 shares authorized;
12,180,300 and 12,028,425 shares issued and outstanding,
respectively 122 120
Additional paid-in capital 83,103 82,443
Accumulated other comprehensive loss - foreign currency
translation adjustments (11,816) (13,447)
Retained earnings 120,576 115,094
--------- ---------
Total stockholders' equity 191,985 184,210
--------- ---------
Total liabilities and stockholders' equity $ 568,231 $ 646,070
========= =========
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 ended Six months ended
May 31, May 31,
--------------------- -------------------------
2002 2001 2002 2001
-------- -------- ---------- ---------
Revenues $573,262 572,879 1,202,505 1,218,037
Cost of sales 538,256 540,612 1,132,845 1,148,977
-------- -------- ---------- ---------
Gross profit 35,006 32,267 69,660 69,060
Selling, general and
administrative expenses 31,804 23,238 63,033 52,172
Impairment of assets 3,655 - 3,655 -
Severance and exit charges 2,566 - 2,566 -
Restructuring charge - 750 - 750
-------- -------- ---------- ---------
Operating income (loss) (3,019) 8,279 406 16,138
-------- -------- ---------- ---------
Other income (expense):
Equity in loss of
affiliated companies - - - (700)
Gain on sale of assets - - - 933
Interest expense (1,782) (3,875) (4,804) (8,964)
Other, net 463 815 705 3,555
-------- -------- ---------- ---------
Total other income (expense) (1,319) (3,060) (4,099) (5,176)
-------- -------- ---------- ---------
Income (loss) before income taxes
and extraordinary gain (4,338) 5,219 (3,693) 10,962
Provision for income taxes 1,617 1,628 1,804 3,179
-------- -------- ---------- ---------
Income (loss) before extraordinary gain (5,955) 3,591 (5,497) 7,783
Extraordinary gain on early extinguishment of
debt, net of tax 42 - 10,979 -
-------- -------- ---------- ---------
Net income (loss) $ (5,913) 3,591 5,482 7,783
======== ======== ========== =========
Net income (loss) per share:
Basic:
Income (loss) before extraordinary gain $ (0.49) 0.30 (0.45) 0.65
Extraordinary gain on early extinguishment
of debt, net of tax - - 0.91 -
-------- -------- ---------- ---------
Net income (loss) $ (0.49) 0.30 0.46 0.65
======== ======== ========== =========
Diluted:
Income (loss) before extraordinary gain $ (0.49) 0.30 (0.33) 0.65
Extraordinary gain on early extinguishment
of debt, net of tax - - 0.67 -
-------- -------- ---------- ---------
Net income (loss) $ (0.49) 0.30 0.34 0.65
======== ======== ========== =========
See accompanying notes to unaudited consolidated financial statements.
4
CellStar Corporation and Subsidiaries
Consolidated Statement of Stockholders' Equity and Comprehensive Income
Six months ended May 31, 2002
(Unaudited)
(In thousands)
Accumulated
Common Stock Additional other
------------------- paid-in comprehensive Retained
Shares Amount capital loss earnings Total
-------- ------ --------- -------------- -------- -------
Balance at November 30, 2001 12,028 $120 82,443 (13,447) 115,094 184,210
Comprehensive income:
Net income - - - - 5,482 5,482
Foreign currency translation adjustment - - - 1,631 - 1,631
-------
Total comprehensive income 7,113
Common stock issued with purchases of
5% convertible subordinated notes 146 2 629 - - 631
Conversion of 5% senior subordinated
convertible notes 6 - 31 - - 31
------- ------ -------- --------- ------- -------
Balance at May 31, 2002 12,180 $122 83,103 (11,816) 120,576 191,985
======= ====== ======== ========= ======= =======
See accompanying notes to unaudited consolidated financial statements.
5
CellStar Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Six months ended May 31, 2002 and 2001
(Unaudited)
(In thousands)
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 5,482 7,783
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and impairment of assets 7,695 5,629
Equity in loss of affiliated companies - 700
Gain on sale of assets - (933)
Extraordinary gain on early extinguishment of debt,
net of tax (10,979) -
Deferred income taxes (1,703) (7,889)
Changes in operating assets and liabilities
net of effects from disposition of business and from
extraordinary gain:
Accounts receivable 34,266 121,746
Inventories 56,000 98,504
Prepaid expenses (3,006) 7,499
Other assets 167 211
Accounts payable (58,239) (192,341)
Accrued expenses 5,809 (2,270)
Income taxes payable 853 2,239
-------- --------
Net cash provided by operating activities 36,345 40,878
-------- --------
Cash flows from investing activities:
Proceeds from sale of assets - 2,237
Change in restricted cash 7,921 1,310
Purchases of property and equipment (2,337) (2,060)
Acquisition of business, net of cash acquired (89) (195)
Investment in joint venture - (735)
-------- --------
Net cash provided by investing activities 5,495 557
-------- --------
Cash flows from financing activities:
Borrowings on notes payable 271,271 154,217
Repayments on notes payable (241,059) (226,479)
Payments on 5% convertible subordinated notes (48,329) -
Additions to deferred loan costs (448) (2,032)
-------- --------
Net cash used in financing activities (18,565) (74,294)
-------- --------
Net increase (decrease) in cash and cash equivalents 23,275 (32,859)
Cash and cash equivalents at beginning of period 47,474 77,023
-------- --------
Cash and cash equivalents at end of period $ 70,749 44,164
======== ========
See accompanying notes to unaudited consolidated financial statements
6
CellStar Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis for 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, 2001.
Certain prior period financial statement amounts have been reclassified to
conform to the current year presentation.
On February 12, 2002, the stockholders approved a one-for-five reverse
stock split. The reverse stock split was effective February 22, 2002. Where
appropriate, share numbers in this Form 10-Q have been adjusted to reflect
the reverse stock split.
(2) Net Income (Loss) Per Share
Basic net income (loss) per common share is based on the weighted average
number of common shares outstanding for the relevant period. Diluted net
income (loss) per common share is based on the weighted average number of
common shares outstanding plus the dilutive effect of potentially issuable
common shares pursuant to stock options and convertible notes.
7
A reconciliation of the numerators and denominators of the basic and
diluted net income (loss) per share computations for the three and six
months ended May 31, 2002 and 2001 follows (in thousands, except per share
data):
Three months ended Six months ended
May 31, May 31,
-------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Basic:
Income (loss) before extraordinary gain $ (5,955) 3,591 (5,497) 7,783
Extraordinary gain on early extinguishment of debt, net of tax 42 - 10,979 -
-------- -------- -------- --------
Net income (loss) $ (5,913) 3,591 5,482 7,783
======== ======== ======== ========
Weighted average number of shares outstanding 12,048 12,028 12,038 12,028
======== ======== ======== ========
Income (loss) per share before extraordinary gain $ (0.49) 0.30 (0.45) 0.65
Extraordinary gain per share on early extinguishment of debt,
net of tax - - 0.91 -
-------- -------- -------- --------
Net income (loss) per share $ (0.49) 0.30 0.46 0.65
======== ======== ======== ========
Diluted:
Income (loss) before extraordinary gain $ (5,955) 3,591 (5,497) 7,783
Extraordinary gain on early extinguishment of debt, net of tax 42 - 10,979 -
-------- -------- -------- --------
Net income (loss) (5,913) 3,591 5,482 7,783
Interest on 5% convertible subordinated notes, net of tax
effect - - - -
-------- -------- -------- --------
Adjusted net income (loss) $ (5,913) 3,591 5,482 7,783
======== ======== ======== ========
Weighted average number of shares outstanding 12,048 12,028 12,038 12,028
Effect of dilutive securities:
Stock options - 1 - 1
5% Senior subordinated convertible notes - - 4,301 -
5% Convertible subordinated notes - - - -
-------- -------- -------- --------
Weighted average number of shares outstanding including
effect of dilutive securities 12,048 12,029 16,339 12,029
======== ======== ======== ========
Income (loss) per share before extraordinary gain $ (0.49) 0.30 (0.33) 0.65
Extraordinary gain per share on early extinguishment of debt
net of tax - - 0.67 -
-------- -------- -------- --------
Net income (loss) per share $ (0.49) 0.30 0.34 0.65
======== ======== ======== ========
Options outstanding at May 31, 2002 and 2001, to purchase 1.5 million and
1.2 million shares of common stock for the three months ended May 31, 2002
and 2001 and 1.5 million and 1.1 million shares of common stock for the six
months ended May 31, 2002 and 2001 were not included in the computation of
diluted earnings per share (EPS) because their inclusion would have been
anti-dilutive.
