For the quarterly period ended August 31, 2004

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jt46AOwrF25zyvGrjvxZ+6nOduHBWpu5WcClyYhCIJhEfKOSh9N7xWRPj3PxH3mL TcDhFmxEDqjKN1wKJXytJw== 0001193125-04-171602.txt : 20041014 0001193125-04-171602.hdr.sgml : 20041014 20041014165809 ACCESSION NUMBER: 0001193125-04-171602 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040831 FILED AS OF DATE: 20041014 DATE AS OF CHANGE: 20041014 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CELLSTAR CORP CENTRAL INDEX KEY: 0000913590 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 752479727 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22972 FILM NUMBER: 041079352 BUSINESS ADDRESS: STREET 1: 1730 BRIERCROFT DR CITY: CARROLLTON STATE: TX ZIP: 75006 BUSINESS PHONE: 972-466-5000 MAIL ADDRESS: STREET 1: 1730 BRIERCROFT DRIVE STREET 2: LEGAL DEPT. CITY: CARROLLTON STATE: TX ZIP: 75006 10-Q 1 d10q.htm FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2004 For the quarterly period ended August 31, 2004

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2004

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 incorporation or organization)		(I.R.S. Employer Identification No.)


1730 Briercroft Court Carrollton, Texas		75006
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number including area code: (972) 466-5000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

On October 8, 2004, there were 20,367,504 outstanding shares of Common Stock, $0.01 par value per share.

CELLSTAR CORPORATION

INDEX TO FORM 10-Q


		Page Number
PART I— FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS
	CONSOLIDATED BALANCE SHEETS (unaudited) August 31, 2004 and November 30, 2003	3
	CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three and nine months ended August 31, 2004 and 2003	4
	CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS (unaudited) Nine months ended August 31, 2004 and 2003	5
	CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Nine months ended August 31, 2004 and 2003	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	30
Item 4.	CONTROLS AND PROCEDURES	31
PART II— OTHER INFORMATION
Item 1.	LEGAL PROCEEDINGS	32
Item 6.	EXHIBITS AND REPORTS ON FORM 8-K	33
	SIGNATURES	34

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

CELLSTAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

(In thousands, except share and per share data)


	August 31, 2004			November 30, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	23,233		39,411
Restricted cash		2,477		16,159
Accounts receivable (less allowance for doubtful accounts of $54,889 and $60,097, respectively)		244,180		214,835
Inventories		134,673		167,807
Deferred income taxes		39,043		35,058
Prepaid expenses		8,558		33,588

Total current assets		452,164		506,858
Property and equipment, net		12,889		12,702
Deferred income taxes		22,576		22,576
Other assets		5,073		6,159

	$	492,702		548,295

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable	$	100,157		107,797
Accounts payable		143,067		186,481
Accrued expenses		26,963		24,470
Income taxes payable		—		893
Deferred income taxes		36,240		36,194

Total current liabilities		306,427		355,835

12% Senior subordinated notes		12,374		12,374
Other long-term liabilities		2,099		3,584

Total liabilities		320,900		371,793

Stockholders’ equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued		—		—
Common stock, $.01 par value, 200,000,000 shares authorized; 20,367,504 and 20,356,242 shares issued and outstanding, respectively		204		204
Additional paid-in capital		123,489		123,407
Accumulated other comprehensive loss—foreign currency translation adjustments		(9,449	)	(12,540	)
Retained earnings		57,558		65,431

Total stockholders’ equity		171,802		176,502

	$	492,702		548,295

See accompanying notes to unaudited consolidated financial statements.

CELLSTAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(In thousands, except per share data)


	Three months ended August 31,					Nine months ended August 31,
	2004			2003		2004		2003
Revenues	$	277,659		414,924		1,094,207		1,295,348
Cost of sales		266,456		392,958		1,033,083		1,230,790

Gross profit		11,203		21,966		61,124		64,558

Selling, general and administrative expenses		22,959		20,052		65,135		70,891
Impairment of assets		2,979		—		2,979		—
Severance and exit charges		—		(710	)	—		(710	)

Operating income (loss)		(14,735	)	2,624		(6,990	)	(5,623	)

Other income (expense):
Interest expense		(1,497	)	(1,586	)	(4,773	)	(4,486	)
Loss on sale of assets		—		(180	)	—		(180	)
Loss on divestiture of Colombia operations		—		—		(120	)	—
Other, net		126		(13	)	307		492

Total other income (expense)		(1,371	)	(1,779	)	(4,586	)	(4,174	)

Income (loss) from continuing operations before income taxes		(16,106	)	845		(11,576	)	(9,797	)

Provision (benefit) for income taxes		(5,320	)	114		(3,531	)	(3,476	)

Income (loss) from continuing operations		(10,786	)	731		(8,045	)	(6,321	)

Discontinued operations		—		710		172		(5	)

Income (loss) before cumulative effect of a change in accounting principle, net of tax		(10,786	)	1,441		(7,873	)	(6,326	)

Cumulative effect of a change in accounting principle, net of tax		—		—		—		(17,153	)

Net income (loss)	$	(10,786	)	1,441		(7,873	)	(23,479	)

Net income (loss) per share:

Basic:

Income (loss) from continuing operations	$	(0.53	)	0.04		(0.40	)	(0.31	)
Discontinued operations		—		0.03		0.01		—

Income (loss) before cumulative effect of a change in accounting principle, net of tax		(0.53	)	0.07		(0.39	)	(0.31	)
Cumulative effect of a change in accounting principle, net of tax		—		—		—		(0.84	)

Net income (loss) per share	$	(0.53	)	0.07		(0.39	)	(1.15	)

Diluted:
Income (loss) from continuing operations	$	(0.53	)	0.04		(0.40	)	(0.31	)
Discontinued operations		—		0.03		0.01		—

Income (loss) before cumulative effect of a change in accounting principle, net of tax		(0.53	)	0.07		(0.39	)	(0.31	)
Cumulative effect of a change in accounting principle, net of tax		—		—		—		(0.84	)

Net income (loss) per share	$	(0.53	)	0.07		(0.39	)	(1.15	)

Weighted average number of shares:

Basic		20,367		20,354		20,362		20,354

Diluted		20,367		20,413		20,362		20,354

See accompanying notes to unaudited consolidated financial statements.

CELLSTAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS

Nine months ended August 31, 2004 and 2003

(Unaudited)

(In thousands)


	Common Stock			Additional paid-in capital	Accumulated other comprehensive loss		Retained earnings		Total
	Shares	Amount		Additional paid-in capital	Accumulated other comprehensive loss		Retained earnings		Total
Balance at November 30, 2003	20,356	$	204	123,407	(12,540	)	65,431		176,502
Comprehensive loss:
Net loss	—		—	—	—		(7,873	)	(7,873	)
Foreign currency translation adjustment	—		—	—	203		—		203
Impairment of foreign currency translation adjustment	—		—	—	2,888		—		2,888

Total comprehensive loss									(4,782	)
Common stock issued under stock option plans	11		—	82	—		—		82

Balance at August 31, 2004	20,367	$	204	123,489	(9,449	)	57,558		171,802

Balance at November 30, 2002	20,354	$	204	123,392	(14,435	)	85,170		194,331
Comprehensive loss:
Net loss	—		—	—	—		(23,479	)	(23,479	)
Foreign currency translation adjustment	—		—	—	(2,949	)	—		(2,949	)
Impairment of foreign currency translation adjustment	—		—	—	158		—		158

Total comprehensive loss									(26,270	)

Balance at August 31, 2003	20,354	$	204	123,392	(17,226	)	61,691		168,061

See accompanying notes to unaudited consolidated financial statements.

CELLSTAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended August 31, 2004 and 2003

(Unaudited)

(In thousands)


	2004			2003
Cash flows from operating activities:
Net loss	$	(7,873	)	(23,479	)
Adjustments to reconcile net loss to net cash used in operating activities
Provision for doubtful accounts		1,017		3,035
Provision for inventory obsolescence		7,641		1,612
Depreciation and amortization		4,910		4,360
Impairment of assets		2,979		763
Deferred income taxes		(3,939	)	(10,035	)
Loss on divestiture of Colombia operations		120		180
Cumulative effect of a change in accounting principle, net of tax		—		17,153
Changes in operating assets and liabilities:				—
Accounts receivable		(32,755	)	(24,010	)
Inventories		25,539		(19,287	)
Prepaid expenses		23,441		(3,699	)
Other assets		717		3,175
Accounts payable		(40,700	)	27,106
Accrued expenses		2,271		(8,158	)
Income taxes payable		(866	)	(2,349	)
Discontinued operations		—		1,168

Net cash used in operating activities		(17,498	)	(32,465	)

Cash flows from investing activities:
Purchases of property and equipment		(4,703	)	(1,825	)
Proceeds from sale of Netherlands		—		4,839
Change in restricted cash		13,682		12,443
Other		—		(38	)
Discontinued operations		—		(186	)

Net cash provided by investing activities		8,979		15,233

Cash flows from financing activities:
Borrowings on notes payable		515,619		530,188
Payments on notes payable		(523,259	)	(481,084	)
Additions to deferred loan costs		(101	)	(213	)
Net proceeds from issuance of common stock		82		—
Discontinued operations		—		5,302

Net cash provided by (used in) financing activities		(7,659	)	54,193

Net increase (decrease) in cash and cash equivalents		(16,178	)	36,961
Cash and cash equivalents at beginning of period		39,411		29,270

Cash and cash equivalents at end of period	$	23,233		66,231

See accompanying notes to unaudited consolidated financial statements.

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 presentation of the results have been reflected therein. Operating revenues and net income (loss) for any interim period are not necessarily indicative of results that may be expected for any other interim period or 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, 2003 (the “Form 10-K”).

The Company has not materially changed its significant accounting policies from those disclosed in the Form 10-K and has reclassified certain prior period financial statement amounts to conform to the current year presentation.

(2) Stock-Based Compensation

Had the Company determined compensation cost based on the fair value at the grant date for its stock options under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income (loss) would have been the pro forma amounts below for the three and nine months ended August 31, 2004, and 2003 (in thousands, except per share amounts):


	For the three months ended August 31,					For the nine months ended August 31,
	2004			2003		2004		2003
Net income (loss), as reported	$	(10,786	)	1,441		(7,873	)	(23,479	)
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax benefits		(244	)	(146	)	(517	)	(986	)

Proforma net income (loss)	$	(11,030	)	1,295		(8,390	)	(24,465	)

Net income (loss) per common share:
Basic - as reported	$	(0.53	)	0.07		(0.39	)	(1.15	)
Basic - proforma		(0.54	)	0.06		(0.41	)	(1.20	)

Diluted - as reported	$	(0.53	)	0.07		(0.39	)	(1.15	)
Diluted - proforma		(0.54	)	0.06		(0.41	)	(1.20	)

(3) Net Income (Loss) Per Share

A reconciliation of the denominators of the basic and diluted net income (loss) per share computations for the three and nine months ended August 31, 2004, and 2003 follows (in thousands):


	Three months ended August 31,		Nine months ended August 31,
	2004	2003	2004	2003
Weighted average number of shares outstanding	20,367	20,354	20,362	20,354
Effect of dilutive securities:
Stock options	—	59	—	—

Weighted average number of shares outstanding including effect of dilutive securities	20,367	20,413	20,362	20,354

Options outstanding to purchase 1.8 million shares of common stock for the three and nine months ended August 31, 2004, respectively, were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive as the Company reported a loss for the periods.

Options outstanding to purchase 1.4 million shares of common stock for the three months ended August 31, 2003 were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive as the exercise price was higher than the average market price.

Options outstanding to purchase 1.8 million shares of common stock for the nine months ended August 31, 2003 were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive as the Company reported a loss for the period.

(4) 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, which consists of the United States, excluding the Company’s Miami, Florida, operations (“Miami”); and Latin America, which includes Mexico and Miami. Revenues and operations of Miami are included in Latin America since Miami’s product sales are primarily for export to Latin American countries, either by the Company or through its exporter customers. The Company divested the remainder of its operations in its European Region in fiscal 2003; however, as of August 31, 2004, the Company still had a receivable of $0.6 million in escrow related to the sale of the Sweden operations. The Corporate segment includes headquarters operations, income and expenses not allocated to reportable segments and interest expense on the Company’s domestic revolving line of credit and long-term debt. Corporate segment assets primarily consist of cash, cash equivalents and deferred income tax assets. Intersegment sales and transfers are not significant.

Segment asset information as of August 31, 2004, and November 30, 2003, follows (in thousands):


	Asia- Pacific		Latin America	North America	Europe	Corporate	Total
Total assets
August 31, 2004	$	243,458	103,092	89,123	668	56,361	492,702
November 30, 2003		277,952	103,931	106,714	4,110	55,588	548,295

Segment operations information for the three and nine months ended August 31, 2004 and 2003, follows (in thousands):


	Asia- Pacific			Latin America	North America	Europe	Corporate		Total
Three months ended August 31, 2004
Revenues from external customers	$	76,495		85,190	115,974	—	—		277,659
Income (loss) from continuing operations before interest and taxes		(13,448	)	2,098	57	—	(3,396	)	(14,689	)

Three months ended August 31, 2003
Revenues from external customers		188,979		88,039	137,906	—	—		414,924
Income (loss) from continuing operations before interest and taxes		929		430	2,616	610	(2,296	)	2,289


	2004			2003
Income (loss) from continuing operations before interest and income taxes per segment information	$	(14,689	)	2,289
Interest expense per the consolidated statements of operations		(1,497	)	(1,586	)
Interest income included in other, net in the consolidated statements of operations		80		142

Income (loss) from continuing operations before income taxes per the consolidated statements of operations	$	(16,106	)	845


	Asia- Pacific			Latin America		North America	Europe	Corporate		Total
Nine months ended August 31, 2004
Revenues from external customers	$	506,569		260,226		327,412	—	—		1,094,207
Income (loss) from continuing operations before interest and taxes		(2,126	)	4,755		352	475	(10,542	)	(7,086	)

Nine months ended August 31, 2003
Revenues from external customers		626,241		285,727		383,380	—	—		1,295,348
Income (loss) from continuing operations before interest and taxes		1,103		(3,627	)	5,159	830	(9,145	)	(5,680	)


	2004			2003
Loss from continuing operations before interest and income taxes per segment information	$	(7,086	)	(5,680	)
Interest expense per the consolidated statements of operations		(4,773	)	(4,486	)
Interest income included in other, net in the consolidated statements of operations		283		369

Loss from continuing operations before income taxes per the consolidated statements of operations	$	(11,576	)	(9,797	)

(5) Debt

Debt consisted of the following at August 31, 2004, and November 30, 2003 (in thousands):


	August 31, 2004		November 30, 2003
Notes payable
Revolving Credit Facility	$	39,173	19,305
People’s Republic of China credit facilities		59,616	88,492
Taiwan credit facilities		1,368	—

Total notes payable		100,157	107,797

Long-term debt
12% Senior subordinated notes		12,374	12,374

Total debt	$	112,531	120,171

The Company has an $85.0 million Loan and Security Agreement (the “Revolving Credit Facility” or “Facility”) that expires in September 2006. The Facility is considered a current liability as the lender has dominion over cash receipts related to the Company’s domestic operations and the Facility contains an acceleration clause that the lenders could choose to invoke if the Company were to commit an event of default.

Funding under the Facility is limited by a borrowing base test, which is measured weekly on eligible domestic accounts receivable and inventory. 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 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, dividend payments, additional debt, mergers and acquisitions and disposition of assets. If the Company terminates the Facility prior to maturity, the Company will incur a termination fee. The termination fee was $2.6 million as of August 31, 2004, and decreases by $0.9 million per year until September 2006 and remaining at $0.4 million thereafter. As of September 28, 2004, the termination fee decreased to $1.7 million. As of August 31, 2004, the Company had borrowed $39.2 million, at an interest rate of 5.50%, under the Facility and had additional borrowing availability of $22.9 million.

On March 31, 2004, the Company finalized an amendment to the Facility that increased borrowing availability under the loan by modifying advance rates for, and definitions of, eligible accounts receivable and inventory. The amendment also allows the Company to utilize its domestic receivables from foreign entities in other financing arrangements.

On October 12, 2004, the Company finalized an amendment to the Facility that modified financial covenants related to interest coverage in its Asia-Pacific Region and its domestic operations for the current fiscal quarter and for the quarters ending November 30, 2004, and February 28, 2005. The amendment was effective as of August 31, 2004. The Company would not have been in compliance with these covenants for the quarter ended August 31, 2004, had this amendment not been finalized. The amendment also excludes certain costs associated with the Company’s plan to divest its operations in Singapore and The Philippines and certain costs associated with the proposed initial public offering of its operations in the People’s Republic of China (the “PRC”), Hong Kong and Taiwan from the interest coverage financial covenant in the Asia-Pacific Region and from a financial covenant related to net worth of the Company. The amendment also extends the maturity date until November 2006 or, in the event of the Company’s refinancing of its 12% Senior Subordinated Notes, until September 2007. The amendment also lowers the applicable margin on interest rates by 50 basis points. The amendment was executed by Wells Fargo Foothill, Inc., as agent and a lender, Fleet Capital Corporation, Textron Financial Corporation, and PNC National Bank Association, as lenders, and the Company and certain of its subsidiaries as borrowers, including CellStar, Ltd., National Auto Center, Inc., CellStar Air Services, Inc., CellStar Telecom, Inc., CellStar Financo, Inc., A&S Air Service, Inc., CellStar International Corporation/SA, CellStar Fulfillment, Inc., CellStar International Corporation/Asia, Audiomex Export Corp., NAC Holdings, Inc., CellStar Global Satellite Services, Ltd., CellStar Fulfillment Ltd., and Florida Properties, Inc.

At August 31, 2004, the Company’s operations in the PRC had various short-term borrowings totaling approximately 493 million Renminbi (“RMB”) (approximately USD $59.6 million). The borrowings consist of lines of credit and factoring facilities. The facilities have interest rates ranging from 3.50% to 5.04% and have maturity dates through February 2005. The various short-term borrowing facilities are collateralized by PRC accounts receivable (USD $53.6 million of collateral).