The $39.1 million of 5% senior subordinated convertible notes issued in the
Exchange Offer (note 5) are convertible into 7.8 million shares of the
Company's common stock on or before November 30, 2002 and are considered as
dilutive securities beginning February 20, 2002. For the three months ended
May 31, 2002, the 5% senior subordinated convertible notes were
anti-dilutive due to the net loss in the quarter. The 5% convertible
subordinated notes were anti-dilutive for the three and six months ended
May 31, 2002 and 2001, 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
8
primarily on income before interest and income taxes in the following
reportable geographical regions: Asia-Pacific, North America, Latin
America, including Mexico and the Company's Miami, Florida operations
("Miami"), and Europe. Revenues and operations of Miami are included in
Latin America since Miami's product sales are primarily for export to South
American and Caribbean countries, either by the Company or through its
exporter customers. The Corporate segment includes headquarter operations
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 May 31, 2002, and November 30, 2001,
follows (in thousands):
Asia- North Latin
Pacific America America Europe Corporate Total
------- ------- ------- ------ --------- -------
Total assets
May 31, 2002 $274,656 99,330 114,012 39,487 40,746 568,231
November 30, 2001 263,268 143,598 130,481 48,885 59,838 646,070
Segment operations information for the three and six months ended May 31,
2002 and 2001, follows (in thousands):
Asia- North Latin
Pacific America America Europe Corporate Total
------- ------- ------- ------ --------- -------
Three months ended
May 31, 2002
Revenues from external customers $ 292,485 138,221 91,227 51,329 - 573,262
Income (loss) before
interest and income taxes 11,612 2,761 (5,244) (7,211) (4,918) (3,000)
Three months ended
May 31, 2001
Revenues from external customers 308,983 104,983 99,130 59,783 - 572,879
Income (loss) before
interest and income taxes 9,116 6,789 (1,998) (1,224) (4,475) 8,208
2002 2001
-------- -------
Income (loss) before interest and income taxes per segment information $ (3,000) 8,208
Interest expense per the consolidated statements of operations (1,782) (3,875)
Interest income included in other, net in the consolidated statements
of operations 444 886
-------- -------
Income (loss) before income taxes and extraordinary gain
per the consolidated statements of operations $ (4,338) 5,219
======== =======
9
Asia- North Latin
Pacific America America Europe Corporate Total
--------- ------- ------- ------ --------- ---------
Six months ended
May 31, 2002
Revenues from external customers $ 643,558 283,097 177,441 98,409 - 1,202,505
Income (loss) before
interest and income taxes 22,115 3,176 (7,253) (7,679) (10,072) 287
Six months ended
May 31, 2001
Revenues from external customers 607,505 251,505 238,198 120,829 - 1,218,037
Income (loss) before
interest and income taxes 13,588 11,067 1,191 (1,103) (7,213) 17,530
2002 2001
-------- -------
Income before interest and income taxes per segment information $ 287 17,530
Interest expense per the consolidated statements of operations (4,804) (8,964)
Interest income included in other, net in the consolidated statements
of operations 824 2,396
-------- -------
Income (loss) before income taxes and extraordinary gain
per the consolidated statements of operations $ (3,693) 10,962
======== =======
(4) Notes Payable
Notes payable consisted of the following at May 31, 2002 and November 30,
2001 (in thousands):
2002 2001
-------- --------
Revolving credit facility $ 31,148 -
People's Republic of China credit facilities 49,013 44,877
Taiwan notes payable 2,695 7,767
-------- --------
$ 82,856 52,644
======== ========
As of September 28, 2001, the Company had negotiated and finalized a new,
five-year, $60.0 million Loan and Security Agreement ("the Facility") with
a bank and terminated its previous multicurrency revolving credit facility.
On October 12, 2001 the Company finalized an amendment to the Facility
increasing the commitment amount from $60.0 million to $85.0 million.
Fundings under the Facility are limited by a borrowing base test, which is
measured weekly. Interest on borrowings under the Facility is at the London
Interbank Offered Rate or at the bank's prime lending rate, plus an
applicable margin. The 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 Facility is further secured by
the Company's domestic accounts receivable, inventory, property, plant and
equipment and all other domestic real property and intangible assets. The
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 5% convertible subordinated
notes, dividend payments, additional debt, mergers and acquisitions and
disposition of assets.
At May 31, 2002, the Company's operations in China had credit facilities in
U.S. dollars of $12.5 million bearing interest at 7.16%, and in RMB (local
currency in China) of 412 million (approximately USD $62.3 million),
bearing interest from 3.00% to 5.85%. The facilities have maturity dates
through December 2002. The credit facilities are partially collateralized
by U.S. dollar cash deposits and accounts receivable from the Company's
operations in China. The cash deposits were made via intercompany loans
10
from the operating entity in Hong Kong as a mechanism to secure
repatriation of these funds. At May 31, 2002, the U.S. dollar equivalent of
$49.0 million had been borrowed against the credit facilities in China. As
a result of this method of funding operations in China, the consolidated
balance sheet at May 31, 2002 also reflects USD $33.9 million in cash that
is restricted as collateral on these advances. In addition, the Company has
notes payable in Taiwan totaling $2.7 million, which matured December 2001
and have been extended with payments through August 2002 by oral agreement
of the parties, and bear interest at 3.95%.
Based upon current and anticipated levels of operations, the Company
anticipates that its cash flows 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) Extraordinary Gain on Early Extinguishment of Debt
On January 14, 2002, the Company filed an S-4 registration statement (the
"Exchange Offer"), with the Securities and Exchange Commission ("SEC"),
offering to exchange, for each $1,000 principal amount of its existing 5%
Convertible Subordinated Notes due October 2002, (the "Subordinated Notes")
$366.67 in cash and, at the election of the holder, one of the following
options: a) $400.94 principal amount of 12% Senior Subordinated Notes due
January 2007 (the "Senior Notes"), b) $320.75 principal amount of Senior
Notes and $80.19 principal amount of 5% Senior Subordinated Convertible
Notes due November 2002 (the "Senior Convertible Notes"), c) $400.94
principal amount of Senior Convertible Notes.
On February 20, 2002, the Company completed its Exchange Offer for its $150
million of Subordinated Notes. Holders owning $128.6 million of
Subordinated Notes exchanged them for $47.2 million in cash, $12.4 million
of Senior Notes, $39.1 million of Senior Convertible Notes. Holders owning
$21.4 million of the Subordinated Notes did not exchange them, and they are
now subordinate to the Company's Facility, the Senior Notes and the Senior
Convertible Notes.
The Company realized a pre-tax extraordinary gain on early extinguishment
of debt of $17.1 million during the first quarter of fiscal 2002 ($10.9
million after-tax) as a result of the exchange. The exchange was accounted
for as a troubled debt restructuring in accordance with Financial
Accounting Standards Board Statement No. 15. Accordingly, the total future
interest payments of $8.8 million on the Senior Notes and Senior
Convertible Notes have been accrued upon completion of the exchange and are
included in accrued expenses ($3.4 million) and other long-term liabilities
($5.4 million) in the accompanying May 31, 2002 balance sheet. The Company
will not recognize these payments as interest expense in future periods.
The Senior Convertible Notes are mandatorily convertible into the Company's
common stock on November 30, 2002, and bear interest at 5%, payable
semi-annually in arrears, in either cash or stock, at the Company's option,
on August 15, 2002, and November 30, 2002. In the event of bankruptcy the
Senior Convertible Note holders are entitled to cash equal to the face
value of the Senior Convertible Note plus accrued interest. The Senior
Convertible Notes are convertible into the Company's common stock at a
conversion price of $5.00 per share (adjusted for the effect of the
one-for-five reverse stock split effective on February 22, 2002) and may be
converted at any time prior to maturity at the option of the holders.
The $39.1 million Senior Convertible Notes issued in the Exchange Offer are
convertible into 7.8 million shares of the Company's common stock.
The Senior Notes mature January 15, 2007, and bear interest at 12%, payable
in cash in arrears semi-annually on February 15 and August 15, commencing
August 15, 2002. The Senior Notes contain certain covenants that restrict
the Company's ability to incur additional indebtedness; make investments,
loans
11
and advances; declare dividends or certain other distributions; create
liens; enter into sale-leaseback transactions; consolidate; merge; sell
assets and enter into transactions with affiliates.
As a result of the Exchange Offer, the Company was deemed to have undergone
an ownership change for purposes of the Internal Revenue Code. The Company
may have limitations beginning with the year ending November 30, 2002 on
the utilization of its U.S. tax carryforwards in accordance with Section
382 of the Internal Revenue Code. The Company does have sufficient tax
carryforwards to offset the tax liability on the extraordinary gain.
As of May 31, 2002, the Company had extinguished $1.8 million of the
Subordinated Notes not tendered in the Exchange Offer in a series of
transactions using various combinations of cash and the Company's common
stock.
The following summarizes the gain on early extinguishment of debt (in
thousands):
Exchange Other
Offer Transactions Total
---------- ------------ -------
Face amount of Subordinated Notes $ 128,616 1,824 130,440
Deferred loan costs related to Subordinated Notes (507) (5) (512)
--------- --------- --------
Book value of Subordinated Notes 128,109 1,819 129,928
Consideration and expenses
Cash 47,205 1,124 48,329
Senior Convertible Notes issued 39,148 - 39,148
Senior Notes issued 12,374 - 12,374
Common stock issued - 631 631
Future interest payments on notes issued 8,793 - 8,793
Expenses incurred 3,500 - 3,500
--------- --------- --------
Gain on exchange 17,089 64 17,153
Taxes 6,152 22 6,174
--------- --------- --------
Gain, net of tax $ 10,937 42 10,979
========= ========= ========
(6) Repositioning of Operations
In the second quarter of 2002, the Company decided as part of its plan to
reposition its operations that it will exit the United Kingdom (the
"U.K."), Peru and Argentina as soon as practicable. In addition, the
Company decided to address the balance of its European and Latin American
markets, excluding Mexico and Miami, over the next six months, assessing
each operation in view of its over-all long-term strategy and will divest
those operations if plans to enhance profitability and return on investment
cannot be developed.
As a result of the decision to exit the U.K., Peru and Argentina
operations, the Company recorded a net charge of $10.0 million for the
three months ended May 31, 2002. The following table summarizes the income
statement classification of the charge (in thousands):
Cost of sales $ 2,256
Selling, general & administrative 1,691
Impairment of assets 3,655
Severance and exit charges 2,566
-------
Operating loss 10,168
Tax benefit (184)
-------
$ 9,984
=======
12
Of the $2.6 million in severance and exit charges, all consisted of
cash-outlays, none of which had been paid as of May 31, 2002.
The severance and exit charge consists of the following (in thousands):
Severance - 80 employees $ 1,626
Lease accruals 780
Other 160
-------
$ 2,566
=======
The Company recorded an impairment charge of $3.7 million, which includes
$2.2 million for accumulated foreign currency translation adjustments as a
result of the Company's liquidation of its investments in each of these
operations and $1.5 million for property and equipment. The property and
equipment was reduced to estimated market value.
Following is a summary of the combined results of operations, including the
exit charge, in the U.K., Peru, and Argentina (in thousands):
Three months ended May 31, Six months ended May 31,
--------------------------- ---------------------------
2002 2001 2002 2001
--------- ---------- -------- -------
Revenues $ 32,641 37,915 59,629 72,370
Cost of sales 33,476 36,868 59,242 69,728
--------- -------- -------- -------
Gross profit (835) 1,047 387 2,642
Selling, general and
administrative expenses 3,981 2,452 5,938 4,732
Impairment of assets 3,655 - 3,655 -
Severance and exit charges 2,566 - 2,566 -
--------- -------- -------- -------
Operating loss $ (11,037) (1,405) (11,772) (2,090)
========= ======== ======== =======
(7) 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 $5.9 million, or $0.49 per diluted share, for
the second quarter of 2002, compared with net income of $3.6 million, or $0.30
per diluted share, for the same quarter last year. Revenues for the quarter
ended May 31, 2002 were $573.3 million, slightly higher than the $572.9 million
in 2001. Gross profit increased from $32.3 million in 2001 to $35.0 million in
2002. Selling, general and administrative expenses for the second quarter of
2002 were $31.8 million compared to $23.2 million in 2001.
In the second quarter of 2002, the Company decided as part of its plan to
reposition its operations that it will exit the United Kingdom (the "U.K."),
Peru and Argentina as soon as practicable. In addition, the Company decided to
address the balance of its European and Latin American markets, excluding Mexico
and Miami, over the next six months, assessing each operation in view of its
over-all long-term strategy and will divest those operations if plans to enhance
profitability and return on investment cannot be developed.
As a result of the decision to exit the U.K., Peru and Argentina, the Company
recorded a net charge of $10.0 million for the three months ended May 31, 2002.
The following table summarizes the income statement classification of the charge
(in thousands):
Cost of sales $ 2,256
Selling, general & administrative 1,691
Impairment of assets 3,655
Severance and exit charges 2,566
-------
Operating loss 10,168
Tax benefit (184)
-------
$ 9,984
=======
In connection with the repositioning of its operations, the Company announced
that Dale H. Allardyce would resign from the position of President and Chief
Operating Officer and that Terry S. Parker, currently the Company's Chief
Executive Officer, would assume the duties of President and Chief Operating
Officer. Included in the exit charges is $0.6 million related to Mr. Allardyce's
separation.
On February 20, 2002, the Company completed its exchange offer (the "Exchange
Offer") for its $150 million 5% Convertible Subordinated Notes due October 2002
(the "Subordinated Notes"). Holders owning $128.6 million of Subordinated Notes
exchanged them for $47.2 million in cash, $12.4 million of 12% Senior
Subordinated Notes due January 2007 (the "Senior Notes"), and $39.1 million of
5% Senior Subordinated Convertible Notes due November 2002 (the "Senior
Convertible Notes"). Holders owning $21.4 million of the Subordinated Notes did
not exchange them, and they are now subordinate to the Company's domestic credit
facility, the Senior Notes and the Senior Convertible Notes.
The Company realized a pre-tax extraordinary gain on early extinguishment of
debt of $17.1 million during the first quarter of fiscal 2002 ($10.9 million
after-tax) as a result of the exchange. The exchange was accounted for as a
troubled debt restructuring in accordance with Financial Accounting Standards
Board Statement No. 15.