At August 31, 2004, the Company’s operations in Taiwan had a short-term borrowing facility that totaled New Taiwan Dollar (“NTD”) 50 million (approximately USD $1.5 million), of which USD $1.4 million had been borrowed. The Facility is collateralized by real property owned by the operations and has an interest rate of 2.2%. The Facility matured in August 2004 and the Company expects to finalize an extension with the bank in October 2004. Three accounts receivable factoring facilities totaling NTD 200 million (approximately USD $5.9 million) were not utilized by the Company at August 31, 2004.

At August 31, 2004, long-term debt consisted of $12.4 million of the Company’s 12% Senior Subordinated Notes (the “Senior Notes”) due January 15, 2007. The Senior Notes bear interest at 12%, payable in cash in arrears semi-annually on February 15 and August 15. 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.

(6) Discontinued Operations

During the quarter ended May 31, 2003, the Company completed the sale of its Netherlands operations to a group which included local management. The purchase price was $2.1 million in cash. During the quarter ended February 28, 2003, in conjunction with the transaction, the Company recorded an impairment charge of $0.8 million to reduce the carrying value of the net assets of its Netherlands operations to the estimated net realizable value. During the quarter ended November 30, 2003, the Company sold its Sweden operations to AxCom AB. The purchase price was $10.9 million in cash. In conjunction with the transaction, the Company recorded a pre-tax gain of $0.8 million, including a charge of $0.3 million for accumulated foreign currency translation adjustments, for the three months ended November 30, 2003.

During the first quarter of 2003, the Company adopted Financial Accounting Standards Board (“FASB”) Statement No. 144. In conjunction with the 2003 sales of its operations in The Netherlands and Sweden, the Company has reclassified to discontinued operations, for all periods presented, the results and related charges for The Netherlands and Sweden operations.

Following is a summary of the discontinued operations related to the Company’s operations in The Netherlands and Sweden that were sold in 2003 (in thousands):


	Three months ended August 31,				Nine months ended August 31,
	2004		2003		2004		2003
Revenues	$	—	27,487		—		90,198
Cost of sales		—	25,203		—		86,439

Gross profit		—	2,284		—		3,759
Selling, general and administrative expenses		—	700		(172	)	3,057
Impairment of assets		—	—		—		763

Operating income (loss)		—	1,584		172		(61	)

Other income (expense):
Interest expense		—	(88	)	—		(294	)
Other, net		—	(486	)	—		558

Total other income (expense)		—	(574	)	—		264

Income before income taxes		—	1,010		172		203

Provision for income taxes		—	300		—		208

Total discontinued operations	$	—	710		172		(5	)

(7) Divestiture of Colombia Operations

On May 26, 2004, the Company completed the divestiture of its Colombia operations to a group that included local management. The Company obtained two promissory notes totaling $1.7 million and retained a 19% ownership interest. A tax refund note of $1.0 million is payable to the Company upon the receipt of a tax refund by the Colombia operations from the Colombian government. The other note of $0.7 million is a five year promissory note and is payable to the Company in equal quarterly installments beginning on the third anniversary of the note. The note is fully reserved and will remain reserved pending receipt of payment by the management group. Prior to the completion of the divestiture, the Company repatriated $3.9 million in cash from its Colombian operations. The Company recorded a pretax loss of $0.1 million on the divestiture for the three months ended May 31, 2004. In conjunction with the anticipated transaction, the Company had previously recorded an asset impairment charge of $4.0 million in the fourth quarter of 2003. The impairment charge included $3.8 million for accumulated foreign currency translation adjustments and $0.2 million for property and equipment. For purposes of the statement of operations, the Company has not classified the Colombia operations as discontinued because of the continuing sale of products to carrier customers in Colombia from the Company’s Miami export operations and the export of products to other customers in South America.

Following is a summary of the operations in Colombia (in thousands):


	Three months ended August 31,				Nine months ended August 31,
	2004		2003		2004	2003
Revenues	$	—	6,046		16,294	36,517
Cost of sales		—	5,555		14,982	35,274

Gross profit		—	491		1,312	1,243
Selling, general and administrative expenses		—	505		1,178	1,936

Operating income (loss)	$	—	(14	)	134	(693	)

(8) Exit of Singapore and The Philippines Operations

As a result of this decision, the Company recorded a charge of $3.8 million, including impairment of assets of $3.0 million, for the three months ended August 31, 2004, to reduce the carrying value of the net assets of its Singapore and The Philippines operations to the estimated net realizable value. The impairment of assets included $2.9 million for accumulated foreign currency translation as a result of the pending liquidation of its investment and $0.1 million for property and equipment. The Company expects to incur severance and exit charges in the fourth quarter of 2004 as a result of exiting these operations. The following table summarizes the income statement classification of the charge for the three months ended August 31, 2004 (in thousands):


	Three months ended August 31, 2004
Cost of sales	$	354
Selling, general and administrative expenses		504
Impairment of assets		2,979

Total charge	$	3,837

Following is a summary of the operations for Singapore and The Philippines for the three and nine months ended August 31, 2004, and 2003 (in thousands):


	Three months ended August 31,					Nine months ended August 31,
	2004			2003		2004		2003
Revenues	$	11,566		37,042		55,306		118,188
Cost of sales		11,108		36,875		54,716		117,311

Gross profit		458		167		590		877
Selling, general and administrative expenses		819		978		2,132		2,317
Impairment of assets		2,979		—		2,979		—

Operating loss	$	(3,340	)	(811	)	(4,521	)	(1,440	)

(9) Cumulative Effect of a Change in Accounting Principle

As of December 1, 2002, the Company adopted FASB Statement No. 142 “Goodwill and Other Intangible Assets.” Pursuant to the provisions of Statement No. 142, the Company stopped amortizing goodwill as of December 1, 2002, and performed a transitional impairment test on its goodwill. The Company recorded an impairment charge of approximately $17.2 million during the first quarter of 2003, which was presented as a cumulative effect of a change in accounting principle, net of tax.

The changes in the carrying amount of goodwill by operating segment was as follows (in thousands):


	Europe			Asia-Pacific		Total
Balance at November 30, 2002	$	8,618		12,321		20,939
Adoption of Statement No. 142 impairment		(8,618	)	(12,321	)	(20,939	)

	$	—		—		—

(10) Contingencies

On April 30, 2003, a purported class action lawsuit was filed in the Court of Chancery of the State of Delaware, New Castle County, styled as follows: Ruth Everson v. CellStar Corporation, James L. Johnson, John L. Jackson, Jere W. Thompson, Dale V. Kesler and Terry S. Parker (the “Everson Suit”). The Everson Suit alleges breach of fiduciary duty and corporate waste in connection with the Company’s proposal to divest up to 70% of its operations (the “CellStar Asia Transaction”) in the People’s Republic of China (the “PRC”), Hong Kong and Taiwan (the “Greater China Operations”). The Everson Suit seeks injunctive and other equitable relief, recissory and/or compensatory damages and reimbursement of attorney’s fees and costs. Following delays in proceeding with the Cellstar Asia Transaction, the parties agreed to a temporary stay of the proceedings until the Company files a revised proxy statement with the Securities and Exchange Commission relating to the CellStar Asia Transaction, or earlier if the plaintiff determines that the transaction is likely to proceed prior to that filing. During the pendency of the stay, the parties must file a status report with the court every sixty (60) days. Defendants have 20 days following the expiration of the stay to respond to plaintiff’s complaint. The Company announced on September 20, 2004, that it will not proceed with the CellStar Asia Transaction at issue in the Everson Suit at this time due to changes in the PRC’s economic environment and handset industry. As a result, it is unclear when, if ever, the CellStar Asia Transaction will be consummated or what form the transaction may take. The ultimate outcome is not currently predictable. The Company intends to explore the possible dismissal of the Everson Suit.

The Company is a party to various other claims, legal actions and complaints arising in the ordinary course of business. Management believes that the disposition of these other matters will not have a materially adverse effect on the consolidated financial condition or results of operations of the Company.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company reported a net loss of $10.8 million, or $0.53 per diluted share, for the third quarter of 2004, compared with net income of $1.4 million, or $0.07 per diluted share, for the same quarter last year. Revenues for the quarter ended August 31, 2004, were $277.7 million, a decrease of $137.2 million, compared to $414.9 million in 2003. Revenues decreased in the Asia-Pacific Region ($112.5 million), the North American Region ($21.9 million) and the Latin American Region ($2.8 million). Gross profit decreased from $22.0 million (5.3% of revenues) in the third quarter of 2003 to $11.2 million (4.0% of revenues) in the third quarter of 2004, primarily as a result of lower margins in the Asia-Pacific Region. Selling, general and administrative expenses increased $2.9 million from $20.1 million (4.8% of revenues) for the third quarter of 2003 to $23.0 million (8.3% of revenues) for the third quarter of 2004, primarily due to an increase in professional fees, including a $2.0 million charge related to the initial public offering (“IPO”).

Since the second quarter of 2004, the Company’s business in the People’s Republic of China (“PRC”) has been negatively impacted by changes in the economic environment as well as structural changes in the handset industry. The Company’s operations in the PRC were impacted by actions taken by the Company’s major suppliers in the PRC to reduce the involvement of national distributors and the carriers’ decision to sell product into the channel at subsidized prices. Also in 2004, the Chinese government implemented tighter credit controls, impacting consumer sentiment in the market place and resulting in inventory build across most channels.

China’s handset market has recently undergone certain structural changes. The growth rate of handset sales in major cities is slowing down as penetration rates increase. Therefore, the Company believes that new growth will have to come from smaller cities and rural areas surrounding the major cities. In an effort to boost new growth, carriers have begun to subsidize handset sales to consumers. This is a dramatic shift in the role of the carrier in China as they have not historically subsidized handsets. As the competition in the handset industry intensifies, many manufacturers have begun to explore shipping large volumes directly to retailers, in particular large scale superstores and regional distributors. This shift in strategy will move the manufacturers closer to the end user, thereby reducing the layers of distribution and limiting their use of national distributors. The Company’s revenues were further impacted by a price reduction from one of the Company’s major suppliers.

Due to the negative impact of these changes on its revenues and profits, the Company announced that it would not proceed with the previously announced IPO of its operations in the PRC, Hong Kong and Taiwan (the “Greater China Operations.”) As a result, the Company recorded a $2.0 million charge in the third quarter of 2004 for expenses incurred in connection with the Asia IPO, which included legal, accounting, tax, auditing, consulting and other related costs.

After evaluation, the Company decided to exit its operations in Singapore and The Philippines. These operations have not been profitable for the past few fiscal quarters and do not present significant growth opportunities for the Company. The Company expects to complete the exit of these operations by the end of its current fiscal year on November 30, 2004. As a result of this decision, the Company recorded a charge of $3.8 million, including impairment of assets of $3.0 million, for the three months ended August 31, 2004 to reduce the carrying value of the net assets of its Singapore and The Philippines operations to the estimated net realizable value. The impairment of assets included $2.9 million for accumulated foreign currency translation as a result of the pending liquidation of its investment and $0.1 million for property and equipment.

Cautionary Statements

The Company’s success will depend upon, among other things, its ability to implement its business strategies, to maintain its channels of distribution, continuing to secure an adequate supply of competitive products on a timely basis and on commercially reasonable terms, economic conditions, wireless market conditions, the financial health of its largest customers, its ability to improve its operating margins, service its indebtedness and meet covenant requirements, secure adequate financial resources, continually turn its inventories and accounts receivable, successfully manage changes in the size of its operations (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, hire, train and retain qualified employees who can effectively manage and operate its business and successfully manage the repositioning of its operations.

The Company’s foreign operations are subject to various political and economic risks including, but not limited to, the following: potentially unstable channels of distribution, increased credit risks, political instability, economic instability, currency controls, currency devaluations, exchange rate fluctuations, export control laws that might limit the markets the Company can enter, inflation, changes in laws and enforcement policies related to foreign ownership of businesses abroad, foreign tax laws, trade disputes among nations, changes in cost of and access to capital, changes in import/export regulations, including enforcement policies, “gray market” resales and tariff and freight rates.

In addition to the factors listed above, threats of terrorist attacks, a decline in consumer confidence and continued economic weakness in the U.S. and throughout the countries in which the Company does business could have a material adverse impact on the Company.

Special Cautionary Notice Regarding Forward-Looking Statements

Certain of the matters discussed in this Quarterly Report on Form 10-Q may constitute “forward-looking” statements for purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (as so amended the “Exchange Act”), and, as such, may involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. When used in this report, the words “anticipates,” “estimates,” “believes,” “continues,” “expects,” “intends,” “may,” “might,” “could,” “should,” and similar expressions are intended to be among the statements that identify forward-looking statements. Statements of various factors that could cause the actual results, performance or achievements of the Company to differ materially from the Company’s expectations (“Cautionary Statements”) are disclosed in this report, including, without limitation, those statements made in conjunction with the forward-looking statements and otherwise herein. All forward-looking statements attributable to the Company are expressly qualified in their entirety by the Cautionary Statements.

Results of Operations

The following table sets forth certain unaudited consolidated statements of operations data for the Company expressed as a percentage of revenues for the three and nine months ended August 31, 2004 and 2003:


	Three months ended August 31,				Nine months ended August 31,
	2004		2003		2004		2003
Revenues	100.0	%	100.0		100.0		100.0
Cost of sales	96.0		94.7		94.4		95.0

Gross profit	4.0		5.3		5.6		5.0

Selling, general and administrative expenses	8.3		4.8		5.9		5.5
Impairment of assets	1.0		—		0.3		—
Severance and exit charges	—		(0.2	)	—		(0.1	)

Operating income (loss)	(5.3	)	0.7		(0.6	)	(0.4	)

Other income (expense):
Interest expense	(0.5	)	(0.4	)	(0.4	)	(0.4	)
Loss of sale of assets	—		(0.1	)	—		—
Loss on divestiture of Colombia operations	—		—		—		—
Other, net	—		—		—		—

Total other income (expense)	(0.5	)	(0.5	)	(0.4	)	(0.4	)

Income (loss) from continuing operations before income taxes	(5.8	)	0.2		(1.0	)	(0.8	)
Provision (benefit) for income taxes	(1.9	)	—		(0.3	)	(0.3	)

Income (loss) from continuing operations	(3.9	)	0.2		(0.7	)	(0.5	)
Discontinued operations	—		0.2		—		—

Income (loss) before cumulative effect of a change in accounting principle, net of tax	(3.9	)	0.4		(0.7	)	(0.5	)
Cumulative effect of a change in accounting principle, net of tax	—		—		—		(1.3	)

Net income (loss)	(3.9	)%	0.4		(0.7	)	(1.8	)

Three Months Ended August 31, 2004, Compared to Three Months Ended August 31, 2003

Revenues. The Company’s revenues decreased $137.2 million, or 33.1%, from $414.9 million in 2003 to $277.7 million in 2004. The Company handled 2.7 million handsets (0.7 million consigned) in the third quarter of 2004 compared to 3.6 million handsets (0.8 million consigned) in the third quarter of 2003. The average selling price of handsets for the third quarter of 2004 was $131 compared to $134 in 2003.

The Company’s operations in the Asia-Pacific Region provided $76.5 million of revenues in 2004 compared to $189.0 million in 2003. Revenues in the PRC were $62.5 million in 2004, a decrease of $82.0 million, or 56.7%, from $144.5 million in 2003. The Company’s PRC operations experienced a significant decline in units sold in the third quarter of 2004 (0.5 million) compared to 2003 (0.9 million); also the average handset selling price decreased significantly from $152 in 2003 to $116 in 2004. Revenues in the PRC operations, beginning in the second quarter of 2004, were negatively impacted by a price reduction from one of the Company’s major suppliers. Due to the supplier’s global market share decline, the supplier reduced prices of their handsets, causing other suppliers in the PRC to also reduce prices. Additionally, the Company’s business in the PRC has been negatively impacted by changes in the economic environment as well as structural changes in the handset industry. Also in 2004, the Chinese government implemented tighter credit controls, impacting consumer sentiment in the market place and resulting in inventory build across most channels. In addition to these economic changes, China’s handset market has recently undergone certain structural changes. The growth rate of handset sales in major cities is slowing down as penetration rates increase. In an effort to boost new growth, carriers have begun to subsidize handsets. This is a dramatic shift in the role of the carrier in China as they have not historically subsidized handsets. As the competition in the handset industry intensifies, many manufacturers have begun to explore shipping large volumes directly to retailers, in particular large scale superstores and provincial distributors. This shift in strategy will move the manufacturers closer to the end user, thereby reducing the layers of distribution and limiting their use of national distributors. Revenues in future periods will be significantly impacted by the Company’s ability to obtain competitive handsets from its current suppliers or from new suppliers and the Company’s ability to maintain access to distribution channels that it has historically enjoyed. There can be no assurance that the Company will be able to procure such handsets on favorable terms or to maintain its historical market access such that it can effectively compete in the PRC. During the third quarter of 2004, the Company’s PRC operations experienced a significant decline in the sale of DBTEL product. As of August 31, 2004, the Company’s PRC operations had approximately $13.1 million of DBTEL product in inventory. The Company’s Asia-Pacific management team is currently negotiating with the manufacturer to return the product. There can be no assurance that the Asia-Pacific management team and the manufacturer will finalize an agreement.

Revenues from the Company’s operations in Hong Kong decreased from $4.4 million in 2003 to $1.4 million in 2004. The Hong Kong market has a penetration rate in excess of 90%. The Company is attempting to increase sales from its Hong Kong operations to other Asia-Pacific markets and to customers exporting to these markets. Revenues from Taiwan, which is also highly penetrated, were $3.0 million in 2003 compared to $1.1 million in 2004. Although the Company is currently exploring potential growth opportunities in the Taiwan operations and plans to keep it in the Asia portfolio at this time, the Company will continue to assess its operation in Taiwan 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. Due to the declining market conditions in Singapore and The Philippines, the Company assessed each of those operations in view of its over-all long-term strategy and decided to exit those markets. Combined revenues for the Company’s operations in Singapore and The Philippines were $11.6 million and $37.0 million for the three months ended August 31, 2004 and 2003, respectively.