As of July 8, 2002, the Company had extinguished an additional $2.8 million of
the Subordinated Notes not tendered in the Exchange Offer in a series of
transactions using various combinations of cash and the Company's common stock.
Cautionary Statements
The Company's success will depend upon, among other things, economic and
wireless market conditions, and its ability to improve 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 meet covenant
requirements, 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), successfully manage the
repositioning of its operations, 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.
14
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. Such risks, and 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.
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 those listed
under "Cautionary Statements" above, 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 six months ended May 31, 2002 and 2001:
Three months Six months
ended May 31, ended May 31,
2002 2001 2002 2001
------ ------ ------ ------
Revenues 100.0 % 100.0 100.0 100.0
Cost of sales 93.9 94.4 94.2 94.3
------ ------ ------ ------
Gross profit 6.1 5.6 5.8 5.7
Selling, general and administrative expenses 5.5 4.1 5.3 4.3
Impairment of assets 0.6 - 0.3 -
Severance and exit charges 0.5 - 0.2 -
Restructuring charge - 0.1 - 0.1
------ ------ ------ ------
Operating income (loss) (0.5) 1.4 - 1.3
Other income (expense):
Equity in loss of affiliated companies - - - (0.1)
Gain on sale of assets - - - 0.1
Interest expense (0.3) (0.7) (0.4) (0.7)
Other, net 0.1 0.2 0.1 0.3
------ ------ ------ ------
Total other income (expense) (0.2) (0.5) (0.3) (0.4)
------ ------ ------ ------
Income (loss) before income taxes and
extraordinary gain (0.7) 0.9 (0.3) 0.9
Provision for income taxes 0.3 0.3 0.1 0.3
------ ------ ------ ------
Income (loss) before extraordinary gain (1.0) 0.6 (0.4) 0.6
Extraordinary gain on early extinguishment of
debt, net of tax - - 0.9 -
------ ------ ------ ------
Net income (loss) (1.0) % 0.6 0.5 0.6
====== ====== ====== ======
Three Months Ended May 31, 2002 Compared to Three Months Ended May 31, 2001
15
Revenues. The Company's revenues increased $0.4 million from $572.9 million to
$573.3 million.
Revenues in the Asia-Pacific Region decreased $16.5 million, or 5.6%, from
$309.0 million to $292.5 million. The Company's operations in the People's
Republic of China provided $249.7 million in revenues, an increase of $29.1
million, or 13.2%, from $220.6 million. Growth in the PRC, where market
penetration of handsets is approximately 13% of the total population, was driven
by increased market penetration. Revenues from the Company's operations in Hong
Kong decreased from $51.1 million to $1.9 million. As the availability in China
of in-country manufactured product has increased, sales to the Company's Hong
Kong based customers that ship products to the remainder of China have
decreased. Additionally, the Company's primary supplier in Hong Kong has
recently significantly reduced the supply of product available in Hong Kong to
encourage the purchase in China of in-country manufactured product. Revenues
from the Company's operations in Singapore increased $9.4 million to $30.9
million, or 43.9%, due to carrier promotions and increased sales to customers in
the India, Malaysia, and Middle Eastern markets. Revenues from Taiwan decreased
$1.9 million, or 33.9% to $3.7 million. The Company's supplier base in Taiwan is
limited, and there were no compelling new products from its major supplier.
Revenues in the Philippines declined from $10.2 million to $6.3 million,
primarily due to a large customer purchasing directly from the manufacturer.
North American Region revenues were $138.2 million, an increase of $33.2 million
compared to $105.0 million in 2001. This increase was primarily due to the
growth of a carrier customer, new products, and the growth of the Company's
direct-to-user services.
The Company's operations in the Latin America Region provided $91.2 million of
revenues, compared to $99.1 million in 2001, a 8.0% decrease. Revenues in
Mexico, the region's largest revenue contributor, were $40.3 million compared to
$66.9 million in 2001 due to reduced business with a large carrier customer.
Revenues from the Company's Miami export operations were $14.4 million compared
to $13.5 million in the second quarter a year ago primarily due to increased
business with customers in Central America and the Caribbean. Combined revenues
from the Company's Chile and Colombia operations were $26.5 million in 2002 and
$11.6 million in 2001. The increase was a result of significant promotional
activity during the second quarter of 2002 by a major carrier in Colombia.
Combined revenues from the Argentina and Peru operations were $10.0 million in
2002 and $7.1 million in 2001.
The Company's European Region operations revenues were $51.3 million, a decrease
of $8.5 million from $59.8 million in 2001. The handset market in Europe is
highly penetrated and is increasingly driven by replacement sales, which were
depressed due to delays in the rollout and acceptance of new handset
technologies and services. Revenues from the Company's U.K. operation were $22.6
million in 2002 and $30.8 million in 2001.
Gross Profit. Gross profit increased $2.7 million from $32.3 million to $35.0
million. Cost of sales in 2002 included a $2.3 million charge related to
inventory, the marketability of which was negatively impacted by the Company's
decision to exit the U.K., Peru and Argentina operations. Gross profit as a
percentage of revenues was 6.1% for the quarter ended May 31, 2002, compared to
5.6% for the prior year quarter. Margins improved as a result of changes in the
geographic mix of revenues and additional incentives from certain manufacturers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $8.6 million from $23.2 million to $31.8
million. This increase was primarily attributable to an increase in bad debt
expense of $4.8 million, from a credit of $1.8 million in 2001 to an expense of
$3.0 million in 2002. Bad debt expense in 2001 included 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 in 2002 included $1.7 million associated with the exit of the Company's
operations in the U.K., Peru and Argentina, primarily bad debt expense related
to receivables, the collectibility of which was negatively impacted by the
Company's decision to exit these operations. This increase was also attributable
to increases in payroll and benefits, insurance premiums and other professional
fees. Selling, general and administrative expenses as a percentage of revenues
were 5.5% and 4.1%, for the second quarter of 2002 and 2001, respectively.
Impairment of Assets. In the second quarter of 2002, the Company decided as part
of its plan to reposition its operations that it will be exiting the U.K., Peru
and Argentina as soon as practicable. As a result of the decision to exit the
U.K., Peru and Argentina, an impairment charge of $3.7 million was incurred for
the three months ended May 31, 2002, which includes $2.2 million for accumulated
foreign currency translation adjustments as a result of the Company's
liquidation of its investment in each of these operations and $1.5 million for
property and equipment. The property and equipment was reduced to estimated
market value.
16
Severance and Exit Charges. In the second quarter of 2002, the Company recorded
$2.6 million in severance and exit charges related to the Company's decision to
exit the U.K., Peru and Argentina. Of the $2.6 million in severance and exit
charges, all consisted of cash-outlays, none of which had been paid as of
May 31, 2002.
The severance and exit charge consists of the following (in thousands):
Severance - 80 employees $ 1,626
Lease accruals 780
Other 160
-------
$ 2,566
=======
Restructuring Charge. 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.
Interest Expense. Interest expense decreased to $1.8 million from $3.9 million.
The decrease was primarily a result of the completion of the Company's Exchange
Offer on February 20, 2002.
Other, Net. Other, net decreased $0.3 million, from income of $0.8 million to
income of $0.5 million, primarily due to a reduction in interest income from
2001 to 2002.
Income Taxes. Income tax expense was $1.6 million for the second quarter of 2002
and 2001. The second quarter of 2002 includes a pre-tax charge of $10.2 million
as a result of the decision to exit the U.K., Peru and Argentina. The Company's
estimated annual effective tax rate, excluding the pre-tax charge of $10.2
million and the related tax benefit of $0.2 million, which is reflected in the
second quarter of 2002, was 30.7% for 2002 compared to 29.0% for 2001.
Extraordinary Gain on Early Extinguishment of Debt, Net of Tax. In the second
quarter of 2002, the Company extinguished $1.8 million of the Company's
Subordinated Notes not tendered in the Exchange Offer in a series of
transactions using various combinations of cash and the Company's common stock
resulting in an extraordinary gain of $42 thousand, net of taxes of $22
thousand.
Six Months Ended May 31, 2002 Compared to Six Months Ended May 31, 2001
Revenues. The Company's revenues decreased $15.5 million from $1,218.0 million
to $1,202.5 million.
Revenues in the Asia-Pacific Region increased $36.1 million, or 5.9%, from
$607.5 million to $643.6 million. The Company's operations in the People's
Republic of China provided $531.9 million in revenues, an increase of $96.6
million, or 22.2%, from $435.3 million. Growth in the PRC, where market
penetration of handsets is approximately 13% of the total population, was driven
by increased market penetration. Revenues from the Company's operation in Hong
Kong decreased from $90.7 million to $28.6 million. As the availability in China
of in-country manufactured product has increased, sales to the Company's Hong
Kong based customers that ship products to the remainder of China have
decreased. Additionally, the Company's primary supplier in Hong Kong has
recently significantly reduced the supply of product available in Hong Kong to
encourage the purchase in China of in-country manufactured product. Revenues
from the Company's operations in Singapore increased $23.5 million to $61.9
million, or 60.9%, due to carrier promotions and increased sales to customers in
the India, Malaysia, and Middle Eastern markets. Revenues from Taiwan decreased
$13.8 million, or 69.3% to $6.1 million. The Company's supplier base in Taiwan
is limited, and there were no compelling new products from its major supplier.
The Company's operations in Taiwan were also affected by the high market
penetration rate. Revenues in the Philippines declined from $23.1 million to
$14.9 million, primarily due to a large customer purchasing directly from the
manufacturer.
North American Region revenues were $283.1 million, an increase of $31.6 million
compared to $251.5 million in 2001. The increase in North America was primarily
from the growth of a carrier customer, new products, and the growth of the
Company's direct-to-user services, partially offset by the conversion of a major
U.S. account in the first quarter of 2001 to a consignment basis with
fulfillment fees.
The Company's operations in the Latin America Region provided $177.4 million of
revenues, compared to $238.2 million in 2001, a $60.8 million decrease. Revenues
in Mexico, the region's largest revenue contributor, were $85.8 million compared
to $143.0 million in 2001 due to reduced business with carrier customers.
Revenues from the Company's Miami export operations were $27.9 million compared
to $24.1 million a year ago primarily due to increased business with customers
in Central America and the Caribbean. Combined revenues from the Company's Chile
and Colombia operations were $47.7 million in 2002 and $55.1 million in 2001.
The decline was a result of
17
significant promotional activity during 2001 by a major carrier in Colombia.
Combined revenues for the Company's operations in Argentina and Peru were $16.1
million in 2002 and $14.7 million in 2001.
The Company's European Region operations recorded revenues of $98.4 million, a
decrease of $22.4 million from $120.8 million in 2001. The handset market in
Europe is highly penetrated and is increasingly driven by replacement sales,
which were depressed due to delays in the rollout and acceptance of new handset
technologies and services. Revenues from the Company's U.K. operations were
$43.5 million in 2002 and $57.6 million in 2001.
Gross Profit. Gross profit increased $0.6 million from $69.1 million to $69.7
million. Gross profit as a percentage of revenues was 5.8% for the six months
ended May 31, 2002, compared to 5.7% for the prior year. Cost of sales in 2002
included a $2.3 million charge related to inventory, the marketability of which
was negatively impacted by the Company's decision to exit the U.K., Peru and
Argentina operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $10.8 million from $52.2 million to $63.0
million. This increase was primarily attributable to an increase in payroll and
benefits, including $1.1 million in senior management transition costs, bad debt
expense, advertising and marketing, and insurance premiums. Bad debt expense was
$4.6 million and $1.9 million in 2002 and 2001 respectively. Bad debt expense in
2001 included 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 in 2002 included $1.7 million
associated with the closure of the Company's operations in the U.K., Peru and
Argentina, primarily bad debt expense related to receivables, the collectibility
of which was negatively impacted by the Company's decision to exit these
operations. Selling, general and administrative expenses as a percentage of
revenues were 5.3% and 4.3%, for the six months ended May 31, 2002 and 2001,
respectively.
Impairment of Assets. In the second quarter of 2002, the Company decided as part
of its plan to reposition its operations that it will be exiting the U.K., Peru
and Argentina as soon as practicable. As a result of the decision to exit the
U.K., Peru and Argentina, an impairment charge of $3.7 million was incurred for
the three months ended May 31, 2002, which included $2.2 million for accumulated
foreign currency translation adjustments as a result of the Company's
liquidation of its investment in each of these operations and $1.5 million for
property and equipment. The property and equipment was reduced to estimated
market value.
Severance and Exit Charges. In the second quarter of 2002, the Company recorded
$2.6 million in severance and exit charges related to the Company's decision to
exit the U.K., Peru and Argentina. Of the $2.6 million in severance and exit
charges, all consisted of cash-outlays, none of which had been paid as of
May 31, 2002.
The severance and exit charge consists of the following (in thousands):
Severance - 80 employees $ 1,626
Lease accruals 780
Other 160
-------
$ 2,566
=======
Restructuring Charge. 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.
Gain on Sale of Assets. During the first quarter ended 2001, the Company
recorded a gain on sale of assets of $0.9 million primarily associated with the
sale of its Venezuela operations in December 2000.
Equity in Loss of Affiliated Companies. Equity in loss of affiliated companies
was $0.7 million in 2001 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 divested its ownership in CellStar Amtel. However, 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 previously guaranteed by
the Company, until such guarantees are released. The Company currently does not
anticipate that any further losses will be recognized.
Interest Expense. Interest expense decreased to $4.8 million from $9.0 million.
The decrease was primarily a result of lower borrowing levels, lower interest
rate on the Company's domestic credit facility and the completion of the
Company's Exchange Offer on February 20, 2002.
Other, Net. Other, net decreased $2.9 million, from income of $3.6 million to
income of $0.7 million, primarily due to a gain of $1.1 million in the first
quarter of 2001 on foreign currencies related to European operations compared
18
to a loss of $0.1 million in 2002 and to a reduction in interest income from
$2.4 million in 2001 compared to $0.8 million in 2002.
Income Taxes. Income tax expense decreased from an expense of $3.2 million in
2001 to an expense of $1.8 million in 2002 primarily due to lower pre-tax
income. The second quarter of 2002 includes a pre-tax charge of $10.2 million as
a result of the decision to exit the U.K., Peru and Argentina. The Company's
estimated annual effective tax rate, excluding the pre-tax charge of $10.2
million and the related tax benefit of $0.2 million, which is reflected in the
second quarter of 2002, was 30.7% for 2002 compared to 29.0% for 2001.
Extraordinary Gain on Early Extinguishment of Debt, Net of Tax. In 2002, the
Company had a net extraordinary gain of $11.0 million primarily related to the
Company's Exchange Offer. (See note 5 and Liquidity and Capital Resources).
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; changes in cost of and access to capital; changes in
import/export regulations, including enforcement policies; "gray market"
resales; tariffs and freight rates. Such risks, and 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.