North American Region revenues were $116.0 million, a decrease of $21.9 million, compared to $137.9 million in 2003. In January 2004, the Company announced that it would cease providing fulfillment and logistics services for one of the region’s largest customers, Cricket Communications, Inc. (“Cricket”), as well as its indirect sales channels, at the expiration of the agreement related to those services. The agreement expired on February 25, 2004. Company management believes that the pricing requested by Cricket going forward would not have met the Company’s desired profitability. Revenues from Cricket and its indirect sales channel represented approximately 11% of the Company’s consolidated revenues for fiscal 2002 and approximately 6% in 2003. Revenues from Cricket and its indirect sales channel represented approximately 0.0% ($0.0 million) and 7.7% ($31.9 million) of the Company’s consolidated revenues for the third quarters of 2004 and 2003, respectively. This decrease was partially offset by increases in revenues from regional carrier customers due to new model promotions, which commenced in April 2004.

The Company’s operations in the Latin American Region provided $85.2 million of revenues in 2004, compared to $88.0 million in 2003, a $2.8 million decrease. Revenues in Mexico were $47.0 million compared to $56.0 million in 2003. Revenues from the Company’s Mexico operations have been primarily generated from two carrier customers. In the second half of 2003, the Company significantly reduced its relationship with one of the carrier customers, resulting in a decrease of $5.4 million from 2003. These actions are part of the Company’s ongoing evaluations of its customers and continued emphasis on maintaining a desired level of profitability with each customer. Revenues from the Company’s Colombia operations were $6.0 million in 2003. As part of the Company’s overall plan to reposition its operations, in the second quarter of 2003, the Company shifted the majority of its business with its major carrier customer in Colombia to the Company’s Miami export operations. In the fourth quarter of 2003, the Company made a strategic decision to seek a high level of local ownership in Colombia, and in the second quarter of 2004, the Company completed the divestiture of its operations in Colombia to a group that included local management. Revenues from the Company’s Miami export operations were $26.3 million compared to $23.5 million a year ago. Revenues from the Company’s operations in Chile were $11.8 million in 2004 compared to $2.6 million in 2003. This increase was primarily due to spot sales of handsets in the third quarter of 2004, which are not expected to occur on a continuous basis.

Gross Profit. Gross profit decreased $10.8 million from $22.0 million in 2003 to $11.2 million in 2004. Gross profit as a percentage of revenues was 4.0% for the quarter ended August 31, 2004, compared to 5.3% for the third quarter of 2003. The decrease in gross profit and gross profit as a percentage of revenues was primarily due to a decrease in the Asia-Pacific Region. Revenues in the PRC operations, beginning in the second quarter of 2004, were negatively impacted by a price reduction from one of the Company’s major suppliers. Due to the supplier’s global market share decline, the supplier reduced prices of their handsets, causing other suppliers in the PRC to also reduce prices. Additionally, the Company’s business in the PRC has been negatively impacted by changes in the economic environment as well as structural changes in the handset industry. Also in 2004, the Chinese government implemented tighter credit controls, impacting consumer sentiment in the market place and resulting in inventory build across most channels. In addition to these economic changes, China’s handset market has recently undergone certain structural changes. The growth rate of handset sales in major cities is slowing down as penetration rates increase. In an effort to boost new growth, carriers have begun to subsidize handsets. This is a dramatic shift in the role of the carrier in China as they have not historically subsidized handsets. As the competition in the handset industry intensifies, many manufacturers have begun to explore shipping large volumes directly to retailers, in particular large scale superstores and provincial distributors. This shift in strategy will move the manufacturers closer to the end user, thereby reducing the layers of distribution and limiting their use of national distributors. Gross profit in the North American Region is down from the third quarter of 2003 is primarily a result of the Company ceasing its business with Cricket and its indirect sales channel as well as one of its carrier customer moving part of its business direct to retail outlets. In the Latin America Region, the gross profit increase was primarily due to favorable foreign exchange rates in Mexico. In the third quarter of 2004, the Company recognized a foreign currency exchange gain in Mexico of $0.2 million compared to a foreign currency exchange loss of $0.5 million in 2003, resulting in a change of $0.7 million from the third quarter of 2003.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $2.9 million from $20.1 million in 2003 to $23.0 million in 2004, primarily due to an increase in professional fees partially offset by a decrease in payroll and benefits. On September 20, 2004, the Company announced that it would not proceed with the previously announced initial public offering (the “IPO”) of its Greater China Operations due to the Company’s business in the PRC being negatively impacted by changes in the economic environment as well as structural changes in the handset industry. As a result, the Company recorded a $2.0 million charge in the third quarter of 2004 which included legal, accounting, tax, auditing, consulting and other related costs related to the IPO. The remaining increase is attributable to an increase in professional fees related to compliance with the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), approximately $1.4 million. These increases were partially offset by a decline in payroll and benefits. In 2003, the Company replaced the general manager in its Mexico operations and embarked on an aggressive reorganization of these operations, cutting payroll costs ($0.4 million) and repositioning the business to recapture market share. Selling, general and administrative expenses as a percentage of revenues were 8.3% and 4.8% for the third quarters of 2004 and 2003, respectively.

Impairment of Assets. After evaluation, the Company decided to exit its operations in Singapore and The Philippines. These operations have not been profitable for the past few fiscal quarters and do not present significant growth opportunities for the Company. The Company expects to complete the exit of these operations by the end of its current fiscal year on November 30, 2004.

As a result of this decision the Company recorded a charge of $3.8 million, including impairment of assets of $3.0 million, for the three months ended August 31, 2004, to reduce the carrying value of the net assets of its Singapore and The Philippines operations to the estimated net realizable value. The impairment of assets included $2.9 million for accumulated foreign currency translation as a result of the pending liquidation of its investment and $0.1 million for property and equipment. The Company expects to incur severance and exit charges in the fourth quarter of 2004 as a result of exiting these operations. The following table summarizes the income statement classification of the charge for the three months ended August 31, 2004 (in thousands):


	Three months ended August 31, 2004
Cost of sales	$	354
Selling, general and administrative expenses		504
Impairment of assets		2,979

Total charge	$	3,837

Interest Expense. Interest expense in 2004 was $1.5 million compared to $1.6 million in the prior year.

Other, Net. Other, net, increased from $0.0 million in 2003 to income of $0.1 million in 2004.

Income Taxes. Income tax expense decreased from an expense of $0.1 million in 2003 to a benefit of $5.3 million in 2004 primarily due to lower pre-tax income. The Company’s annual effective tax rates, excluding the effects of discontinued operations, for the quarters ended August 31, 2004, and 2003, were 31% and 35%, respectively.

Discontinued Operations. As discussed in Note 6 to the Consolidated Financial Statements, the Company sold its operations in Sweden and The Netherlands in 2003.

Nine Months Ended August 31, 2004, Compared to Nine Months Ended August 31, 2003

Revenues. The Company’s revenues decreased $201.1 million, or 15.5%, from $1,295.3 million in 2003 to $1,094.2 million in 2004. The Company handled 9.4 million handsets (2.2 million consigned) for the first nine months of 2004 compared to 10.7 million handsets (2.6 million consigned) for the same period of 2003. The average selling price of handsets for the first nine months of 2004 was $141 compared to $147 in 2003.

The Company’s operations in the Asia-Pacific Region provided $506.6 million of revenues in 2004 compared to $626.2 million in 2003. Revenues in the PRC were $438.4 million in 2004, a decrease of $33.9 million, or 7.2%, from $472.3 million in 2003. The Company’s PRC operations experienced a significant increase in units sold in the first six months of 2004 (2.4 million) compared to 2003 (1.6 million), however, during the third quarter of 2004, the PRC experienced a decline in units sold compared to the third quarter of 2003, from 0.9 million to 0.5 million. At the same time, the average handset selling price decreased significantly from $180 in 2003 to $145 in 2004. Revenues in the PRC operations, beginning in the second quarter of 2004, were negatively impacted by a price reduction from one of the Company’s major suppliers. Due to the supplier’s global market share decline, the supplier reduced prices of their handsets, causing other suppliers in the PRC to also reduce prices. Additionally, the Company’s business in the PRC has been negatively impacted by changes in the economic environment as well as structural changes in the handset industry. Also in 2004, the Chinese government implemented tighter credit controls, impacting consumer sentiment in the market place and resulting in inventory build across most channels. In addition to these economic changes, China’s handset market has recently undergone certain structural changes. The growth rate of handset sales in major cities is slowing down as penetration rates increase. In an effort to boost new growth, carriers have begun to subsidize handsets. This is a dramatic shift in the role of the carrier in China as they have not historically subsidized handsets. As the competition in the handset industry intensifies, many manufacturers have begun to explore shipping large volumes directly to retailers, in particular large scale superstores and provincial distributors. This shift in strategy will move the manufacturers closer to the end user, thereby reducing the layers of distribution and limiting their use of national distributors. Revenues in future periods will be significantly impacted by the Company’s ability to obtain competitive handsets from its current suppliers or from new suppliers and the Company’s ability to maintain access to distribution channels that it has historically enjoyed. There can be no assurance that the Company will be able to procure such handsets on favorable terms or to maintain its historical market access such that it can effectively compete in the PRC.

The Company’s PRC revenues had historically been from the sale of handsets supplied by Nokia and Motorola. From late 2002 to mid 2003, Nokia and Motorola lost significant market share to the local Chinese manufacturers. The local Chinese manufacturers had 39% of the PRC’s wireless handset market as of May 2004 according to Gartner, a technology research and advisory firm. In late 2003, the Company began purchasing from Shanghai DBTEL Industry Co., Ltd. (“DBTEL”) on a purchase order basis. For the first six months of 2004, Nokia and DBTEL products accounted for approximately 79% of the Company’s revenues in the PRC. For the same period, Motorola products accounted for approximately 1% of the Company’s revenues in the PRC. During the third quarter of 2004, the Company’s PRC operations experienced a significant decline in the sale of DBTEL product. As of August 31, 2004, the Company’s PRC operations had approximately $13.1 million of DBTEL product in inventory. The Company’s Asia-Pacific management team is currently negotiating with the manufacturer to return the product. There can be no assurance that the Asia-Pacific management team and the manufacturer will finalize an agreement.

Revenues from the Company’s operations in Hong Kong decreased from $22.2 million in 2003 to $8.6 million in 2004. The Hong Kong market has a penetration rate in excess of 90%. The Company is attempting to increase sales from its Hong Kong operations to other Asia-Pacific markets and to customers exporting to these markets. The Company’s revenues from Taiwan, which is also highly penetrated, were $13.2 million in 2003 compared to $4.1 million in 2004. Although the Company is currently exploring potential growth opportunities in its Taiwan operations and plans to keep it in the Asia portfolio at this time, the Company will continue to asses its operation in Taiwan 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. Combined revenues for the Company’s operations in Singapore and The Philippines were $55.3 million and $118.2 million for the nine months ended August 31, 2004 and 2003, respectively. Due to the declining market conditions in Singapore and The Philippines, the Company assessed each of those operations in view of its over-all long-term strategy and decided to exit those markets.

North American Region revenues were $327.4 million in 2004, a decrease of $56.0 million or 14.6%, compared to $383.4 million in 2003. In January 2004, the Company announced that it would cease providing fulfillment and logistics services for one of the region’s largest customers, Cricket, as well as its indirect sales channels, at the expiration of the agreement related to those services. The agreement expired on February 25, 2004. Company management believes that the pricing requested by Cricket going forward would not have met the Company’s desired profitability. Revenues from Cricket and its indirect sales channel represented approximately 11% of the Company’s consolidated revenues for fiscal 2002 and approximately 6% in 2003. Revenues from Cricket and its indirect sales channel represented approximately 2.2% ($24.4 million) and 6.6% ($85.0 million) of the Company’s consolidated revenues for the nine months ended August 31, 2004, and 2003, respectively. Revenues were also negatively impacted by the lack of product availability from some of the Company’s major suppliers, primarily Motorola, during the latter part of the second quarter of 2004. The suppliers cited a shortage of CDMA chipsets as the primary reason for the handset shortages.

The Company’s operations in the Latin American Region provided $260.2 million of revenues in 2004, compared to $285.7 million in 2003, a $25.5 million decrease. Revenues in Mexico were $107.2 million in 2004 compared to $151.3 million in 2003. Revenues from the Company’s Mexico operations have been primarily generated from two carrier customers. In the second half of 2003, the Company significantly reduced its relationship with one of the carrier customers, resulting in a decrease in revenues of $22.9 million from 2003. These actions are part of the Company’s ongoing evaluations of its customers and continued emphasis on maintaining a desired level of profitability with each customer. Revenues from the Company’s Colombia operations decreased to $16.3 million in 2004 from $36.5 million in 2003. As part of the Company’s overall plan to reposition its operations, in the second quarter of 2003 the Company shifted the majority of its business with its major carrier customer in Colombia to the Company’s Miami export operations. In the fourth quarter of 2003, the Company made a strategic decision to seek a high level of local ownership in Colombia, and in the second quarter of 2004, the Company completed the divestiture of its operations in Colombia to a group that included local management. Revenues from the Company’s Miami export operations were $113.0 million in 2004 compared to $88.8 million a year ago primarily due to this shift, as well as sales to carriers in Ecuador and Venezuela through a U.S. distributor. Revenues to the major carrier customer in Colombia in the first nine months of 2004 were $20.2 million in 2004 and $12.8 million in 2003. Revenues from the Company’s operations in Chile were $23.7 million in 2004 compared to $9.1 million in 2003. This increase was primarily due to spot sales of handsets in 2004, which are not expected to occur on a continuous basis.

Gross Profit. Gross profit decreased $3.5 million from $64.6 million in 2003 to $61.1 million in 2004. Gross profit as a percentage of revenues was 5.6% for the nine months ended August 31, 2004, compared to 5.0% for the same period of 2003. The higher gross profit as a percentage of revenues was primarily due to higher margins in the North American and Latin American Regions. Although gross profit in the North American Region is down from 2003, gross profit as a percentage of revenues increased as a result of the Company ceasing its business with Cricket and its indirect sales channel as the business had a low gross profit percentage. The increase in Latin America is primarily due to favorable foreign exchange rates in Mexico as well as a change in the operations model from high volume low margin products to a higher margin model. Revenues in the PRC operations, beginning in the second quarter of 2004, were negatively impacted by a price reduction from one of the Company’s major suppliers. Due to the supplier’s global market share decline, the supplier reduced prices of their handsets, causing other suppliers in the PRC to also reduce prices. Additionally, the Company’s business in the PRC has been negatively impacted by changes in the economic environment as well as structural changes in the handset industry. Also in 2004, the Chinese government implemented tighter credit controls, impacting consumer sentiment in the market place and resulting in inventory build across most channels. In addition to these economic changes, China’s handset market has recently undergone certain structural changes. The growth rate of handset sales in major cities is slowing down as penetration rates increase. In an effort to boost new growth, carriers have begun to subsidize handsets. This is a dramatic shift in the role of the carrier in China as they have not historically subsidized handsets. As the competition in the handset industry intensifies, many manufacturers have begun to explore shipping large volumes directly to retailers, in particular large scale superstores and provincial distributors. This shift in strategy will move the manufacturers closer to the end user, thereby reducing the layers of distribution and limiting their use of national distributors.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $5.8 million from $70.9 million in 2003 to $65.1 million in 2004. The decrease in selling, general and administrative is primarily due to decreases in bad debt expense and payroll and benefits. Bad debt expense decreased from $3.8 million in 2003 to $1.0 million in 2004 primarily due to decreases in Mexico and North America. In the first quarter of 2003, the Company recorded a $1.3 million charge related to NTELOS Inc., a carrier customer in the North American Region that filed for bankruptcy in March 2003. The decline in payroll and benefits is due primarily to decreases in Latin America and the Corporate segment. In 2003, the Company replaced the general manager in its Mexico operations and embarked on an aggressive reorganization of these operations, cutting payroll costs ($1.5 million) and repositioning the business to recapture market share. In the Corporate segment, pursuant to Robert Kaiser’s amended and restated employment agreement, effective as of May 1, 2004, Mr. Kaiser waived the Company’s obligation to pay him $0.5 million related to the timing of his promotion to President and Chief Operating Officer. The Company originally recorded this expense in the second quarter of 2003 in accordance with his then existing employment agreement, and accordingly reversed this liability in the second quarter of 2004 upon execution of the amended and restated employment agreement. The Company recorded charges of $3.6 million and $2.0 million in expense associated with the IPO the nine months ended August 31, 2003 and 2004, respectively, which included legal, accounting, tax, auditing, consulting and other related costs. The increase in accounting and audit fees is attributable to a $1.4 million expense associated with expenses to comply with Sarbanes-Oxley. Selling, general and administrative expenses as a percentage of revenues were 5.9% and 5.5% for the nine months ended August 31, 2004 and 2003, respectively.

Impairment of Assets. After evaluation, the Company decided to exit its operations in Singapore and The Philippines. These operations had not been profitable for the past few fiscal quarters and do not present significant growth opportunities for the Company. The Company expects to complete the exit of these operations by the end of its current fiscal year on November 30, 2004.


	Three months ended August 31, 2004
Cost of sales	$	354
Selling, general and administrative expenses		504
Impairment of assets		2,979

Total charge	$	3,837

Interest Expense. Interest expense in 2004 was $4.8 million compared to $4.5 million in the prior year.

Loss on Divestiture of Colombia Operations. On May 26, 2004, the Company completed the divestiture of its Colombia operations to a group that included local management. The Company obtained two promissory notes totaling $1.7 million and retained a 19% ownership interest. A tax refund note of $1.0 million is payable to the Company upon the receipt of a tax refund by the Colombia operations from the Colombian government. The other note of $0.7 million is a five year promissory note and is payable to the Company in equal quarterly installments beginning on the third anniversary of the note. The note is fully reserved and will remain reserved pending receipt of payment by the management group. Prior to the completion of the divestiture, the Company repatriated $3.9 million in cash from its Colombian operations. The Company recorded a pretax loss of $0.1 million on the divestiture for the three months ended May 31, 2004. In conjunction with the anticipated transaction, the Company had previously recorded an asset impairment charge of $4.0 million in the fourth quarter of 2003. The impairment charge included $3.8 million for accumulated foreign currency translation adjustments and $0.2 million for property and equipment.