Revenues from the Company's operations in the PRC, including Hong Kong, were
$560.5 million and $526.0 million for the six months ended May 31, 2002 and 2001
respectively. As the availability in China of in-country manufactured product
increases, sales to the Company's Hong Kong based customers that ship products
to the remainder of China may decrease. Additionally, the Company's primary
supplier in Hong Kong has recently significantly reduced the supply of product
available in Hong Kong to encourage the purchase in China of in-country
manufactured product. Revenues from the Hong Kong operation were $28.6 million
and $90.7 million for the six months ended May 31, 2002 and 2001, respectively.
Repositioning of Operations
In April 2000, the Company curtailed a significant portion of its U.K.
international trading operations following third party theft and fraud losses.
The trading business involves the purchase of products from suppliers other than
manufacturers and the sale of those products to customers other than network
operators or their dealers and other representatives. As a result of the
curtailment, the Company experienced a reduction in revenues for the U.K.
operations after the first quarter of 2000 compared to 1999. Since the
curtailment, the Company has experienced operating losses in its U.K.
operations.
In the fourth quarter of 2000, the Company recorded a non-cash goodwill
impairment charge of $6.4 million related to the operations in Peru due to a
major carrier customer's proposed changes to an existing contract that adversely
changed the long-term prospects of the Peru operations. Since the second quarter
of 2001, the Company has incurred losses in its operations in Peru.
In December 2001, the Argentine government removed the fixed exchange rate
maintained between the Argentine peso and the U.S. dollar. The Argentine economy
has been in a state of turmoil over the last six months. As a result of the
Company's decision to exit the operations in Argentina, the Company recorded an
impairment charge of $0.9 million for accumulated foreign currency translation
adjustments.
In the second quarter of 2002, the Company decided as part of its plan to
reposition its operations that it will be exiting the U.K., Peru and Argentina
as soon as practicable. The Company determined that improving its position in
the U.K. market would require substantial investment, which the Company was not
willing to make. The economic climate in Peru and Argentina, coupled with the
small scale of the Company's operation in those countries, provided little
upside and significant risk. In addition, the Company has decided to address the
balance of its European and Latin American markets, excluding Mexico and Miami,
over the next six months, assessing each operation in view of its over-all
long-term strategy and will divest those operations if plans to enhance
profitability and return on investment cannot be developed. In conjunction with
this decision, the Company's revolving credit facility was amended to allow the
Company to pursue its exit strategy from these markets, and any similar decision
the Company
19
may make with respect to the balance of its European and South American
operations. As a result of the decision to exit the U.K., Peru and Argentina,
the Company recorded a pre-tax charge of $10.2 million for the three months
ended May 31, 2002. The Company expects to return to the U.S. an estimated $4.0
million in the next three months from the exited operations.
In fiscal 2000 and 2001, the Company incurred losses of $1.8 million and $0.7
million, respectively, related to its minority interest in CellStar Amtel. As a
result of the continuing deterioration in the Malaysia market, the Company
divested its 49% ownership in CellStar Amtel. However, 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 previously guaranteed by the Company
until such guarantees are released. The Company currently does not anticipate
any further losses to be recognized.
During the fourth quarter of 2001, the Company recorded a $3.0 million charge
for a value added tax prepaid asset in the Company's Mexico operations for which
the recoverability is uncertain.
Liquidity and Capital Resources
The following table summarizes the Company's contractual obligations (amounts in
thousands) and interest rates at May 31, 2002:
Payments Due By Period
--------------------------------------------------
Less than One to Three Four to Five More than
Total One Year Years Years Five Years
---------- --------- ------------ ------------ ----------
Notes payable
Revolving credit facility (variable interest, currently 5.75%) $ 31,148 31,148 - - -
People's Republic of China credit facilities (3.00% to 7.16%) 49,013 49,013 - - -
Taiwan notes payable (3.95%) 2,695 2,695 - - -
5% Senior convertible notes (mandatorily convertible) 39,117 39,117 - - -
5% Convertible subordinated notes 19,560 19,560 - - -
12% Senior subordinated notes 12,374 - - 12,374 -
Operating leases 8,021 3,157 1,753 1,231 1,880
---------- -------- -------- -------- -------
Total $ 161,928 144,690 1,753 13,605 1,880
========== ======== ======== ======== =======
During the period ended May 31, 2002, the Company relied primarily on cash
available at November 30, 2001, funds generated from operations and borrowings
under its revolving credit facilities to fund working capital, capital
expenditures and expansions.
At May 31, 2002, the Company's operations in China had credit facilities in U.S.
dollars of $12.5 million bearing interest at 7.16%, and in RMB (local currency
in China) of 412 million (approximately USD $62.3 million), bearing interest
from 3.00% to 5.85%. The facilities have maturity dates through December 2002.
The credit facilities are partially collateralized by U.S. dollar cash deposits
and accounts receivable from the Company's operations in China. 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 May 31, 2002, the U.S.
dollar equivalent of $49.0 million had been borrowed against the credit
facilities in China. As a result of this method of funding operations in China,
the consolidated balance sheet at May 31, 2002 also reflects USD $33.9 million
in cash that is restricted as collateral on these advances. In addition, the
Company has notes payable in Taiwan totaling $2.7 million, which matured
December 2001 and have been extended with payments through August 2002 by oral
agreement of the parties, and bear interest at 3.95%.
As of September 28, 2001, the Company had negotiated and finalized a new,
five-year, $60.0 million Loan and Security Agreement ("the Facility") with a
bank and terminated the previously existing facility. On October 12, 2001 the
Company finalized an amendment to the Facility increasing the commitment amount
from $60.0 million to $85.0 million.
Fundings under the Facility are limited by a borrowing base test, which is
measured weekly. Interest on borrowings under the Facility is at the London
Interbank Offered Rate or at the bank's prime lending rate, plus an applicable
margin. The 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 Facility is further secured by the Company's
domestic accounts receivable, inventory, property, plant and equipment and all
other domestic real property and intangible assets. The Facility contains, among
other provisions, covenants relating to the maintenance of minimum
20
net worth and certain financial ratios, exchanging, refinancing or extending of
the Company's Subordinated Notes, dividend payments, additional debt, mergers
and acquisitions and disposition of assets. At July 8, 2002, the Company had
$22.2 million in borrowings and $28.2 million in availability under the
Facility.
At November 30, 2001, long-term debt consisted of $150.0 million of the
Company's Subordinated Notes which were convertible into 1.1 million shares of
common stock at $138.34 per share (adjusted for the effect of the one-for-five
reverse stock split effective on February 22, 2002) at any time prior to
maturity.
On January 14, 2002, the Company filed an S-4 registration statement with the
Securities and Exchange Commission offering to exchange, for each $1,000
principal of the Subordinated Notes, $366.67 in cash and, at the election of the
holder, one of the following options: a) $400.94 principal amount of Senior
Notes , b) $320.75 principal amount of Senior Notes and $80.19 principal amount
of Senior Convertible Notes, or c) $400.94 principal amount of Senior
Convertible Notes.
On February 20, 2002, the Company completed its Exchange Offer for its
Subordinated Notes. Holders owning $128.6 million of Subordinated Notes
exchanged them for $47.2 million in cash, $12.4 million of Senior Notes and
$39.1 million of Senior Convertible Notes. Holders owning $21.4 million of the
Subordinated Notes did not exchange them and they are now subordinate to the
Company's Facility, the Senior Notes and the Senior Convertible Notes.