Other, Net. Other, net, consisted of income of $0.3 million in 2004 compared to income of $0.5 million in 2003.

Income Taxes. Income tax expense was a benefit of $3.5 million in 2004 and 2003. The Company’s annual effective tax rates, excluding the effects of discontinued operations were 31% and 35% in 2004 and 2003, respectively.

Discontinued Operations. As discussed in Note 6 to the Consolidated Financial Statements, the Company sold its operations in Sweden and The Netherlands in 2003.

Liquidity and Capital Resources

The following table summarizes the Company’s contractual obligations at August 31, 2004 (amounts in thousands):


			Payments Due By Period
	Total		Less than One Year	One to Three Years	Four to Five Years	More than Five Years
Contractual obligations
Notes payable
Revolving credit facility (variable interest, 5.5% at August 31, 2004)	$	39,173	39,173	—	—	—
People’s Republic of China credit facilities (3.5% to 5.0% at August 31, 2004)		59,616	59,616	—	—	—
Taiwan credit facility (2.2% at August 31, 2004)		1,368	1,368	—	—	—
12% senior subordinated notes		12,374	—	12,374	—	—
Operating leases		6,751	2,404	3,383	964	—

Total contractual obligations	$	119,282	102,561	15,757	964	—

During the quarter ended August 31, 2004, the Company relied primarily on cash available at May 31, 2004, funds generated from operations, borrowings under its credit facilities to fund working capital and capital expenditures.

The Company has an $85.0 million Loan and Security Agreement (the “Revolving Credit Facility” or “Facility”) with a bank that expires in September 2006. The Facility is considered a current liability as the lender has dominion over cash receipts related to the Company’s domestic operations and the Facility contains an acceleration clause that the lenders could choose to invoke if the Company were to commit an event of default. Funding under the Facility is limited by a borrowing base test, which is measured weekly on eligible domestic accounts receivable and inventory. 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 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, dividend payments, additional debt, mergers and acquisitions and disposition of assets. If the Company terminates the Facility prior to maturity, the Company will incur a termination fee. The termination fee was $2.6 million as of August 31, 2004, and decreases by $0.9 million per year until September 2006 and remaining at $0.4 million thereafter. As of September 28, 2004, the termination fee decreased to $1.7 million. As of August 31, 2004, the Company had borrowed $39.2 million, at an interest rate of 5.50%, an increase of $19.9 million from $19.3 million at November 30, 2003. The increase in borrowings was a result of the Company reducing domestic trade payables in the second quarter of 2004. Under the Facility, the Company had additional borrowing availability of $22.9 million at August 31, 2004. The interest rate was 5.75% on September 21, 2004.

As of September 30, 2004, the Company had borrowed $38.7 million under the Facility and had additional borrowing availability of $21.8 million.

At August 31, 2004, the Company’s operations in the PRC had various short-term borrowings totaling approximately 493 million Renminbi (“RMB”) (approximately USD $59.6 million). The borrowings consist of revolving lines of credit and factoring facilities. The facilities have interest rates ranging from 3.50% to 5.04% and have maturity dates through February 2005. The various short-term borrowing facilities are collateralized by PRC accounts receivable (USD $53.6 million of collateral).

In Singapore, the Company has a banker’s guarantee line that totals Singapore Dollar (“SGD”) 2.5 million (approximately USD $1.5 million), of which SGD 855 thousand (approximately USD $0.5 million) had been utilized at August 31, 2004. In order to issue the bank guarantees, a cash deposit of SGD 1.0 million (approximately USD $0.6 million) was required and is restricted. The facility bears interest at 12.0% and matures in September 2004. The Company has a second facility that includes a banker’s guarantee line that totals SGD 3.0 million (approximately USD $1.8 million) all of which had been utilized at August 31, 2004. The second facility also includes a SGD 1.0 million (approximately USD $0.6 million), credit line which has not been utilized. The banker’s guarantee lines are used to secure certain of the accounts payable of the operation. In order to issue the bank guarantees, a cash deposit of SGD 1.0 million (approximately USD $0.6 million), was required and is restricted. The facility bears interest at 9.0% and matures in February 2005.

At August 31, 2004, long-term debt consisted of $12.4 million of the Company’s 12% Senior Subordinated Notes due January 2007 (the “Senior Notes”). The Senior Notes bear interest at 12%, payable in cash in arrears semi-annually on February 15 and August 15. 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.

Cash, cash equivalents, and restricted cash at August 31, 2004, were $25.7 million, compared to $55.6 million at November 30, 2003. Restricted cash at August 31, 2004, was $2.5 million, compared to $16.2 million at November 30, 2003. The reduction in cash and restricted cash is largely in the PRC operations, as the Company has modified its financing arrangements such that restricted cash is no longer required as collateral for borrowings and cash on hand has been used to reduce accounts payable.

Compared to November 30, 2003, accounts receivable increased from $214.8 million to $244.2 million at August 31, 2004. Accounts receivable days sales outstanding for the quarter ended August 31, 2004, based on monthly accounts receivable balances, were 84.9, compared to 35.7 for the quarter ended November 30, 2003. Accounts receivable have increased by $58.4 million in the PRC operations compared to November 30, 2003, primarily due to the granting of longer credit terms to customers. The Company’s PRC operations, in its attempt to expand to other markets, extended longer credit terms of 90 days to most of its wholesale distributors to encourage them to sell to large-scale retailers and carriers, which generally receive longer credit terms. Inventories decreased to $134.7 million at August 31, 2004, from $167.8 million at November 30, 2003, primarily due to a decrease of $38.8 million in the PRC operations. Inventory turns for the quarter ended August 31, 2004, based on monthly inventory balances, were 7.6 turns per year, compared to 11.5 for the quarter ended November 30, 2003. The decrease in inventory turns was due to reduced sales levels, primarily in the Company’s Asia-Pacific Region. Accounts payable decreased to $143.1 million at August 31, 2004, compared to $186.5 million at November 30, 2003.

This increase in accounts receivable and the decrease in accounts payable has caused the Company’s cash flow from operating activities to be a net use of cash of $17.5 million for the nine months ended August 31, 2004. The Company believes that these changes should not materially affect the Company’s liquidity.

Based upon current and anticipated levels of operations, the Company anticipates that its cash flow from operations, together with amounts available under its credit facilities and existing unrestricted cash balances, will be adequate to meet its anticipated cash requirements for at least the next twelve months. In the event that existing unrestricted cash balances, cash flows and available borrowings under the credit facilities 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.

International Operations

Asia-Pacific Region

The Company believes that the intrinsic value of its Asia-Pacific Region is not fully reflected in the current market price of its common stock. As a result, the Company engaged UBS Securities LLC (“UBS”) to assist it in evaluating transactions that could result in recognizing the value that it believes is locked up in the Asia-Pacific Region, which is substantially comprised of its Greater China Operations. Those evaluations focused on a number of possible transactions including a possible initial public offering of all or a portion of the Asia-Pacific Region operations, a spin-off, a sale to outside investors or a management buyout. On March 14, 2003, the Company filed a preliminary proxy statement with the SEC, which included a stockholder proposal to divest up to 70% of its Greater China Operations (the “CellStar Asia Transaction”), including the IPO.

On May 1, 2003, the Company announced that it would delay the IPO and, consequently, the divestiture of its Greater China Operations due to the spread of SARS, which negatively impacted the business environment and financial markets in Hong Kong and China, as well as limited the Company’s ability to market the IPO. Due to the delay, during the year ended November 30, 2003, the Company expensed $4.0 million in IPO costs, which included legal, accounting, tax, auditing, consulting and other costs related to the CellStar Asia Transaction.

On March 10, 2004, the Company filed a new preliminary proxy statement with the SEC, seeking, among other matters, stockholder approval of the CellStar Asia Transaction and the IPO. On May 17, 2004, the Company announced that the CellStar Asia Transaction would not be completed in the summer of 2004 as previously anticipated due to delays in the process of listing the stock of the Greater China Operations on the SEHK.

Since the second quarter of 2004, the Company’s business in the PRC has been negatively impacted by changes in the economic environment as well as structural changes in the handset industry. The Company’s operations in the PRC were impacted by actions taken by the Company’s major suppliers in the PRC to reduce the involvement of national distributors and the carriers’ decision to sell product into the channel at subsidized prices. Also in 2004, the Chinese government implemented tighter credit controls, impacting consumer sentiment in the market place and resulting in inventory build across most channels.

In addition to these economic changes, China’s handset market has recently undergone certain structural changes. The growth rate of handset sales in major cities is slowing down as penetration rates increase. Therefore, new growth will have to come from smaller cities and rural areas surrounding the major cities. In an effort to boost new growth, carriers have begun to subsidize handsets. This is a dramatic shift in the role of the carrier in China as they have not historically subsidized handsets. As the competition in the handset industry intensifies, many manufacturers have begun to explore shipping large volumes directly to retailers, in particular large scale superstores and provincial distributors. This shift in strategy will move the manufacturers closer to the end user, thereby reducing the layers of distribution and limiting their use of national distributors.

As a result of these changes in the economic environment and handset industry and upon the advice of UBS, the Company announced on September 20, 2004, that it would not proceed with the CellStar Asia Transaction at this time.

In spite of these recent developments, the Company continues to believe that there is still enormous growth opportunity in China and is currently restructuring its business model to reflect the new operating environment in the region. Historically, the operation in China has operated as a national distributor with a distribution channel of approximately 73 local distributors, representing approximately 17,000 points of sale. The Company has cooperative agreements with several of these distributors that allow them to establish wholesale and retail operations using CellStar’s trademarks. Under the terms of these agreements, CellStar provides services, sales support, training and promotional materials in exchange for an agreement to purchase only from CellStar those products sold by CellStar. Given the recent shift in the industry, the Company believes that an investment in the distribution channel in China will allow it to participate in the retail and wholesale activities of several of its largest customers.

The Company is pursuing this strategy primarily to shift a portion of its handset business to the retail sector in order to reduce the layers of distribution and improve profits. Currently CellStar provides approximately 45% of the total product sold by eight of its largest distributors. The new strategy will allow the Company to not only continue to participate in the wholesale sales to these customers, but also participate in the retail portion of their business, which typically has higher margins.

As a result of the investment, the Company believes that it can provide its customers with resources and finances that they are currently lacking, as well as the national recognition and backing that the CellStar brand has obtained in China. The Company also believes that the investment will elevate its retail presence in China and allow it to build stronger relationships with the carriers as they are becoming a dominant player in the handset industry. The investment will also facilitate the Company’s growth outside major cities, and as manufacturers in the PRC shift to more direct to retail models, allow the Company to remain key to the new distribution model that is emerging in the country.

The Company and its financial advisors continue to evaluate alternatives for deriving the value which the Company believes is locked up in the Greater China Operations.

Exit of Singapore and The Philippines Operations

After evaluation the Company decided to exit its operations in Singapore and The Philippines. These operations had not been profitable for the past few fiscal quarters and do not present significant growth opportunities for the Company. The Company expects to complete the exit of these operations by the end of its current fiscal year on November 30, 2004.


	Three months ended August 31, 2004
Cost of sales	$	354
Selling, general and administrative expenses		504
Impairment of assets		2,979

Total charge	$	3,837

Following is a summary of the operations for Singapore and The Philippines for the three and nine months ended August 31, 2004 and 2003 (in thousands):


	Three months ended August 31,					Nine months ended August 31,
	2004			2003		2004		2003
Revenues	$	11,566		37,042		55,306		118,188
Cost of sales		11,108		36,875		54,716		117,311

Gross profit		458		167		590		877
Selling, general and administrative expenses		819		978		2,132		2,317
Impairment of assets		2,979		—		2,979		—

Operating loss	$	(3,340	)	(811	)	(4,521	)	(1,440	)

Mexico

The Company’s Mexico operations derive their revenues primarily from wholesale purchasers and the activation of handsets. The Company’s operations in Mexico accounted for approximately 61%, 54%, and 51% of the Latin America Region’s revenues in 2001, 2002, and 2003, respectively. Over the last three years, the operations in Mexico have recognized operating losses of $9.8 million, $11.5 million, and $3.0 million in 2001, 2002, and 2003, respectively. Despite the losses in the Mexico operations in recent years, the Company believes growth and profit potential exist in the Mexico market due to the size of this market. The Mexico operations showed improvement in the second half of 2003, including operating profits of $0.3 million and $0.7 million for the third and fourth quarters of 2003, respectively. Furthermore, the Mexico operations had operating profits of $0.5 million, $0.6 million and $1.6 million in the first, second and third quarters of 2004, respectively. In 2003, the Company replaced the general manager and embarked on an aggressive reorganization of its Mexico operations, cutting payroll costs and repositioning the business to recapture market share. Given the recent improvement in operations and the improved relationship with the largest wireless carrier in Mexico, the Company is now committed to staying in Mexico.

At November 30, 2002, the Company had a value-added tax (“VAT”) asset in its Mexico operations of $10.7 million related to the Company’s 1998 to 2001 VAT returns. In connection with this asset, in the fourth quarter of 2001, the Company recorded a charge of $3.0 million, and in the fourth quarter of 2002, the Company recorded an additional charge of $1.5 million as the recoverability was uncertain. In December 2003, the Company filed for and received a refund of $3.7 million in relation to the VAT receivable. The Company continues to pursue collection of the remaining net asset of $2.1 million and the Company believes it has sufficient documentation to collect the balance.

Colombia

To reduce its in-country exposure in Colombia, the Company negotiated with its major carrier customer in Colombia and shifted the carrier customer’s business to the Company’s Miami export operations during the second quarter of 2003. For purposes of the statement of operations, the Company has not classified the Colombia operations as discontinued because of the continuing sale of products to carrier customers in Colombia from the Company’s Miami export operations and the export of products to other customers in South America.

Following is a summary of the operations in Colombia (in thousands):


	Three months ended August 31,				Nine months ended August 31,
	2004		2003		2004	2003
Revenues	$	—	6,046		16,294	36,517
Cost of sales		—	5,555		14,982	35,274

Gross profit		—	491		1,312	1,243
Selling, general and administrative expenses		—	505		1,178	1,936

Operating income (loss)	$	—	(14	)	134	(693	)

Seasonality and Cyclicality

The effects of seasonal fluctuations have not historically been apparent in the Company’s operating results due to a number of seasonal factors in the different countries and markets in which it operates, including the purchasing patterns of customers in different markets, product promotions of competitors and suppliers, availability of distribution channels, and product supply and pricing. The Company’s sales are also influenced by cyclical economic conditions in the different countries and markets in which it operates. An economic downturn in one of the Company’s principal markets could have a materially adverse effect on the Company’s operating results.

Critical Accounting Policies

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, 2003, 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 estimates.

(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 accounting principles generally accepted in the United States of America. The most significant estimates relate to the allowance for doubtful accounts, the reserve for inventory obsolescence and the deferred tax asset valuation allowance.

In determining the adequacy of the allowance for doubtful accounts, management considers a number of factors including the aging of the receivables portfolio, customer payment trends, financial condition of the customer, economic conditions in the customer’s country, and industry conditions. 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. 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. At August 31, 2004, the Company had gross deferred income tax assets, net of valuation allowances, of $61.6 million, a significant portion of which relate to net operating loss carryforwards. 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 are deductible. Management considers the scheduled reversal of deferred income tax liabilities and projected future taxable income, including income generated by 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, including taxable income generated by tax planning strategies, management determines if it is more likely than not that the Company will realize the benefits of these deductible differences. A valuation allowance is provided for any amounts not expected to be realized. 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. In addition, any potential transaction could affect, positively or negatively, the valuation allowance on deferred tax assets depending on the form and the valuation of the transaction.

As a result of the Company completing an exchange offer for its previously existing 5% convertible subordinated notes on February 20, 2002, the Company was deemed to have undergone an ownership change in accordance with Section 382 of the Internal Revenue Code. Beginning with the year ended November 30, 2002, this ownership change limits the amount of losses that can be used on an annual basis to offset future taxable income. In order to utilize the full U.S. tax loss carryforwards, the Company must complete, prior to February 2007, a taxable transaction related to operations existing as of February 20, 2002. If at any time prior to February 2007 the Company deems such a transaction unlikely to occur by February 2007 or that the transaction will not allow the Company to fully utilize the U.S. tax loss carryforwards, the Company will then record a valuation allowance for the U.S. tax loss carryforwards the Company does not anticipate utilizing.

Prior to the fourth quarter of 2002, the Company did not accrue for U.S. Federal income taxes or tax benefits on the undistributed earnings and/or losses of its international subsidiaries because earnings were considered permanently reinvested and, in the opinion of management, would continue to be reinvested indefinitely. As a result of the progress in the fourth quarter of 2002 in evaluating the strategic options with regard to its Asia-Pacific Region, it was determined that the earnings in its Asia-Pacific Region did not meet the criteria to be considered permanently reinvested since the Company has manifested its intent to pursue possible transactions designed to allow the Company to withdraw and return to the U.S. some or all of the value of those operations. The Company had accrued, at August 31, 2004, U.S. Federal income taxes on the undistributed earnings of the Asia-Pacific Region of approximately $33.8 million.

No U.S. Federal income taxes on the undistributed earnings will be payable until such earnings are actually remitted back to the U.S. in the form of dividends or sale proceeds. As of August 31, 2004, the Company had net operating loss carryforwards in the U.S. of approximately $66.8 million, a significant portion of which the Company believes it will be able to utilize to offset the taxes payable in the event that a transaction is completed.

At August 31, 2004, the Company had not provided for U.S. Federal income taxes on earnings of its Mexico and Chile subsidiaries of approximately $2.2 million as these earnings are considered permanently reinvested.

(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’ activation of the subscriber’s service and residual commissions when received 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 or, if applicable, upon shipment of the related product, whichever is later.

(c) Vendor Credits and Allowances

The Company recognizes price protection credits; sell through credits, advertising allowances and volume discounts, when supported by a written agreement or if not supported by a written agreement, when received. Price protection credits and other incentives are applied against inventory and cost of goods sold, depending on whether the related inventory is on-hand or has been previously sold. Sell-through credits are recorded as a reduction in cost of goods sold when the products are sold. Advertising allowances are generally for the reimbursement of specific incremental, identifiable costs incurred by the Company and are recorded as a reduction of the related cost. Allowances in excess of the specific costs incurred, if any, are recorded as a reduction cost of goods sold or inventory, as applicable.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Exchange Risk and Derivative Financial Instruments

For the quarters ended August 31, 2004, and 2003, the Company recorded net foreign currency gains (losses) of $0.1 million and ($0.7) million, respectively, in cost of goods sold. The gain (loss) in both quarters was primarily due to the fluctuations in foreign exchange rates in the Company’s Mexico operations.

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 borrowing in local currency, or by conducting transactions denominated in U.S. dollars. The Company consolidates the bulk of its foreign exchange exposure related to intercompany transactions in its international finance subsidiary. The Company continues to evaluate foreign currency exposures and related protection measures.

For the quarter ended August 31, 2004, $62.5 million, or 22.5%, of the Company’s revenues were from the Company’s operations in the PRC. With the exception of intercompany activity, all revenues and expenses of the PRC operations are in RMB. The Company does not hold derivative instruments related to the RMB.

The Company has forward purchase contracts relating to USD $1.9 million of its receivables in its Chile operations which were denominated in Chilean Pesos. The contracts are a combination of deliverable and non-deliverable and are in terms matching the length of the receivable, maturing in September and October 2004. The Company holds no other derivative instruments.

Interest Rate Risk

The Company manages its borrowings under its Facility each business day to minimize interest expense. The interest rate of the Facility is an index rate at the time of borrowing plus an applicable margin. The interest rate is based on either the agent bank’s prime lending rate or the London Interbank Offered Rate. During the quarter ended August 31, 2004, the interest rate of borrowings under the Facility ranged from 5.0% to 5.5%. The interest rate increased to 5.75% on September 21, 2004, as a result of changes in banks’ prime lending rates. A one percent change in variable interest rates will not have a material impact on the Company. The Company has short-term borrowings in the PRC bearing interest between 3.5% and 5.0% (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources”). The Senior Notes due in January 2007 bear interest at 12.0%.

Item 4. Controls and Procedures

The Company’s management, with the participation of the Executive Chairman and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Executive Chairman and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, except as noted below, are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the SEC. There were no changes in the Company’s internal control over financial reporting during the quarter ended August 31, 2004, other than described below, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company has substantially completed the documentation requirements and initial testing of internal controls as part of its compliance with Section 404 of Sarbanes-Oxley. As a result of the documentation and testing, the Company has identified a number of deficiencies. The deficiencies are primarily in four areas and were generally noted in all the regions:

information technology access controls

information technology change controls

documentation of controls and evidence of performance of controls

segregation of duties

The Company has begun remediation on the majority of these deficiencies. However, the remediation may not be complete by November 30, 2004, or have been completed for a sufficient period of time to demonstrate the effectiveness of the remediation. Although Company management does not consider any individual deficiency to be material, the aggregation of these deficiencies, if not adequately remediated, could potentially result in one or more material weaknesses.

In connection with the exit from Singapore, the Company instituted additional approval requirements for purchases and disbursements.

While the Company’s management, including the Executive Chairman and the Chief Financial Officer, believes that its disclosure controls and procedures provide reasonable assurance that fraud can be detected and prevented, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, errors and instances of fraud, if any, have been detected. A control system, no matter how well conceived and operated, can provide only reasonable and not absolute assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Part II—OTHER INFORMATION

Item 1. Legal Proceedings

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.


10.1		Amended and Restated Employment Agreement, executed on September 1, 2004, and effective as of May 1, 2004, by and among CellStar, Ltd., CellStar Corporation and Terry S. Parker. (1) (2)

10.2		Eleventh Amendment and Waiver to Loan Agreement, dated as of August 31, 2004, by and among CellStar Corporation and each of CellStar Corporation’s subsidiaries signatory thereto, as Borrowers, the lenders signatory thereto, as Lenders, and Wells Fargo Foothill, Inc. f/k/a/ Foothill Capital Corporation, in its capacity as agent for the Lenders. (1)

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)

32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)

32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)

(1)

Filed herewith.

(2)

The exhibit is a management contract or compensatory plan or agreement.

(b) Reports on Form 8-K

On September 7, 2004, the Company filed a Current Report on Form 8-K under Item 1.01 describing the Amended and Restated Employment Agreement by and among CellStar Corporation, CellStar, Ltd. and Terry S. Parker.

On September 22, 2004, the Company filed a Current Report on Form 8-K under Items 2.02, 2.05, and 9.01 containing the press release announcing lower than expected second quarter earnings in its Asia-Pacific Region and scheduling its related earnings release and conference call, and also describing charges expected to be incurred related to the exit of its operations in Singapore and The Philippines.

On September 24, 2004, the Company filed a Current Report on Form 8-K under Items 2.02 and 9.01 containing the transcript of the conference call that discussed, among other things, expected financial results for its Asia Pacific operations for the third quarter of 2004 and new strategies with respect to those operations.

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

By:		/s/ RAYMOND L. DURHAM
		Raymond L. Durham Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

October 14, 2004

EXHIBIT INDEX



10.1		Amended and Restated Employment Agreement, executed on September 1, 2004, and effective as of May 1, 2004, by and among CellStar, Ltd., CellStar Corporation and Terry S. Parker. (1) (2)

10.2		Eleventh Amendment and Waiver to Loan Agreement, dated as of August 31, 2004, by and among CellStar Corporation and each of CellStar Corporation’s subsidiaries signatory thereto, as Borrowers, the lenders signatory thereto, as Lenders, and Wells Fargo Foothill, Inc. f/k/a/ Foothill Capital Corporation, in its capacity as agent for the Lenders. (1)

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)

32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)

32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)

(1)

Filed herewith.

(2)

The exhibit is a management contract or compensatory plan or agreement.

EX-10.1 2 dex101.htm AMENDED AND RESTATED EMPLOYMENT AGREEMENT Amended and Restated Employment Agreement

Exhibit 10.1

AMENDED AND RESTATED

EMPLOYMENT AGREEMENT

This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Agreement”), executed this 1^st day of September, 2004, effective as of May 1, 2004 (the “Effective Date”), is made by and among CellStar Ltd., a Texas limited partnership (the “Employer”), CellStar Corporation, a Delaware corporation and parent company of Employer (“Parent”), and Terry S. Parker (the “Employee”).

R E C I T A L S

WHEREAS, Employer, Employee and Parent are parties to that certain Employment Agreement, dated July 5, 2001 (the “Old Employment Agreement”), whereby Employer has obtained the benefit of the services of Employee as an employee of Employer for the period of time and subject to the terms and conditions provided therein;

WHEREAS, Employer, Employee and Parent wish to amend and restate the provisions of the Old Employment Agreement in their entirety by means of this Agreement, with the intent that (i) the provisions of this Agreement shall supercede and replace the provisions of the Old Employment Agreement in their entirety and (ii) that Employee’s employment with Employer shall be governed by this Agreement effective as of the Effective Date;

WHEREAS, Employer desires that Employee participate in Parent’s equity and incentive compensation plans and other benefits as provided herein; and

WHEREAS, the Board of Directors of Parent deems it advisable and in the best interests of Parent and Employer to enter into this Agreement with Employee;

A G R E E M E N T

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereby agree as follows:

ARTICLE I

Employment

1.1 Employment. Employee currently serves as an employee of Employer. Effective as of the Effective Date, Employee’s employment shall be governed by, and shall be continued under, the terms and conditions contained in this Agreement.

1.2 Term. Subject to the provisions of the next sentence, the term of this Agreement shall commence on the Effective Date and shall end on the two (2) year anniversary of the Effective Date (the “Original Term”), unless earlier terminated as provided herein (the period from the Effective Date to the date of the termination of this Agreement is hereinafter referred to as the “Term”). At the expiration of the Original Term, this Agreement shall automatically be renewed for one (1) additional year (the “Renewal Term”) unless (i) notice of any decision not to renew this Agreement is given by Employer or Employee at least one hundred eighty (180) days prior to the expiration of the Original Term or (ii) this Agreement is earlier terminated as provided herein. At the end of the Renewal Term, the Term shall terminate, unless Employee and Employer agree in writing to extend the Term for an additional period.

1.3 Position and Duties.

(a) Position. During the Term, Employee shall serve as the chief executive officer with the title of Executive Chairman of Employer and Parent, with authority, duties and responsibilities consistent with such position, and shall perform such other services for Employer, Parent and their affiliated entities consistent with such position as may be reasonably assigned to him from time to time by the board of directors of the general partner of Employer or the Board of Directors of Parent. During the Term, Employee shall, if reasonably requested to do so and if so elected or appointed, also accept election or appointment, and serve, as an officer and/or director of Employer or any of its affiliated entities and perform the duties appropriate thereto, without additional compensation other than as set forth herein. Employee’s actions hereunder shall at all times be subject to the direction of the board of directors of the general partner of Employer or the Board of Directors of Parent.

(b) Commitment. During the Term, Employee shall devote substantially all of his business time, energy, skill and best efforts to the performance of his duties hereunder in a manner that will faithfully and diligently further the business and interests of Employer, Parent and their affiliated entities. Subject to the foregoing, Employee may serve in any capacity with any civic, educational or charitable organization; provided that such activities and services do not interfere or conflict with the performance of his duties hereunder. Employee shall comply with policies, standards and regulations established from time to time by the board of directors of the general partner of Employer or the Board of Directors of Parent.

1.4 Compensation.

(a) Base Salary. Subject to Section 1.4(c) below, beginning on the Effective Date, Employer shall pay Employee as compensation an aggregate salary (“Base Salary”) of five hundred thousand dollars ($500,000) per year during the Term, or such greater amount as shall be approved in accordance with the policies of Employer and/or Parent, as applicable. The Base Salary for each year shall be paid by Employer in accordance with the regular payroll practices of Employer.

(b) Annual Incentive Payment. Employee shall be eligible to participate in an annual incentive plan approved by the Board of Directors of Parent.

(c) Withholding. With respect to any compensation received by Employee with respect to Employee’s services for Employer or any of its affiliates, Employer will deduct such withholding and other payroll taxes as are required to be withheld by Employer under applicable law.

(d) Equity Incentive Awards. Employee shall be entitled to annual consideration for future grants of stock options and other forms of equity incentive awards in amounts (if any) and on terms and conditions to be determined by the Board of Directors of Parent.

(e) Payment and Reimbursement of Expenses. During the Term, Employer shall pay or reimburse Employee for all reasonable travel and other expenses incurred by Employee in performing his obligations under this Agreement in accordance with the policies and procedures of Employer or Parent, provided that Employee properly accounts therefor in accordance with the regular policies of Employer or Parent, as applicable.

(f) Fringe Benefits and Perquisites. During the Term, Employee shall be entitled to participate in or receive benefits under any stock purchase, profit-sharing, pension, retirement, paid time off, life, medical, dental, disability or other plan or arrangement made generally available by Employer or Parent to employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Employee shall be credited with the greater of 10 years or his actual years of service with Employer as of the Effective Date for purposes of determining eligibility and vesting for paid time off and short-term disability benefits. Without limiting the generality of the foregoing, Employer shall maintain long-term disability insurance for Employee that provides for annual disability payments equal to the lesser of (i) sixty percent (60%) of Employee’s Base Salary, after giving effect to all other disability benefits that would be payable to Employee by Parent, Employer or government agencies, or (ii) such lesser amount that may be payable under insurance policies that Employer can purchase in accordance with normal insurance underwriting standards.

1.5 Termination by Employer.

(a) Disability. Employer may terminate this Agreement for Disability. “Disability” shall exist if, because of ill health or physical or mental disability, Employee shall have been unable to perform the essential functions of his position under this Agreement, after reasonable accommodation by Employer, as determined in good faith by Parent’s Board of Directors or a committee thereof, for a period of one hundred eighty (180) consecutive days, or if, in any 12-month period, Employee shall have been unable or shall have failed to perform his duties for a period of one hundred thirty (130) or more business days, irrespective of whether or not such days are consecutive days.

(b) Cause. Employer may terminate Employee’s employment for Cause. Termination for “Cause” shall mean termination because of Employee’s (i) gross incompetence, (ii) willful misconduct that causes or is likely to cause material economic harm to Employer, Parent or their affiliated entities or that brings or is likely to bring material discredit to the reputation of Employer, Parent or any of their affiliated entities, as determined by the Board of Directors of Parent in good faith, (iii) failure to substantially follow directions of the board of directors of the general partner of Employer or the Board of Directors of Parent that are consistent with his duties under this Agreement, provided, that no act, or failure to act, on Employee’s part shall be deemed to constitute Cause unless done, or omitted to be done, by Employee not in good faith and without reasonable belief that Employee’s act, or failure to act, was in or not opposed to the best interest of Employer, (iv) conviction of, or entry of a pleading of guilty or nolo contendere to, any crime involving moral turpitude or entry of an order duly issued by any federal or state regulatory agency having jurisdiction in the matter permanently prohibiting Employee from participating in the conduct of the affairs of Employer, Parent or their affiliated entities, or (v) any other material breach of any provision of this Agreement. Items (i), (ii), (iii) and (v) of this Section shall not constitute Cause unless Employer or Parent notified Employee thereof in writing, specifying in reasonable detail the basis therefor and stating that it is grounds for Cause. Furthermore, if Employee’s actions are curable, items (i), (ii), (iii) and (v) of this Section shall not constitute Cause unless Employee fails to cure such matter within thirty (30) days after such notice is sent or given under this Agreement. Notwithstanding the previous sentence, if Employer has given notice to Employee of the same action covered by item (i), (ii), (iii), or (iv) on three separate occasions, Cause shall exist for terminating Employee upon the giving of the third notice, and Employee shall not have the right to cure such matter covered by the third notice. It is understood that “Cause” shall not include a failure to perform due to a Disability.

(c) Without Cause. Employer may, at any time, terminate Employee’s employment Without Cause. Termination “Without Cause” shall mean termination of Employee’s employment by Employer other than termination for Cause or for Disability.

(d) Employer Explanation of Termination. Upon termination of this Agreement by Employer, Employer shall give prompt written notice (the “Employer Termination Notice”) to Employee advising Employee of such termination. The Employer Termination Notice shall state in reasonable detail the basis for such termination and shall indicate whether the termination is being made for Cause, Without Cause or for Disability.

(e) Definition of Date of Termination. “Date of Termination” shall mean the last day of Employee’s employment.

(f) Payments upon Termination by Employer. After termination by Employer, Employer shall provide the following payments to Employee:

(i) If Employer terminates Employee’s employment for Disability, Employer’s obligation to pay salary and benefits pursuant to Section 1.4 (Compensation) shall terminate, except that Employer shall pay Employee accrued but unpaid salary and benefits pursuant to Section 1.4 (Compensation) through the Date of Termination, after giving effect to all disability benefits received by Employee under the terms of any applicable disability policy.

(ii) If Employer terminates Employee’s employment for Cause, then Employer’s obligation to make payments and provide benefits pursuant to Section 1.4 (Compensation) shall terminate, except that Employer shall pay Employee his accrued but unpaid Base Salary and benefits pursuant to Section 1.4 (Compensation) through the Date of Termination; provided, however, that Employee shall not be entitled to any payment pursuant to Section 1.4(b) (Annual Incentive Payment) for the fiscal year of Parent in which such termination occurs.

(iii) Subject to Section 1.7(b) (Termination Following a Change in Control), if Employer terminates Employee’s employment Without Cause, then Employer shall pay to Employee, as severance pay in a lump sum on the thirtieth (30^th) day following the Date of Termination, the following amounts:

(1) his accrued but unpaid Base Salary through the Date of Termination at the rate in effect as of the Date of Termination; and

(2) in lieu of any further Base Salary, annual incentive payments or other forms of compensation for periods subsequent to the Date of Termination, an amount equal to the result obtained from the following equation:

[(S + B) ÷ 365] x D

where

S =

Employee’s Base Salary at the rate in effect as of the Date of Termination.

B =

the greater of (i) the amount of the annual incentive payment made (or to be made) to Employee pursuant to Section 1.4(b) (Annual Incentive Payment) for the fiscal year of Parent immediately preceding the fiscal year that includes the Date of Termination or (ii) the average of the annual incentive payments made (or to be made) to Employee for each of the last three fiscal years of Parent immediately preceding the fiscal year that includes the Date of Termination

D =

the number of days from the Date of Termination to the last day of the Original Term (or, if such termination occurs within one hundred eighty (180) days of the expiration of the Original Term and neither Employee nor Employer has given prior notice of their decision to not renew this

Agreement, the last day of the Renewal Term), provided, in no event shall the number of days determined under this item be less than three hundred sixty-five (365) days.

In addition, Employee will be entitled to (A) a prorated portion of any annual incentive payment earned for the fiscal year in which his employment is terminated, if earned in accordance with the terms of its grant and (B) the services of an outplacement consultant who is selected by Employer and reasonably acceptable to Employee and whose fees are paid by Employer.

(g) Waiver of Other Rights upon Employer Termination. Employee hereby acknowledges and agrees that the payments by Employer under Section 1.5(f) ( Payments upon Termination by Employer) shall be the sole and exclusive remedy of Employee for termination of Employee’s employment by Employer and Employee hereby waives any and all other remedies under law or in equity.

1.6 Termination by Employee.

(a) Company Breach. Employee may terminate his employment hereunder for Company Breach. For purposes of this Agreement, a “Company Breach” shall be deemed to occur in the event of a material breach of this Agreement by Employer or Parent; provided, however, that Employee shall not be entitled to terminate for Company Breach unless Employee notifies Employer thereof in writing, specifying in reasonable detail the basis therefor and stating that it is grounds for Company Breach, and unless Employer fails to cure such Company Breach within thirty (30) days after such notice is sent or given under this Agreement. For purposes of this Agreement, a material breach by Employer or Parent shall include, without limitation, (i) the reduction in Employee’s Base Salary as in effect on the Effective Date, (ii) a change in Employee’s duties or responsibilities with Employer or Parent that (A) represents a substantial reduction of the duties or responsibilities of Employee as in effect immediately prior thereto and (B) Employee does not expressly consent to in writing, or (iii) if Employee’s eligibility for a bonus in any fiscal year (provided that all performance standards established for him have been achieved) shall be, in terms of a percentage of base salary, any amount less than the percentage of base salary established for the President and Chief Executive Officer of Parent for such fiscal year.