The Senior Convertible Notes are mandatorily convertible into the Company's
common stock on November 30, 2002, and bear interest at 5%, payable
semi-annually in arrears, in either cash or stock, at the Company's option, on
August 15, 2002, and November 30, 2002. In the event of bankruptcy the Senior
Convertible Note holders are entitled to cash equal to the face value of the
Senior Convertible Note plus accrued interest. The Senior Convertible Notes are
convertible into the Company's common stock at a split adjusted conversion price
of $5.00 per share (adjusted for the effect of the one-for-five reverse stock
split effective on February 22, 2002) and may be converted at any time prior to
maturity at the option of the holders. The $39.1 million of Senior Convertible
Notes are convertible into 7.8 million shares of common stock and are considered
as dilutive securities in calculating earnings per share effective February 20,
2002.
The Senior Notes mature January 15, 2007 and bear interest at 12%, payable in
cash in arrears semi-annually on February 15 and August 15, commencing August
15, 2002. The Senior Notes contain certain covenants that restrict the Company's
ability to incur additional indebtedness; make investments, loans and advances;
declare dividends or certain other distributions; create liens; enter into
sale-leaseback transactions; consolidate; merge; sell assets and enter into
transactions with affiliates.
The Company realized a pre-tax extraordinary gain on early extinguishment of
debt of $17.1 million during the first quarter of fiscal 2002 ($10.9 million
after-tax) as a result of the exchange. The exchange was accounted for as a
troubled debt restructuring in accordance with Financial Accounting Standards
Board Statement No. 15.
As of May 31, 2002, the Company had extinguished $1.8 million of the
Subordinated Notes not tendered in the Exchange Offer in a series of
transactions using various combinations of cash and the Company's common stock.
As of July 8, 2002 an additional $1.0 million of Subordinated Notes had been
extinguished using various combinations of cash and the Company's common stock.
Cash, cash equivalents, and restricted cash at May 31, 2002 were $104.6 million,
compared to $89.3 million at November 30, 2001.
Compared to November 30, 2001, accounts receivable decreased from $216.0 million
to $181.2 million at May 31, 2002. Inventories declined to $162.9 million at May
31, 2002, from $218.9 million at November 30, 2001. 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 $170.7 million
at May 31, 2002 compared to $229.0 million at November 30, 2001, primarily due
to lower inventory levels.
Based upon current and anticipated levels of operations, the Company anticipates
that its cash flows 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.
21
Critical Accounting Policies
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 of the Notes to the Consolidated Financial
Statements, included in the Company's Annual Report on Form 10-K for the year
ended November 30, 2001, includes a summary of the significant accounting
policies and methods used in the preparation of the Company's Consolidated
Financial Statements. The following is a brief discussion of the more critical
accounting policies and methods used by the Company.
(a) Significant Estimates
Management of the Company has made a number of estimates and assumptions related
to the reporting of assets and liabilities in preparation of the consolidated
financial statements in conformity with generally accepted accounting
principles. The most significant estimates relate to the allowance for doubtful
accounts, the reserve for inventory obsolescence, the deferred tax asset
valuation allowance and the determination of the recoverability of goodwill.
In determining the adequacy of the allowance for doubtful accounts, management
considers a number of factors including the aging of the receivable portfolio,
customer payment trends, financial condition of the customer, economic
conditions in the customer's country, and industry conditions. In some years,
the Company has experienced significant amounts of bad debt, including $51.5
million in fiscal year 2000. In 2000, the decline in the redistributor market in
the North American Region and Miami, the decision to exit the Brazil market, and
the competitive market conditions significantly impacted bad debt expense.
Actual amounts could differ significantly from management's estimates.
In determining the adequacy of the reserve for inventory obsolescence,
management considers a number of factors including the aging of the inventory,
recent sales trends, industry market conditions, and economic conditions. In
assessing the reserve, management also considers price protection credits or
other incentives the Company expects to receive from the vendor. In some years,
the Company has experienced significant amounts of inventory obsolescence,
including $32.3 million in fiscal year 2000. After a supply shortage in 1999,
there was an oversupply of product resulting in intense price competition in
2000 which significantly impacted obsolescence. Actual amounts could differ
significantly from management's estimates.
In assessing the realizability of deferred income tax assets, management
considers whether it is more likely than not that the deferred income tax assets
will be realized. The ultimate realization of deferred income tax assets is
dependent on the generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the
scheduled reversal of deferred income tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based on the
level of historical taxable income and projections for future taxable income
over the periods in which the deferred income tax assets are deductible,
management determines if it is more likely than not that the Company will
realize the benefits of these deductible differences. The amount of the deferred
income tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carry-forward period are
reduced.
As a result of the Exchange Offer, the Company was deemed to have undergone an
ownership change for purposes of the Internal Revenue Code. The Company may
have limitations beginning with the year ending November 30, 2002 on the
utilization of its U.S. tax carryforwards in accordance with Section 382 of the
Internal Revenue Code.
The Company does not provide for U.S. Federal income taxes or tax benefits on
the undistributed earnings and/or losses of its international subsidiaries
because earnings are reinvested and, in the opinion of management, should
continue to be reinvested indefinitely. At May 31, 2002, the Company had not
provided for U.S. Federal income taxes on earnings of international subsidiaries
of approximately $192.0 million. On distribution of these earnings in the form
of dividends or otherwise, the Company would be subject to both U.S. income
taxes and certain withholding taxes in the various international jurisdictions.
Determination of the related amount of unrecognized deferred U.S. income tax
liability is not practicable because of the complexities associated with this
hypothetical calculation.
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired and is amortized using the straight-line method over 20 years.
The Company assesses the recoverability of this intangible asset by determining
the estimated future cash flows related to such acquired assets. In the event
that goodwill is found to be carried at an amount that is in excess of estimated
future operating cash flows, then the goodwill will be adjusted to a level
commensurate with a discounted cash flow analysis using a discount rate
reflecting the Company's average cost of funds.
22
Management's estimates of future cash flows are based in part upon prior
performance, industry conditions, economic conditions, and vendor and customer
relationships. Changes in these factors or other factors could result in
significantly different cash flow estimates and an impairment charge. In 1999,
due to changing market conditions in Poland, the Company considered the
remaining $4.5 million in goodwill related to its Poland operations to be
impaired. In 2000, due to the current and expected future economic conditions in
Venezuela, the Company considered the goodwill related to the Venezuela
operations impaired and recorded a $3.9 million impairment charge. In 2000, a
major customer's proposed change to an existing contract that adversely changed
the long-term prospects of the Peru operations resulted in the Company recording
a goodwill impairment charge of $6.4 million.
At May 31, 2002, the Company had goodwill, net of accumulated amortization, of
$21.4 million related to its Asia-Pacific operations ($12.8 million) and its
remaining Europe operations in Sweden and the Netherlands ($8.6 million). The
Company is assessing its operations in Sweden and the Netherlands over the next
six months in view of the Company's long-term strategy and will divest these
operations, if plans to enhance profitability and return on investment cannot be
developed (see International Operations).
The Financial Accounting Standards Board has issued Statements No. 141 and No.
142 which will impact the Company's accounting policy for goodwill. A more
complete discussion of Statements No. 141 and No. 142 is included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the caption Accounting Pronouncements Not Yet Adopted in this
Form 10-Q.
(b) Revenue Recognition
For the Company's wholesale business, revenue is recognized when the customer
takes title and assumes risk of loss. If the customer takes title and assumes
risk of loss upon shipment, revenue is recognized on the shipment date. If the
customer takes title and assumes risk of loss upon delivery, revenue is
recognized upon delivery. In accordance with contractual agreements with
wireless service providers, the Company receives an activation commission for
obtaining subscribers for wireless services in connection with the Company's
retail operations. The agreements contain various provisions for additional
commissions ("residual commissions") based on subscriber usage. The agreements
also provide for the reduction or elimination of activation commissions if
subscribers deactivate service within stipulated periods. The Company recognizes
revenue for activation commissions on the wireless service providers' acceptance
of subscriber contracts and residual commissions when earned and provides an
allowance for estimated wireless service deactivations, which is reflected as a
reduction of accounts receivable and revenues in the accompanying consolidated
financial statements. The Company recognizes fee service revenue when the
service is completed.