(b) Voluntary Resignation. During the Term, Employee may voluntarily terminate his employment upon thirty (30) days prior written notice to Employer, which notice may be waived by Employer in Employer’s discretion. “Voluntary Resignation” shall mean termination of Employee’s employment by Employee other than termination for Company Breach.

(c) Employee Explanation of Termination. Upon termination of this Agreement by Employee, Employee shall give prompt written notice (the “Employee Termination Notice”) to Employer of such termination. The Employee Termination Notice shall state in reasonable detail the basis for such termination and shall indicate

whether the termination is being made for Company Breach or if the termination is due to Voluntary Resignation.

(d) Payments upon Termination by Employee. Employer shall provide the following payments to Employee upon Employee’s termination of this Agreement:

(i) If Employee’s termination is due to Voluntary Resignation, then Employer’s obligation to make payments and provide benefits pursuant to Section 1.4 (Compensation) shall terminate, except that Employer shall pay Employee his accrued but unpaid Base Salary and benefits pursuant to Section 1.4 (Compensation) through the Date of Termination; provided, however, that Employee shall not be entitled to any payment pursuant to Section 1.4(b) (Annual Incentive Payment) for the fiscal year of Parent in which such termination occurs.

(ii) Subject to Section 1.7(b) (Termination Following a Change in Control), if Employee terminates his employment for Company Breach, then Employee shall be entitled to the payments specified in Section 1.5(f)(iii) as if Employee were terminated by Employer Without Cause; provided, that if the termination for Company Breach is based upon a material reduction by Employer of Employee’s Base Salary, then for the purposes of the calculations set forth in Section 1.5(f)(iii), Employee’s Base Salary as of the Date of Termination shall be deemed to be Employee’s Base Salary immediately prior to the reduction that Employee claims as grounds for Company Breach.

(e) Waiver of Other Rights upon Employee Termination. Employee hereby acknowledges and agrees that the payments by Employer under Section 1.6(d) (Payments upon Termination by Employee) shall be the sole and exclusive remedy of Employee for termination of Employee’s employment by Employee, and Employee hereby waives any and all other remedies under law or in equity.

1.7 Change in Control.

(a) Definition of Change in Control. For the purposes of this Agreement, a “Change in Control” shall mean any of the following:

(i) any consolidation or merger of Parent in which Parent is not the continuing or surviving corporation or pursuant to which shares of Parent’s common stock would be converted into cash, securities or other property, other than a merger of Parent in which the holders of Parent common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger (subject to adjustment for rounding or fractional interests resulting therefrom);

(ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of Parent;

(iii) any approval by the stockholders of Parent of any plan or proposal for the liquidation or dissolution of Parent;

(iv) the cessation of control (by virtue of their not constituting a majority of directors) of Parent’s Board of Directors by the individuals (the “Continuing Directors”) who (x) at the date of this Agreement were directors or (y) become directors after the date of this Agreement and whose election or nomination for election by Parent’s stockholders, was approved by a vote of at least two-thirds of the directors then in office who were directors at the date of this Agreement (or whose election or nomination for election was previously so approved);

(v) (A) the acquisition of beneficial ownership (“Beneficial Ownership”), within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of an aggregate of fifteen percent (15%) or more of the voting power of Parent’s outstanding voting securities by any person or group (as such term is used in Rule 13d-5 under the Exchange Act) who Beneficially Owned less than ten percent (10%) of the voting power of Parent’s outstanding voting securities on the Effective Date of this Agreement, (B) the acquisition of Beneficial Ownership of an additional five percent (5%) of the voting power of Parent’s outstanding voting securities by a person or group who Beneficially Owned at least ten percent (10%) of the voting power of Parent’s outstanding voting securities on the Effective Date of this Agreement, or (C) the execution by Parent and a stockholder of a contract that by its terms grants such stockholder (in its, his or her capacity as a stockholder) or such stockholder’s Affiliate (as defined in Rule 405 promulgated under the Securities Act of 1933 (an “Affiliate”)) including, without limitation, such stockholder’s nominee to Parent’s Board of Directors (in its, his or her capacity as an Affiliate of such stockholder), the right to veto or block decisions or actions of Parent’s Board of Directors; provided, however, that notwithstanding the foregoing, the events described in items (A), (B) or (C) above shall not constitute a Change in Control hereunder if the acquiror is (1) a trustee or other fiduciary holding securities under an employee benefit plan of Employer, Parent or one of their affiliated entities and acting in such capacity, (2) a corporation owned, directly or indirectly, by the stockholders of Parent in substantially the same proportions as their ownership of voting securities of Parent, (3) a person or group meeting the requirements of clauses (i) and (ii) of Rule 13d-1(b)(1) under the Exchange Act or (4) in the case of an acquisition described in items (A) or (B) above (but not in the case of an acquisition described in item (C) above), any other person whose ownership or acquisition of shares of voting securities is approved by a majority of the Continuing Directors; provided further, that none of the following shall constitute a Change in Control: (aa) the right of the holders of any voting securities of Parent to vote as a class on any matter or (bb) any vote required of disinterested or unaffiliated directors or stockholders including, without limitation, pursuant to Section 144 of the Delaware General Corporation Law or Rule 16b-3 promulgated pursuant to the Exchange Act; or

(vi) subject to applicable law, in a Chapter 11 bankruptcy proceeding, the appointment of a trustee or the conversion of a case involving Parent to a case under Chapter 7.

(b) Termination Following a Change in Control. Notwithstanding the provisions of Section 1.5 (Termination by Employer) or Section 1.6 (Termination by Employee) hereof, if, during the twenty-four (24) month period after a Change in Control, Employee terminates his employment for Company Breach or Forced Relocation (as defined below), or if Employer or Parent terminates Employee Without Cause during such period, then in lieu of any payments that Employee would be otherwise entitled to receive pursuant to Section 1.5(f)(iii) or Section 1.6(d)(ii) of this Agreement, Employer shall pay to Employee as severance pay and as liquidated damages (because actual damages are difficult to ascertain), in a lump sum, in cash, within thirty (30) days after termination, an amount which is equal to three (3) times the sum of (A) Employee’s Base Salary as of the Date of Termination (or such greater amount of Base Salary that was paid to Employee prior to any material salary reduction that serves as the basis for termination by Employee upon Company Breach) plus (B) the greater of (x) the amount of the annual incentive payment that Employee received (or will receive) pursuant to Section 1.4(b) (Annual Incentive Payment) for the fiscal year of Parent immediately preceding the fiscal year of the Date of Termination or (y) the average of the annual incentive payments made (or to be made) to Employee for each of the last three fiscal years of Parent immediately preceding the fiscal year that includes the Date of Termination; provided, however, that if such payment, either alone or together with other payments or benefits, either cash or non-cash, that Employee has the right to receive from Employer, including, but not limited to, accelerated vesting or payment of any deferred compensation, options, stock appreciation rights or any benefits payable to Employee under any plan for the benefit of employees, would constitute an “excess parachute payment” (as defined in Section 280G of the Internal Revenue Code of 1986), then such payment or other benefit shall be reduced to the largest amount that will not result in receipt by Employee of a parachute payment. The determination of the amount of the payment described in this Section shall be made by Parent’s independent auditors.

In addition, Employee will be entitled to (X) the services of an outplacement consultant who is selected by Employer and reasonably acceptable to Employee and whose fees are paid by Employer and (Y) reimbursement from Employer for all reasonable costs and expenses (including without limitation, attorneys’ fees) incurred by Employee in enforcing the provisions of this Section 1.7(b) or Section 1.8 (Employee Benefits after Termination) against Employer or Parent.

For the purposes of this Section 1.7(b), after a Change in Control, “Forced Relocation” shall mean Parent or Employer requiring Employee to be based at any place outside a fifty (50) mile radius of Parent’s Carrollton, Texas headquarters as in use on the date of this Agreement, except for reasonable travel on behalf of Employer or Parent.

Employee hereby acknowledges and agrees that the payments by Employer under this Section 1.7(b) shall be the sole and exclusive remedy of Employee for termination of Employee’s employment Without Cause or by reason of a Company Breach or Forced Relocation within the twenty-four (24) month period following a Change in Control, and Employee hereby waives any and all other remedies under law or in equity.

1.8 Employee Benefits after Termination. Employer shall maintain in full force and effect (to the extent consistent with past practice), for the continued benefit of Employee and, if applicable, his spouse and children, the employee benefits set forth in subsections 1.4(f) (Fringe Benefits and Perquisites) through the Date of Termination (subject to the provisions of Section 1.5(f)(i)); provided, that his continued participation or, if applicable, the participation of his spouse and children, is possible under the general terms and conditions of such plans and programs. Following the Date of Termination, Employee and his eligible dependents shall be eligible for continued health coverage in accordance with the terms of applicable law. Notwithstanding the foregoing, if Employee is terminated Without Cause or resigns upon a Company Breach, or resigns as a result of a Forced Relocation within the twenty-four (24) month period following a Change in Control, then Employer shall maintain health and life insurance coverage for the benefit of Employee and, if applicable, his spouse and children, for a period of time equal to (i) if the Date of Termination is not within the twenty-four (24) month period after a Change in Control, the lesser of (A) five hundred forty five (545) days and (B) the number of days utilized in the formula specified in Section 1.5(f)(iii) above, or (ii) if the Date of Termination is within the twenty-four (24) month period after a Change in Control, three (3) years; provided, however, that Employer’s obligation to provide such health and life insurance coverage shall be reduced to the extent that Employer is not able to obtain such coverage in accordance with normal insurance underwriting standards. Such insurance shall be maintained in substantially the same manner (including without limitation, coverage amounts, deductibles and level of premium contributions required by Employee) as it was maintained immediately prior to the Date of Termination.

1.9 Death of Employee. Notwithstanding any other provision of this Agreement to the contrary, if Employee dies prior to the expiration of this Agreement, Employee’s employment and other obligations under this Agreement shall automatically terminate and all compensation to which Employee is or would have been entitled hereunder (including without limitation under Sections 1.4(a) (Base Salary) and 1.4(b) (Annual Incentive Payment)) shall terminate as of the end of the month in which Employee’s death occurs; provided, however, that (i) Employer shall pay to Employee’s estate, as soon as practicable, a prorated amount of the annual incentive payment specified in Section 1.4(b) for the fiscal year of Parent in which Employee’s death occurs, if earned in accordance with Parent’s annual incentive plan; and (ii) for the balance of the month in which Employee’s death occurs, Employee’s spouse and children shall be entitled to receive their benefits under Employer’s group hospitalization, medical and dental plans (if any), to the extent permitted under the terms of such plans, and thereafter Employee’s dependents shall have a right to continued health coverage in accordance with the terms of applicable law.

ARTICLE 2

Non-Competition and Confidentiality

2.1 Training/Confidential Information. For purposes of this Article 2 (Non-Competition and Confidentiality), the term “the Company” shall be construed to include Employer, Parent and any and all Affiliates of Employer and Parent.

The Company shall provide Employee with specialized knowledge and training regarding the business in which the Company is involved, and will provide Employee with initial and ongoing confidential information and trade secrets of the Company (hereinafter referred to as “Confidential Information”). For purposes of this Agreement, Confidential Information includes, but is not limited to:

(a) Customer lists and prospect lists developed by the Company;

(b) Information regarding the Company’s customers which Employee acquired as a result of his employment with Employer, including but not limited to, customer contracts, work performed for customers, customer contacts, customer requirements and needs, data used by the Company to formulate customer bids, customer financial information and other information regarding the customer’s business;

(c) Information regarding the Company’s vendors which Employee acquired as a result of his employment with Employer, including but not limited to, product and service information and other information regarding the business activities of such vendors;

(d) Information related to the Company’s business, including but not limited to marketing strategies and plans, sales procedures, operating policies and procedures, pricing and pricing strategies, business plans, sales, profits, and other business and financial information of the Company;

(e) Training materials developed by and utilized by the Company;

(f) Any other information which Employee acquired as a result of his employment with Employer and which Employee has a reasonable basis to believe the Company would not want disclosed to a business competitor or to the general public; and

(g) Information which:

(i) is proprietary to, about or created by the Company;

(ii) gives the Company some competitive advantage, the opportunity of obtaining such advantage or the disclosure of which could be detrimental to the interests of the Company;

(iii) is not typically disclosed to non-employees by the Company, or otherwise is treated as confidential by the Company; or

(iv) is designated as Confidential Information by the Company or from all the relevant circumstances should reasonably be assumed by Employee to be confidential to the Company.

Notwithstanding the foregoing, Confidential Information shall not include any information that is or has become public knowledge, other than by acts by Employee or representatives of Employee in violation of this Agreement.

2.2 Non-Disclosure. Employee acknowledges, understands and agrees that all Confidential Information, whether developed by the Company or others or whether developed by Employee while carrying out the terms and provisions of this Agreement (or previously while serving as an officer of the Company), shall be the exclusive and confidential property of the Company and (i) shall not be disclosed to any person (except as otherwise required by law or legal process) other than employees of the Company and professionals engaged on behalf of the Company, and other than disclosure in the scope of the Company’s business in accordance with the Company’s policies for disclosing information, (ii) shall be safeguarded and kept from unintentional disclosure and (iii) shall not be used for Employee’s personal benefit. Subject to the terms of the preceding sentence, Employee shall not use, copy or transfer Confidential Information other than as is necessary in carrying out his duties under this Agreement.

2.3 Return of Company Property and Information. Upon termination of employment, or at any earlier time as directed by the Company, Employee shall immediately deliver to the Company any and all Confidential Information in Employee’s possession, any other documents or information which Employee acquired as a result of his employment with Employer, and any copies of such documents/information. Employee shall not retain any originals or copies of such documents or materials related to the Company’s business which Employee came into possession of or created as a result of his employment at the Company. Employee acknowledges that such information, documents and materials are the exclusive property of the Company. Upon termination of employment, or at any earlier time as directed by the Company, Employee shall immediately deliver to the Company any property of the Company in Employee’s possession. Employee agrees that should he fail to return any Company property, the Company shall be entitled to deduct from any sums otherwise due Employee (including, but not necessarily limited to wages and expense reimbursements) the cost and/or value of any property which Employee fails to return, up to the maximum amount allowed by law. Employee hereby authorizes the Company to deduct and/or withhold any such sums from Employee’s wages and/or other sums due to Employee.

2.4 Non-Competition.

(a) Description of Proscribed Actions. During the Term and for a period thereafter equal to (X) in the event of a termination Without Cause, resignation for Company Breach or resignation for Forced Relocation pursuant to Section 1.7(b) (Termination Following a Change in Control), twelve (12) months, and (Y) in all other

cases, eighteen (18) months, in consideration for the obligations of Employer and Parent hereunder, including without limitation their disclosure (pursuant to Section 2.1 (Training/Confidential Information) above) of Confidential Information, Employee shall not, unless approved in writing by a duly passed resolution of the Board of Directors of Parent:

(i) directly or indirectly, engage or invest in, own, manage, operate, control or participate in the ownership, management, operation or control of, be employed by, associated or in any manner connected with, or render services or advice to, any Competing Business (defined below); provided, however, that Employee may invest in the securities of any enterprise (but without otherwise participating in the activities of such enterprise) if (x) such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Exchange Act and (y) Employee is not the Beneficial Owner of more than five percent (5%) of the outstanding capital stock of such enterprise;

(ii) directly or indirectly, either as principal, agent, independent contractor, consultant, director, officer, employee, employer, advisor (whether paid or unpaid), stockholder, partner or in any other individual or representative capacity whatsoever, either for his own benefit or for the benefit of any other person or entity, solicit, divert or take away any suppliers, customers or clients of the Company or any of its Affiliates; or

(iii) directly or indirectly, either as principal, agent, independent contractor, consultant, director, officer, employee, employer, advisor (whether paid or unpaid), stockholder, partner or in any other individual or representative capacity whatsoever, either for his own benefit or for the benefit of any other person or entity, either (A) hire, attempt to hire, contact or solicit with respect to hiring, any employee of Employer or Parent or any Affiliate thereof, (B) induce or otherwise counsel, advise or encourage any employee of Employer, Parent or any Affiliate thereof to leave the employment of Employer, Parent or any Affiliate thereof, or (C) induce any representative or agent of Employer, Parent or any Affiliate thereof to terminate or modify its relationship with Employer, Parent or such Affiliate.

(b) Judicial Modification. Employee agrees that if a court of competent jurisdiction determines that the length of time or any other restriction, or portion thereof, set forth in this Section 2.4 (Non-Competition) is overly restrictive and unenforceable, the court may reduce or modify such restrictions to those which it deems reasonable and enforceable under the circumstances, and as so reduced or modified, the parties hereto agree that the restrictions of this Section 2.4 (Non-Competition) shall remain in full force and effect. Employee further agrees that if a court of competent jurisdiction determines that any provision of this Section 2.4 (Non-Competition) is invalid or against public policy, the remaining provisions of this Section 2.4 (Non-Competition) and the remainder of this Agreement shall not be affected thereby, and shall remain in full force and effect.

(c) Nature of Restrictions. Employee acknowledges that the business of Employer and Parent and their Affiliates is international in scope and that the restrictions imposed by this Agreement are legitimate, reasonable and necessary to protect Employer’s, Parent’s and their Affiliates’ investment in their businesses and the goodwill thereof. Employee acknowledges that the scope and duration of the restrictions contained herein are reasonable in light of the time that Employee has been or will be engaged in the business of Employer, Parent and/or their Affiliates, and Employee’s relationship with the suppliers, customers and clients of Employer, Parent and their Affiliates. Employee further acknowledges that the restrictions contained herein are not burdensome to Employee in light of the consideration paid therefor and the other opportunities that remain open to Employee. Moreover, Employee acknowledges that he has other means available to him for the pursuit of his livelihood.

(d) Competing Business. “Competing Business” shall mean any individual, business, firm, company, partnership, joint venture, organization, or other entity engaged in the wholesale distribution or retail sales of wireless communication equipment in any domestic or international market area in which Employer, Parent or any of their Affiliates does business at any time during Employee’s employment with Employer or any of its Affiliates.

2.5 Injunctive Relief. Because of Employee’s experience and reputation in the industries in which Employer, Parent and their Affiliates operate, and because of the unique nature of the Confidential Information, Employee acknowledges, understands and agrees that Employer and Parent will suffer immediate and irreparable harm if Employee fails to comply with any of his obligations under Article 2 (Non-Competition and Confidentiality) of this Agreement, and that monetary damages will be inadequate to compensate Employer and Parent for such breach. Accordingly, Employee agrees that Employer and Parent shall, in addition to any other remedies available to them at law or in equity, be entitled to injunctive relief to enforce the terms of Article 2 (Non-Competition and Confidentiality), without the necessity of proving inadequacy of legal remedies or irreparable harm.

ARTICLE 3

Representations and Warranties by Employee

Employee hereby represents and warrants, the same being part of the essence of this Agreement, that, as of the Effective Date, he is not a party to any agreement, contract or understanding, and that no facts or circumstances exist, that would in any way restrict or prohibit his from undertaking or performing any of his obligations under this Agreement. The foregoing representation and warranty shall remain in effect throughout the Term.

ARTICLE 4

Indemnification

Parent agrees to indemnify, and advance expenses to, Employee to the extent provided in the Certificate of Incorporation and Bylaws of Parent as of the date of this Agreement. To the extent that a change in the Delaware General Corporation Law or other applicable law (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under Parent’s Certificate of Incorporation and Bylaws and this Agreement, it is the intent of the parties hereto that Employee shall enjoy by this Agreement the greater benefits so afforded by such change.

ARTICLE 5

Miscellaneous

5.1 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

5.2 Indulgences, Etc. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any right, remedy, power or privilege, nor shall any waiver of any right, remedy, power, or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence.

5.3 Employee’s Sole Remedy. Employee’s sole remedy shall be against Employer or Parent for any claim, liability or obligation of any nature whatsoever arising out of or relating to this Agreement or an alleged breach of this Agreement or for any other claim arising out of the termination of Employee’s employment hereunder (collectively, “Employee Claims”). Employee shall have no claim or right of any nature whatsoever against any of Employer’s or its Affiliates’ directors, former directors, officers, former officers, employees, former employees, stockholders, former stockholders, agents, former agents or the independent counsel in their individual capacities arising out of or relating to any Employee Claim. Employee hereby releases and covenants not to sue any person other than Employer or Parent over any Employee Claim. The persons described in this Section 5.3 (other than Employer, Parent and Employee) shall be third-party beneficiaries of this Agreement for purposes of enforcing the terms of this Section 5.3 (Employee’s Sole Remedy) against Employee.

5.4 Notices. All notices, requests, demands and other communications required or permitted under this Agreement and the transactions contemplated herein shall be in writing and shall be deemed to have been duly given, made and received when sent by telecopy (with a copy sent by mail) or when personally delivered or one business day after it is sent by overnight service, addressed as set forth below:

If to Employee:

Terry S. Parker

13330 Noel Road #1504

Dallas, Texas 75240

If to Employer or Parent:

CellStar Corporation

1730 Briercroft Court

Carrollton, Texas 75006

Attn: General Counsel

Any party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section for the giving of notice, which shall be effective only upon receipt.

5.5 Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part.

5.6 Entire Agreement. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written (including without limitation, the Old Employment Agreement), except as herein contained, which shall be deemed terminated effective immediately. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing.

5.7 Headings; Index. The headings of paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.

5.8 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, without giving effect to principles of conflict of laws.

5.9 Dispute Resolution. Subject to Employer’s and Parent’s right to seek injunctive relief in court as provided in Section 2.5 (Injunctive Relief) of this Agreement, any dispute, controversy or claim arising out of or in relation to or connection to this Agreement, including without limitation any dispute as to the construction, validity, interpretation, enforceability or breach of this Agreement, shall be exclusively and finally settled by arbitration, and any party may submit such dispute, controversy or claim, including a claim for indemnification under this Section 5.9 (Dispute Resolution), to arbitration.

(a) Arbitrators. The arbitration shall be heard and determined by one arbitrator, who shall be impartial and who shall be selected by mutual agreement of the parties; provided, however, that if the dispute involves more than $2,000,000, then the arbitration shall be heard and determined by three (3) arbitrators. If three (3) arbitrators are necessary as provided above, then (i) each side shall appoint an arbitrator of its choice within thirty (30) days of the submission of a notice of arbitration and (ii) the party-appointed arbitrators shall in turn appoint a presiding arbitrator of the tribunal within thirty (30) days following the appointment of the last party-appointed arbitrator. If (x) the parties cannot agree on the sole arbitrator, (y) one party refuses to appoint its party-appointed arbitrator within said thirty (30) day period or (z) the party-appointed arbitrators cannot reach agreement on a presiding arbitrator of the tribunal, then the appointing authority for the implementation of such procedure shall be the Senior United States District Judge for the Northern District of Texas, who shall appoint an independent arbitrator who does not have any financial interest in the dispute, controversy or claim. If the Senior United States District Judge for the Northern District of Texas refuses or fails to act as the appointing authority within ninety (90) days after being requested to do so, then the appointing authority shall be the Chief Executive Officer of the American Arbitration Association, who shall appoint an independent arbitrator who does not have any financial interest in the dispute, controversy or claim. All decisions and awards by the arbitration tribunal shall be made by majority vote.

(b) Proceedings. Unless otherwise expressly agreed in writing by the parties to the arbitration proceedings:

(i) The arbitration proceedings shall be held in Dallas, Texas, at a site chosen by mutual agreement of the parties, or if the parties cannot reach agreement on a location within thirty (30) days of the appointment of the last arbitrator, then at a site chosen by the arbitrators;

(ii) The arbitrators shall be and remain at all times wholly independent and impartial;

(iii) The arbitration proceedings shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association, as amended from time to time;

(iv) Any procedural issues not determined under the arbitral rules selected pursuant to item (iii) above shall be determined by the law of the place of arbitration, other than those laws which would refer the matter to another jurisdiction;

(v) Subject to Employee’s right to recover reasonable costs and expenses as set forth in Section 1.7(b) (Termination Following a Change in Control), the costs of the arbitration proceedings (including attorneys’ fees and costs) shall be borne in the manner determined by the arbitrators;

(vi) The decision of the arbitrators shall be reduced to writing; final and binding without the right of appeal; the sole and exclusive remedy regarding any claims, counterclaims, issues or accounting presented to the arbitrators; made and promptly paid in United States dollars free of any deduction or offset; and any costs or fees incident to enforcing the award shall, to the maximum extent permitted by law, be charged against the party resisting such enforcement;

(vii) The award shall include interest from the date of any breach or violation of this Agreement, as determined by the arbitral award, and from the date of the award until paid in full, at 6% per annum; and

(viii) Judgment upon the award may be entered in any court having jurisdiction over the person or the assets of the party owing the judgment or application may be made to such court for a judicial acceptance of the award and an order of enforcement, as the case may be.

5.10 Survival. The covenants and agreements of the parties set forth in Article 2 (Non-Competition and Confidentiality), and Article 5 (Miscellaneous) are of a continuing nature and shall survive the expiration, termination or cancellation of this Agreement, regardless of the reason therefor.

5.11 Subrogation. In the event of payment under this Agreement, Employer and Parent shall be subrogated to the extent of such payment to all of the rights of recovery of Employee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Employer or Parent effectively to bring suit to enforce such rights.

5.12 No Duplication of Payments. Employer and Parent shall not be liable under this Agreement to make any payment in connection with any claim made against Employee to the extent Employee has otherwise actually received payment (under any insurance policy, bylaw or otherwise) of the amounts otherwise indemnifiable hereunder.

5.13 Binding Effect, Etc. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of Employer, Parent, spouses, heirs, and personal and legal representatives. Employer and Parent shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of their business or assets, by written agreement in form and substance satisfactory to Employee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that Employer or Parent would be required to perform if no such succession had taken place.

5.14 Contribution. If the indemnity contained in this Agreement is unavailable or insufficient to hold Employee harmless in a claim for an indemnifiable event, then separate from

and in addition to the indemnity provided elsewhere herein, Parent shall contribute to expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by or on behalf of Employee in connection with such claim in such proportion as appropriately reflects the relative benefits received by, and fault of, Parent and Employer on the one hand and Employee on the other in the acts, transactions or matters to which the claim relates and other equitable considerations.

5.15 Parent Guaranty. Parent guarantees the payment and performance of all obligations of Employer under this Agreement and agrees it will pay or perform those obligations if for any reason Employer fails to do so. This guarantee is absolute, continuing, irrevocable and not conditional or contingent. Any notice given hereunder to either Employer or Parent will be deemed to be notice to Parent for purposes of this guaranty.

*********

[Remainder of page intentionally left blank.]

IN WITNESS WHEREOF, Employer and Parent have caused this Agreement to be executed by their officer/general partner thereunto duly authorized, and Employee has signed this Agreement, this 1^st day of September, 2004, effective as of the date first set forth above.


CELLSTAR LTD
By:		National Auto Center, Inc.
General Partner

By:		/s/ Elaine Flud Rodriguez
		Elaine Flud Rodriguez
		Sr. Vice President

CELLSTAR CORPORATION

By:		/s/ Elaine Flud Rodriguez
		Elaine Flud Rodriguez
		Sr. Vice President

EMPLOYEE

/s/ Terry S. Parker
Terry S. Parker

EX-10.2 3 dex102.htm ELEVENTH AMENDED AND WAIVER TO LOAN AGREEMENT Eleventh Amended and Waiver to Loan Agreement

Exhibit 10.2

ELEVENTH AMENDMENT AND WAIVER TO LOAN AGREEMENT

This ELEVENTH AMENDMENT AND WAIVER TO LOAN AGREEMENT (this “Amendment”) is dated as of August 31, 2004, by and among CELLSTAR CORPORATION, a Delaware corporation (“Parent”), each of Parent’s Subsidiaries signatory hereto (together with Parent, each an individual “Borrower”, and collectively, the “Borrowers”), the lenders signatory hereto (the “Lenders”), and WELLS FARGO FOOTHILL, INC., in its capacity as agent for the Lenders (the “Agent”).

W I T N E S S E T H:

WHEREAS, the Borrowers, the Lenders and the Agent have entered into that certain Loan and Security Agreement dated as of September 28, 2001, as amended by that certain First Amendment to Loan Agreement dated as of October 12, 2001, as further amended by that certain Second Amendment to Loan Agreement dated as of February 11, 2002, as further amended by that certain Third Amendment and Waiver to Loan Agreement dated as of May 9, 2002, as further amended by that certain Fourth Amendment to Loan Agreement effective as of May 9, 2002, as further amended by that certain Fifth Amendment to Loan Agreement dated as of November 13, 2002, as further amended by that certain Sixth Amendment to Loan Agreement dated as of February 6, 2003 as further amended by that certain Seventh Amendment to Loan Agreement dated as of February 28, 2003, as further amended by that certain Eighth Amendment and Waiver to Loan and Security Agreement dated as of May 31, 2003, as further amended by that certain Consent and Waiver and Ninth Amendment to Loan and Security Agreement dated as of February 24, 2004, and as further amended by that certain Tenth Amendment to Loan Agreement dated as of March 31, 2004 (as the same may be further modified, amended, restated or supplemented from time to time, the “Loan Agreement”), pursuant to which the Lenders have agreed to make loans and other financial accommodations to the Borrowers from time to time;

WHEREAS, the Borrowers have requested that the Agent and the Lenders amend certain terms of the Loan Agreement; and

WHEREAS, the Agent and the Lenders have agreed to the requested amendments on the terms and conditions set forth herein.

NOW THEREFORE, in consideration of the foregoing premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree that all capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in the Loan Agreement and further agree as follows:

1. Amendments to Section 1.1 of the Loan Agreement.

(a) Section 1.1 of the Loan Agreement, “Definitions”, is hereby modified and amended by deleting the existing definition of “Applicable Prepayment Premium” set forth therein and inserting the following definition in substitution thereof:

““Applicable Prepayment Premium” means, as of any date of determination, an amount equal to (a) during the period of time from and after the date of the execution and delivery of this Agreement up to the date that is the first anniversary of the Closing Date, 5%

times the Maximum Revolver Amount, (b) during the period of time from and including the date that is the first anniversary of the Closing Date up to the date that is the second anniversary of the Closing Date, 4% times the Maximum Revolver Amount, (c) during the period of time from and including the date that is the second anniversary of the Closing Date up to the date that is the third anniversary of the Closing Date, 3% times the Maximum Revolver Amount, (d) during the period of time from and including the date that is the third anniversary of the Closing Date up to the date that is the fourth anniversary of the Closing Date, 2% times the Maximum Revolver Amount, (e) during the period of time from and including the fourth anniversary of the Closing Date up to the date that is the fifth anniversary of the Closing Date, 1% times the Maximum Revolver Amount, and (f) during the period of time from and including the fifth anniversary of the Closing Date up to the Maturity Date, 0.5% times the Maximum Revolver Amount, provided, however, if the Applicable Prepayment Premium, as calculated hereunder, when added to all interest and other charges for the use of money as contemplated by the Official Code of Georgia Annotated, Section 7-4-18 (the “Interest Charges”) exceeds 5% per month (the “Legal Limit”), the amount of such Applicable Prepayment Premium shall be reduced to an amount which when added to the Interest Charges would equal the Legal Limit less $1.00.”

(b) Section 1.1 of the Loan Agreement, “Definitions”, is hereby modified and amended by deleting the existing definition of “Base Rate Margin” set forth therein and inserting the following definition in substitution thereof:

““Base Rate Margin” means 0.5 percentage points.”

(c) Section 1.1 of the Loan Agreement, “Definitions”, is hereby modified and amended by deleting the existing definition of “LIBOR Rate Margin” set forth therein and inserting the following definition in substitution thereof:

““LIBOR Rate Margin” means 3.5 percentage points.”

(d) Section 1.1 of the Loan Agreement, “Definitions”, is hereby modified and amended by deleting the existing definition of “Fixed Charge Coverage Ratio” set forth therein and inserting the following definition in substitution thereof:

““Fixed Charge Coverage Ratio” means, with respect to any Person during any fiscal period and without duplication, the ratio for such Person during such fiscal period, of (a) EBITDA, minus (i) cash capital expenditures, minus (ii) tax expense (excluding amounts to be offset by any net operating losses) for such Person during such fiscal period, plus cash tax refunds received in such period, plus (iii) Restructuring Expenses incurred during such fiscal period, plus (iv) to the extent deducted in calculating net earnings for the Subsidiaries operating within the geographic area comprising Asia, expenses in an aggregate amount of up to $6,500,000 incurred prior to November 30, 2004, in connection with the initial public offering of the Stock of any such Subsidiaries, to (b) (i) principal payments made by such Person on any Indebtedness during such fiscal period (other than (A) refinancings permitted by Section 7.1(d), (B) payments on Advances, (C) payments on revolving loans under any Permitted Foreign Subsidiary Credit Facility to the extent available to be reborrowed under such facility or to the

extent cash collateral is released as a result thereof, (D) payments under any Permitted Foreign Subsidiary Credit Facility with an initial term, including any permitted extensions thereof, of six (6) months or less, (E) cash payments on the Convertible Subordinated Debt required by Section 6.16, (F) refinancings of debt of a Foreign Subsidiary with the proceeds of a credit facility obtained by another Foreign Subsidiary within the same non-U.S. geographic region, (G) principal payments on a revolving credit facility of CellStar-Intercall AB (Cellstar Sweden) in an aggregate amount not exceeding $10,000,000 during any fiscal year, (H) principal payments on any accounts receivable factoring facility of CellStar Mexico to the extent such facility is with recourse to CellStar Mexico in an aggregate amount not exceeding $30,000,000 during any fiscal year, and (I) principal payments on any foreign accounts receivable factoring facility or other credit facility of CellStar Ltd. and/or National Auto Center, Inc. to the extent such facility is with recourse to CellStar Ltd. and/or National Auto Center, Inc.), and (ii) cash interest expense (other than interest expense on a principal amount of up to (A) $10,000,000 borrowed by CellStar-Intercall AB (Cellstar Sweden) under a revolving credit facility, (B) $30,000,000 borrowed by CellStar Mexico under an accounts receivable factoring facility, and (C) $30,000,000 borrowed by CellStar Mexico under a revolving credit facility) minus cash interest income during such fiscal period.”

(e) Section 1.1 of the Loan Agreement, “Definitions”, is hereby modified and amended by deleting the existing definition of “Restructuring Plan” set forth therein and inserting the following definition in substitution thereof:

““Restructuring Plan” means the Borrowers’ plan to (a) discontinue its foreign operations in the United Kingdom, Argentina, Ireland, Barbados, Peru, the Philippines and Singapore, (b) maximize the value to the Parent of its operations in Sweden, The Netherlands, Colombia and Chile, and (c) dispose, if appropriate, of the assets used in connection with such foreign operations through an asset sale, stock sale or otherwise, including the divestiture or liquidation of the Restructuring Subsidiaries.”

(f) Section 1.1 of the Loan Agreement, “Definitions”, is hereby modified and amended by deleting the existing definition of “Restructuring Subsidiaries” set forth therein and inserting the following definition in substitution thereof:

““Restructuring Subsidiaries” means the following Subsidiaries: CellStar S.A., CellStar Argentina S.A., CellStar de Colombia, Ltda, CellStar del Peru, S.A., Celular Express del Peru S.A.C., Quick Cellular S.A.C., CellStar Chile, S.A., CellStar (UK) Ltd., CellStar Netherlands B.V., CellStar Holding AB, CellStar-Intercall AB, CellStar Ireland, CellStar Foreign Sales Corporation, CellStar Pacific pte Ltd. and CellStar Philippines, Inc.”