(c) Vendor Credits
The Company recognizes price protection credits and other incentives from
vendors when such credits are received in writing, or if the credits are based
on sell-through to customers, when the credits have been received in writing and
the related product is sold. Vendor credits, excluding sell-through credits, are
applied against inventory and cost of goods sold, depending on whether the
related inventory is on-hand or has been previously sold at the time the credits
are received in writing. Sell-through credits are recorded as a reduction in
cost of goods sold in the period received.
Accounting Pronouncements Not Yet Adopted
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 the adoption of
this statement to have a material impact 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
23
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 impairment 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. At May
31, 2002, the Company had goodwill, net of accumulated amortization, of $21.4
million related to its Asia-Pacific operations ($12.8 million) and its remaining
Europe operations in Sweden and the Netherlands ($8.6 million). The Company is
assessing its operations in Sweden and the Netherlands over the next six months
in view of the Company's long-term strategy and will divest these operations, if
plans to enhance profitability and return on investment cannot be developed (see
International Operations). The Company has not yet determined the impact the
adoption of this statement will have 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
accrued 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.
In April 2002, the FASB issued Statement No. 145, "Revision of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Statement No. 145 rescinds Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt" and an amendment of Statement No. 4,
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." Statement No. 145 also rescinds Statement No. 44, "Accounting for
Intangible Assets of Motor Carriers". Statement No. 145 amends Statement No. 13,
"Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic affects that are similar to
sale-leaseback transactions. Statement No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. Under
Statement No. 4, all gains and losses from extinguishment of debt were required
to be aggregated and, if material, classified as an extraordinary item, net of
related income tax effect. Statement No. 145 eliminates Statement No. 4, and,
thus the exception to applying Opinion 30 to all gains and losses related to
extinguishments of debt (other than extinguishments of debt to satisfy
sinking-fund requirements). As a result, gains and losses from extinguishment of
debt should be classified as extraordinary items only if they meet the criteria
in Opinion 30. Applying the provisions of Opinion 30 will distinguish
transactions that are part of an entity's recurring operations from those that
are unusual or infrequent or that meet the criteria for classification as an
extraordinary item. Statement No. 145 becomes effective for fiscal years
beginning after May 15, 2002, with early applications encouraged. The Company
expects to reclassify the extraordinary gain on early extinguishment of debt
resulting from its Exchange Offer upon adoption. The Company does not expect the
adoption of the other portions of this statement to have a material effect on
its consolidated results of operations or financial position.
24
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Risk
For the quarter ended May 31, 2002 and 2001, the Company recorded net foreign
currency gains (losses) of $(0.6) million and $0.3 million, respectively in
costs of goods sold. For the quarter ended May 31, 2002 and 2001, the Company
recorded in other income (expense), net foreign currency losses of $38 thousand
and $20 thousand, respectively.
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.
The Company has foreign exchange exposure on the intercompany advances from the
Hong Kong entity to the China entity as the funds have been effectively
converted into RMB (local currency in China). The Company also has foreign
exchange exposure on the RMB lines of credit in China as they are collateralized
by U.S. dollars. For the quarter ended May 31, 2002, $249.7 million, or 43.6%,
of the Company's revenues were from the Company's operation in China. With the
exception of intercompany activity, all revenues and expenses of the China
operations are in RMB. The Company does not hold derivative instruments related
to the RMB.
In December 2001, the Argentine government removed the fixed exchange rate
maintained between the Argentine peso and the U.S. dollar. The Argentine economy
has been in a state of turmoil over the last six months. As a result of the
Company's decision to exit the operations in Argentina, the Company recorded an
impairment of $0.9 million for currency translation adjustments.
Derivative Financial Instruments
The Company periodically uses various derivative financial instruments as part
of an overall strategy to manage its 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 Company's risk of loss 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 its 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 May 31, 2002, the Company had no forward contracts and does not hold any
other derivative instruments.
Interest Rate Risk
The Company's borrowings and interest rates are summarized in tabular form under
the heading Liquidity and Capital Resources.
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. During the quarter ended May 31, 2002, the interest rate of
borrowings under the Facility was 5.75%. 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
expense.
25
The Company has short-term borrowings in China at rates varying from 3.00% to
7.16%. The notes payable in Taiwan bear interest at 3.95%. The Subordinated
Notes have a fixed coupon interest rate of 5.0% and are due in October 2002. The
Senior Convertible Notes bear interest at 5.0% and mature November 30, 2002. The
Senior Notes bear interest at 12.0% and mature January 15, 2007.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
On October 15, 2001, the Company announced that the results for the three and
six months ended May 31, 2001 would be restated to reflect certain accounting
adjustments. In October 2001, the Company received an inquiry from the SEC
requesting information concerning the restatement of earnings for the quarter
ended May 31, 2001. The Company believes that it has fully responded to such
request.
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 4. Submission of Matters to a Vote of Security Holders
The Company held its 2001 Annual Meeting of Stockholders on May 9, 2002 (the
"Annual Meeting"). At the Annual Meeting, the Company's stockholders elected
Dale V. Kesler as a Class I Director, to serve until the Annual Meeting of
Stockholders to be held in 2005. The total number of shares entitled to vote at
the Annual Meeting was 12,028,405 shares of Common Stock. A total of 7,713,399
shares of Common Stock were represented in person or by proxy at the Annual
Meeting. With regard to the election of Dave V. Kesler as a Class I Director,
7,503,728 votes were cast for his election and 209,671 votes were withheld from
voting for his election.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Third Amendment and Waiver to Loan Agreement dated as of May 9, 2002
by and among CellStar Corporation and each of CellStar Corporation's
subsidiaries signatory thereto, as Borrowers, the lenders signatory
thereto, as Lenders, and Foothill Capital Corporation, as Agent. (1)
10.2 Separation Agreement and Release dated as of June 20, 2002, by and
among between CellStar Ltd., CellStar Corporation and Dale Allardyce.
(1)(2)(3)
(b) Reports on Form 8-K.
None.
-----------------------------------
(1) Filed herewith.
(2) The exhibit is a management contract or compensatory plan or
arrangement.
(3) Mr. Allardyce's resignation was part of the Company's plan to
reposition its operations in the second quarter of 2002. The
charge related to the Separation Agreement and Release has been
included in the exit charge taken in the second quarter, and
therefore the Separation Agreement and Release is filed as an
exhibit to this Form 10-Q.
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/ Robert A. Kaiser
----------------------------------------
By: Robert A. Kaiser
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: July 11, 2002
27
EXHIBIT INDEX
-------------
Exhibit
No. Description
------- --------------------------------------------------------------------
10.1 Third Amendment and Waiver to Loan Agreement dated as of May 9, 2002
by and among CellStar Corporation and each of CellStar Corporation's
subsidiaries signatory thereto, as Borrowers, the lenders signatory
thereto, as Lenders, and Foothill Capital Corporation, as Agent. (1)
10.2 Separation Agreement and Release dated as of June 20, 2002, by and
among between CellStar Ltd., CellStar Corporation and Dale Allardyce.
(1)(2)(3)
-------------------------
(1) Filed herewith.
(2) The exhibit is a management contract or compensatory plan or
arrangement.
(3) Mr. Allardyce's resignation was part of the Company's plan to
reposition its operations in the second quarter of 2002. The
charge related to the Separation Agreement and Release has been
included in the exit charge taken in the second quarter, and
therefore the Separation Agreement and Release is filed as an
exhibit to this Form 10-Q.
28