2. Amendment to Section 3.4 of the Loan Agreement. Section 3.4 of the Loan Agreement, “Term”, is hereby modified and amended by deleting the first sentence thereof in its entirety and by inserting the following in substitution thereof:

“This Agreement shall become effective upon the execution and delivery hereof by Borrowers, Agent, and the Lenders and shall continue in full force and effect for a term ending on the earlier of (x) 60 days prior to the maturity date of the Convertible Subordinated Debt consisting of Parent’s 12% Senior Subordinated Notes due 2007 or (y) September 27, 2007 (the “Maturity Date”).”

3. Amendment to Section 7.6 of the Loan Agreement. Section 7.6 of the Loan Agreement, “Guarantee”, is hereby modified and amended by deleting the word “and” before clause (c) thereof and by inserting the following to the end of said Section 7.6:

“, and (d) guarantees by Parent of the key executive employment agreements of any of its subsidiaries entered into in the ordinary course of business.”

4. Amendments to Section 7.20 of the Loan Agreement.

(a) Section 7.20 of the Loan Agreement, “Financial Covenants”, is hereby modified and amended by deleting subsection (a) in its entirety and by inserting the following in substitution thereof:

“(a) Consolidated Tangible Net Worth. Parent and its Subsidiaries, taken as a whole, shall not permit Consolidated Tangible Net Worth to be less than the required amount set forth in the following table as of the last day of each fiscal quarter as set forth below, and for each month following such quarter-end date until the next fiscal quarter-end calculation:



Applicable Amount		Applicable Period
Initial Consolidated Tangible Net Worth, plus (a) 100% of the gain or loss, if any, realized as a result of forgiveness of any Convertible Subordinated Debt (after taxes), plus (b) 100% of the additional paid-in capital resulting from the conversion of the Convertible Subordinated Debt, plus (c) 80% of net income of the Parent and its Subsidiaries on a consolidated basis (without any deduction for losses) on a cumulative basis from September 1, 2001 to, and including February 28, 2002, plus (d) 75% of net income of the Parent		Beginning with the fiscal quarter ended November 30, 2002 through the Maturity Date.



Applicable Amount		Applicable Period
and its Subsidiaries, on a consolidated basis (without any deduction for losses) on a cumulative basis from March 1, 2002 for each quarter ended thereafter through such date of determination, minus (e) 100% of the Restructuring Expenses on a cumulative basis through such date of determination not to exceed $30,000,000, minus (f) 100% of the Undistributed Earnings Charge not to exceed $55 Million, minus (g) expenses in an aggregate amount of up to $6,500,000 incurred by Borrowers prior to November 30, 2004, in connection with the initial public offering of the Stock of any Subsidiaries operating within the geographic area comprising Asia

(b) Section 7.20 of the Loan Agreement, “Financial Covenants”, is hereby modified and amended by deleting subsection (b) in its entirety and by inserting the following in substitution thereof:

“(b) Fixed Charge Coverage Ratio for Asia and Latin America. Fail to maintain a Fixed Charge Coverage Ratio of at least the required ratio set forth in the following table as of the last day of each fiscal quarter beginning November 30, 2001, calculated for the immediately preceding four fiscal quarter period for the applicable region, on an individual basis:



Required Ratio		Applicable Region
0.00:1.0for the fiscal quarter ending on or about August 31, 2003; (0.75):1.0for the fiscal quarter ending on or about November 30, 2003; (1.50):1.0for the fiscal quarter ending on or about February 28, 2004;		Subsidiaries operating within the geographic area comprising Asia



Required Ratio		Applicable Region
2.0:1.0for the fiscal quarters ending on or about May 31, 2004 and August 31, 2004; 1.50:1.0for the fiscal quarter ending on or about November 30, 2004; 1.0:1.0for the fiscal quarter ending on or about February 28, 2005; and for each fiscal quarter end thereafter, 2.0:1.0
2.0:1.0		Subsidiaries operating within the geographic area comprising Latin America

Notwithstanding the foregoing, for any period in which a Fixed Charge Coverage Ratio is calculated hereunder for the Asia and Latin America regions, if, for any region on an individual basis, the result of the calculation set forth in clause (b) of the definition of Fixed Charge Coverage Ratio hereunder for the Asia and Latin America regions, respectively is less than or equal to zero, no Fixed Charge Coverage Ratio will be tested pursuant to this subsection (b).”

(c) Section 7.20 of the Loan Agreement, “Financial Covenants”, is hereby modified and amended by deleting subsection (c) in its entirety and by inserting the following in substitution thereof:

“(c) Fixed Charge Coverage Ratio for the Domestic Business Unit. Fail to maintain a Fixed Charge Coverage Ratio of at least the required ratio set forth in the following table calculated as of August 31, 2001 for the three quarter fiscal period then ended, and as of November 30, 2001 and each fiscal quarter end thereafter, for the immediately preceding four fiscal quarter period, for the Domestic Business Unit:



Required Ratio prior to giving effect to conversion, exchange, refinance, or extension of 80% of Convertible Subordinated Debt pursuant to Section 6.16(a)	Required Ratio after giving effect to conversion, exchange, refinance, or extension of 80% of Convertible Subordinated Debt pursuant to Section 6.16(a)	Test Date

1.10:1.0	1.10:1.0	August 31, 2001

1.10:1.0	1.25:1.0	November 30, 2001

1.10:1.0	1.25:1.0	February 28, 2002

1.10:1.0	1.25:1.0	May 31, 2002

1.10:1.0	1.25:1.0	August 31, 2002

1.50:1.0	1.50:1.0	November 30, 2002, February 28, 2003, May 31, 2003, August 31, 2003, November 30, 2003, February 28, 2004, May 31, 2004 and August 31, 2004

(0.50):1.0	(0.50):1.0	November 30, 2004

1.0:1.0	1.0:1.0	February 28, 2005

1.50:1.0	1.50:1.0	May 31, 2005 and each fiscal quarter ended thereafter

Notwithstanding the foregoing, for any period in which a Fixed Charge Coverage Ratio is calculated hereunder for the Domestic Business Unit, where the result of the calculation set forth in clause (b) of the definition of Fixed Charge Coverage Ratio hereunder for the Domestic Business Unit, taken as a whole, is less than or equal to zero, no Fixed Charge Coverage Ratio will be tested pursuant to this subsection (c).”

5. Waivers.

(a) Subject to the terms and conditions set forth herein, the Agent and the Lenders hereby waive compliance with, and waive the Defaults and Events of Default arising under the Loan Agreement, applicable to:

(i) Borrowers failing to maintain a Fixed Charge Coverage Ratio for their Subsidiaries operating within Asia of 2.0:1.0 for the fiscal quarter ending August 31, 2004 as required under Section 7.20(b) of the Loan Agreement; and

(ii) Borrowers failing to maintain a Fixed Charge Coverage Ratio for the Domestic Business Unit of 1.50:1.0 for the fiscal quarter ending August 31, 2004 as required under Section 7.20(c) of the Loan Agreement;

(b) Subject to the terms and conditions set forth herein, the Agent and the Lenders hereby waive compliance with the requirement that Borrowers provide 30 days written notice to Agent of the dissolution or liquidation of CellStar Air Services, Inc., A&S Air Services, Inc., CellStar Telecom, Inc. and Florida Properties, Inc. (collectively the “Inactive Borrowers”) as required under Section 7.3(ii) of the Loan Agreement; provided that the Borrowers shall deliver documentation within 3 Business Days of such dissolution or liquidation evidencing that such dissolution or liquidation of such Inactive Borrower results in the assets (or proceeds received from the sale of such assets) of such Inactive Borrower being owned by (or transferred to, in connection with the proceeds from the sale of such assets) a Borrower; and

(c) Subject to the terms and conditions set forth herein, the Agent and the Lenders hereby waive compliance with the requirement that Borrowers provide 30 days written notice to Agent of the dissolution or liquidation of CellStar Philippines, Inc. (“CellStar Philippines”) as required under Section 7.3(iii) of the Loan Agreement; provided that the Borrowers shall deliver documentation within 3 Business Days of such dissolution or liquidation evidencing that such dissolution or liquidation of CellStar Philippines results in the assets (or proceeds received from the sale of such assets) of CellStar Philippines being owned by (or transferred to, in connection with the proceeds from the sale of such assets) a Borrower or another Subsidiary in which Agent has a valid perfected first priority Lien in the Stock of such transferee Subsidiary;

provided, further that in no event shall such waivers waive any other requirement or hinder, restrict or otherwise modify the rights and remedies of the Agent and the Lenders following the occurrence of any other failure to comply with Section 7.20 or Section 7.3, or the occurrence of any Default or Event of Default under the Loan Agreement.

6. No Other Amendments. Except as set forth in Section 6 above, the execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Agent or the Lenders under the Loan Agreement or any of the other Loan Documents, nor constitute a waiver of any provision of the Loan Agreement or any of the other Loan Documents. Except for the amendments and waivers set forth above, the text of the Loan Agreement and all other Loan Documents shall remain unchanged and in full force and effect and each Borrower hereby ratifies and confirms its obligations thereunder. This Amendment shall not constitute a modification of the Loan Agreement or a course of dealing with the Agent or the Lenders at variance with the Loan Agreement such as to require further notice by the Agent or the Lenders to require strict compliance with the terms of the Loan Agreement and the other Loan Documents in the future, except as expressly set forth herein. Each Borrower acknowledges and expressly agrees that the Agent and the Lenders reserve the right to, and do in fact, require strict compliance with all terms and provisions of the Loan Agreement and the other Loan Documents. The Borrowers have no knowledge of any challenge to the Agent’s or any Lenders’ claims arising under the Loan Documents, or to the effectiveness of the Loan Documents.

7. Conditions Precedent to Effectiveness. This Amendment shall become effective as of the date hereof when, and only when, the Agent shall have received each of the following:

(a) fully executed and delivered counterparts of this Amendment by the Borrowers, the Lenders and the Agent

(b) payment of a Lenders’ amendment fee from the Borrowers in the amount of $50,000 (it being understood that, by execution and delivery of this Amendment, the Borrowers authorize the Agent to charge the Borrowers’ Loan Account for such fee and such amount shall thereafter accrue interest at the rate applicable to Advances under the Loan Agreement in accordance with Section 2.6 of the Loan Agreement) which shall be for the benefit of the Lenders in accordance with each Lender’s Pro Rata Share; and

(c) such other information, documents, instruments or approvals as the Agent or the Agent’s counsel may reasonably require.

8. Representations and Warranties of Borrowers. Each Borrower represents and warrants to the Agent and the Lenders as follows:

(a) Each Borrower is a corporation or limited partnership organized or formed, as the case may be, validly existing and in good standing under the laws of the jurisdiction indicated on the signature pages hereto and in all other jurisdictions in which the failure to be so qualified reasonably could be expected to constitute a Material Adverse Change;

(b) The execution, delivery, and performance by each Borrower of this Amendment are within such Borrower’s corporate or partnership authority, have been duly authorized by all necessary corporate or partnership action and do not and will not (i) violate any provision of federal, state, or local law or regulation applicable to such Borrower, the Governing Documents of any Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on any Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of any Borrower, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of any Borrower, other than Permitted Liens, or (iv) require any approval of any Borrower’s shareholders, partners, or members or any approval or consent of any Person under any material contractual obligation of any Borrower;

(c) The execution, delivery, and performance by each Borrower of this Amendment do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority or other Person;

(d) This Amendment and all other documents contemplated hereby, when executed and delivered by each Borrower will be the legally valid and binding obligations of such Borrower, enforceable against each Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors’ rights generally; and

(e) No Default or Event of Default is existing.

9. Counterparts. This Amendment may be executed in multiple counterparts, each of which shall be deemed to be an original and all of which, taken together, shall constitute one and the same agreement. In proving this Amendment in any judicial proceedings, it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom such enforcement is sought. Delivery of a signature page hereto by facsimile transmission or by e-mail transmission of an adobe file format document (also known as a PDF file) shall be as effective as delivery of a manually executed counterpart hereof.

10. Reference to and Effect on the Loan Documents. Upon the effectiveness of this Amendment, on and after the date hereof each reference in the Loan Agreement to “this Agreement,” “hereunder,” “hereof” or words of like import referring to the Loan Agreement, and each reference in the other Loan Documents to “the Loan Agreement”, “thereunder”, “thereof” or words of like import referring to the Loan Agreement, shall mean and be a reference to the Loan Agreement as amended hereby.

11. Costs, Expenses and Taxes. The Borrowers agree to pay on demand all reasonable costs and expenses in connection with the preparation, execution, and delivery of this Amendment and the other instruments and documents to be delivered hereunder, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Agent with respect thereto and with respect to advising the Agent as to its rights and responsibilities hereunder and thereunder.

12. Governing Law. This Amendment shall be deemed to be made pursuant to the laws of the State of Georgia with respect to agreements made and to be performed wholly in the State of Georgia, and shall be construed, interpreted, performed and enforced in accordance therewith, without reference to the conflict or choice of laws provisions thereof.

13. Loan Document. This Amendment shall be deemed to be a Loan Document for all purposes.

[Signature pages follow]

IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the day and year first written above.


BORROWERS:		CELLSTAR CORPORATION, a Delaware corporation

		By: /s/ Elaine Flud Rodriguez
		Name: Elaine Flud Rodriguez
		Title: Sr. VP and General Counsel

		CELLSTAR, LTD., a Texas limited partnership

		By: National Auto Center, Inc., its General Partner

		By: /s/ Elaine Flud Rodriguez
		Name: Elaine Flud Rodriguez
		Title: Sr. VP and General Counsel

		NATIONAL AUTO CENTER, INC., a Delaware corporation

		By: /s/ Elaine Flud Rodriguez
		Name: Elaine Flud Rodriguez
		Title: Sr. VP and General Counsel

		CELLSTAR AIR SERVICES, INC., a Delaware corporation

		By: /s/ Elaine Flud Rodriguez
		Name: Elaine Flud Rodriguez
		Title: Sr. VP and General Counsel

S-1


		CELLSTAR TELECOM, INC., a Delaware corporation

		By: /s/ Elaine Flud Rodriguez
		Name:Elaine Flud Rodriguez
		Title: Sr. VP and General Counsel

		CELLSTAR FINANCO, INC., a Delaware corporation

		By: /s/ Elaine Flud Rodriguez
		Name: Elaine Flud Rodriguez
		Title: Sr. VP and General Counsel

		A&S AIR SERVICE, INC., a Delaware corporation

		By: /s/ Elaine Flud Rodriguez
		Name: Elaine Flud Rodriguez
		Title: Sr. VP and General Counsel

		CELLSTAR INTERNATIONAL CORPORATION/SA, a Delaware corporation

		By: /s/ Elaine Flud Rodriguez
		Name: Elaine Flud Rodriguez
		Title: Sr. VP and General Counsel

		CELLSTAR FULFILLMENT, INC., a Delaware corporation

		By: /s/ Elaine Flud Rodriguez
		Name: Elaine Flud Rodriguez
		Title: Sr. VP and General Counsel

S-2


		CELLSTAR INTERNATIONAL CORPORATION/ASIA, a Delaware corporation

		By: /s/ Elaine Flud Rodriguez
		Name: Elaine Flud Rodriguez
		Title: Sr. VP and General Counsel

		AUDIOMEX EXPORT CORP., a Texas corporation

		By: /s/ Elaine Flud Rodriguez
		Name: Elaine Flud Rodriguez
		Title: Sr. VP and General Counsel

		NAC HOLDINGS, INC., a Nevada corporation

		By: /s/ Elaine Flud Rodriguez
		Name: Elaine Flud Rodriguez
		Title: President

		CELLSTAR GLOBAL SATELLITE SERVICES, LTD., a Texas limited partnership

		By: National Auto Center, Inc., its General Partner

		By: /s/ Elaine Flud Rodriguez
		Name: Elaine Flud Rodriguez
		Title: Sr. VP and General Counsel

S-3


		CELLSTAR FULFILLMENT LTD., a Texas limited partnership

		By: CellStar Fulfillment, Inc., its General Partner

		By: /s/ Elaine Flud Rodriguez
		Name: Elaine Flud Rodriguez
		Title: Sr. VP and General Counsel

		FLORIDA PROPERTIES, INC., a Texas corporation

		By: /s/ Elaine Flud Rodriguez
		Name: Elaine Flud Rodriguez
		Title: Sr. VP and General Counsel

S-4


AGENT AND LENDERS:		WELLS FARGO FOOTHILL, INC., a California corporation, as Agent and as a Lender

		By: /s/ Robert Bernier
		Name: Robert Bernier
		Title: Vice President

		FLEET CAPITAL CORPORATION, as a Lender

		By: /s/ Dennis M. Hansen
		Name: Dennis M. Hansen
		Title: Senior Vice President

		TEXTRON FINANCIAL CORPORATION, as a Lender

		By: /s/ Greg Gentry
		Name: Greg Gentry
		Title: Porfolio Manager

		PNC BANK NATIONAL ASSOCIATION, as a Lender

		By: /s/ Robin L. Arriola
		Name: Robin L. Arriola
		Title: Vice President

S-5

EX-31.1 4 dex311.htm SECTION 302 CEO CERTIFICATION Section 302 CEO Certification

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Terry S. Parker, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CellStar Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Terry S. Parker

Terry S. Parker, Executive Chairman

Date: October 14, 2004

EX-31.2 5 dex312.htm SECTION 302 CFO CERTIFICATION Section 302 CFO Certification

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Raymond L. Durham, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CellStar Corporation;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Raymond L. Durham

Raymond L. Durham, Chief Financial Officer

Date: October 14, 2004

EX-32.1 6 dex321.htm SECTION 906 CEO CERTIFICATION Section 906 CEO Certification

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of CellStar Corporation (the “Registrant”) on Form 10-Q for the quarterly period ended August 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, in the capacity as indicated below and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

/s/ Terry S. Parker

Terry S. Parker, Executive Chairman

Date: October 14, 2004

EX-32.2 7 dex322.htm SECTION 906 CFO CERTIFICATION Section 906 CFO Certification

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

/s/ Raymond L. Durham

Raymond L. Durham, Chief Financial Officer

Date: October 14, 2004

-----END PRIVACY-ENHANCED MESSAGE-----

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